Coalition issues guidelines for public pensions

(Reuters) - A coalition of bond lawyers, analysts, auditors, state treasurers, pension administrators, securities professionals, bond dealers and issuers released on Thursday a framework for describing financial strains on state and local governments caused by pension funding obligations.

"This answers not an accounting question, but a securities law question: what should be disclosed to an investor?" said National Association of Bond Lawyers Governmental Affairs Director William Daly. "It requires looking at each issuer's situation ... You can't just have a checklist of 'disclose this, disclose that.'"

Nearly two years ago New Jersey became the first state charged with securities fraud by the U.S. government. Without admitting or denying any wrongdoing, the state settled allegations that it had lied about the magnitude of its pension shortfall.

Since then, the pressure has mounted for state and local governments to accurately portray pension funding obligations.

The framework from the group suggests summarizing the type of pension plan, how contributions flow into it, how the plan is governed, whether employees receive Social Security payments, and plain statements of how difficult funding the pension can be.

Most governments will likely follow the guidance in deciding what to disclose, given that the coalition includes the Government Finance Officers Association, a group of smaller issuers, and the National Association of State Treasurers.

The full document can be found here

The Pew Center on the States estimates that public pensions are short $660 billion in paying future benefits.

Other guidelines, due to be issued soon, will address the accounting question. The Governmental Accounting Standards Board's final set of requirements for providing greater detail about pension obligations is due this summer, spokesman John Pappas said.

Currently, state and local governments can select from a menu of accounting practices for their pension systems provided by the board, an independent group that sets the accounting standards for all governments in the country to follow much like the Financial Accounting Standards Board does for the private sector.

The largest point of contention is how much money governments need to put aside for future benefits.

In the proposal GASB made last July, it considered abandoning the practice of spreading expenses over several years and suggested that pension systems lacking sufficient assets to cover future benefits use projected rates of investment returns of about 3 to 4 percent. The historical averages for returns on investments, which provide the bulk of pension funds' revenue, have been around 8 percent.

Last year, members of the U.S. Congress considered legislation that would require all systems to post projections using the lower rates, but the bills largely stalled.

(Reporting by Lisa Lambert)