More on That Phony Fitch Rating for Greenville
Remember when I said buying Greenville bonds was dumb partially because Fitch gave them a AAA rating based on the idea that Greenville was getting 7% on investments to fund their pensions which were already in the red?
Turns out the rush to get that rating was because of new accounting rules going into effect that would , among other things, give investors a more accurate picture of a pensions:
Under current rules set by the Governmental Accounting Standards Board, public pensions are estimated to be about 75 percent funded. This June, like Moody’s, GASB approved new guidelines that would shrink that estimate to 57 percent. GASB’s rules take full effect by 2015.
Among other things, the new accounting rules from Moody’s and GASB limit the rate of return on future investments that pension funds can assume for accounting purposes. Most government pension funds assume a 7 percent to 8 percent return, which critics say overstates future investment income.
Unions and many pension fund managers dispute that critique, pointing out that investment returns have surpassed that over the past several decades, even if recent history has been more difficult. Still, others say the changes are long overdue and will better reflect the funding situations of public employee pension funds.
Which also explains why Greenville went to Fitch not Moody’s but whatever. Put simply this means people can’t blow smoke up your ass about how well investments are doing to pay for pensions. Most pensions are lucky to get around 2% on their investments and that’s no where near enough to keep from going bankrupt. Neither is 7% by the way.
So again – buy Greenville bonds and you’re a sucker.