Governors Nationwide Fight to Tackle 'Pension Bomb'

In the face of escalating fiscal problems around the country, governors are upping their rhetoric on pension reform in an effort to tackle heightened costs.

(January 24, 2011) — To deal with escalating fiscal problems, governors nationwide are fighting to increase their efforts on pension reform in an attempt to reduce costs.

Already, the governors of New Jersey, California, Washington, Virginia, and Massachusetts have publicly endorsed such reforms. In New York City, the issue was highlighted recently when Mayor Michael Bloomberg promoted his own plan to reduce rising pension costs, which are among the biggest pressures on state budgets.

Last week, Bloomberg promised to support New York Governor Andrew Cuomo’s proposed public-pension reforms. “We will work to pass several basic reforms to bring our pension system into the 21st century,” Bloomberg said in his annual State of the City Address, aiming to solve the city’s looming $2.4 billion deficit. With costs for New York City taxpayers only heading higher, Bloomberg said he wants lawmakers to hike the retirement age for non-uniformed city employees to 65. Additionally, he announced that he wants to reduce the cost of the city’s pension system by consolidating some of its administration and raising the retirement age for new employees.

In New Jersey, Governor Chris Christie addressed the state General Assembly on January 11, saying the unfunded liability of the New Jersey Division of Investment would grow to a “staggering” $183 billion from the current $54 billion within three decades. And in his State of the Commonwealth address, Virginia Governor Robert McDonnell proposed that state employees contribute 5% of pay to the $51.9 billion Virginia Retirement System.

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Despite the urges by governors around the country, a recent report from the Center on Budget and Policy Priorities concluded that misunderstandings regarding state debt, pensions, and retiree health costs are exaggerated. The report stated that predictions of an “imminent fiscal meltdown” among US states and municipalities have created misperceptions also diverting attention from needed structural reforms.

While US states will reportedly confront deficits totaling $140 billion in the next fiscal year, the Center has concluded that the operating deficits most states are forecasting for fiscal 2012 are largely the result of the weak post-recessionary economy. “Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Iris J. Lav, senior adviser at the research group, stated in a news release.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Verizon Follows AT&T Footsetps in Pension Accounting Change

In an effort to realign its pension accounting, Verizon Communications plans to report a $600 million pension charge in its 2010 earnings, simplifying the view of its accounts for current investors.

(January 21, 2011) — As part of its plan to simplify how it accounts for pension and other post-retirement benefits, Verizon Communications has said it will book pretax charges of $600 million in its 2010 results.

According to the Wall Street Journal, the firm has indicated plans to switch to a style of accounting that would record gains and losses each year as opposed to recording them over a number of years, consequently moving $20.2 billion worth of future losses behind them.

The move follows the decision by AT&T, the largest US phone company, which said last week that it would slash $17 billion from retained earnings, changing the way it handles accounting for its pension fund. As part of a move to tie the plan’s expected return to market fluctuations, the phone company is slashing the benefit plan’s discount rate to 5.8% from 6.5%. As a result, the company will take a $0.28 per share, or $2.7 billion, pretax charge in its fourth quarter 2010 financial report, for which AT&T is due to report results on January 27.

The decision by Verizon to follow AT&T’s lead shows that other companies aiming to mitigate the impacts of the 2008 financial crisis on their pension plans may mirror this pension accounting change. The decision also follows a move by Honeywell International Inc, a maker of cockpit electronics, to implement a similar change to its accounting, which it announced in November.

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Fran Shammo, Verizon’s chief financial officer, said the change will make its financial reporting “easier to understand and more transparent,” the Wall Street Journal reported. “We’ve been considering this accounting change for some time.”

According to Reuters, Verizon said the estimated return on its pension assets was about 14% in 2010 compared with an assumption of 8.5%, resulting in an actuarial gain of about $1 billion. The change won’t impact cash flow or pension funding, and it won’t affect liabilities for pensions or other post-employment benefits. Verizon will announce its 2010 financial results on January 25. Verizon is expected to post revenue of $26.47 billion for the fourth quarter and $105.9 billion for the full year 2010.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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