Snapshots

GASB Review of Governmental Pension Accounting, Disclosure Rules Continues
The Governmental Accounting Standards Board (GASB) logged in almost 200 individual letters in response to its request for comments on its Preliminary Views (PV) on major issues related to pension accounting and financial reporting by employers. The letters came from individuals, businesses, associations, public pension systems, groups of pension plan representatives, individual employers, public sector unions and national public sector organizations.

The PV was released on June 16, 2010, and written comments were due by September 17, 2010. GASB subsequently held three public hearings on October 13th in Dallas; October 14th in San Francisco; and October 27th in New York City, where dozens of individuals appeared to testify and respond to questioning by the GASB members.

NCTR joined with NASRA and NCPERS in drafting a comment letter which was signed by fiduciaries, administrators and plan members of more than 80 public retirement systems, including 39 NCTR member plans. Furthermore, 20 NCTR member systems and several other NCTR commercial members also sent individual comment letters to GASB. Several NCTR members also testified in person at the GASB public hearings.

Finally, NCTR joined with NASRA, NCPERS and 14 other national organizations, including the National Education Association (NEA), the American Federation of Teachers (AFT), the American Federation of State, County and Municipal Employees (AFSCME), the National Association of Counties (NACo), the National League of Cities (NLC), and the U.S. Conference of Mayors, in sending a group letter to GASB.

NCTR also adopted a resolution concerning the GASB PV at its annual convention in October which reiterated the concerns expressed by many individual NCTR members that:

1. GASB should maintain its current view that the basic discount rate for governmental plans’ unfunded pension obligation should remain the long-term expected rate of return on plan investments;

2. The Annual Required Contribution (ARC) should not be eliminated;

3. The cumulative difference between an employer’s ARC and its actual contributions (known as the employer’s “Net Pension Obligation,” or NPO) should not be replaced on the employer’s balance sheet with a new number, referred to by GASB as the “Net Pension Liability,” or NPL;

4. For single employer and agent plans, an employer’s unfunded pension obligation should continue to be subject to disclosure in the required supplementary information section of employer’s financial statements, and that for cost-sharing plans, an employer’s pension liability should continue to be the difference between the employer’s contractually required contribution and the employer’s actual contributions;

5. The current GASB standards, permitting public pension plans, in consultation with their actuaries, to defer recognition of all asset gains and losses over a responsible period of time, are reasonable and that the GASB PV’s proposed change in this area is needlessly complex, would diminish transparency and understanding for users of public retirement plan financial information, and would adversely impact the predictability and stability of required contributions;

6. GASB’s current disclosure requirements regarding cost-sharing plans adequately express employers’ obligations to the plan, and such pension plan costs should be distributed evenly across the entire group of employers, generally regardless of individual employer characteristics; and

7. Should changes be made, GASB should phase them in over time so as to avoid confusion on the part of the user community and unnecessary disruption of the consistency of public pension reporting.

The next step in the GASB process will likely be the issuance of an exposure draft of the final form any revisions will take, probably in the middle of 2011.

• Group Letter from NCTR/NASRA/NCPERS Member Systems

• Letter from NCTR and 16 other National Public Sector Associations

• Links to all GASB PV Comment Letters

• NCTR Resolution on GASB PV (see page 10)

New GAO Study of Public Pensions Requested
The Government Accountability Office (GAO) has been asked to produce yet another report on public pensions. This time, the request came from the Senate Committee on Aging and the Senate Committee on Health, Education, Labor, and Pensions (HELP). The study will examine “pension issues in the state and local government sectors,” according to the GAO. (Based on Hill sources, the request was from Senator Herb Kohl (D-WI), Chairman of the Aging Committee, and Senator Mike Enzi (R-WY), the Ranking member of the HELP Committee.)

Specifically, the GAO is interested in:

• Current issues and challenges with state and local pension systems;

• State and local government strategies for funding their pension obligations;

• Data and sources of information on state and local pension systems; and

• Selecting case examples of state and local pension systems for study.

