Public Pension Crisis and Accounting Standards: How Many Canaries Must Die?

Posted: Mar 31, 2017 11:54 AM
Public Pension Crisis and Accounting Standards: How Many Canaries Must Die?

Before high-tech equipment, miners took canaries with them into the mines.  If the canary keeled over, it was a sign of immediate trouble.  The theory was that a canary was more sensitive than humans to poison gas and was more expendable than humans in the scheme of things.

Today, financially speaking, canaries in the form of smaller municipal and other public pensions are keeling over, and it’s a sign of immediate trouble for the $4 to $6 trillion unfunded liabilities facing the public sector across the U.S.  The warning signs are clear, as new accounting standards show that actuarial assumptions relied upon by political leaders and real accounting projections fail to reconcile.

The new Governmental Accounting Standards (GASB 67, 68, 74, and 75) shine a light into the dark mines, revealing that past accounting practices, though entirely legal, simply fail to address the underlying need for more cash value.  It has to come from somewhere, and political leaders have become increasingly aware of “unfunded liabilities” and how paying for them occupy larger and larger percentages of their budgets.  At some unknown but very real moment in the not-too-distant future, the mine will explode.

The public retirement plan crisis, well-documented as a financial leviathan in and of itself, is now carrying across the board to affect the financial health of the sponsoring government entity itself.  Previously what was thought to be a perfectly safe canary sitting aside the CEO (Mayor, Governor) is showing signs of deprivation because of the ever-increasing cash required to keep the plans afloat.  The bird staggers when it becomes clear the increasing pension fund liabilities pinch the overall balance sheet.  The final blow comes when the rating agencies downgrade the entity’s credit ability, requiring even more cash to fill the gap.

If the canary could only talk, what would the tiny bird say? Wouldn’t he say that actuarial assumptions must match more closely actual investment results, which create lower assumed rates, higher contributions and better funding?  Shouldn’t actual payroll growth be used rather than hypothetical?  Shouldn’t plan administrators insist that the most current mortality tables should be used, reflecting that people live longer and therefore more money is required?  Shouldn’t administration plans and investment expenses always be monitored? 

The warning signs have always been there. If administrators fund a plan less today as an expedient way to keep parks and libraries open, the canary will die.  Ever-growing unfunded liabilities suck the financial air out of the atmosphere of a municipality. Isn’t it time that those in charge take heed of the warning signs? There is still time to take corrective action, but very little attention is being given to the fact that doing too little or none at all will lead to disaster. Take heed – an explosion is imminent.

In the face of looming disaster, what should a municipality do? Today, there is high tech sensing equipment available and it comes in the form of the Registered Municipal Advisor. The RMA is equipped to opine on various bottom-line scenarios. The licensed professional is trained to help map out an overall strategy back to financial health.

It may also be that the RMA points out a potential problem as yet unforeseen by political leaders and plan administrators and offers ways to address it. This holistic approach to the financial complexities within the defined benefit plans and within the other employee benefits is the major pathway back to municipal fiscal health.

Just as new technology has improved conditions in the mines and saved lives in the process by avoiding explosions, new expertise based on experience in the pension fund arena and innovations in available financial tools to address the problems offer promise for government entities to take corrective actions now.  The time has come for the better canary.