Wednesday, April 8, 2009

The Debts of the Spenders: Pension Tension and Derivative Problems w/GASB 43, 45, and 53

Since we are in an accounting frame of mind (especially after the ratings downgrade of municipal bonds released earlier this week), I have decided to revisit an old topic of mine that I wrote extensively about back in academia.

GASB 43 and 45. You MUST understand these accounting rules if you are investing in annuities, muni bonds, or anything linked to state and local finance. They are the equivalent of M2M for ALL non-federal US governments that mark PENSION costs at fair value instead of the old method of cash outlays for the fiscal year. GASB stands for Government Accounting Standards Board and is the public sector equivalent of FASB.

GASB 43 and 45 are unlikely to go away anytime soon. States have already spent billions in complying with these rule changes. Since state governments often have constitutional mandates to have balanced budgets this has led to strained tensions w/ratings agencies and institutional bond buyers.

But wait. In fact, it gets a lot worse.

Did you know govts were trading derivatives too? Their exposure to "swaptions" or OTC bilateral derivatives w/private banking is already spelling trouble. But this summer should really become interesting w/the advent of GASB 53.

"Governments are required to implement Statement 53 for periods beginning after June 15, 2009. Early application is encouraged."

Not only are state and local governments already marking pension outlays to fair value but soon they can add derivative losses as well by this summer!


So public pensions (teachers, police, and fire unions) will claim that they "MUST meet contractual obligations legally" and raise taxes on people who have no jobs, can't earn interest income on their savings, and who increasingly lack medical insurance. The end result is that government workers are making more in retirement than they ever did on salary.

At some point people are going to get angry.


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