FASB

Faulty Public Pension Accounting: A Problem too Big to Ignore

by Ivan Osorio on April 28, 2011

in Economy, Employment, Labor, Regulation

One reason the ongoing debate over collective bargaining for government employees has been so loud is that the stakes are so high — for unionized government employees on one side and for taxpayers on the other.

For years, public sector collective bargaining enabled government employee unions, especially at the state and local level, to aggressively lobby for generous compensation in exchange for political support for the politicians who grant such largess.

Those politicians, seeking to avoid taxpayer wrath today, deferred many of the costlier elements of that compensation well into the future, including pensions. To make matters worse, states underfunded those pensions for years, and the accounting methods they used hid the funding gaps.

Today, however, much as the budget crises affecting state government around the country has brought public attention to the bad bargain for taxpayers that is public sector collective bargaining, state pension accounting standards face considerable public scrutiny, from across the ideological spectrum.

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Killed by Pension Accounting

by Ivan Osorio on October 18, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Labor, Regulation

Think accounting rules are a boring topic? You wouldn’t if the fate of your business rested on it. Indeed, a rule change may be coming soon that may expose the huge liabilities many companies face as a result of their participating in some grossly underfunded union pension funds. In a straightforward, non-boring manner, Washington Examiner columnist Mark Hemingway breaks it down.

On Nov. 1, the Financial Accounting Standards Board (FASB) ceases to take public comment on a new rule requiring that companies more accurately report liabilities they have from participation in multiemployer pension plans. Unless FASB is persuaded otherwise, the rule takes effect Dec. 15.

There are some 1,500 multiemployer pension plans in the United States, which are unique to unions. In these plans, multiple companies pay into the pension plan, but each company assumes the total liability.

Under “last man standing” accounting rules, if five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the employees of the other four companies.

What this means is that companies with union labor often have pension liabilities that are several multiples higher than the pension expenditures they report — the Kroger grocery store chain shocked analysts last year when it disclosed its multiemployer pension liabilities more than doubled in a year to $1.2 billion.

Ratings agencies such as Moody’s and Standard and Poor’s have been highlighting the lack of transparency in union pension plans. Now Wall Street wants union businesses to be upfront about their liabilities.

FASB’s new rule could effectively wipe out the paper worth of many companies, especially in the trucking and construction industries. Once banks and creditors are aware of these staggering pension liabilities, it will make it nearly impossible for union businesses to get loans, credit lines or bonding.

If forced to report their true liabilities, hundreds — perhaps thousands — of companies will scramble to get out from under their union obligations.

UPS did precisely that three years ago, opting to pay $6.1 billion to withdraw from the Teamsters Central States Fund. That’s right, UPS decided that $6.1 billion was less costly than the Central States Fund’s liabilities! The last-man standing rule made the situation especially bad. As Bloomberg reported at the time, “The Central States Fund has suffered as several unionized trucking companies have failed or been acquired during the past decade, leaving UPS and other remaining employers to bear greater liability for retirees covered.”

As Hemingway notes, it is largely to shore up such failing pension funds that organized labor worked so hard for passage of the so-called Employee Free Choice Act — its card-check provision would enable unions to organize new members without the hindrance of a secret ballot election, while its binding arbitration provision would make it easier to impose pension liabilities on employers. He also rightly notes that the fight over EFCA isn’t quite over yet, and Republicans need to be on guard during the upcoming lame duck session of Congress.

Businesses should be even more on guard. As Brett McMahon of Miller & Long Construction (whom Hemingway also cites) described it, for a business, facing millions in new multi-employer pension liabilities would be “a good time to start liquidating.”

For more on union pensions, see here.

The mark-to-market relief rally

by John Berlau on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Odds & Ends

The events leading to the Dow’s climbing over 8000 today can be properly called the Mark-to-Market Relief Rally. More than any expected action of the bureaucrats and politicians at the G20, the decision today of the Financial Accounting Standards Board (FASB) to relax strict application of mark-to-market accounting mandates, urged on by members of Congress of both parties, it what’s giving investors something to cheer for.

In this era that supposedly signifies the return of big government, it is heartening that on this issue, Republicans and Democrats worked together to push for this common-sense free-market reform that will do much to get our economy going and could save taxpayers billions in avoiding the need for bailouts.

In CEI’s recently released “Bipartisan Agenda for Economic Liberalization,” we advise Congress to “make accounting regulators accountable” and to “require regulators to suspend mark-to-market accounting mandates such as Financial Accounting Standard 157 until better guidance is developed for illiquid markets.” Thanks to members of Congress such as Paul Kanjorski, Ed Perlmutter, and Peter DeFazio on the Democratic side and Spencer Bachus, Scott Garrett, and Michelle Bachmann (here’s her statement on today’s action) on the GOP side pushing FASB to reform the rules, a significant step has been taken toward this objective being achieved.

By itself, this change will not make the price of mortgage assets higher or lower. Rather, it will allow price discovery to occur. Mark-to-market distorted the market by forcing banks to take losses on mortgage assets even if the underlying loans were still performing, based on the last fire sale price of similar assets. Respected banking analyst Richard Bove pointed out that because of mark-to-market, Bank of New York Mellon had to value its portfolio of commercial mortgage-backed securities with a 1 percent default rate as if it had a 25 percent default rate. This resulted in a $70 billion loss of liquidity to the financial system from this bank alone. (Bove’s analysis doesn’t seem to be available online, but is described in this brilliant article on the investor site MotleyFool.com by Liz Peek.)

