Public pension plan executives keeping a watchful eye over their funding levels will have another number to worry about next year when new Governmental Accounting Standards Board rules usher in a stark indicator: net pension liability.
Under current GASB accounting and disclosure methods, public pension plans have focused on their annual required contribution, which is used to set annual pension funding targets. That figure will now slip to the footnotes while the total unfunded liability, instead of the current amount due, goes on the balance sheet. Intended to make public plans report more like their corporate counterparts, the new rules are expected to make underfunded plans look worse, and even relatively well-funded ones less so.
Some public pension plan sponsors and proponents worry that a higher pension liability figure will make defined benefit plans harder than ever to defend, and at the very least stir up misconceptions. Plan executives are also braced for the potential of a higher liability number to jeopardize credit ratings that could increase governments' borrowing costs and further strain limited budget resources.
Optimists hope the dramatic change will give plan sponsors the leverage they need to collect overdue contributions and keep funding on track, which would also mean more money to invest.
One concern is the potential for confusion about which number to track, and what shape a plan really is in. Particularly in a low-interest-rate environment that keeps many public plans' funding levels low already, “I think the GASB standards will add additional confusion about the funded status,” said Kim Nicholl, Segal Co. senior vice president and leader of the firm's National Public Sector Retirement Practice in Chicago.
Also troubling is the requirement that seriously underfunded plans use more conservative discount rates to calculate their liabilities. Designed to keep plans funded above that trigger point, the lower discount rate is likely to cause some panic over long-term viability of those plans. The Center for Retirement Research at Boston College estimates that single change would see 2010 aggregate funding ratios for state and local pension plans plummet to 53% from 77%.
The new standards implement two sets of rules, one for government employers and one for public pension plan administrators, that go into effect for fiscal plan years beginning after June 15, 2013, and June 15, 2014, respectively.
State budget officials were worried enough to convene in August a pension funding task force of advocacy groups like the Center for State and Local Government Excellence, Washington, to get ready for the new rules and to find “a rational way” to figure out how much employers need to pay, both toward current costs and to reduce unfunded liabilities. The task force would like governments to adopt formal pension funding policies apart from GASB to ensure not only clear reporting, but also the funding discipline to get pension promises paid, but no formal proposal has been made yet.
“We are working with a lot of plans” to prepare for the new GASB rules, said Ms. Nicholl. “As you can imagine, there are a lot of stakeholders.”
David Driscoll, a Boston-based principal with Buck Consulting, thinks the pending GASB changes will expand the role of actuaries and consultants to help plans navigate the new reporting waters. “There is going to be the need for defensible, respectable statistics. It's a different era.”
This article originally appeared in the October 1, 2012 print issue as, "Some execs worry new GASB rule will add fuel to fire".