Thursday, October 21, 2010

Perpetually Parsing Pensions

You know this whole debate over whether to get the pension fund to 50% funding may not matter as much as it may seem.  Or at least the problem may be so much worse than we think and that the numbers we assume are good turn out to be wildly optimistic.

The government accounting folks, GASB, are considering a change in pension accounting rules that would bring public pension accounting more in line with private sector accounting.   The result, if it happens, is that the calculations of almost all public pension liability will be much much higher than they are now.  So Pittsburgh's billion dollar liability would be something a lot more. What if the number was $2 billion? Any % increase on a billion dollars is real money.  If you want to see more on the accounting issue, see this from the WSJ:  Board at Center of Pension Dispute   Note the Pittsburgh connection in the story that has nothing to do with the city btw.

I was reminded of that because I was reading a paper that just came out.  Remember when I compared Pittsburgh's debt and pension obligations per capita to that in Vallejo, California (which is still plodding through a bankruptcy proceeding) to Pittsburgh. Someone has taken the time to parse those numbers more systematically across a number of cities.

The Crisis in Local Government Pensions in the United States (link)
JOSHUA RAUH, KELLOGG SCHOOL OF MANAGEMENT AND NBEROctober 2010
October 13, 2010

or if you want crib notes, read the Economist's coverage of their research.

It does not look like they included Pittsburgh in their research, most likely becasue the city is so small.  No time to parse all that, but in scanning it I think they cacluated some liability valuations that use some more normal assumptions on things like the future discount rate. Public pension plans tend to use a very high discount rate of 8%.  Actuarial valuations of private sector pension plans almost always use a much smaller value for their discount rate.   I suspect that if they did do such a caclulation for Pittsburgh would be quite a shock and show a lot higher than the billion dollar liability we are talking about these days.  Just imagine where we would be in that case?

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