The number of GAO studies examining various issues related to public pensions has increased over the last few years, reflecting both increased media attention to governmental plans as well as a growing interest (and concern, in some cases) by Congress in their activities and overall health. The most recent report, dealing with investments, was released in August of this year, and was entitled “State and Local Government Pension Plans: Governance Practices and Long-term Investment Strategies Have Evolved Gradually as Plans Take On Increased Investment Risk.”

To date, most of the GAO reports on public pensions have been relatively favorable, and have not generated a high degree of controversy, nor been used as tools to advance adverse Federal actions.

Not yet, at least.

Hopefully, this latest report will be similar in nature, although its focus on funding could prove to be problematic. NCTR and NASRA will be interviewed by the GAO during December as part of their research efforts. So if you would like to be volunteered as a “case example” for their study, be sure to let us know!

Seriously, it will be important for the GAO to appreciate the great effort that many NCTR member systems have devoted to addressing the current challenges confronting our community. We have a good story to tell about the manner in which public pensions have responded to the economic crisis, so it would truly be very helpful to know if your system would be interested in working with the GAO staff on what could be a very important – and hopefully, very positive – report.

• GAO Report on Public Pension Governance and Investments

Aspen Institute: Private Industry + Social Security Administration = “Starter” Life Annuities
The Aspen Institute’s Initiative on Financial Security (Aspen IFS) has developed a proposal to provide Americans who do not have access to a defined benefit plan with a new option to obtain retirement income that lasts their lifetime. The “Security Plus Annuities,” in the words of its developers, “partners private industry with the Social Security Administration to offer low-cost, inflation-protected, ‘starter’ life annuities.”

It is described as being designed to particularly address the needs of low- and moderate-income workers who often have not had access to a 401(k) plan at their jobs, and workers near retirement whose employer-provided pension plans do not offer lifetime income products. It is premised on two main conclusions: (1) the current 401(k) universe of plans is virtually annuity-free, primarily because employers who do offer them “must undertake rigorous analysis before adding an annuity provider to a plan or face additional fiduciary liability if the provider later becomes insolvent” according to Aspen IFS; and (2) it will likely take years of “building a consensus, crafting and passing legislation, and issuing regulations before lifelong income products become routinely available in 401(k) plans and IRAs,” the Aspen IFS explains.

The key features of the Security Plus Annuity are described as being:

• Retirees would have a one-time opportunity in their first year of receiving Social Security benefits to buy a Security Plus Annuity, capped at $100,000 in purchase amount.

• For married retirees, Security Plus Annuities would offer spousal benefits.

• Security Plus Annuity payments would be automatically added to monthly Social Security checks.

• Through a competitive bidding process, the Federal government would pre-select a private market annuity provider or providers (depending on the volume of purchases) to underwrite Security Plus Annuities on a group basis.

• The Federal government would provide record-keeping, marketing, distribution and other administrative services.

The Aspen Institute is an international nonprofit organization founded in 1950. According to its President and CEO, Walter Isaacson, its “core mission is to foster enlightened leadership and open-minded dialogue. Through seminars, policy programs, conferences and leadership development initiatives, the Institute and its international partners seek to promote nonpartisan inquiry and an appreciation for timeless values.” The Aspen Institute is largely funded by foundations such as the Carnegie Corporation, The Rockefeller Brothers Fund and the Ford Foundation, by seminar fees, and by individual donations.

• Aspen IFS: The Case for Security Plus Annuities

• Retirement Savings: Confronting the Challenge of Longevity

The Failure of the 401(k): New Report Supports Guaranteed Retirement Accounts
Demos , a non-partisan public policy research and advocacy organization, has released a new report in early November that discusses the current state of the U.S. private retirement system, and why reform is necessary. The report argues that “[t]he shift from traditional pensions to individual plans has significantly endangered the gains our country has made in reducing old-age poverty since the introduction of Social Security.”

