Our pension is messed up. It is horribly underfunded - to the tune of 46%. GAAP (Generally Accepted Accounting Principles) don't have a hard/fast rule on how a plan should be funded. The problem comes in because you're dealing with the net present value of future cash flows - and those variables are affected by the investments, the overall financial market, the longevity of the pensioners, and a host of other influences.
Worse yet is the fact that because of the inability of Illinois politicians to exercise fiscal restraint, the state's budget has an unfunded pension liability of $40.7 billion. This rate is more than five times the national average (7.3%). Currently Illinois has the largest unfunded pension liability in the nation.
|Understanding the reasoning behind these demands for change requires some general knowledge of the calculation of net periodic pension expense (GAAP rules) and the rules that the federal government uses to monitor plan funding (tax rules). They have some commonalities, but their purposes and computations differ significantly. We provide a general description of how the rules differ. To further demonstrate these differences, we provide a detailed comparison of the two sets of rules using data for 15 companies and show that the GAAP and tax funding ratios can provide different estimates of a plan's solvency.Section 401(c) of the Sarbanes-Oxley Act of 2002 mandated that the SEC conduct a study on companies' off-balance sheet accounts to determine if there is sufficient transparency of these transactions. The June 2005 report included a defined benefit plan section. The SEC report estimates that about $414 billion of the pension liability remains off-balance sheet and that these plans may be underfunded by $201 billion. (2) In his testimony before Congress, Congressional Budget Office's (CBO) Director Holtx-Eakin provided an estimate of $450 billion for the underfunding. (3) Both reports recognize that pension liability estimates are highly sensitive to projected interest rates, future returns on plan assets, retirement ages, and life expectancies. A shift in any of these factors can cause large fluxuations on the funding estimate. As current market returns and interest rates increase, it is highly likely that the underfunded plan estimates will decrease when 2005 rates are used.A company's funding policy, one subpart of its pension policy, should be solely determined with reference to its benefit and investment policies. As a result of governmental regulations (tax rules) and accounting standards (generally accepted accounting principles, i.e., GAAP), companies may not be able to implement a rational funding policy. (4) When implementing the GAAP rules, companies frequently have two objectives: reduce expense to maximize income and maintain a constant expense to provide income stability. (5) Although companies may be aggressive in their attempt to maximize income, they are more likely to be conservative in estimates for funding purposes because a shortfall in plan assets has more dire consequences than under reporting financial expense. (6) George Miller, as a Committee on Education & the Workplace member, reviewed private PBGC reports. Following his review, he called for more public disclosure on pension funding status. (7)|
But what's interesting about this whole pension debate is that the Illinois Constitution requires that pensions be funded first - before almost everything else in the budget!
From the Chicago Center for Tax Budget and Accountability:
|The Illinois Constitution mandates that the state satisfy the pension benefits earned by its employees and retirees−without diminution. That means no change in current pension law can diminish the state's responsibility to provide benefits to either former public employees who have retired or to current employees when they retire.The current pension system would be affordable, if the state had the fiscal discipline (and revenue) to have made required yearly payments for benefits earned each year, (the “normal cost”) plus make interest payments on accrued unfunded liability.|
Our current trustees, I feel, aren't doing enough to push this issue; though I have little hope that even a change in representation will do much.
I'm voting for Mike Shields because I've heard him speak and I like his message. Here's a snippet of Mike bitch-slapping that fraud Ron Huberman: