CARSON CITY – The Governmental Accounting Standards Board (GASB) has voted to approve two new standards that the group says will substantially improve the accounting and financial reporting of public employee pensions by state and local governments.
“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” said GASB Chairman Robert H. Attmore. “Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.”
The new rules were approved June 25 and take effect beginning in 2014.
There are differences of opinion about whether the new reporting requirements will mean significant changes for how the Nevada Public Employees’ Retirement System (PERS) calculates and funds its long-term liability.
Dana Bilyeu of PERS says the changes won’t be significant in Nevada
Bilyeu, executive officer of Nevada PERS, said the new rules are not expected to change the metrics that form the basis for how the public pension plan liability is currently being funded over the long-term. Pension funding is governed by the Actuarial Standards of Practice, not GASB, she said.
The GASB rules require uniform reporting of pension liabilities for the purpose of providing comparable information, for instance, when states or municipalities sell bonds, Bilyeu said The new rules may lead to confusion because there will be two different numbers used to calculate pension liabilities when they take effect, she said.
The funding side of the public pension plan in Nevada will continue to use assumptions built around plan experience such as an eight percent return annualized over 30 years, Bilyeu said.
The rate for the financial reporting rule will be different, but not dramatically so, in Nevada, she said, in light of current plan experience.
“In Nevada, at least preliminarily, I don’t see a huge difference,” she said. “What they’re trying to do is put standards in place so there is uniformity in reporting in the bond market, as well as for other uses of financial statements.”
For states such as Illinois that do not fully fund their public pension plans on a consistent basis, the reported liability discount rate for financial reporting could be much lower, closer to 4 percent, Bilyeu said.
The concept is designed to allow the users of the financial statements, as in the bond market, to evaluate what the default risk is for the sponsor by showing a measure of how that sponsor pays on other debt, such as pension debt.
Bilyeu said she is concerned that the rate of return used for financial reporting purposes will be used by critics of the public pension program to argue contribution rates should be higher than those calculated now to fund the system using the estimated 8 percent discount rate.
The financial reporting rule will lend itself to much more volatile results over time, she said.
The two different numbers that will be reported in future years are not meant to be comparable, Bilyeu said. In fact GASB specifically indicated that the new pension reporting requirements are deliberately drafted so as not to influence funding decisions, she said.
The Nevada Policy Research Institute says the changes could spur PERS reforms
Geoff Lawrence, deputy policy director at the libertarian think tank, said at the least the new rules will present a more accurate report showing that public that pension liabilities, in Nevada and elsewhere, are much greater than what are being estimated currently.
There is still a lot of uncertainty because the actual rules won’t be available for review until August.
But since the long-time liability of PERS is only 70 percent funded, the new reporting could push the system to imposing higher contribution rates to make it fully funded, he said.
“It looks like GASB is going to allow pension systems that they consider well-funded to continue with the same accounting methods that they’ve used in the past regarding the discount rate,” Lawrence said. “And well-funded pension systems are usually considered those within 80 percent funding level or above. Now Nevada PERS, along with many other states, currently falls below that funding ratio.”
If forced to use a lower discount rate, Nevada and other public pension plans will see their unfunded liabilities grow by tens of billions of dollars, he said.
If a 5 percent return calculation is used for PERS, the liability is closer to $35 billion than $10 billion, and would require much higher contribution rates, Lawrence said.
“I guess the take away for most citizens and lawmakers and so forth is that cities, counties and the state are now going to face higher annual contribution rates in order to work towards retiring that unfunded liability amount which is going to be much higher,” he said.
The contribution rate for this year and next in Nevada is 23.75 percent of a regular public employee’s wage, with half paid by the employer and half by the employee. The contribution rate will be recalculated in November for the next two-year budget. The rate for public safety employees is much higher.
Higher contribution rates mean bigger financial hits to taxpayers.
The new rule will spur some public recognition that pension liabilities are being under reported, Lawrence said.
“We are going to have these two sets of numbers, and one is the official GASB number which most economists are going to throw their weight behind,” he said. “And it’s going to show some disconnect at the legislative level and within PERS administration that is probably going to compel some type of drive towards changing the fund management rules at the state level.”
Changing the state pension plan to a 401(k)-style defined contribution plan would eliminate the unfunded liability for the future, but the liability for the current plan will still have to be funded over time.
Nevada PERS, which covers most state and local government workers, is a defined benefit pension plan, guaranteeing a set retirement income based on years of service and salary.
The Pew Center on the States recently reported that the financial health of Nevada’s public employee pension plan is cause for serious concern because it is only 70 percent funded as of fiscal year 2010 with a $10 billion gap. The funding ratio in Nevada is below the 80 percent benchmark that fiscal experts recommend for a sustainable program.
Bilyeu has argued, however, that Nevada has always fully funded its annual pension obligations as calculated by an independent actuary, and that this is a better measure for determining the health of a public employee pension plan than the funding ratio.
Gov. Brian Sandoval says he intends to pursue changes to PERS in 2013
Sandoval on Thursday reiterated his intention to make changes to the pension plan in the 2013 legislative session during an interview on the Nevada NewsMakers television program.
“Of course I’m concerned about our PERS system, the public employee retirement system, and the fact that it is underwater,” he said.
Sandoval said one of his disappointments of the 2011 session was getting a bill through providing for a study of PERS, but only if private sector funding was obtained. That money was not forthcoming and the study did not proceed.
“Right now I’m working to get a study done so that we can have the background, but at the end of the day we know that we have to reform our PERS system because we can’t keep going in the direction that we are,” he said.
There are critics of the new GASB rules
A national group, the National Public Pension Coalition, has criticized the new rules.
“These accounting changes undermine the retirement security of teachers, cops, firefighters and other public workers by making unfunded liabilities appear much larger than they actually are,” said Jordan Marks, executive director of the group. “These unnecessary changes add a new layer of red tape resulting in wasteful administrative costs for taxpayers, enabling politicians to slash the modest pensions of public workers while continuing to let Wall Street off-the-hook.”
The new rules are found in Statement No. 67, Financial Reporting for Pension Plans, which revises existing guidance for the financial reports of most pension plans, and Statement No. 68, Accounting and Financial Reporting for Pensions, which revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits. The complete rules will not be available for review until August.
The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the board’s diverse constituency, including preparers and auditors of government financial statements, users of those statements, and members of the academic community.
Gov. Brian Sandoval says he will pursue changes to PERS in the next legislative session:
062912Sandoval :10 that we are.”
Geoff Lawrence of NPRI says Nevada PERS does not meet the definition of a well-funded plan:
062912Lawrence1 :29 that funding ratio.”
Lawrence says the new GASB rules could require higher contribution rates to retire the unfunded liability:
062912Lawrence2 :24 be much higher.”
Lawrence says the new rules could prompt changes to PERS fund management rules:
062912Lawrence3 :27 the state level.”