The report also looks at proposed policies to reform the retirement system in the past “from all sides of the political spectrum,” specifically the Urban Institute’s “Super Simple Savings Plan”, the ERISA Industry Committee’s “New Benefit Platform for Life Security”, the Obama administration’s “Automatic IRA” proposal, and the Economic Policy Institute (EPI) and Bernard Schwartz Center for Economic Policy Analysis at the New School (SCEPA)’s “Guaranteed Retirement Account (GRA).”

While it finds all four proposals represent improvements over the current retirement system, it concludes that only one proposal—Guaranteed Retirement Accounts—“could serve as a true successor to the traditional pension as workers’ second tier of retirement savings.”

The GRA concept was developed by Teresa Ghilarducci, an economics professor at The New School in New York City and serves as the Bernard L. and Irene Schwartz Chair in economic policy analysis and director of SCEPA, the Schwartz Center for Economic Policy Analysis that focuses on economic policy research and outreach. She joined The New School in 2008 after 25 years as a professor of economics at the University of Notre Dame.

A GRA is essentially a mandatory Government-administered guaranteed individual retirement plan. Mandatory minimum contributions from workers and employers of 2.5 percent each would be required, and the Federal government would contribute $600 for all workers, regardless of income. There would be a guaranteed minimum 3 percent real return on the account; the Federal government through the Social Security Administration would administer the plan; and the Federal Thrift Savings Plan would manage the pooled assets. Workers would receive an annuity based on their account balance at retirement. The Federal cost of the program would be paid for by removing the tax deferral for contributions to an IRA or 401(k) that exceeded $5,000 per individual, per year.

• Demos Report: The Failure of the 401(k)

• Description of Guaranteed Retirement Account

Should States be Permitted to Go Bankrupt?
David Skeel, a law professor at the University of Pennsylvania, writes in the November 29th issue of The Weekly Standard that Congress should consider creating a new chapter for states in U.S. bankruptcy law. According to Skeel, “Although bankruptcy would be an imperfect solution to out-of-control state deficits, it’s the best option we have, at least if we want to have any chance of avoiding massive federal bailouts of state governments.”

Skeel argues that the constitutionality of bankruptcy for States is “beyond serious dispute.” He also points out that, with more than 70 years of experience with Chapter 9, which permits cities and other municipal entities to file for bankruptcy, this “shows how bankruptcy-for-states might work, what its limitations are, and why we need it now.”

Such a State bankruptcy law would give debtor states power to rewrite union contracts, with court approval, and Skeel also points out that it is “possible that a state could even renegotiate existing pension benefits in bankruptcy, although this is much less clear and less likely than the power to renegotiate an ongoing contract.”

But would governors, particularly those with union supporters, be willing to take full advantage of such powers? While Skeel recognizes the political realities involved, he insists bankruptcy “would give a resolute state a new, more effective tool for paring down the state’s debts,” particularly if a governor thought he could shift blame onto a bankruptcy court.

However, Skeel believes that perhaps the best reason for Congress to give this new power to the States is that “it would give the federal government a compelling reason to resist the bailout urge.” State bankruptcy would offer what he calls “a credible, less costly, and more effective alternative.” “Bankruptcy isn’t perfect,” he writes, “but it’s far superior to any of the alternatives currently on the table.”

• Skeel: “Give States a Way to Go Bankrupt”

New CII White Paper on Wall Street Pay
The Council of institutional Investors (CII) has recently released a new white paper entitled “Wall Street Pay: Size, Structure and Significance for Shareowners.” The new study, written by Paul Hodgson, senior research associate at The Corporate Library, found that the pay practices of major Wall Street banks encouraged excessive risk-taking by executives that helped bring financial markets to the brink of collapse in 2008. While banks’ executive compensation has improved somewhat since then, Hodgson finds that banks still are not tying compensation to long-term gains in performance.

