Moody's Investor Services will soon unveil new pension standards that could peel away gimmicks used to hide the shocking size of government retirement debt.
Final details have not been released. But if the rating company adopts the standards it suggested in a proposal circulated last year, unfunded pension liabilities for most state and local governments would be about $2.2 trillion, nearly triple what they currently report.
The new numbers will be used by Moody's when it examines government agency finances to rate their bonds. The standards will not require governments to better fund their pension systems or affect official balance sheets. Moody's doesn't have that authority.
But the standards could drive up borrowing costs for local governments that suffer ratings downgrades because of the more transparent accounting. That might encourage public agencies to pay off pension debt faster.
Marcia Van Wagner, Moody's vice president spearheading the changes, told me they stem from frustration about disparate ways governments calculate pension debts. Comparing one public agency's pension debt to another's is often apples to oranges.
So Moody's plans to recalculate pension debt by applying the same accounting assumptions. "This is a cultural shift in the way people are thinking about their liabilities," Van Wagner said.
John Dickerson, pension watchdog and financial analyst, calculated the potential effect on the pension
Using current accounting rules, he found the six systems combined in 2011 had 77 percent of the funds they should have. But applying Moody's suggested standards drops that to 58 percent.
It's actually worse. Most of the counties also borrowed money, by issuing bonds, to prop up their pension funds. So taxpayers owe money not only to the pension systems but also to bondholders. When pension bond debts are included, the six systems, serving primarily county employees and retirees, fall to an average 50 percent funded, with a combined $11.6 billion shortfall.
To understand the proposed Moody's standards, consider what pension debt represents and how it's calculated.
Employees earn future pension benefits each year they work. Those benefits should be pre-funded with contributions from employers and often employees. That money, combined with investment returns, should provide sufficient funds to pay the future pension benefits.
Pension systems periodically examine whether they're on target. They look at liabilities, the current value of the future pension benefits employees have already earned. They compare that to current assets. If there's a shortfall, that's the unfunded liability -- a debt that must be paid.
When calculating liabilities, public pension systems in California make assumptions about future investment returns. The higher the assumed return rate, the less money needed now.
California systems aggressively assume returns of 7 percent to 8 percent annually. Moody's would be much more conservative, tying that rate to returns on corporate bonds, currently about 4 percent annually. As a result, Moody's would show significantly greater current liabilities.
When calculating assets, pension systems ease in the effect of investment gains and losses. For example, at the California Public Employees' Retirement System, the nation's largest pension plan, changes in one year are spread over 15 years. Consequently, CalPERS has yet to account for most Great Recession losses. Moody's would immediately recognize gains and losses, leading to fewer assets in most cases.
Thus, Moody's would generally show greater liabilities and less money on hand. That mostly explains the projected tripling of unfunded liabilities.
The next issue is paying off that debt. Pension systems treat it like a long-term credit card balance, with annual installment payments. CalPERS, for example, spreads repayment over 30 years, keeping payments low but pushing today's debt onto future generations.
Moody's would standardize the repayment period at 17 years. That would mean greater annual pension contributions. Again, the government agencies won't have to make those higher payments, but Moody's would use those amounts to evaluate their credit worthiness.
The best part is that Moody's plans to make these numbers public. That will help all of us better understand the magnitude of government pension debt.
Contact columnist and editorial writer Daniel Borenstein at 925-943-8248 or firstname.lastname@example.org. For Moody's proposal and Dickerson's local analysis, go to this column at www.contracostatimes.com/daniel-borenstein.