Tag Archives: CIO

Paving over pension liabilities, again

Public sector pensions are subject to a variety of accounting and actuarial manipulations. A lot of the reason for the lack of funding discipline, I’ve argued, is in part due to the mal-incentives in the public sector to fully fund employee pensions. Discount rate assumptions, asset smoothing, and altering amortization schedules are three of the most common kinds of maneuvers used to make pension payments easier on the sponsor. Short-sighted politicians don’t always want to pay the full bill when they can use revenues for other things. The problem with these tactics is they can also lead to underfunding, basically kicking the can down the road.

Private sector plans are not immune to government-sanctioned accounting subterfuges. Last week’s Wall Street Journal reported on just one such technique.

President Obama recently signed a $10.8 billion transportation bill that also included a provision to allow companies to continue “pension smoothing” for 10 more months. The result is to lower the companies’ contribution to employee pension plans. It’s also a federal revenue device. Since pension payments are tax-deductible these companies will have slightly higher tax bills this year. Those taxes go to help fund federal transportation per the recently signed legislation.

A little bit less is put into private-sector pension plans and a little bit more is put into the government’s coffers.

The WSJ notes that the top 100 private pension plans could see their $44 billion required pension contribution reduced by 30 percent, adding an estimated $2.3 billion deficit to private pension plans. It’s poor discipline considering the variable condition of a lot of private plans which are backed by the Pension Benefit Guaranty Corporation (PBGC).

My colleague Jason Fichtner and I drew attention to these subtle accounting dodges triggered by last year’s transportation bill. In “Paving over Pension Liabilities,” we call out discount rate manipulation used by corporations and encouraged by Congress that basically has the same effect: redirecting a portion of the companies’ reduced pension payments to the federal government in order to finance transportation spending. The small reduction in corporate plans’ discount rate translates into an extra $8.8 billion for the federal government over 10 years.

The AFL-CIO isn’t worried about these gimmicks. They argue that pension smoothing makes life easier for the sponsor, and thus makes offering a defined benefit plan, “less daunting.” But such, “politically-opportunistic accounting,” (a term defined by economist Odd Stalebrink) is basically a means of covering up reality, like only paying a portion of your credit card bill or mortgage. Do it long enough and you’ll eventually forget how much those shopping sprees and your house actually cost.

Centralized Confusion

For the first time in our nation’s history federal grants are the dominant source of revenue for state and local governments.

Implications: erosion of local control and increased spending at all levels of government.

Things to watch in the coming months and years: what happens to your local tax bill. In theory, aid is meant to lessen the need for localities to find revenues to balance their books. But one  possible outcome of intergovernmental aid is that it creates fiscal illusion,  inducing a permanently higher demand for spending on the part of the recipient government. When the money retreats the new spending brought with it, does not.

But while spending of this intensity and magnitude centralizes the provision of  government it does not bring with it centralized or clear reporting. An interesting but, perhaps not too surprising, corollary to fiscal dependency.

Congress really doesn’t know what happens to federal money once it flows to local government. States and localities have separate procedures for budgeting. This  flows from federalism -the very thing the presence of aid undermines. But once states and localities accept the aid it is difficult to understand why they resist efforts at a centralization of budgetary reporting.

There is fiscal illusion with aid.  And, there is also the stubborn (and illusory) insistence of  autonomy  (see: the Illusion of Home Rule) once that money becomes institutionalized in budgets.

Yesterday, the House Committee on Science and Technology held a second hearing on stimulus accountability. On the expert panel, was the CIO of a technology company that tracks procurement spending. His testimony describes this ”transparency barrier,’ on how federal funds are ultimately spent.  That barrier is very high up in the reporting chain.

The provisions of ARRA do nothing to illuminate this. Reporting requirements stop at the state/city level. There are no requirements for local reporting or tracing ultimate recipients – contractors and subcontractors.

In other words, if you want to know how stimulus dollars are being spent in your town, better to read your local newspaper, than the federal budget.