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Pension Debt and Expense Models
GASB 68 and Moody's Pension Adjustments

Is Your Local Government in Good Shape? Will Unfunded Pensions Bankrupt It?
How Do You Know?

The rules for government reporting of pension finances radically changed in June, 2012. Governments must use the new rules a couple of years from now. They will hugely increase most governments’ reported debt and pension expense.

Credit rating agencies are getting tougher on unfunded pensions. Moody’s Investor Services will begin adjusting reported government pension finance values. They will indicate most governments have a lot more unfunded pension debt and should be paying far more to Pension Funds.

The main importance of these imminent changes to concerned citizens today is they strongly show that unfunded pensions put state and local government finances at great risk, much more than reported to the people. They help explain how unfunded pensions produce much greater risk and by implication what to do about it. The impact of these changes will be profound.

I’ve developed models to show the impact of these two changes. I used the models to produce reports explaining these changes to citizens.

A quote that explains why these changes are so desperately needed:

Bill Gates on How Government Pension Accounting is Fraudulent The way that state (and local government) budgets are presented is so fraudulent - there’s a thing called the Government Accounting Standards Board that allows you (state and local governments) not to take (report) full pension cost, not to take (report) retiree health care benefits. It looks really free to continue state (and local) deficit spending which is nominally a balanced budget but only accounting fraud allows you to pretend it’s balanced.

Bill Gates, Aspen Ideas Festival, Summer 2010 - Click to see video


What impact will GASB 68 have on your government's financial statements? What does GASB 68 do, how and why?

I developed a model that shows what recent financial statements would have "looked like" if GASB 68 had been in effect. It's designed for local governments with their own Pension Funds.

The model projects the value of the "Net Pension Liability" (or Net Pension Asset if a Pension Fund is “over-funded”). It projects the value of annual Pension Expense and what will be very large one time past Pension Expenses that will be reported as a form of "prior year adjustment". The model shows the total financial impact of unfunded pensions including Pension Obligation Bonds.

I applied the model to Mendocino County's 2011 statements. Mendocino is a small county financially with a $200 million budget. Here's the impact:

Change to Mendocino County
  As Reported GASB 68
Pension Expense $15 Million $41 Million
Bottom Line (before "Special Adjustment" $13 Million Minus $13 Million
Total Assets $220 Million $163 Million
Total Debt $145 Million $263 Million
Net Worth $75 Million Minus $100 Million
Unreported Past Pension Expenses Reported in One Year $175 Million

Data must come from at least 10 years of audited financial statements and Pension Fund actuarial valuations.

Here are three papers:

Major Pension Financial Reporting Reform = Major Hit on Mendocino County: (8/8/12) The impact of the new rules on Mendocino County - 11 pages. pdf file (654 KB)

Very Short Description of My GASB 68 Predictor Model: (8/8/12) A short description of my model - 2 pages. pdf file (164 KB)

Summary Description of My GASB 68 Predictor Modely: (10/16/12) A somewhat longer description, a summary of a more complex paper not posted here at this time - 8 pages with 5 pages of quotes from GASB 68. pdf file (790 KB)


Moody's Model

During summer 2012 Moody’s announced their intention to adjust reported government pension financial values used in their credit rating analysis. They published their draft adjustments for comments.

Moody’s proposes to make four adjustments. Two are very significant. First, pension liabilities would be recalculated using high-grade long term corporate bonds as the discount rate (5.5% for 2010-2011). Second, annual contributions would be adjusted to reflect this lower discount rate and a 17 year level-dollar amortization of unfunded pensions.

Moody’s reported their Cut the Credit Card Up! adjustments would triple the value of unfunded government pension debt across the US they would use in credit ratings.

I modeled the adjustments in Moody’s review document. My model uses data from actuarial valuations. It produces four adjusted values—total pension debt, unfunded pension debt, normal yearly government pension contributions, and unfunded pension amortization payments.

I applied the model to the six California North Coast—Bay Area counties that have independent Pension Funds: Alameda, Contra Costa, Marin, Mendocino, San Mateo, and Sonoma.

Moody's Investor Service's Proposed Changes in Analyzing Government Pension Data: (1/1/13 (939KB)

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