The nation’s two largest public pension systems last week asked for a delay in new accounting rules that will make pension debt more visible, a change intended to aid decision-makers that some think may alarm the public.
CalPERS wants more time to reprogram 2,200 plans and is having difficulty hiring scarce actuaries at state pay rates. CalSTRS needs time to hire more staff and begin a relationship with 1,600 school districts at an estimated cost of $1.2 million a year.
“Most of this is stuff that could be dealt with in time,” Alan Milligan, CalPERS chief actuary, told a Governmental Accounting Standards Board hearing. “But I do believe we need more time to implement this new standard.”
The CalSTRS chief financial officer, Robin Madsen, told the board: “We are excited to participate with GASB on that. We have been in dialog and conversations, and we would like to continue that. We just don’t feel it’s ready at this point.”
The once little-known board, now increasingly important, is holding a final round of hearings before issuing new public pension rules next June. The change is scheduled to take effect for large plans on June 15, 2013, and for other plans a year later.
A groundbreaking board rule in 2004 directed government employers to calculate and report retiree health care debt. The board began work on pension rules in 2006, before a sagging economy and stock market crash gave pension funds huge losses.
Now the new rules are coming out as soaring public pension costs are national news. Critics say overly optimistic earnings forecasts hide pension debt, and overly generous pensions are “unsustainable,” diverting money from basic programs.
The most radical change advocated by critics was briefly mentioned at the hearing last week: A switch to the 401(k)-style investment plans common in the private sector, which avoids long-term debt and risk for employers, but can be inadequate for retirees.
“Do you think these GASB proposals will encourage governments in California to switch from a defined benefit plan (pension) to a defined contribution plan (401k)?” asked board member Michael Granof, receiving an indefinite reply.
A Pasadena-based accountant told the board the new rules are creating “a lot of emotion” as he makes presentations to city councils and county supervisors. He said some even worry that the change will cost them their jobs or “close down” their pension plans.
“I’m trying to explain what is going on here – because it is not Armageddon, all it is sunshine,” said Eric Berman, a representative of the Association of Governmental Accountants and long-time GASB adviser.
Debt amounts. The new rules are not likely to show eye-popping increases in pension debt or “unfunded liability.” But pension plans that do not have enough projected assets to cover future pension costs may show more debt.
Pension plans use their earning forecasts, often about 7.75 percent, to offset or “discount” future obligations. Some economists say a risk-free government bond rate, now about 4 percent, should be used because pensions are risk free, guaranteed by taxpayers.
When a Stanford graduate student report last year used a risk-free bond rate to discount the obligations of the three state pension funds, their combined “unfunded liability” ballooned from the $55 billion they were reporting to $500 billion.
The new rules use a “blended” discount rate. Pension funds would continue to use their earnings forecasts for assets projected to be available to pay pension obligations in the future.
But if the assets fall short, the funds would presumably borrow to cover the remainder of the obligation. So that part would be discounted at a high quality tax-exempt municipal bond rate.
Milligan told the board most California Public Employees Retirement System plans will not have to use the blended rate. He said actuarial adjustments can be made to prevent “failing on a technicality.”
Debt visibility. Under the new rules, the pension debt of state and local government employers, now buried in scattered notes deep in annual financial reports, will be out front on the balance sheet along with other debt.
The debt will be reported with a new number. The “net pension liability” is the difference between the total pension liability and the net assets set aside in a trust to pay the benefits of current and future retirees.
A speaker told the board the change could move a balance sheet from a surplus to a shortfall, possibly affecting decisions about employee requests for benefit increases. One credit rating agency, Moody’s, already counts pension debt with other debts.
The GASB chairman, Robert Attmore, said the rating agencies have told him the new rules will not affect bond ratings. The new reporting rules do not change the information used by rating agencies.
A board summary said the new rules make pension expenses more visible by reporting them promptly: “For instance, the full impact of changes in pension benefits would be recognized as expense immediately, rather than recognized over as many as 30 years.”
The reporting of pension increase costs has been spread over decades because they are funded that way. But the new rules are intended to break the traditional link between funding and accounting.
Rules criticism. Some pension officials think decision-makers would be best served by keeping the focus on funding. A key gauge of pension health is whether employers are paying the full annual “actuarially required contribution.”
Some also think that reducing “smoothing” techniques, which spread key factors over a number of years, could result in big year-to-year swings in the new accounting numbers, confusing or misleading the public about the condition of pension funds.
Milligan said the new rules could conflict with a state constitution limit on the amount of debt incurred in one year. After talking to several pension plan officials, he said the conflict may be “solvable,” given more time.
Another problem: CalPERS cannot pay for employer accounting costs. A speaker at the hearing said audits of employer balance sheets with the new liability number may need to be reviewed by actuaries, which are scarce in California.
The California State Teachers Retirement System thinks the new rules may require school districts to report pension liabilities. But CalSTRS gets most of its information from county education offices and has little contact with districts.
Madsen told the board the new rules “would really be changing the way we do business,” requiring more time to develop a relationship with the districts. CalSTRS is an unusual plan in which costs are shared by the employer and the state.
Other speakers at the hearing said the new accounting rules should require government employers to report their retiree health debt. The state, for example, owes an estimated $60 billion over the next 30 years for retiree health care.
Like most government employers, the state has not set aside money to invest and help pay for retiree health care promised current state workers. The state is paying about $1.5 billion for retiree health care this year, a rapidly growing cost.
“I think I can offer you some hope,” Attmore, the GASB chairman, told a speaker. “Dealing with OPEB (other post-employment benefits), primarily retiree health benefits, is something that’s on our agenda. We will be looking at that going forward.”
Attmore told another speaker that GASB has “another project that is looking at financial projections.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 17 Oct 11