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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?

Last Update 10/13/12

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.

I’ve developed models to show the impact of these two changes.

A quote that shows why new pension reporting rules were 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 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

GASB 68 Model

This model shows you the huge impact GASB 68 will have on your government's financial statements . It can help you gain a basic understanding of what GASB 68 does, how and why. It can also help government financial officials understand how GASB 68 "works" and what they are going to ahve to do to implement it.

This model 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 predicts the value of the "Net Pension Liability" (or Net Pension Asset if a Pension Fund is “over-funded”). It predicts 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 Oh No!!! model to my home county's 2011 statements. Mendocino is a small county financially with a $200 million budget. Reported pension expense went from $15 million to $41 million. That pushed Change in Net Assets Before Special Items from a positive $13 million to a negative ($13 million). Total Assets declined from $220 million to $163 million whereas Total Liabilities reported went from $145 million up to $263 million.

If GASB 68 had been implemented in 2011 the County would have reported a prior years adjustment of unreported pension expenses of $175 million!

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

GASB will release an "Implementation Guide" in Spring 2013. Until then we can't know specifics about some complex calculations.

This model is my work - GASB has not reviewed or approved the model in any way.

Here are two descriptions of the model and what it can do for you:

Two Page Abstract Eight Page Summary
A very short terse description of what the model is designed to do, the main provisions of GASB 68 that are modeled, the construction and explanation of the model, the model's output, and a highly summarized description of the output of the model applied to the County of Mendocino. More detail about the need for GASB 68 and a predictor model, the general principles for the development of the model, a word about including Pension Obligation Bonds in calculating the total financial impact of unfunded pension debt, the main provisions of GASB 68 that are modeled including excerpts from GASB 68, a more complete description of "Net Pension Liability", annual pension expense to be incorporated in statements, and the one-time recognition as prior year adjustments of unreported pension expenses calculated under GASB 68's rules, and more detail about the model's construction.
 

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. On average unfunded pension debt was 2 ½ times larger than reported which tripled the counties’ total reported debt as Moody’s suggested. County normal pension contributions doubled and UAAL Amortization payments more than tripled. Overall County payments to their Pension Funds were 2 1/2 times greater.

Again—this is my work. Moody’s has not reviewed or approved the model. The Moody’s model is significantly “simpler” than the much more complicated GASB 68 model.

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