Ontario Liberals Loving Their Pension Assets?

David Reevely of the Ottawa Citizen reports, Pension experts hand Ontario's Liberals a $1.5B pre-election windfall:
The Ontario Liberals have an extra $1.5 billion to spend between now and the next election and can still keep their promise to balance the provincial budget by 2018, thanks to a helpful ruling on how to handle surpluses in a couple of big provincial pension funds.

What does $1.5 billion buy? It’s more than the money the province gave up by taking sales tax off electricity bills starting this month. For $1.5 billion, the Liberals could cut bills by that much again and probably buy labour peace with Ontario’s restive doctors and have some left. They could stop pressuring boards of education to close half-empty schools — more than twice over. They could replace half a dozen small hospitals. They could even cut taxes.

The point is, we’re talking serious money — the stakes in what’s otherwise the most arcane public-accounting battle ever to spill out of a comptrollers’ seminar and into the streets.

The Liberals like to promise big before elections. Premier Kathleen Wynne is especially keen on governing from “the activist centre,” which in 2014 meant picking her moments with some care but roaring in with cash for infrastructure, early-childhood educators and personal-support workers, industrial subsidies and northern development. But she and Finance Minister Charles Sousa have also sworn up and down that Ontario will finish 2018 with a balanced provincial budget.

So they got a shock last fall when Bonnie Lysyk, the province’s auditor general, told them she thought it was wrong to count money held by the pension plans for the Ontario Public Service Employees Union and Ontario’s teachers’ unions as provincial assets. Specifically, about $11 billion in surpluses in those funds, the government’s share of which had been treated as government assets for as long as they’d been there. That stripped billions of dollars off the government’s balance sheet.

More importantly, it meant $1.5 billion in excess income that the government had treated as a form of revenue could no longer be handled that way. That produced a nasty spat between the auditor-general and Liz Sandals, the minister who, as president of the treasury board, is in charge of how the province keeps its books. Sandals presented the legislature with an unaudited financial report because Lysyk wouldn’t sign off on it, an unprecedentedly brazen way of handling an ordinarily dull part of running the government.

The money’s there either way — the only question is which ledger it should be inscribed in. But if it’s in this ledger here, it makes the Liberals’ budget-balancing promise $1.5 billion easier to keep; if it’s in that ledger there, the promise is $1.5 billion harder.

(That says something about how arbitrary the goal of a balanced budget by a certain date is, you’ll note. But a balanced budget by 2018 is what Wynne and Sousa have promised.)

The government appointed an expert panel to make a ruling, a four-person group led by Tricia O’Malley, former chair of the Canadian Accounting Standards Board — a job she had twice, with a long stint helping set international accounting standards in between. The others are a benefits lawyer, an actuary who consults for Ernst & Young on pensions, and the Province of New Brunswick’s chief accountant.

What they say doesn’t have the force of a judge’s order, but they have cred. And they say the government can count the money as a provincial asset.

Without getting too deeply into it (I promise), the provincial government co-sponsors the pension plans, so it’s effectively a half-owner. That said, the government can’t directly draw on the surpluses the plans have just now; the money has to stay in the plans. If the government can’t take the money, Lysyk’s reasoning goes, the money isn’t really a government asset.

Nevertheless, the panel’s report volleys back, those surpluses work in the government’s favour.

“It is reasonable to expect that the plan sponsors will be able to benefit from lower contribution levels in the future, if the plans have surplus assets,” the panel’s report says.

Then follows several dozen pages of detailed reasoning, drawing on generally accepted accounting principles and guides, paragraph by paragraph.

Ultimately: “The surpluses in the plans can be used by reducing the contributions the government is required to make to the plans, freeing cash that would otherwise be required to make contributions to be used for other purposes.”

Purposes like, well, whatever the Liberals think is a good idea.

Sandals and Sousa refrained from crowing.

“We are committed to implementing the advice of this independent panel and will use it in preparing the province’s financial statements,” Sandals said in a written statement.

And in campaigning for 2018.
Robert Benzie of the Toronto Star also reports, Ontario pensions are an asset, expert panel concludes:
A panel of accounting experts has concluded that $10.7 billion in government-sponsored pension plans should count toward the province’s bottom line.

