The following is the March “Views & Vents” column for Employee Benefit News

In February 2007, the Government Accountability Office issued a study on private retirement plans and urged Congress to increase pension scrutiny and auditing.  My "Views & Vents" response at the time, "How The GAO Got It All Wrong," was not exactly supportive.

Now, the venerable institution has weighed in on public retirement plans. If anything, GAO's prognosis is even worse. Unfortunately, so is its logic.

A Bucketful of Truth

The GAO report, State and Local Government Retiree Benefits, Current Funded Status of Pension and Health Benefits, shows that public plans may be more "at risk" than their private-sector counterparts.  It raises serious questions about the stability of benefits promised to "nearly 20 million employees and 7 million retirees and dependents of state and local governments — including school teachers, police, firefighters, and other public servants."

Of the pension plans the GAO tracks, only 58% are funded "soundly"(i.e., at the 80% level). This represents a significant drop since 2000. Even worse, some plans "have persistently reported low funded ratios," which "raise[s] concerns about the future . . . and may shift costs to future generations."

That's a disturbing conclusion, and right on the money. But it's just a bucketful of truth in a sea of misinterpreted data and misleading conclusions.

Flying Below the Radar

As the GAO notes, about 90% of governments sponsor defined benefit (DB) pension plans. Of course, the private sector was also once DB-centric. Then came a series of regulations — issued by government — that made private pension administration cumbersome and costly. And, unlike government, private employers faced a battalion of disincentives for "persistently" underfunding their plans. 

Over time, regulatory and accounting burdens forced most private employers out of DB altogether. That's why the vast majority of company retirement programs are now 401(k) or similar defined contribution plans.

But things were supposed to be different for governments. Their plans were largely exempt from the complex rules and funding requirements that led to mass DB exodus in the private sector. 

It seems that flying under the regulatory radar hasn't had a salutary effect on governmental plans. Exempt from most funding rules, governments tend to take shortcuts. Most don't meet their annual required contribution. And the worst offenders are "sponsors of plans with the lowest funded ratios." 

As the GAO notes, "Almost two-thirds of plans with funded ratios below 80% in 2006 did not contribute the full ARC in multiple years" [emphasis added]. In fact, in the majority of years the GAO tracked, most "did not [even] contribute more than 90%."

Unequal Playing Fields

Interestingly, multi-billion dollar shortfalls in governmental plans dwarf those in the private sector. While regulators consider the private pension system to be in "crisis," the GAO views public deficits as mere trifles.

Even in a crunch, the GAO explains, "current assets and new contributions may be sufficient to pay [pension] benefits for several years." And, looking further out, the average public entity would need to make only minor contribution adjustments "to achieve healthy funding on an ongoing basis."

So what's the GAO's real beef? Where all benefit roads seem to lead: "daunting [governmental] fiscal challenges" driven "by the growth in health-related costs." 

Over the Cuckoo's Nest

As related in the last "Views & Vents," retiree health care is the most incendiary issue in benefits today. Because of changes in Governmental Accounting Standard Board (GASB) rules, public employers will need to meet the same standards as companies and recognize the future value of retiree health benefits on their current financial statements. And they'll have to allocate millions of current dollars toward this notional future value — even though costs (if any) won't be incurred for decades (if ever).

It's revealing that these liabilities – for benefits that are theoretical – draw more GAO wrath than do those for pension benefits, which, in contrast, are actually guaranteed.

"Unfunded [health care] liabilities are large," rebukes the GAO, because "governments typically have not set aside any funds for future retiree health benefits in the way they have for pensions." 

Well, of course they haven't. Health care and pensions are as different as, well, non-qualified and qualified plans. Why would anyone prefund benefits that can be adjusted as conditions change?  

The Longhorn Law

I have argued elsewhere that the insane notion of using accrual-based accounting for a non-qualified benefit will be the death of the retiree health plan. If you think otherwise, ponder the newly sponsored Texas House Bill 2365, introduced to "protect Texans from far-reaching [GASB] consequences." 

"Consider your own individual health care costs, and those of your family, for this year alone" the bill suggests. "Now try to predict how your health may change during the next 50 years and project the associated cost. It's an impossible figure to determine or guess."

According to the bill, "GASB 45 does not meet the two-prong test necessary for [a] transaction to be booked: It does not meet the accounting definition of an obligation, nor is it measurable." And, the bill points out, "Consider what happened when the private-sector equivalent of GASB . . . imposed a similar rule on private companies. No fewer than 70% of Fortune 500 companies cut or eliminated retiree health benefits."

The New "Rome"

In the ancient world, an axiom held that "All roads lead to Rome." In the benefits world, they go to the New Rome — a realm of regulators ramming down ruthless and ruinous rules.

Of course, common sense suggests that the simplest way to fund the unfundable — is to eliminate the need to fund it. That's why, in the New Rome, terminated plans may become the ultimate accounting solution.

Corey Sherman (coreystrategy@bellsouth.net) is managing partner of Strategic Planning Associates.