CII believes that the new report “may help inform shareowners’ decisions about how to cast advisory votes on executive compensation—‘say on pay’—at U.S. public companies next year, a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

Key findings of the CII white paper include:

• Total CEO compensation at major Wall Street institutions in 2003-2007 was two to three times the level of pay at other Fortune 50 companies during the same period. The differential was driven mainly by big dollops of time-restricted stock in Wall Street pay packages.

• Pay at these banks was structured to incentivize executives to deliver strong performance—over the short-term. But lavish cash bonuses, high absolute levels of pay and excessive focus on short-term annual growth measures had damaging consequences for shareowners over the long-term.

• Compensation structure on the Street has improved since 2008, but the banks still are not tying compensation to long-term performance metrics.

The report recommends that shareowners press for long-term performance measures, “commitments to ensure that a large portion of compensation is tied to long-term value growth and that deferment and forfeiture elements are retained.”

• New CII “Wall Street Pay” White Paper

NCTR/NASRA FY 2009 Public Fund Survey Now Available
The Public Fund Survey (PFS), an online compendium of key characteristics of most of the nation’s largest public retirement systems, is sponsored by NCTR and NASRA and conducted by Keith Brainard, NASRA’s Director of Research. It contains data on 101 public retirement systems and 126 plans whose membership and assets comprise approximately 85 percent of the entire state and local government retirement system, providing pension and other benefits for 13.4 million active members and 6.9 million annuitants (including retirees, disabilitants and beneficiaries). As of FY 09, systems in the Survey hold assets of $2.1 trillion.

The primary source of Survey data is public retirement system annual financial reports. Data also is taken from actuarial valuations, benefits guides, system websites, and input from system representatives. This latest report focuses on fiscal year 2009, which is reported for 98 of the systems in the survey.

The FY 2009 survey shows that aggregate public pension funding levels declined in FY 09 from 85.0 percent to 79.9 percent, due primarily to the 2008-09 market drop. However, improving capital markets since March 2009 are helping to offset the effects of these losses.

The increased unfunded liabilities resulting from the market decline are causing required contribution rates to rise. Median employer contribution rates for workers who participate in Social Security rose to 9.4 percent of pay, and to 12.7 percent of pay for employers whose participants do not participate in Social Security. The median employee contribution rates remained five percent of pay for Social Security-eligible workers, and eight percent for non-Social Security-eligible.

The overall average ARC paid by public plan sponsors in FY 09 was 88 percent, consistent with the levels of the previous six years. Through FY 09, the percentage of plans receiving at least 90 percent of their ARC held steady at just above 60 percent.

The new survey found that the predominant investment return assumption among funds in the Survey remains at 8.0 percent, although in recent months, some funds have reduced this assumption, and other plans are considering doing so.

Public Fund Survey data is made available to public retirement system staff and trustees as well as corporate members of NASRA and NCTR. Registration is required to access most of the PFS website.

• Public Fund Survey Website

GFOA Issues New Advisory on Responsible Management and Design Practices for DB Plans
The Government Finance Officers Association (GFOA) has recently approved a new Advisory that discusses what GFOA believes are responsible management and design practices for defined benefit governmental pension plans.

The Advisory recommends that “under no circumstance should state and local government plan sponsors engage in pension contribution holidays or make insufficient contributions. “ The Advisory also makes comments in specific areas:

1. Spiking of final pensionable compensation.

2. Sustainable full-retirement ages

3. Retroactive benefits increases

4. Deferred Retirement Option Plans (DROPs)

5. Ad hoc cost-of-living allowances (COLA) for existing retirees

6. Investment assumptions

7. Non-contributory plans

8. Prior service credits

A GFOA Advisory identifies specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. This Advisory was approved by the GFOA’s Executive Board on October 15, 2010.

• New GFOA Advisory on Responsible Management and Design Practices for DB Plans