Pension Task Force Releases Guide for Elected Officials

A recently formed task force of state and local groups has released a guide for elected officials to help them develop pension plan funding policies as they transition to new financial reporting requirements.

Eleven groups, including the “Big 7,” published a seven-page report “Pension Funding: A Guide for Local Officials” which recommends that the most important step state and local governments can take is to base their pension funding policy on an actuarially determined contribution (ADC), which should be obtained on an annual or biannual basis.

The task force, which was formed late in 2012, also said pension policy should promote fiscal discipline and intergenerational equity.

“The ultimate goal is to ensure that pension promises can be paid, employer costs can be managed and the plan to fund pensions is clear to everyone,” the groups wrote.

Last summer the Governmental Accounting Standards Board issued new accounting standards that focus on improving financial reporting and liabilities for public pension plans. Currently, governments disclose pension information in the footnotes to their financial statements, and generally only report the contributions they are required to make in a given year, as well as what they actually paid.

The new GASB accounting standards will require governments to disclose a “net pension liability” figure for the first time on their balance sheets in addition to funding projections. The net pension liability is the difference between the total pension liability and the assets set aside in a trust and restricted to paying benefits.

The GASB standards will take effect for pension plan fiscal years beginning after June 15, 2013 and will apply to employers in fiscal years beginning after June 15, 2014.

Most state and local groups opposed the new standards and argued that they “focus entirely on accounting measurements of pension liabilities and no longer on how employers fund the cost of benefits or calculate their annual required contribution.”

As a result, the groups felt guidance was needed to help fill in the gap for state and local governments.

Public pension plans hold more than $3 trillion in assets in trust on behalf of more than 15 million working and eight million retired state and local government employees, according to the guide.

As of 2011, $2.7 trillion was funded and $900 billion was unfunded for 109 state-administered plans and 17 locally administered plans that represent 85% of total state and local government pension assets and members, the report said.

Since the significant declines in public and private retirement plans following the Great Recession in 2008 and 2009, 44 state enacted major changes in state retirement plans, according to the National Conference of State Legislatures.

Some of those changes have included increases in employee contributions to pension plans, longer vesting periods, reduced benefit levels, higher retirement ages and lower cost-of-living adjustments.

While state and local governments are not required to make changes in their funding policy according to GASB standards, they must meet them in order to receive a clean or nonqualified opinion from auditors on their financial statements.

Based on that premise, the task force recommended pension funding policies follow five general rules:

1. Have a pension funding policy that is based on an actuarially determined contribution;

2. Build funding discipline into the policy to ensure that promised benefits can be paid;

3. Maintain intergenerational equity so that the cost of employee benefits is paid by the generation of taxpayers who receives services;

4. Make employer costs a consistent percentage of payroll;

5. Require clear reporting to show how and when pension plans will be fully funded.

The task force also recommended that a sound pension funding policy should include at least three core elements including of funding in a manner consistent with policy objectives: actuarial cost method, asset smoothing method and amortization policy. The guide describes each of these.

For reprint and licensing requests for this article, click here.
Tax
MORE FROM BOND BUYER