States Face Pressure on Pension Shortfalls
By MICHAEL CORKERY And MICHAEL RAPOPORT New accounting rules are likely to show that public pension plans could face hundreds of billions of dollars in additional liabilities, putting new pressure on state and local governments to act.
The revamped rules expected to be approved Monday by an accounting-standards group will force governments to record pension costs sooner than they did before and disclose shortfalls more prominently. The changes also will force some public pension funds to calculate retirement benefits using more conservative assumptions.
The new rules could hit pension plans in states like Illinois and New Jersey particularly hard, and even raise borrowing costs for certain municipalities, analysts say. "This could be the event that incites a bigger policy response than what we've seen so far," says Matt Fabian, managing director at Municipal Market Advisors, a research firm.
The exact impact of the new rules by the Governmental Accounting Standards Board isn't clear. According to researchers at Boston College, pension liabilities at 126 state and municipal pension plans would jump by roughly $600 billion, or about 18%. The estimate is based on 2010 financial data and doesn't reflect the stock market's recent rebound or moves by many U.S. states to rein in pension costs.
Even with those improvements, the accounting changes are expected to increase total public-pension liabilities substantially when they take effect starting in 2013.
Many state pension managers downplay the impact of the new rules, arguing that the changes will merely affect how pension numbers are reported, and not the substance of the plans' conditions.
Some economists and lawmakers have pushed for tougher rules for years. "We think we've struck the appropriate balance that will result in some improvements in accounting and financial reporting," says GASB Chairman Robert Attmore.
The new rules won't in themselves force cities and states to refill their pension coffers or slash benefits, but they will underline the widening funding gap many of the nation's largest public plans face.
More than 40 states have already moved to trim pension costs since the financial crisis by raising contributions from employees or cutting back benefits for new workers, often after wrenching political debates.
Some officials expect renewed political pressure to end the guaranteed pension benefits that are now received by about eight million retired public workers across the U.S. "Those attacks have occurred prior to the [GASB changes] and I can only anticipate that they will be amplified,'' says Thom Williams, executive director of the Wyoming Retirement System.
Some pension officials said they don't plan to make drastic changes based on GASB's decision. For example, many pension officials plan on using two sets of numbers when calculating pension obligations: one for official reporting purposes and another to determine taxpayers' pension bills. GASB's new rules would allow that.
"It's an accounting change; that is all it is,'' says Andrew Pratt, a spokesman for New Jersey Treasurer's office. "New Jersey still has complete control over how the assumptions in its pension plans are set."
"We will have to go spend time and explain it and not have people overreact to the numbers," said North Carolina Treasurer Janet Cowell.
The changes follow more than four years of research and deliberation by GASB, a private-sector body recognized by governments, markets and the accounting industry as the official source for public-sector accounting rules.
The new rules won't alter the pension benefits that governments pay, and they won't directly affect how much governments contribute to their pension plans. GASB says its move is aimed at separating the accounting for pension plans from decisions on how to fund them.
But the discrepancy between the two sets of numbers could put renewed pressure on governments to close the funding gap.
"Are there going to be renewed discussions about contribution levels? That's very likely," said David Kausch, chief actuary at Gabriel Roeder Smith & Co., a benefits-consulting firm.
Last December, Mr. Kausch warned trustees overseeing the Illinois University system pension plan that the GASB changes could create "sticker shock."
Under the revised rules, pension officials will have to measure assets based on market values, which could cause numbers to swing from year to year.
The Center for Retirement Research at Boston College estimated that the changes would cause the group of 126 pension plans it analyzed to fall to 57% funded—that is, their assets would cover 57% of their obligations—from 76% in 2010.
In Illinois, the funding level of pensions for university employees would slip to 40% from 46%, according to the Boston College analysis.
A spokeswoman for the university fund declined to comment on that estimate.
"I hope it reinforces the need to do something,'' says Tom Cross, Illinois House Republican leader. "I still think there are people who are not accepting the reality of the situation."
Critics say the GASB changes don't go far enough, particularly in the way states will have to calculate pension liabilities that stretch over several decades.
To make that calculation, pension plans use a "discount rate"—an interest-rate assumption to determine how much future benefit payments are worth in today's dollars.
Public pension plans use the rate of return they expect on their investments, typically around 8%.
The lower the discount rate, the higher the obligations' current value—and higher obligations mean a bigger funding gap.
GASB's new rules would force underfunded plans to use a lower rate for some of their obligations.
But the overall government rate wouldn't be as low as the 4% to 5% rate that corporate pension plans use.
In recent years, many state pension systems with the largest funding gaps have skipped or made only a portion of their annual contributions.
Mr. Attmore, the GASB chairman, said "decisions regarding funding of pensions are appropriately the domain of elected officials who determine how to allocate limited resources among various competing interests in the government budget process." |
