CenturyLink’s billion-dollar pension “relief”…

There’s a lot of sturm und drang over pension plans these days. State and local governments are getting slammed because new accounting rules make their pension plans look less healthy (even though the underlying obligations aren’t actually changing). Meantime, private-sector employers have successfully lobbied for easier contribution requirements from the federal government.

We’ll come back to the public pension plans in a minute, but CenturyLink (CTL) gave us a fresh reminder of this last development with the 10-Q it filed last week.

In the filing, CenturyLink says federal legislation is likely to save it a cool $1 billion over just the next five years. And, unlike other kinds of pension numbers, this is no accounting artifact: This is cold, hard cash that CenturyLink won’t have to contribute to its pension plan during that time period. As CenturyLink put it:

“we have projected that this relief will reduce our pension plan funding requirements over the next five years by approximately $1 billion, which will correspondingly enhance our cash flows over this period.”

CenturyLink isn’t the first company to disclose serious savings from this legislation, nicknamed MAP-21 and more formally called the Moving Ahead for Progress in the 21st Century Act. The legislation is primarily a transportation bill, but includes some pension provisions. Our footnotedPro service for professional investors gave subscribers a heads-up on some other companies disclosing big savings — noting that this is likely to help other companies as well — on July 19 (PDF, subscription required).

In effect, Congress is letting pension plans pretend we aren’t in a period of historically low interest rates. Instead of using recent interest rates to calculate what future pension obligations are worth today, companies get to use a 25-year average. That drags up the interest rate, making future obligations look smaller today. This matters, of course, because the size of those obligations in present-value terms helps determine how much companies are legally obliged to contribute to their plans.

(It also continues a pattern companies have set over at least the past decade: Whenever market returns or interest-rate conditions make their pensions look worse, they plead extenuating circumstances and ask Congress to change the rules governing how much they have to contribute. They’re usually successful.)

None of this affects how CenturyLink (or other companies) will report their pension obligations to investors; that’s governed by different rules. But it does make a big difference when it comes to cashflow — a billion-dollar difference, in CenturyLink’s case.

Maybe more importantly, the legislation also doesn’t affect by one cent what CenturyLink (or other companies) will ultimately have to pay out in pensions. It’s just letting them save less today to pay the very same pensions tomorrow.

Put more bluntly, it’s license to underfund their pensions still more than they already do. As it stands, using the accounting rules for CenturyLink’s financial statements, the company’s pensions plans were underfunded by $1.8 billion as of the end of 2011, according to the company’s 10-K. Letting CenturyLink contribute less will only make that worse, unless the company coughs up the cash anyway, or Mr. Market comes to the rescue.

Not that CenturyLink’s pension shortfall drags down the company’s income. In fact, quite the opposite — through the screwy magic of pension accounting, CenturyLink’s pension plans contributed $63 million to net income last year, and have contributed another $50 million through June 30 of this year. Unlike the savings from the federal legislation, however, that’s just on paper — it gooses reported net income without actually generating cash.

So how does this tie in to the public-pension drama we mentioned at the beginning?

The irony, of course, is that many of the same factors are driving the two stories: Recent low interest rates and poor investment returns are being factored into the new accounting rules for public plans, making them look less affordable for state and local governments. And the very same factors are the reasons private-sector employers have won a reprieve from putting money into their plans, saving them a ton of cash.

In case it isn’t obvious, we’ll lay it out plainly: The long-term effects on the two sets of pension plans are identical. If the low rates and poor returns persist, both kinds of employers will ultimately have to pony up more over time to pay promised benefits. Yet one set of employers is getting grief, and the other is getting “relief.”

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