In 2004, Republicans in Congress helped to pass a new accounting requirement that threatens to destroy public institutions, pensions, and unions. Here is how it works. Each public institution now has to put on its financial books the total liability for its pension and retiree health care plans. At first glance, this seems like a prudent law, but it was designed to undermine pensions by making them appear to be generating huge deficits. To understand this problem, we can look at the University of California, which has its own retirement plans.
Due to the 2004 accounting change (GASB 45), the UC system has been forced to declare on its books a multi-billion dollar retiree health care liability; however, the university is not actually spending these billions. For instance, in 2009, it declared a $1.5 billion retiree health care liability, but it only used $240 million to cover this account. Moreover, the university has now accumulated over $14 billion in its total retiree health care liability, and so when it tries to balance its books, it shows a huge deficit. In response to this expanding liability, the system has called to reduce benefits and increase the contributions that employees make to their own plans.
It is important to stress that the UC is not spending billions on retiree health care each year; rather, it being forced to predict how much it would need to cover all present and future retirees. However, since the huge accounting liability works to produce a fiscal deficit, the university fears that its high bond ratings will go down, and then it will have to pay much higher interest rates on its bonds, and virtually everything the university now does, is tied up with borrowing money.
Just like retiree health care, pension plans also have to put on their ledgers their present and future liability, and the result of this accounting change is that many pension plans appear to be approaching insolvency. Yet, once again, we need to distinguish between the accounting liability and the actual costs of the plans. While it is true that many pensions lost huge sums due to the global financial meltdown and highly questionable investment strategies, the dire position of their fiscal health has been greatly exaggerated.
It appears then that the Republican trick has worked. Politicians, employers, and the public are so afraid of the looming pension deficits that they are calling for the end of pension plans, while everyone is blaming public employers for allowing the unions to force the government into plans that will bankrupt everyone. Talk radio is full of diatribes against the public employee unions that have robbed taxpayers blind by negotiating huge retirement packages. This narrative helps the Republicans accomplish their plan to eliminate unions, get rid of pensions, and demonize public employees. Luckily, there are a few simple solutions to this problem.
The first thing to do is to simply get rid of the 2004 accounting rule, and have public institutions, like private corporations, just report their current pension and health care costs. This move would help the financial status of many institutions, and they could then take out loans or bonds to help finance the retirement costs they cannot handle. Moreover, by not putting billions of dollars of liabilities on their books, employers would be forced to present the true fiscal status of their institutions. For the truth of the matter is that many employers are using the huge retirement liability to declare fiscal emergencies, which in turn allows them to eliminate jobs, reduce pay, and downsize benefits.
The next thing to do is to limit special retirement deals and cap pension payouts. It turns out that at institutions like the University of California, top executives are given special pension packages, and now there are many people who will be drawing over $200,000 a year for the rest of their lives. Without a cap on payments, the poorest employees end up having to pay for the excessive pensions of the wealthiest employees.
Another important step is to make sure that institutions do not shift a lot of their investments into highly volatile areas like private equity, real estate, and financial derivatives. In many cases, a central reason for the underfunding of pension plans is that in the pursuit for high returns and increased commissions, money managers have pushed institutions into high-risk investments. Instead of concentrating on a steady income through treasury bonds, the people in charge of the pension portfolios have chased magical returns, and now the employees are paying the price, while the money managers are keeping their huge fees and bonuses. Clearly this whole system should be investigated.