The Future of Public Pension Plans
saves the taxpayers a lot of money over a long period of time.
We need to factor that into the cost to taxpayers, the efficacy,
and the ability of the pension fund to earn money—because
most of the pension benefits that are paid to employees over
time are actually paid by the fund’s earnings. Those of us who
advocate the more conventional approach feel that the pension
fund’s ability to lower taxpayer cost should be baked into the
methodology when coming up with a liability to be used for
financial reporting purposes.
I believe there’s value to the market value number. People who are trained economists don’t believe any other number makes sense. And by providing the
number, a lot of the complaints that the
information is hidden are overcome.
NORTH: I believe there’s value to the market value number.
People who are trained economists don’t believe any other
number makes sense. And by providing the number, a lot of the
complaints that the information is hidden are overcome. Does
it require a lot of careful explanation? Yes. Does it require doing
some other disclosures of other actuarial numbers so that things
can be put in context? Yes.
I make it a point in the New York City Retirement System’s
comprehensive annual financial reports to disclose multiple
measures of funded status along with commentary on exactly
what the numbers mean. If you ask an actuary what’s the value
of a stream of payments and you tell him the fund it supports is
invested 70 percent in equities, he’ll give you a number. But if
you said, “Oops, I made a mistake; we actually have all the money in bonds,” the value of the stream of payments—as reported
by the actuary—changes. For economists that just doesn’t work.
On a risk-adjusted basis, the value of the stream of payments
is what it is. For budgeting models like the ones actuaries use,
recognizing assets as part of the process is perfectly reasonable.
But the underlying financial values are demonstrated by the
market value of liabilities.
RIZZO: In the private sector, the Financial Accounting Standards Board (FASB) requires that a corporation’s DB pension
liability be measured in a manner that’s similar to a market value. It’s a settlement value of the liability. In the private sector,
it’s all about a corporation’s market price of their share, so the
market matters. And because corporations tend to merge and
go bankrupt and terminate their plans, that makes a lot of sense
for the Financial Accounting Standards Board.
The FASB and the GASB (Governmental Accounting Standards Board) have a common parent—the Financial Accounting
Foundation. FASB sets GAAP (generally accepted accounting
principles) standards for the corporate world, and GASB sets
the GAAP standards for the government world. The rules that
GASB established for GAAP financial reporting have been in
need of improvement, and it has undertaken a deliberative and
thorough project to change the accounting standards for government financial reporting on pensions. One of the things it
is looking at is this matter of comparability and consistency.
Under new proposed standards there will be a single measurement method.
Currently, governments are allowed to use any number of
methods for reporting in their financial statements, and there’s
been a tie between the funding methods and the financial reporting methods. GASB has divorced them in its proposal. In
many instances, governments will have two sets of numbers—
liabilities and costs for funding purposes and liabilities and
expenses for financial reporting. This will apply to pensions
but also to retiree medical.
GASB has dictated one cost method—what’s called the en-try-age-normal cost method—but it also preserved this notion
that the cost to taxpayers is what we’re measuring and disclosing. In this way, it rejected the market value of liability as not
being useful or relevant for financial reporting purposes for
KEN T: The concern with the disclosure of the market value of
liability is how that information is used. It is a measurement
based on a risk-free cash flow to participants, which is one of
the reasons why it’s valuable to measure. But we don’t live in
a risk-free world. We pool risks regularly, and in a DB system
system we’re pooling investment risk and we’re pooling longevity risk. To identify and focus on this risk-free measurement
could mislead the public to say, “That is what the funding target
RIZZO: When I was an actuarial student just out of college, one
of my co-workers came to me as a prank and said, “I’ve got this
list of employees for ABC client, and what we need is for you to
calculate the average Social Security number.” After he left the
room, I got to thinking, “That is a totally irrelevant number.”
That’s almost the way I feel about the market value of li-
ability. Someone might say, “Well, you have that calculation
in your computer. Why can’t you give it to me? Are you hid-
ing it?” But, almost like the average Social Security number,
there is a very narrow relevance to the market value of liability