Public Pension Underfunding in California

Abstract

As is widely known, public sector pension plans and state and local governments throughout the country are in trouble. Things are about to get worse. The Governmental Accounting Standards Board has adopted new accounting and reporting rules that will make underfunded plans of governments appear to be much more underfunded than under the current rules. The changes involve discount rates, amortization periods, asset valuation and a requirement that local governments that are party to cost-sharing multiple-employer plans report their proportionate share of the plan’s unfunded liability in their financial statements. In a parallel development, Moody’s Investor Services (one of the major credit rating agencies) is about to launch similar changes. The combined effect will be to add significantly to the debt of many local governments and likely force them into Chapter 9 bankruptcy. California is on the cutting edge of this development, with three sizable cities already in Chapter 9. This article will focus on California; however, the developments discussed apply to public pension plans and local governments nationwide.