April 22, 2013
The NYT told readers about efforts to require city governments to disclose their pension liabilities in order to be able to continue to issue tax-exempt bonds. While better disclosure of pension liabilities may be desirable, there are important methodological issues that the piece neglects to mention.
The piece notes that Moody’s, the bond-rating agency, is now adjusting pension liabilities reported by city governments in making assessments of their financial situation. The methodology used by Moody’s to make its adjustment ignores the expected return from market assets. Moody’s methodology would have implied that pension funds were hugely over-funded at the peak of the stock bubble in 2000, even though any reasonable assessment of pension liabilities would have predicted very low returns on assets at that point.
If municipalities were to adjust pension contributions to sustain funding targets using the Moody’s methodology it would lead to highly erratic funding patterns. In most cases, governments would have to make large contributions for a number of years and then would have to contribute little or nothing as market returns exceeded the return assumptions used by Moody’s. This would be comparable to having city governments accumulate large bank deposits so that they could pay for their schools or fire departments from the annual interest.
Usually public finance economists advocate funding mechanisms that imply an even flow through time so that no particular cohort of taxpayers is excessively benefited or penalized. The Moody’s methodology, which is also being pushed as part of the bill being debated in Congress, goes in the opposite direction. This fact should have been noted in the piece.
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