Are you a public employee who is concerned that you may see your pension benefits diminished? Maybe you are a member of the local city council and are worried that your city may go broke trying to "comply with the law" that requires very high pension contribution rates by your city. Are you trying your best to navigate through the "mine field" of statutory and regulatory constraints that "govern" public pension funding? Do you cringe every time you hear about some new "law" promulgated by the "Dalai Lamas" of pension funding? Do you begin every day by pointing your prayer rug toward Norwalk, Connecticut and praying that the "god of public finance" will have mercy on you. Do you religiously follow the demands of the three big bullies who constantly threaten you with a lower bond rating and eventual financial ruin?
We should probably begin with the law that requires 100% funding of public pensions systems. After all, the law is what we all agree to uphold and abide by. However, there is one major problem with the public pension funding law – there ain't none. It is nothing but fabricated baloney. Think I am wrong? Prove It! Before you start spamming me with thousands of pages of “rules” attached to hate mail, read a little further.
Just who are these “controlling authorities” and what is there “legal standing” concerning public pensions and public finance? There are six:
1. GASB – Governmental Accounting Standards Board
2. AICPA – American Institute of Certified Public Accountants
3. GFOA – Government Finance Officers Association
4. Moody's – Bond Rating Company
5. Standard and Poor's – Bond Rating Company
6. Fitch – Bond Rating Company
There are other pretenders, but the syndicate is limited to these six “families.” Just like the mafia, each emphatically denies the existence of any collaboration. Another similarity with the mafia is that these guys have no legal portfolio – zilch. Over the years they have muscled their way into the public financial community and usurped the authority of legally elected officials. These six families have no legal authority – nada. But, don't confuse authority with power. This syndicate has overwhelming de facto power and can crush you and your city in a heartbeat and for the most part you have little or no recourse.
A common trait of the six is that they are the sole property and employees of the “Godfather.” Just who is this godfather? Well, there is not really a Don, but a critical mass of fiscal conservatives that dictate the agenda, with the Tea Party selecting the lectionary today. This consortium of fiscal conservatives are not being total candid with you. Their issue is not really with public pensions or how they are funded. Their real thesis is: “We believe that the present cost of government services is too high and we want the price reduced.” And what is the basis for their belief? Just as your moma used to tell you - “Just because I say so.” Now, I must admit, they could be right about the cost of government, but unfortunately that is not their point of attack.
Let's examine the six families and their complicity in this conspiracy to require 100% funding of public pensions.
Actually, the six can be divided into two groups – the rule makers and the enforcers. GASB, AICPA, and GFOA are the owners of the doctrine and they exclusively control the rules. GASB gives the edicts of the Orthodox Church of Governmental Modified Accrual Accounting, AKA The Church of What's Happening Now. AICPA and GFOA sit in amen corner and lend legitimacy to GASB's pronunciations. Occasionally, the atheistic Securities and Exchange Commission can be seen picketing out front. This all takes place at the big cathedral in Norwalk, where GASB resides. GASB has a long list of rules that are chronologically numbered – GASB 1, GASB 2, etc.
Here is the ironic part – no city or county has to recognize, follow, or obey this compendium of commandments. It is not the Ten Commandments. It is more like the ten suggestions. It is not the law of the land. If a local government ignores GASB and its two minions, the sheriff will not show up with an arrest warrant. Disobeying GASB is not a violation of the law.
And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads:
And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.
The governmental finance mark of the beast is the unqualified audit opinion. Without it, you are toast. Either you obey the GASB commandments and get the mark of the beast or you will be frozen out of the credit market. Ideally, this could be a workable system, if it had not been kidnapped by the accountants and their love for a convoluted concept of accrual accounting. The accounting industry claims it is “letting it all hang out” with its rules, but it is more like John Ehrlichman's “modified, limited hangout.”
