|
The Sisyphean task of funding U.S. state and local-governmentretirement plans, a hidden risk for municipal-bond investors, willget even more daunting under proposed new accounting rules. Pensions in Illinois, New Jersey, Indiana and Kentucky may haveless than 30 percent of the assets needed to cover promisedbenefits under the measure, according to data from the Boston College Center for Retirement Research. The changes, which take effectstarting in June 2013, will alter how liabilities are calculatedand how assets are reported on financial statements. The Governmental Accounting Standards Board , which decides how states and municipalities must keep theirbooks, is set to issue the new rules next month. Any decisions madeso far are "tentative and subject to change," John Pappas , a spokesman for the Norwalk-based organization, said by e-mail.Pensions would begin using the rules for fiscal years startingafter June 15, 2013, and employers such as school districts wouldfollow a year later. As currently set up, the changes would force pensions andmunicipalities to report the portion of current and future retireeobligations that exceed projected assets as a liability on balancesheets for the first time. "People are going to be really surprised," Matt Fabian , managing director with Concord, Massachusetts-based Municipal Market Advisors , said by telephone. "It's one of the few things out there thatcould precipitate a major change in investor demand." The rules may raise government costs in the $3.7 trillion municipalmarket as investors demand more yield to compensate for higherpension risk and possibly lower ratings. Illinois became Moody'sInvestors Service's lowest-rated state in January because it hadn'tdealt with its underfunded pensions. Twenty-year munis yield 3.81 percent, close to the lowest since1967, according to a Bond Buyer index. The gauge touched 3.6percent in January, the lowest since 3.4 percent in 1967. Pushing Up Costs The need for higher contributions can add to the returns investorsrequire, according to the Boston College center. "The market is starting to look much closer at what governments aredoing to address the pension problems," said Jean-Pierre Aubry , assistant director of state and local research at the center, inan interview. "Contributions to pensions matter to bondholders." A center report in February 2011 showed pension costs as aproportion of budgets rose to 3.8 percent in 2008 from 3 percent in2005. The effect may increase as unfunded liabilities grow. The changes may force government officials to cut benefits or spendmore to cover what they've promised, Fabian said. That may lowerfunding for other programs or prompt tax increases. "The numbers are going to look worse," Joe Pangallozzi , a managing director and analyst with BlackRock Inc. 's fixed-income group in Plainsboro, New Jersey, said by telephone."Now that you have these numbers, what are you going to do to putthe system on a solid footing?" Returns Rebounding Assets held by U.S. public pensions are starting to show aturnaround in returns that is raising the funding level for some.Retirement plans ended the first quarter with a median gain of 7.5percent on investments, the best performance since 2010, as stocksand real estate boosted the results, Wilshire Associates has said. State and local governments have spent the past threeyears dealing with stagnant revenue and rising costs afterrecovering from the longest recession since the 1930s. Widening Gaps The new method also may widen the gap between assets and promisedbenefits by applying a lower discount to the uncovered portion. Therules would tie the measure to a 30-year, AA rated municipal bond,rather than a typically higher expected investment return. The average AA+ municipal bond yields about 4.2 percent for 30-yearmaturities, according to a Bloomberg Fair Value index. The Teachers' Retirement System of Illinois has an assumed rate of annual return on assets of 8.5 percent,which is lower than its average of 9.3 percent each year during thepast three decades, Dave Urbanek , a fund spokesman, said by telephone. Under the new rules, the so-called funded ratio would fall to 53percent from 77 percent for 126 plans, taken as a group, accordingto a November 2011 study from the Boston College center. Themeasure gauges assets as a proportion of obligations and wasapplied to both state and local pensions. May Surprise Officials "The liability will appear to be larger than it has in the past,"Cathie Eitelberg, national public-sector market director for NewYork-based Segal Co ., a pension consultant, said in a telephone interview. "Therecould be some very surprised elected officials." Municipal-bond investors will have two numbers to look at ratherthan one, Eitelberg said. Currently, they get a liability item infootnotes of financial statements. Under the new rules, governmentswill have the figures listed on a balance sheet and an explanationof what is being done to address it, she said. Illinois, which already has the U.S. state pensions with the widestgaps between assets and promised benefits, will see two of itsfunds fall to the lowest among the 126 plans studied by the BostonCollege center. The state Teachers system's funded ratio will dropto about 18 percent, the lowest level in the study, from 48percent, and the State Employees' Retirement System of Illinoiswill sink to 22 percent from 46 percent, ranking second. Funding Failure The Illinois Teachers ' plan has lost ground because the Legislature failed to fund statepensions at required levels. The $34.6 billion system got $10billion less from lawmakers than it needed from 1970 to 2011, saidUrbanek, the spokesman. "Changing accounting rules so the underfunded liability gets higheris like saying you're stirring your coffee in the wrong direction,"Urbanek said. "We already know we're the worst in the nation." Governor Pat Quinn , a Democrat, has proposed changes that may cut the unfundedliability of state plans by boosting worker contributions, loweringcost-of-living increases and raising the retirement age to 67. New Jersey's Public Employees' Retirement System will see itsfunded ratio drop to about 30 percent from 62 percent, while the New Jersey Teachers ' Pension & Annuity Fund will fall from almost 58 percent to about 25 percent, according tothe Boston College study released in November. Changes Made Without changes Governor Chris Christie pushed through last year, the state's unfunded liability forretirees would be $20 billion higher, according to Andrew Pratt , a state Treasury Department spokesman. The Republican's overhaulraised employee payments and the minimum retirement age for mostworkers. "Governor Christie has put the pensions on course for solvencywithout draining resources needed for schools, transportation andaid to the poor and disabled," Pratt said by e-mail. "Taxpayerswill be asked to pay less for government pensions, and publicemployees have a far greater certainty of a secure retirement." Pensions in Washington, Minnesota, Pennsylvania and Texas may seefunding levels worsen the most under the new accounting rules,according to data from the Boston College center. Two plans forteachers run by the state of Washington would fall to about 40percent from almost 93 percent. The new public disclosure requirement may "exacerbate" the unfundedliability of some plans, Washington Treasurer James McIntire saidby telephone. He said he doesn't expect the rules to change how thegaps are dealt with in his state, which has taken steps to improveasset levels. "It doesn't change the amount of money you put into your pensionplans and it doesn't change what you owe," he said. "It justchanges how you value it for reporting purposes.". We are high quality suppliers, our products such as ipod charger adaptor , China usb travel charger adapter for oversee buyer. To know more, please visits car charger outlet adapter.
Related Articles -
ipod charger adaptor, China usb travel charger adapter,
|