With the expected change to mark-to-market today, whether banks hold or sell toxic assets should not be a concern. Either way, this rule change will help keep toxic assets from weighing down banks’ “regulatory capital” and unnecessarily tightening the lending they do. And it will save taxpayers billions by letting the market simply value the assets at prices similar to what government programs such as Treasury Secretary Tim Geithner’s Public Private Investment Partnership seek to buy them for.

The concerns about FASB’s independence is also misplaced. Rather, the concern should be that this quasi-private board, whose edicts are embedded in federal regulations and have a profound affect on the economy, is unaccountable to the American people. Many accountants, economists, and other experts have long criticized mark-to-market for being pro-cyclical, resulting in assets being valued too high during a boom, as when Enron utilized mark-to-market to manipulate its earnings, and causing a downward spiral during a bust. Yet FASB refused to take those concerns under consideration until Congress pushed it to.

Saying that only accountants can determine accounting policy in federal regulation is like saying that only members of the military can make policy regarding war. Today’s change in mark-to-market rules is a good first step toward restoring the accountability of big accounting bodies like FASB and the Public Company Accounting Oversight Board.

If there is anything regrettable about today’s action, it is that Hank Paulson and Tim Geithner didn’t push through this reform sooner and save the economy all this consternation and taxpayers all those billions. CEI has been advocating mark-to-market reform almost from the time that the current FASB rule (Financial Accounting Standard 157) was implemented in late 2007, and here is a link to an op-ed I wrote for the Wall Street Journal in September 2008 on how the mark-to-market mandate was a significant factor in spreading the credit contagion.

Markets Rally on Hopes of Regulatory Relief

by Hans Bader on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Global Warming, Precaution & Risk, Regulation, Stimulus to Nowhere

The stock market has gone up by 280 points so far today, fueled by FASB’s vote to relax rigid mark-to-market accounting rules, which require financial institutions to value assets at their current fire-sale prices, and magnify boom-bust economic cycles.

The market may also be getting a boost from the Senate’s earlier vote undercutting the Obama Administration’s proposed $2 trillion cap-and-trade carbon tax, which would impose burdens on the economy akin to Herbert Hoover‘s disastrous 1932 Revenue Act at the beginning of the Great Depression.

The market’s rise contrasts with its fall in the weeks after passage of Obama’s $800 billion stimulus package, which Obama falsely claimed was needed to avert “disaster” and “irreversible decline.” Obama made that claim even though the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package would shrink the economy over “the long run.”

Many commentators have called for relaxation or repeal of mark-to-market accounting rules to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has until recently ignored inexpensive possible ways of mitigating the financial crisis like reform of “mark-to-market” accounting rules.

The Obama administration’s footdragging on accounting-regulation reform is inconsistent with the rationale for its trillion-dollar toxic-asset buy-up program, which defies mark-to-market concepts in a much more extreme way than a mere relaxation of mark-to-market accounting rules. The Treasury Secretary claims taxpayers won’t lose a full trillion under Obama’s toxic-asset program, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why did he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules were right — in which case taxpayers will end up losing a trillion dollars — or they were wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, a major donor to liberal politicians, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout.

Obama’s record-breaking tax and spending increases violate his campaign promises to enact a “net spending cut” and not to raise taxes “in any form” on anyone making less than $250,000 a year.

Ironically, Obama’s “cap-and-trade” carbon tax might have the perverse effect of increasing, rather than reducing, greenhouse gas emissions. Cap-and-trade is a pernicious “form of tax farming.”

Paulson bailout would worsen contagion-spreading accounting rules

by John Berlau on September 22, 2008 · 1,225 comments

in Economy, Legal, Nanny State, Politics as Usual, Precaution & Risk

My colleague Hans Bader is correct that most of the aims of Treasury Secretary Henry Paulson’s $700 billion bailout — stopping the “contagion” of securitized loans that have become illiquid — could be achieved if mark-to-market accounting rules were “immediately relaxed by federal agencies like the SEC that enforce them.” As I wrote in my Wall Street Journal op-ed this weekend, because the mark-to-market rules require writedowns of performing loans based on the last sale of similar assets, good “banks holding mortgages that haven’t been impaired often have to adjust their books based on another bank’s sale — even if they plan to hold their loans to maturity.” (And commenter “Topcat” misses the point of the post. Because agencies like the SEC and Federal Deposit Insurance Corporation use mark-to-market to measure the solvency of banks and brokerages, these firms are certainly not “free to disregard the regulatory rule for valuation and apply their own.”)

But the bailout — in addition to putting taxpayers on the hook and massively increasing government’s role in the economy — would likely make mark-to-market and hence the credit crisis worse, according to experts who have reviewed Paulson’s plan. Paulson proposes a “reverse auction” approach by which government would choose the lowest selling price to by a financial firm’s mortgage-backed securities. But unless mark-to-market rules were changed, this sale would force other firms to write down their assets to this price.

An Associated Press story paraphrases American Enterprise Institute scholar Vincent Reinhart, a former Federal Reserve monetary affairs director, as saying that “if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules.” A Wall Street Journal news article similarly observes that “buying for pennies on the dollar … would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets.”

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