Public pension executives are facing a paperwork tsunami this year.
Not only do new financial reporting rules from the Governmental Accounting Standards Board start going into effect this June, but Moody's Investors Service Inc. is implementing — starting this month — a new set of calculations that puts pension debt front and center in rating state and local governments.
“Moody's introducing a third set of calculations is only going to exacerbate the confusion and the selective use by people finding the pension number that fits their agenda,” said Keith Brainard, director of research in Georgetown, Texas, for the National Association of State Retirement Administrators.
When issuing the proposed change, Moody's officials noted that by their calculations, some $3 trillion in state and local unfunded pension liabilities were roughly triple what governments were reporting. To get a better sense of long-term liabilities and how they affect overall debt, and to allow for more comparability of plans' long-term liabilities, the New York-based ratings agency said it will now ask for more information, including:
- accrued actuarial liabilities based on a high-grade long-term corporate bond index discount rate, currently around 5.5%;
- the market value of assets, instead of more common asset smoothing;
- pension contributions spread over a common amortization period of 17 years; and
- multiple-employer cost-sharing plans' portion of pension liabilities based on contributions to larger, state-run plans.
Consider recent changes
Officials at Moody's, which has collected data for 8,500 local governments and 14,000 public pension plans, say they will also consider recent plan changes or reforms not yet reflected in pension reports.
“Comparable disclosure across plans is a very worthwhile goal that helps inform bondholders and others,” said Donald Fuerst, senior pension fellow at the American Academy of Actuaries, Washington, which supports more consistent disclosure of public plan assets and liabilities. But he worries that without complete demographic data for each plan, “the methodology is going to be somewhat simplistic” and thus may have limited value or impact. “I don't think it's going to have any real significant change in how things go,” he said in an interview.
It will have “a dramatic change on government balance sheets,” said John Tuohy, Arlington County (Va.) deputy treasurer, who chairs the pension committee of the Government Finance Officers Association, Washington. “But what are they trying to accomplish? We fund so much of what we do through debt, which is short term, while pension obligations stretch out years. It really is a huge distinction.”
GFOA members are particularly concerned about pension funds “at or slightly above doing the right thing,” Mr. Tuohy said in an interview. “The reality is that nothing has changed for them, but you're tossing them into the concern bucket. I worry about them because the practical effect is the cost of the debt. That turns into real money, and that money has to come from somewhere.” Even for a solid pension system like the $1.7 billion Arlington County Employees' Retirement System, which is funded around 91%, Moody's review could cause that to drop as low as 75% by some unofficial calculations “while the circumstances haven't changed at all,” he said.
Along with the immediate spike in pension liabilities expected from the new liability measurements, public pension officials and advocates are also worried about being subjected to a “one-size-fits-all” approach. “Using a single discount rate to measure public pension plans will introduce greater distortion and result in less clarity, not more,” officials from the $40.2 billion Maryland State Retirement & Pension System, Baltimore, wrote to Moody's in its September comment letter. “It is difficult to see how the goal of greater comparability among plans will be achieved. ... It is unclear how comparability, even if it were possible, says anything about the state's ability to fulfill its obligations.”
A common metric for pension liability “is a very positive step for transparency,” maintained Josh McGee, vice president of public accountability at the Laura and John Arnold Foundation in Houston who studies public pension issues, in an interview. “Just like any other debt, (governments) should be worried about how it affects their credit rating. It doesn't actually affect what they owe. Hopefully it will push the others to do a better job of managing debt, and to have governments pay what they promise.”
It should also discourage government officials from diverting pension contributions for other purposes, he said. “Taking from the pension fund is convenient, but it is borrowing just like any other debt,” which plans should address sooner rather than later. He cited the example of the $116.3 billion Teacher Retirement System of Texas, Austin, which at 80% is relatively well funded, “but has no plan to pay off” that unfunded liability. TRS spokesman Howard Goldman said officials are now working with state legislators to consider options for addressing a $27.4 billion unfunded liability.
Public pension and budget officials would prefer that Moody's let GASB rules settle in before adding another measurement and a third number that could confuse public debate. “GASB has done a really good job of highlighting the impact of underfunding. It's going to end up on Moody's to explain why they didn't accept that. They are kind of throwing a rock in the pond,” said Mr. Tuohy of Arlington County.
“It's important that people understand that while there are a lot of new calculations going on, the underlying reality of the conditions of these plans and the funding of these plans has not changed. It's incumbent on the public pension community to educate stakeholders on what these different sets of numbers mean,” said Mr. Brainard of NASRA.
Mr. McGee of the Arnold Foundation recognizes fears expressed by public plan sponsors and public employee advocates that having a more prominent pension liability number might put more pressure on governments to cut pensions, “but ignoring it simply makes the problem bigger in the future” and risks putting more of the burden on new workers. “The size of the pension debt has become so large that they can't ignore it anymore,” Mr. McGee said in an interview.
David Jacobson, spokesman for Moody's public finance group in New York, cautions that state ratings will not experience any immediate change, and less than 2% of plans are likely to go under review for possible downgrade. Further, he said, with pensions just one of many factors, any resulting downgrades “are likely to be limited to two notches.”
But David Madland, director of the American Worker Project at the Center for American Progress in Washington, worries that Moody's “misguided” mission “could make (public pension systems) appear far more underfunded than they are and more expensive, and probably hasten their decline.”
This article originally appeared in the April 1, 2013 print issue as, "Public funds face scrutiny from accounting updates".