As first disclosed by the Star last week, the finding undermines auditor general Bonnie Lysyk’s surprise interpretation that the funds are not a public asset.

“There was a difference of a professional opinion between the professional accounting staff of government and the staff at the office of the auditor general on how the surpluses of these two plans ought to be dealt with in the public accounts,” panel chair Tricia O’Malley said Monday.

“We believe that an asset does exist — the net pension asset meets the definition of an economic resource, which is what an asset is,” said O’Malley, chair of the Canadian Actuarial Standards Oversight Council.

The panel’s conclusion is significant because the government’s share in the Ontario Public Service Employees’ Union Pension Plan and the Ontario Teachers’ Pension Plan is worth $1.5 billion of the annual budget.

Last fall, the auditor unexpectedly decreed the pension surpluses shouldn’t be considered an asset because the government did not have ready access to the funds.

But O’Malley, whose panel was asked by Queen’s Park to weigh in, likened the joint-sponsorship to co-owning a home that could not be sold off unless both partners agreed.

“Many government assets are not accessible. A road is an asset to a government because it allows it to provide public services of transportation, but you can’t move a road or you can’t sell a road unless it’s a toll road, but it’s still an asset,” she said.

Lysyk, who was briefed on the expert panel’s review on Feb. 3 and has had the report for about two weeks, had no comment Monday on whether she would accept the findings.

In a statement, her office said she “will be reviewing the report being made public this morning by the provincial government’s pension asset advisory panel regarding two of Ontario’s jointly sponsored pension plans.”

“Once her office and her expert advisers have finished reviewing this final report, the auditor will then provide comment to the media later in the week.”

Treasury Board President Liz Sandals said the government is “committed to implementing the advice of this independent panel and will use it in preparing the province’s financial statements.”

Finance Minister Charles Sousa, who has promised to finally balance the books in the spring budget, also welcomed O’Malley’s review.

“As a result of the expert assessment of the independent advisory panel, we now have additional advice on how to account for these jointly sponsored pension plans as assets,” said Sousa.

“This advice will help us continue to present the province’s finances fairly and accurately as we work toward balancing the budget in 2017-18. We will provide a full update on the province’s fiscal situation in the near future.”
So what exactly are the recommendations of this expert panel? You can read the entire pension asset advisory expert panel report prepared for the Ontario government here. Below, I provide you with the executive summary:

The Pension Asset Expert Advisory Panel (the Panel) was appointed to provide advice and recommendations to the Ontario government on the application of public sector accounting standards to Ontario’s jointly sponsored pension plans. The need for this advice arose as a result of a difference of professional opinion between the government’s professional accounting staff and the Office of the Auditor General (OAG).

The Panel has specifically considered whether the government should include an asset in its financial statements representing its share of the surplus in two pension plans – Ontario Teachers’ Pension Plan (OTPP) and Ontario Public Sector Employees’ Union Pension Plan (OPSEUPP). This is an important question because including or excluding the asset affects the picture the Public Accounts provide of the government’s financial position at the year end and how it has managed its resources over the year (the annual surplus or deficit).

The Panel received and reviewed background information, including the governing documents of the plans and related agreements. It received analyses from both the government and the OAG, setting out their respective understanding of the facts and their conclusions. The Panel met with both the government’s professional accounting staff and the Auditor General and her Public Accounts staff responsible for the pension issue to ensure we fully understood their thinking. The Panel then performed its own independent analysis of the documents and of the legal, actuarial and accounting issues using the expertise and experience of its members related to those issues.

The full report sets out in detail the Panel’s analysis and the reasons for its conclusions. This summary gives the overall conclusions and the main considerations that influenced the Panel’s thinking.

Panel conclusions and considerations

Both OTTP and OPSEUPP are jointly sponsored defined benefit plans. In these plans, the risks and rewards are shared between an Employee Sponsor (in these cases, the Ontario Teachers Federation or OPSEU) and an Employer Sponsor (the government). In accordance with the terms of the Plans, the Sponsors must agree on all decisions about the important features of the plan, including valuation assumptions, how shortfalls (deficits) are to be made up and how the benefits of overfunding (surpluses) are to be shared.

