US - States may face increased retirement- fund deficits and pressure to stop skipping pension contributions under proposals being reviewed by the Governmental Accounting Standards Board.
Pension-forecasting proposals from the rule-making organization, released June 16, would revise methods for projecting liabilities and investment returns. The changes mean estimated investment income likely will be reduced from current assumptions and unfunded liabilities will increase, Moody's Investors Service said in a report.
The proposed revisions may make states less likely to skip pension payments, Cliff Corso, the chief executive officer of Cutwater Asset Management Corp., said yesterday in a telephone interview. "That should shed a decent amount of light - a lightning rod - to spur action."
Estimates of the gap between the value of U.S. public- pension plans and the amount needed to cover promised benefits range from $500bn to $3trn. The smallest projection, from the Pew Center on the States, is based on annual investment returns of 7.25% to 8.5%. The higher figure was forecast by George Mason
University researchers using the relatively risk-free 3.5% return on 15-year Treasuries.
The standards board, based in Norwalk, Connecticut, proposes using the expected return on a basket of high-quality municipal bonds, which would produce a deficit somewhere between the high and low estimates. The Bloomberg Fair Market index of AAA-rated municipal bonds ended yesterday yielding 4.38%.
"The average discount rate will almost certainly be lower than is being currently used," Moody's said, referring to the proportion of projected liabilities forecast to be covered by investment income. "For plans that are expected to be underfunded, this lower discount rate will result in large increases" in the reported deficits, Moody's said.
Every percentage point drop in the assumed rate of return would increase reported pension underfunding by between 8% and 12%, according to Moody's.
"Shedding a light gets things out there and gets things moving," said Cutwater's Corso. His Armonk, New York-based company manages $5bn of municipal bonds in a $44bn fixed-income portfolio.
The proposed accounting revisions, which are subject to comment through October, come as states are reporting widening pension liabilities following declines in asset values in the year through June 2009. Wilshire Associates, based in Santa Monica, California, has estimated the median investment loss at 17% that year.
As fiscal 2010 began, states had only 65% of the amount needed to cover promised benefits, down from 85 percent a year earlier, a Wilshire analysis of 125 retirement plans showed.
Public-pension plans in the U.S. held assets valued at $2.3trn on June 30, 2008, according to a February report from Washington-based Pew. Most commonly, the funds project future returns to average about 8% a year, Pew said.
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