Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Pensions Face New Accounting Rules

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Pensions Face New Accounting Rules

Article excerpt

The Sisyphean task of funding U.S. state and local-government retirement plans, a hidden risk for municipal-bond investors, will get even more daunting under proposed new accounting rules.

Pensions in Illinois, New Jersey, Indiana and Kentucky may have less than 30 percent of the assets needed to cover promised benefits under the measure, according to data from the Boston College Center for Retirement Research. The changes will alter how liabilities are calculated and how assets are reported on financial statements. Pensions would begin using the rules for fiscal years starting after June 15, 2013, and employers such as school districts would follow a year later.

The Governmental Accounting Standards Board, which decides how states and municipalities must keep their books, is set to issue the new rules next month. Any decisions made so far are "tentative and subject to change," John Pappas, a spokesman for the Norwalk, Conn.- based organization, said.

"People are going to be really surprised," said Matt Fabian, managing director with Concord, Mass.-based Municipal Market Advisors. "It's one of the few things out there that could precipitate a major change in investor demand."

The rules may raise government costs in the $3.7 trillion municipal market as investors demand more yield to compensate for higher pension risk and possibly lower ratings. Illinois became Moody's Investors Service's lowest-rated state in January because it hadn't dealt with its underfunded pensions.

The need for higher contributions can add to the returns investors require, according to the Boston College center.

"The market is starting to look much closer at what governments are doing to address the pension problems," said Jean-Pierre Aubry, assistant director of state and local research at the center. "Contributions to pensions matter to bondholders."

A center report in February 2011 showed pension costs as a proportion of budgets rose to 3. …

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