In fact, Moody's itself seems to recognize the negative impact on projected pension returns of its new methodology, based on the "Pensions Final Adjustments" report sent to me by David Jacobson, their AVP - Communications Strategist, Public Finance Group (Page 4): "Because interest rates are currently at an historic low, the market approach to measuring liabilities results in much larger current total liabilities than those reported using the conventional governmental approach." The very fact that Moody's and others are using expected rates of return, which are additionally "all over the place," demonstrates how these ratings firms are forecasting liabilities years, if not decades, into the future, just as Burien and Richardson say. And there are more reasons to suspect the expected rates of future return are geared low, perhaps too low. The Journal of Accountancy's June 25, 2012 article "GASB vote places unfunded pension liabilities on government balance sheets" says (emphasis added):Accrued actuarial liabilities will be adjusted based on a high-grade long-term taxable bond index discount rate as of the date of valuation (of the fund).
Rather than using the average historical investment return rate of 8 percent, Moody's uses a return on a taxable bond index . This return would be no higher than that on a basket of high-rated corporate bonds ranging from 4.4 to 6.2 percent, the FT says. The problem with using this rate is that we have been in a five-year period of zero-interest rate policy while the Federal Reserve has artificially suppressed interest rates to promote financial stability and spur economic growth". Moody's model, in periods of artificially suppressed interest rates, has enormous flaws .
GASB on Monday approved Statement No. 67, Financial Reporting for Pension Plans , and Statement No. 68, Accounting and Financial Reporting for Pensions . Statement No. 68 will require governments with defined benefit pension plans to disclose a "net pension liability" on their balance sheets.
That liability equals the difference between the total pension liability and the value of assets set aside in a pension plan to pay benefits. The statement calls for immediate recognition of more pension expense than is currently required. This includes immediate recognition of annual service cost and interest on the pension liability, plus the effect of changes in benefit terms on the net pension liability.
Currently, the pension liability on a government's balance sheet is based on the difference between the contributions they are required to make to a pension plan in a given year versus what they actually funded. The change reflects the view that pension costs and obligations should be recorded as employees earn them, rather than when the government contributes to a pension plan or when retirees receive benefits.
So, the GASB -- the Governmental Accounting Standards Board, which is the main body for determining how pensions will be evaluated, has determined the current evaluation method under-accounts for liabilities. (Yet, even with these recent adjustments, Michigan as a whole, has a lower Net Pension Liability Relative to Economic Indicators (3.4%) than average (7.9%), according to Moody's "State Pension Liability Medians" report, Table 3 on page 11. Detroit, really inner city Detroit may be doing poorly, but the state is not, and the state could, if it chose to, spread the wealth to rescue what is still, by far, its largest city).
Walter Burien is no fan of the GASB. In an email to me, he said:
I Note GASB is a 100% "Private Association" created by the large government gangs in the first place to in effect bypass their own monopoly laws. They have done so by letting GASB.org call the shots in which Government internally networking together as a monopoly never openly would have been able to arrange for.
In any case, Detroit is recognizing this GASB-led change already, according to Orr's June, 2012 report "City of Detroit Proposal for Creditors," page 24 (hey, how about a Report for Citizens?):
In addition, the Governmental Accounting Standards Board has issued a statement (No. 67), effective during the City's 2014 fiscal year, requiring municipalities to recognize their unfunded pension benefit obligation as a liability and to more comprehensively measure the annual costs of pension benefits.
However, under the old accounting assumptions the liability would be $1.5B less than the $3.5B pension fund deficit. Says the Orr report:
Even if the City were not to change prior actuarial assumptions, pension UAAL is projected to grow to nearly $2 billion by 2017. The adoption of realistic actuarial assumptions would result in a significantly higher number for UAAL.
Note that liability is projected out to 2017. Now we're getting somewhere. Five years of liabilities, but not five years of revenues, let alone counting of past assets. Judged that way, we'd all be broke!
Accounting is not only about arithmetic truth; it is also about choices of what and how to account.
I became curious about this when this NY Times article about Detroit's proposed bankruptcy came out and so I looked up Detroit's Comprehensive Annual Financial Report (CAFR) 2012 (you might want to keep this document open -- we'll be referring to it a lot in this article). All government CAFRS -- variously estimated to number between 184,000 -- 230,000 - are now available online, yet somehow, the media doesn't seem to know how to use Google or Bing, and they just take the official word of their condition from public officials. The decline in investigative journalism is a subject for another article, but the ability to promulgate almost any kind of financial mistruth is one glaring result, and the criminogenic environment it creates is costing us trillions.
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