States and actuaries are trying to stifle debate about the growing shortfall in fund assets.
States and actuaries are trying to stifle debate about the growing shortfall in fund assets.
Plunging investment returns have sent debt soaring in state and local pension funds and prompted new financial concerns. Meanwhile, a debate has broken out about whether these pension funds are accurately measuring their obligations. Though the issues might seem arcane, the stakes are high for taxpayers who might have to bail out these funds and for public employees who rely on them for retirement.
The public dispute over accounting standards is a signal to taxpayers, retirees and political reformers that fundamental flaws remain in how pensions measure their finances.
On Aug. 1, the American Academy of Actuaries and the Society of Actuaries shut down a 14-year-old task force on pension financing when several members were about to publish a paper that found many state and local retirement systems calculate their obligations using overly optimistic future rates of return. The authors want states and municipalities to adopt new valuation standards that would make projecting the cost of future benefits more predictable.
The problem is that this change would also make many public pension funds seem far more indebted than they are under current standards. Such a change would produce more pressure on politicians to boost funding and cut benefits.
One of the task-force members, Edward Bartholomew, blasted the AAA and the SOA in an interview with the trade publication Pensions & Investments. “This paper [is] being censored,” he said. “They didn’t want it to get out.” In a memo about the controversy, the AAA and SOA said they intended to block any attempt by task-force members to publish their work independently because that would be “inappropriate.”
The spat is part of a growing fight over how governments measure the value of pension assets. Private-sector retirement funds follow guidelines set by the Financial Accounting Standards Board. But states and municipalities follow voluntary rules from the Government Accounting Standards Board.
One crucial difference is that private pension systems must project the future growth of their assets using a conservative “risk-free” rate of return...
Read the entire piece here in The Wall Street Journal
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Steven Malanga is a senior fellow at the Manhattan Institute and a senior editor at City Journal.
