The implementation of the Governmental Accounting Standards Board pension accounting changes are likely to add volatility to unfunded state pension liabilities, which already are in need of significant improvements, Standard & Poor’s said in a report Tuesday.
State pensions are stabilizing but significant improvements are needed to sufficiently fund system levels and it could take several years to accomplish that, the rating agency said in the report, “A Bumpy Road Lies Ahead for U.S. Public Pension Funded Levels.” The report is the rating agency’s annual state pension funding survey.
The new GASB pension plan and financial accounting changes significantly change how pension liabilities are accounted for and reported in state and local governments’ financial statements. GASB’s Statement 67 on financial reporting for pension plans, took effect on June 15 and Statement 68 on accounting and financial reporting for pensions, will take effect on June 15, 2014. These changes will lead to more conservative liability estimates as well as enhanced comparability and disclosure, the rating agency said in the report.
The 50-state average funded ratio — actuarial value of assets divided by the actuarial accrued liabilities — fell by approximately 1% to 72.9% in 2011 compared with 73.7% in 2010. This is slightly smaller than the 1.6% drop in 2010 and much smaller than the 7% decline from 2008 to 2009, at the height of the financial crisis.
“This recent trend of smaller declines in the past three years could lead some market watchers to believe that the worst is over and that pension funded levels have bottomed out,” the report said. “Although a decelerating rate of decline is positive, we expect states will need to actively manage pension funds to ensure their long-term sustainability. The road to pension funded level improvement will be bumpy.”
The rating agency concluded that the credit implications of liabilities for state pension systems and efforts to reform them are far from over and that more policymakers are considering making structural changes to their systems in an effort to lower liabilities.
While states continue to operate cautiously, they face increasing budget challenges as they deal with demands to reduce taxes, implement provisions from the Affordable Care Act, and deal with sequestration.
The survey found that most states have sufficient assets in their pension trusts to fund benefits payments over the near to medium term and in many cases, the long term.
Based on 2011 data reported in the states’ comprehensive annual financial reports (CAFRs), the latest year for which CAFRs are available, pension funded ratios dropped for 34 of the 50 states. The ratios remained unchanged for six states and increased for 10 states in 2011.
Unfunded pension liabilities totaled $833 billion as of 2011, up from $757 billion or 10% from the previous year, the report found.
The top five states with the highest pension funded levels were Wisconsin with 99.9%, South Dakota with 96.3%, North Carolina with 95.3%, Washington at 93.7% and New York at 92.7%. The five states with the lowest funded pension levels are Illinois with 43.4%, Kentucky with 53.4%, Connecticut with 55%, Louisiana at 56.2% and New Hampshire at 57.4%.
