Pension wars, or: I don’t want the province anywhere near my money

A high-profile public dispute about technical accounting…

Here’s a story that appeared in the Toronto Star last year:

  • “Depending on whom you believe, Ontario’s deficit last year was either $3.5 billion or $5 billion.
  • And the province’s net debt was either $294.5 billion or $305.2 billion.
  • Finance Minister Charles Sousa and Treasury Board President Liz Sandals insist it’s the former.
  • Auditor General Bonnie Lysyk says it’s the latter.
  • That’s because she no longer believes the government should include on its bottom line its share of assets from the teachers’ and public servants’ pension funds that it co-sponsors.
  • Against the backdrop of the accounting dispute, Sousa and Sandals on Monday released an unaudited version of the province’s public accounts for the fiscal year that ended March 31.
  • …Asked what changed (compared to previous years, when such policies were acceptable to the Auditor General), Lysyk said her office took a closer look at the government’s claim to the Ontario Public Service Employees’ Union Pension Plan and the Ontario Teachers’ Pension Plan, which it co-sponsors.
  • ‘I had my staff review that asset much more than in past years,’ she told the Star, concluding that, because the government does not have ready access to the funds, they should not be considered assets…

That last piece is a paraphrase rather than a direct quote. In a statement issued around the same time, the Auditor General’s office framed the past practices this way: “The government previously included these pension assets in its financial statements—even though the province did not control or have unilateral access to those assets.”

It would be pointless to deny that the Ontario government has a major political interest in continuing to recognize such assets, given its desire to head into the next provincial election with a balanced budget (however technical the nature of the balance). As a contribution to resolving the dispute, it convened a so-called Pension Asset Expert Advisory Panel, which reported on February 13, 2017. Here’s how a news release from the Treasury Board Secretariat summed that up:

  • “The panel’s report concluded that the province’s share of the net pension assets of both the OTPP and the OPSEUPP should be recognized as an asset in Ontario’s financial statements and should be reported for the following reasons:
    • Recognizing the asset will provide a faithful representation of the province’s financial position
    • The accounting surplus in the plan has a future economic benefit
    • The government controls access to that accounting surplus
    • The accounting surplus exists as the result of past transactions and events
    • It would be misleading not to recognize the province’s share of the assets in Public Accounts.
  • In addition, the panel concluded that the government will be able to benefit from the full amount of each net pension asset, and as a result, no reduction in the value is necessary.”

The Chair of the Panel, as reported by the National Post, summed up the key points like this:

  • “The fact that they can’t take money out of the plan to use for other purposes, to us, is not relevant simply because of the fact that if you don’t have to put as much money in by reducing contributions, you thereby have additional funds that you didn’t have to spend on the pension that you can spend on something else,” said panel chair Tricia O’Malley.
  • She likened it to owning an income property with a friend.
  • “Simply because you and your friend own this property together, are you going to leave your share of that rental asset, that rental property, off your net worth statement as an asset?” she said. “I doubt it, if that’s something that’s of value and you have a share of it.”

As I post this column though, Auditor General Lysyk still doesn’t seem inclined to accept the panel’s position, raising the possibility she might qualify her report on the province’s financial statements. The Star sees all this as “a damning indictment of an auditor gone awry.”

This is a dispute about applying public sector accounting principles rather than IFRS.  However, it’s possible to imagine the same kind of faceoff in an IFRS-driven world. The story might bring to mind the old (apparently not entirely apocryphal) stories about politicians and others who railed against deferred tax liabilities on corporate balance sheets – why should big companies be allowed to defer their taxes, when they can afford to pay it all now (just like regular people have to do!) Take for instance this reader’s letter also published in the Star:

  • “It is astonishing to me that public service pension plan funds can be considered an ‘asset’ on the provinces books. ‘Sponsorship’ notwithstanding, the funds belong to the members of the plans, and are intended to meet future liabilities as the members retire.
  • (Lysyk’s stance) is a merciful blessing in my opinion. I receive an Ontario Municipal Employees Retirement System pension and I don’t want the province anywhere near my money…”

One might find something almost inspiringly quaint there, in the apparent belief that a difference in the accounting treatment for the asset will inherently affect the legal entitlements attaching to it. But then, it would be easy to conclude Lysyk must think something similar. If nothing else, this whole widely-reported saga will presumably have prompted a lot of people to think about technical accounting issues much more than they usually do. Unfortunately, and inevitably, they may be more confused than enlightened by the whole thing. In its most recent dispatch as I write, the Star reports that Lysyk is “demanding proof ‘in writing’ from the unions that they are okay with the government booking the surpluses as a public asset for accounting purposes,” as if social consensus lay at the heart of satisfactory accounting treatments. If only!

The opinions expressed are solely those of the author

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