GASB continues to parade out its pronouncements, as demanded by accrual accounting zealots and fiscal conservatives striving for minimalist government. Neither of these GASB patrons openly state their agenda, but instead hide it behind a Vance Packard publicity campaign. As for the canon of all canons – GASB 45, Moses brought it down from the mountain top. At least, that is what GASB would like for you to believe. Failure to strictly follow its codification of post employment benefits could subject the violator to excommunication.
A closer examination reveals that GASB is just a “paper tiger” - literally. GASB only claims to be the god over financial statements – ink on paper. Never has it claimed that its subjects must actually turn accounting transactions into cash transactions. Take GASB 45 for an example, GASB only requires that the current liability and net change in that liability be recognized in the “full accrual” presentation in the Comprehensive Annual Financial Reports. It does not even suggest that it has the authority to force cities to transfer money into a fund for pensions or retiree insurance. It is the bond rating companies that are pushing that snake oil.
Next comes the bond rating companies – once pillars of the financial world that have morphed into Frankenstein's monster. After getting past the GASB guys, cities are confronted with the enforcers – Moody's, Standard & Poor's, and Fitch. These guys have a secret grading system that determines a city's creditworthiness. A rating of AAA is the crème de la crème of ratings. Don't jump through all of the hoops and that AAA rating could take a dive and your rate of interest could go through the roof. Today, the bond rating companies are one-by-one bullying cities into actually converting accounting theory into live cash transactions. The veiled threat is “Either fully pre-fund all pensions and post employment benefits or we will pan your bond rating.”
Do you ever wondered who are the clients (source of money) of auditors and the bond raters. It is the entities being examined. Cities hire and pay their auditors. Cities hire and pay the bond raters. Normally, clients would be in charge, but in a rather strange attempt to appear independent from each other, cities have exercised only limited influence over these two “independent examiners.” Over the years, the power and influence of these two “employees” increased significantly, until today where the two original security companies have become more like a mafia protection racket. The master has become the slave. “Do as I say, or I will throw you on the railroad tracks.”
This system might actually work, if GASB and the bond raters did not come the same gene pool – bean counters. Bean counters see accrual accounting as a goal unto itself. However, they lack the courage to fully implement true accrual accounting and instead build in safety nets, in case they step on a banana peel. Under true accrual accounting, there would be no five year smoothing of earnings variances or thirty year amortization of prior years unfunded liabilities and the same rules would be applied to every line on the balance sheet. Trouble is they do not have the stomach to implement such draconian insanity. So, they have developed accrual lite – a coward's half-hearted dogma.
If GASB and the bond raters had not conned cities into this madness, there would be no issue with defined benefit plans. Most police and fire defined benefit plans require from 20% to 25% of annual wages to be set aside to pre-fund them, but few cities faithfully do this. They fink out during the years when the fund over-performs or has surplus funds. When the fund takes a hit on its investments, the city cries about the high contribution rate. The solution, assuming the goal is to fully pre-fund the pension, is to deposit 20% to 25% every year – good or bad. Dump the accounting industry nonsense.
Finally, let's look at the rationale for pre-funding pension liabilities. What is an unfunded pension liability? It is money owed by the city to its employees, by way of the pension. It is debt – plain and simple. What are bonds payable? It is money owed by the city to bond holders, by way of a bank administrator. It is debt – plain and simple. How are these two debts different? There is no difference. Debt is debt. Why would we demand pre-funding for pension plans, but not for debt service of bonds? If the pension rules were applied to debt service, every city would have to maintain a cash balance great enough to pay off all outstanding bonds.
The botttom line? There are three problems with pensions:
1. Employers not making pension contributions during good years
2. The insane practice of mark-to-market
3. Retroactive granting of benefits without ponying up the money to pay for it
Don't agree? Click the comment button below and then sound off. Oh don't bother sending statutes requiring cites to appropriate the funds to pay pension obligations. Those laws are not about pre-funding. They cover the nonsensical idea that the current city council cannot bind future city councils. Oh sure, what about bonds, rental agreements, leases, etc? Also, a self-imposed ordinance requiring funding of pensions is not law, but an exercise in self-deception.