Public pension plans have long been relying on flawed discount rates to value their liabilities, and various attempts have been made to estimate the true value of those obligations. A recent paper by pension expert Joshua D. Rauh at the Hoover Institution is among such attempts. What sets this paper apart from previous efforts is its use of the disclosures under the new GASB standards to arrive at more accurate estimates of pension liabilities. The paper is based on an analysis of 564 state and local pension systems, covering 97 percent of the public pension assets in the US.
The paper finds that the new GASB guidelines (GASB 67) have no meaningful impact on the way public plans measure their liabilities. Most plans still use their expected returns as discount rates, and in fiscal year 2014 only 11 percent of the plans used discount rates that were on average only 1.1 percent below the expected return. The average discount rate in the sample is 7.41 percent.
The new GASB disclosures however provide interest rate sensitivities, which allow the author to revalue each plan’s accrued liabilities with better accuracy. Using the market valuation approach, the author finds that the true aggregate unfunded market value liability is $3.412 trillion, compared to the official $1.191 trillion under GASB 67 standards. The corresponding market value funded ratio is 51.4%, compared to the official 75.2%. The revaluation also reveals that the true annual cost of keeping pension liabilities from rising is 17.5% of state and local budgets, compared to the actual contribution level of 7.3%.
To read the full paper, go here.
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