The Panel’s analysis concludes that an asset exists for the government in both OTTP and OPSEUPP because:
  • the accounting surplus in the plan has a future economic benefit – the surpluses in the plans can be used by reducing the contributions the government is required to make to the plans, freeing cash that would otherwise be required to make contributions to be used for other purposes.
  • the government controls access to that accounting surplus – the government shares control of the surplus with the Employee Sponsors. In OTPP, the Sponsors must agree on how the surplus will be used. If they don’t agree, the process to be followed to reach a decision is set out in the plan. The only condition is that the surplus must be shared “equitably,” or fairly. Historically, surpluses have been shared approximately 50/50 over time, though not necessarily in each period. In OPSEUPP, funding surpluses are allocated 50/50, and each sponsor is free to use its allocation for benefit improvements or contribution reductions as it sees fit. This indicates 50/50 sharing of surpluses is the principle.
  • the accounting surplus exists as the result of past transactions and events – service rendered by the employees, contributions made by both the employees and employer, and investment earnings.
The public sector pension accounting standard notes that the sponsors could benefit from a surplus by taking assets out of the Plans as well as by reducing their contributions. The standard includes several specific conditions for a sponsor to recognize an asset based on withdrawal. The Panel concluded that these conditions are not relevant to assessing the ability of a sponsor to reduce contributions because:
  • The legal requirements for taking assets out of a plan and those for reducing contributions are very different. Removing assets requires permission to do so in the terms of the plan, agreement with plan members or approval of the joint sponsor, as well as approval of the Financial Services Commission of Ontario. In contrast, the joint plan sponsors are free to decide on their own level of required contributions as long as they comply with the terms of the plan and with the Pension Benefits Act. All that is required is for the joint sponsors to agree. No external approvals are needed. The Panel concluded that the accounting answer should reflect the significant differences between the legal regimes that apply to contribution reductions and asset withdrawals.
  • In the case, of OPSEUPP, the terms of the plan explicitly prohibit asset withdrawals. However, they also explicitly provide that contribution reductions are not asset withdrawals. The terms of the OTTP are not as explicit when it comes to asset withdrawals. However, the Sponsors have agreed on a policy to guide the use of surpluses in the plan – once previous reductions in pension benefits have been restored, the next priority is to reduce contributions for both members and the government. Thus, the government does not currently have an intention or ability to benefit by taking assets out of the Plans.
The Panel also concluded there is no accounting standards requirement for any agreement to be in place specifying when and by how much contributions will be reduced for the government to record an asset beyond the agreements already in place (i.e., legislation and the various plan documents). The public sector accounting standards are clear that the benefits from the surplus need only be expected. In these cases, benefits can reasonably be expected based on the law, the terms of the Plans and the policies and past actions of the joint Sponsors in fulfilling their responsibilities to act fairly. Given all the uncertainties and estimates required in accounting for pensions, virtually nothing can be considered certain.

Because of those estimation uncertainties, like accounting for all other assets, the public sector pension accounting standard requires the government to consider whether the benefits it expects will be enough to recover the entire amount of the surplus asset. The standard provides specific guidance on how to measure the expected benefit of the asset based on reduced contributions. No contribution requirements are fixed because they must be renegotiated regularly. Following the guidance in the standard shows that the government will be able to benefit by the entire amount of the asset.

Stepping back

It is reasonable to expect that the plan Sponsors will be able to benefit from lower contribution levels in the future, if the plans have surplus assets. While the government (or teachers/OPSEU members) may not expect to receive refund cheques, it is reasonable for them to expect that fewer contributions will need to be made if there are surplus assets in the plans. On the other hand, all parties would expect that benefits will be reduced or additional contributions will need to be made should deficits emerge.

Established mechanisms exist to put these expectations into practice. History shows examples of plan sponsors benefiting from surpluses in these plans. Expecting that the joint sponsors will benefit from the surplus assets in the future is also reasonable. In fact, it would be unreasonable, absent any changes, to assume otherwise.

Given that the government can be expected to benefit from surplus assets, those assets have real economic value. It would be misleading not to recognize its share of them in the Public Accounts.

