The growing public pension funding crisis facing most of our cities and states leaves the important decision-making constituencies – elected officials, fund managers, and union representatives - in the precarious position of “we have to do something, but what?”
Political expediency, inefficiencies built into the pension process, and inaction are contributing to the $3 to $4 trillion unfunded liability problem now facing cities and states. Municipalities and states are also confronted with a perfect storm in which new accounting rules, sub-par investment results and lack of reform have merged.
Additionally, much like NOAA posts storm warning days ahead of landfall, the Governmental Accounting Standards Board (GASB) and the rating agencies forecasted several years ago what would befall government-sponsored defined benefits plans if they did not make rapid and certain changes.
Employee unions are often portrayed as the culprit, yet neither fund fiduciaries nor plan sponsors are without fault. At this point, the cooperation of all parties will be needed, along with the political will to develop a plan that will work for current and future benefit recipients. So how do we buy the time necessary for long-term reform to work?
One of the more promising new solutions is the asset backed contract. The contract places a major asset within a defined benefit plan that is paid for in digestible budget installments without an offsetting liability. This low-cost method places a GASB-defined asset in the plan which will help stabilize credit and allow plan investment advisors to rebalance existing plan assets in favor of lower risk investments.
Another important benefit of the asset backed contract plan is that it should help stabilize agency ratings because it presents a consistent and reasonably brief time period in which to solve a large portion of pension liabilities. Likewise, it compares favorably with a pension obligation bond (POB) currently being considered by several states because the asset is placed inside the plan and there is no corresponding billion-dollar bond liability and no risks inherent in an arbitration play (POB proceeds placed inside the plan must outperform the interest charge on the bonds). And, such borrowing threatens future credit ratings.
If anyone in a decision-making capacity in government has ever said, “If I knew 15 years ago what I know now, I know that I would have voted differently on pension plan administration,” this new concept offers a mulligan and buys the space needed to enact corrective pension reforms. The light these important constituencies see at the end of the budget tunnel will be a better tomorrow and not a train. It’s about time!