Blue ribbon panel recommends better reporting standards for

　　Blue ribbon panel recommends better reporting standards for public pension health
 

　　The Society of Actuaries issued a report this week recommending a number of controversial changes in the way that public pension funds value their assets and liabilities and disclose their financial health.

　　The report, authored by an independent "blue ribbon" panel of experts, weighs into an ongoing debate over the financial reporting and resulting funding practices of public pensions. Politics, rather than economics, often drive that debate, though there is a broad consensus among financial experts that public pension systems – including, in some respects, Oregon's - systematically mis-measure their assets and liabilities. That's politically convenient, as it lowers annual pension obligations, but it results in chronic underfunding and encourages riskier investments, experts say.

　　The core of the accounting debate addressed in the report is the interest rate, or discount rate, that public funds use to calculate the cost of future benefits in today's dollars. Public pension funds use their assumed earnings rate on investments, and if they invest in a basket of risky assets, as Oregon does, they can assume they'll earn 7.5 to 8 percent annually. That high rate reduces the current value of those future benefits, allowing government employers to set aside less money today to meet them.

　　But that return is hardly guaranteed, and many experts argue for the use of a so-called risk-free rate, comparable to the yield on U.S. Treasuries. The impact would be huge, adding as much as $2 trillion to the liabilities public pension funds around the country, according to some studies.

　　The panel's report took a middle ground, suggesting that public pensions calculate and disclose their overall liabilities and annual costs using both rates. The difference between the two is a good measure of system risk, as it represents the additional liabilities and contributions governments would have to pay if they weren't taking investment risks.

　　For purposes of setting actual contribution rates, the panel made another middle-ground recommendation, suggesting the use of a forward-looking rate that recognizes both the potential for higher investment returns and the risk those investments entail. That number is currently about 6.4 percent.

　　The use of that discount rate would be politically fraught for the Oregon PERS Board, which struggled mightily last year with its decision to shave its assumed earnings rate from 8 percent to 7.75 percent. That move prompted a backlash from public employee groups, in part because it reduces annuity calculations under the system's generous money match formula. The contribution rate increase caused by a change in the discount rate would also be troubling for lawmakers after last year's painful debate over PERS reforms to reduce annual costs.

　　Milliman Inc., the actuary for Oregon's Public Employee Retirement System, did not return call for comment on how a change in PERS discount rate might impact the system's unfunded liability or contributions. It directed questions to PERS communications office. David Crosley, a spokesman for the system, who suggested that PERS already uses conservative actuarial assumptions compared to its peers.

　　"If you look at the recommendations," Crosley said, "it's fair to say we're ahead of the curve."

　　The report also recommended that pension plans report a standardized contribution rate, calculated using a uniform set of funding and actuarial assumptions, so outsiders have a benchmark to judge the adequacy of their actual contributions.

　　The panel was appointed to provide objective recommendations for actuaries and plan trustees to improve accounting, governance and financial disclosures. It included a union specialist, former pension plan executive, a former lieutenant governor, actuaries and other experts.

　　Bob Stein, retired global managing partner of actuarial services for Ernst & Young, chaired the panel, and said he hoped to see the recommendations built into actuaries' professional standards. But he said that wasn't strictly necessary.

　　"Trustees and plan administrators could request their actuary to follow these recommendations today," he said. "If trustees want to get more and better information, all they have to do is ask for it."

　　-- Ted Sickinger
 

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