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Will Congress Let Accounting Fiction Obscure Pension Reality?

By Peter R. Fisher

New York Times, July 18, 2003

WHAT should be done when an important sector of the American economy has severe problems?

The easy answer is to avoid admitting the problems and hope that time will make everything better. Look for an accounting gimmick to obscure the reality.

That is how the government dealt with the early days of the savings and loan crisis two decades ago. It made the situation much worse than it needed to be.

Which brings us to the corporate pension system. Much of corporate America is looking for a way to make its pension deficits appear smaller than they really are, and the politicians appear to be tempted to comply.

The argument companies are making is that if something is not done to make pensions look better, then many companies will terminate their plans. So if you want them to do a better job of telling the truth about the health of pension plans, you are working against the interests of workers who want to collect those pensions.

The reverse is true. Applying reality now would make it harder for companies to avoid putting cash into pension plans that need it. And while those payments might be painful, they would leave the plans more likely to meet their obligations and avoid a crisis.

The Bush administration is seeking to shed some light on this area and to get away from some of the worst accounting gimmicks that have arisen in past years. Unfortunately, the Bush plan will take years to phase in, meaning fictions will continue longer than they should.

But when Peter R. Fisher, the Treasury under secretary for domestic finance, testified at a House hearing this week, the static he heard was not from lawmakers who questioned why accurate numbers were being delayed. They were upset that the numbers he wants to provide would make pension plans look worse than they now appear.

On the surface, the argument is about one of those MEGO — My Eyes Glaze Over — things that no ordinary person could possibly care about: What is the best way to estimate the current value of future pension obligations? Companies want to make those obligations look smaller by using a high interest rate in estimating how much money they need now to pay benefits in the future.

Current law has allowed some companies — particularly ones with older workers — to assume unreasonably high interest rates. In addition, the rules have allowed companies to ignore current market interest rates and instead use average rates over a four-year period. The effect has been to give companies a false sense of security, letting them delay putting money into their pension plans.

The Bush plan would require companies use current market rates and says that short-term obligations should be discounted at lower shorter-term rates. Companies that make such calculations every day are trying to persuade Congress that would be just too complicated and volatile. And they might win a House subcommittee vote today.

That would be amazing. A year after passage of the Sarbanes-Oxley Act, which was spurred by outrage over the games companies played to fool their shareholders, Congress could sanction similar games with pension plans.

"America's pension beneficiaries are every bit as entitled to timely and accurate accounting and disclosure as are America's shareholders," said Mr. Fisher, adding that accounting fictions could lead to systematic underfunding of pension plans, particularly those with older workers.

Keeping bad news off the books only made the savings and loan problems worse. Why repeat that mistake?