Connecticut Liabilities Outpace Asset Growth

Liabilities more than double in 10 years, while assets gain 28%.

Connecticut’s total and unfunded liabilities have significantly outpaced their asset growth over the last six years, according to the state’s Office of Fiscal Analysis.

Between the end of June 2010 and the end of June 2016, the state’s total liabilities surged 53% to $32.3 billion, from $21.1 billion, while its unfunded liabilities grew at an even faster pace, rising 73% to $20.4 billion from $11.8 billion. And during those six years, the funded ratio dropped to 37% from 44%. Meanwhile, the state’s assets increased only 28% to $11.9 billion in 2016 from $9.3 billion in 2010.

But as bad as those numbers seem to be, the reality may be worse, according to a report released in May by the Hoover Institution. According to “Hidden Debt, Hidden Deficits: 2017 Edition,” state treasuries are underestimating the true cost of their pension debt by billions of dollars.

By the calculations of report’s author, Joshua Rauh, a senior fellow at the Hoover Institution, and professor of finance at the Stanford Graduate School of Business, Connecticut’s unfunded liability in 2015 was more than twice what the state had reported: $68.4 billion, instead of $30 billion.

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Governmental accounting standards for pensions were changed in 2014 and 2015 with the implementation of Governmental Accounting Standards Board (GASB) statements 67 and 68. Statements 67 and 68 require state and local governments to report on the assets and liabilities of their systems with a greater degree of harmonization.

“However, these standards still preserved the basic flaw in governmental pension accounting: the fallacy that liabilities can be measured by choosing an expected return on plan assets,” said the report. “This procedure uses as inputs the forecasts of investment returns on fundamentally risky assets and ignores the risk necessary to target hoped-for returns.”

For example, the report said that a liability-weighted expected return of 7.6%, which was the average expected return in 2015, implies that state and city governments are expecting the money they invest today to double approximately every 9.5 years.

“That means that a typical government would view a promise to make a worker a $100,000 payment in 2026 as ‘fully funded’ even if it had set aside less than $50,000 in assets in 2016,” said the report. A similar payment in 2036 would be viewed as “fully funded” with less than $25,000 in assets in 2016, it said.

“This practice obscures the true extent of public sector liabilities,” said the report. “In order to target high returns, systems have taken increased investment positions in the stock market and other risky asset classes such as private equity, hedge funds, and real estate.

“The targeted returns may or may not be achieved, but public-sector accounting and budgeting proceed under the assumption that they will be achieved with certainty,” added the report. “Furthermore, while systems face somewhat stricter disclosure requirements under the new GASB standards, these standards will not directly affect funding decisions.”

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TPR Anti-Avoidance Hearing Heads to Upper Tribunal for First Time

Regulator wants to force ITV to fund plan with £90 million deficit.

The UK’s The Pensions Regulator (TPR) said a pending lawsuit, in which it is trying to force broadcaster ITV to fund a pension plan, will be heard by the Upper Tribunal in early 2018. It will be the first time an anti-avoidance case by TPR has been heard in full in the Upper Tribunal.

TPR is seeking the court’s help in forcing ITV to pay contributions to close a £90 million ($115.4 million) deficit in the Box Clever Group Pension Scheme.

In December 2011, TPR’s Determinations Panel issued a financial support direction (FSD) to ITV, which then referred the decision to the Upper Tribunal in January 2012. But since then, TPR said, it has been fighting various legal challenges brought by ITV, which has prevented the case from being heard, until now.

“We have fought at every stage to bring our case for an FSD and are pleased the courts have agreed with our position,” said Mike Birch, TPR’s director of case management. “This sends a clear message that we will not shy away from pursuing regulatory action to protect workplace pensions.”

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Box Clever was formed in 2000 after a merger between the TV rental businesses of Granada (now ITV) and Thorn (now Carmelite). TPR opened an anti-avoidance investigation following the collapse of Box Clever. Respective employees were transferred to the new company and enrolled in the Box Clever pension plan, which was created to ensure that those members would continue to receive the same benefits as promised in their former plans. Today, the plan, which has approximately 2,800 members, has a buy-out deficit of more than £90 million, according to TRP.

ITV originally went to the Upper Tribunal in January 2012 to challenge TPR’s determination to issue an FSD.  The broadcaster began its challenge of TPR’s ability to submit additional evidence in late 2013. Several hearings followed, including an appeal to the Court of Appeal, before the Upper Tribunal ruled in favor of TPR in 2016. ITV then made subsequent requests for permission to appeal, with the most recent being refused in late July. The Court of Appeal refused permission for ITV to appeal against a ruling made in TPR’s favor to allow the introduction of new evidence in its anti-avoidance case against the broadcaster.

TRP said it is the fourth time the courts have considered these issues and sided with the regulator.

“[The] Appellants fail to advance any argument…which would entitle this Court to interfere,” said the judge, the Rt Hon Lady Justice Arden, in her ruling. Arden said TPR is not bound by the case it put before the determinations panel, and is entitled to raise matters not previously raised where a determination is referred to the Upper Tribunal.

“It is vital for us to be able to introduce new evidence where appropriate when we are pursuing anti-avoidance and so we welcome this latest important ruling,” said Birch. “The ruling also brings closer the prospect of greater certainty for members of the Box Clever Group Pension Scheme, which due to legal challenges by ITV has been delayed for six years.”

The Upper Tribunal hearing examining TPR’s decision to issue a FSD is scheduled to start January 29, 2018, and is expected to last for two weeks.

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