New regulations aimed at increasing clarity in pension budgets seems to have driven state and local governments to the gambling tables. The rules, adopted by the Governmental Accounting Standards Board (GASB), require pension funds running toward bust to report their funding levels with less unrealistic optimism about expected returns. However, because the GASB simultaneously allows governments to report more optimistically if they have issued large amounts of pension obligation bonds, ailing funds are able to mask their problems with an influx of borrowed money. From ProPublica and WashPo:
[…A] side effect [of the GASB rules] is to allow governments with extremely underfunded pensions to slash reported shortfalls by $2 or more for each $1 borrowed. […]
It’s like getting a new credit card, borrowing on it to pay off part of an existing loan, then having the total amount owed magically shrink by more than what is borrowed. Sounds impossible — but it’s true. […]
Plenty of takers are bellying up to the borrowing bar. Governments sold $670 million worth of pension bonds through the first half of this year, more than double the $300 million raised for all of last year, according to deal-trackers at Thomson Reuters.
Yet this particular scheme of issuing bonds tends not to work out very well:
A review by ProPublica and The Post of the 20 largest pension bonds issued since 1996 found that in three-fourths of the deals, governments did not make their full required contribution in the years after the bonds were sold. Those bonds account for nearly two-thirds of the pension debt issued since 1996, according to Thomson Reuters. In more than half the deals, some proceeds even went on to make annual pension contributions — borrowing from the future to pay today’s expenses.
Because of the underfunding, most of the pension funds now are worse off than before the bonds were issued.
In all five recent or proposed bond sales examined — by Kentucky, Kansas, Pennsylvania, Colorado and the town of Hamden, Conn. — the issuers and potential issuers said they were planning to make less than full payments for many years.
“These bonds are pernicious,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “They discourage pension funding. They shift costs forward to future generations.”
The deck-stacking, debt-shuffling, pocket-lining malfeasance that plagues our public pension system isn’t going away. Pension funds shouldn’t sit uninvested, but the present system bets too much and expects too much from our bets. In the Simon and Garfunkel hit, The Boxer, the singer laments that promises are nothing but “a pocketful of mumbles.” In regards to our national pension promises, this truth is becoming evident. The whole report is informative and sobering—read it here.