Panel advice

The Government should record an asset in the Public Accounts for its share of the surplus reported in the accounting valuations of OTTP and OPSEUPP. The estimated future benefit of the recorded asset should continue to be evaluated following the requirements of the public sector pension accounting standard each year.
So what is this all about? You're done reading this expert panel's report and recommendations and are a bit confused as to what all the fuss is about.

Let me clarify it for you. This is sleazy Ontario Liberal politics at its best because rest assured if these plans were experiencing chronic deficits, there is no way Ontario's government would be loving the province's pensions like this.

All of a sudden they found a cookie in the cookie jar -- not because they cut anything but because these plans are well managed and jointly sponsored and are not in the red (quite the opposite, they have surpluses) -- so Ontario's Liberals are claiming these pension assets should be accounted as assets on the government books.

Ok, let me be fair, yes it's true if surpluses persist at OTPP and OPSEUPP, then this will mean the sponsors of the plans, the unions and government of Ontario, can then discuss cutting the contribution rate which will free up money for the government to pursue other expenditures.

But therein lies the hitch. If Ontario Auditor General Bonnie Lysyk accepts the expert panel's recommendations this means if the plans experience chronic deficits in the future, something which is not out of the realm of possibility no matter how well they are managed, then these deficits should be tacked on to the Ontario government's liabilities.

Of course, Ontario's Liberals don't care about that, all they care about is getting reelected in 2018, so right now they're loving Ontario's pension assets and surpluses. Again, which government doesn't love finding cookies in the cookie jar?

Thank you very much Ron Mock, Hugh O'Reilly and the wonderful staff at OTPP and OPTrust, keep delivering great results so we can use your assets and surpluses to balance our otherwise shaky Ontario government books.

But be careful for what you wish for because no matter how good the pension managers are at OTPP and OPTrust are at investing pension monies -- and they're very good -- they simply cannot guarantee pension surpluses won't turn into pension liabilities in the future if interest rates around the world plunge to new record lows. No pension plan can.

And at that point, Ontario's Liberals are screwed, but it doesn't matter as long as they get reelected for one more term. The buck will be passed on to future governments and of course, Ontario's taxpayers which are already reeling from insane taxes and hydroelectric bills.

In fact, when a buddy of mine living in Toronto told me his hydro bill went from $400 a month to $325 a month, I was floored (even at $325 a month, that is an insane amount). He lives in a very nice house in Oakville but it's not a huge mansion.

Another buddy of mine, an infrastructure expert, told me this is all because of Ontario's disastrous policies in the past to privatize hydroelectricity and now the province is "pretty much screwed for years until they build capacity to address this problem" (great news for Hydro Quebec but Ontario’s deal with Quebec won’t reduce cost of hydro bills).

I think Ontario's Liberal government is reeling and looking for ways to balance the budget by 2018. Unfortunately, dipping their hand in the pension cookie jar is a temporary reprieve and if they're not careful, they might one day find that jar empty or worse still, full of dead rats.

Again, let me be clear, these are my brash conservative opinions, nothing stated here is linked to the representatives of OTPP or OPTrust. Last year, I praised Premier Wynne and the Ontario Liberals for taking the lead on expanding the Canada Pension Plan.

But here I have to call a spade a spade, Ontario's newfound love for pension assets has nothing to do with government accounting rules and expert pension panels. It's all about dirty, sleazy Liberal politics and is an underhanded and easy way to fulfill a balanced budget promise that otherwise would never have been fulfilled (Liberals love spending money, hate cutting government expenditures!).

[Note: This reminds me of the heyday when corporations were using defined-benefit pension assets and surpluses to pad their books and increase their profits. All that changed when interest rates plummeted to record lows and pension liabilities soared to record highs, prompting many corporations to shed their DB plans and replace them with crappy DC plans.]

Below, Ontario Premier Kathleen Wynne says a new deal to import electricity from Quebec signed back in October will save Ontario about $70 million over seven years but many experts disagree.

And since it's Valentine's Day, let me share a wonderful CBS News story of a couple closer than ever after husband's brush with death. If this doesn't melt your heart, nothing will (if it doesn't load up below, click here to watch it).

As always, if you have different views on this or any other comment, feel free to email them to me at LKolivakis@gmail.com and I'll be glad to post them, even anonymously. Happy Valentine's Day!