New Pension Accounting Rules Roll Out
The Governmental Accounting Standards Board released new rules that are expected to become final next year.
They’re cut, dried and dense. Accounting rules are something only a bean counter could love. But they can also repaint the landscape of municipal finance. That’s likely to be the case with new pension accounting rules spelled out by the Governmental Accounting Standards Board (GASB) in an exposure draft released this summer. The rules are expected to become final next year.
Under them, pension liabilities will have to be displayed on the balance sheet and the “true cost” of pension benefits must be reported in the operating statement -- even if the employer fails to make the necessary annual contributions. That true cost will be higher than most employers now pay.
There are other implications -- some helpful, some challenging. Labor negotiators will benefit from increased transparency. They will finally have a better way to show the impact of promised benefits and the fiscal consequences of future proposed benefit increases.
As to the challenges, the amortization of unfunded liabilities will be accelerated, which will result in higher actuarially calculated employer contributions. Translation: Accumulated pension debt must be repaid faster under the new standards, resulting in even-higher pension costs.
Budget officers will need to prepare for this in their 2013-2014 fiscal year budgets. Some states and large municipalities with $1 billion pension plans will have to address these changes as early as next summer.
The rules are not yet set in stone. After they complete public hearings this month, GASB may do some tweaking of how they calculate such technical aspects as the discount rate for valuing future liabilities on today’s books and how employers amortize certain expenses. But there is little doubt that employers’ financial statements are going to change, with greater emphasis on visibility. Footnote disclosures will also be far more comprehensive and transparent, with more-revealing facts for investors and citizens.
To prepare for all this, here’s a list of actions to consider:
• Have your actuaries prepare 15-year projections of your future contributions under the proposed GASB guidelines versus your current contribution policies, along with the resultant funding ratios. A 10-year projection, which is now under discussion by the National Association of Bond Lawyers, will fail to show whether your amortization policy is “kicking the can” to future taxpayers, or whether you’ll pay off the bills before today’s average worker will retire.
• Intensify efforts to cut the costs of retiree benefits through various mitigation techniques, such as raising employee contributions for pensions, requiring employee contributions for other post-employment benefit (OPEB) plans, changing benefits formulas for future employees and for current employees where legally permitted.
• Start discussing the data with labor unions now, especially if negotiations are under way. The national labor leaders know that GASB’s truth squad is on the horizon.
• Plan your approach to the investment community. Before your next bond issue, you will want to have a clear and concise explanation for the rating agencies of how the numbers will show on your books and what this will do to their standard financial ratios.
• Meet with your pension officials and begin candid discussions of what you will be able to afford to contribute toward their plan in the future. A complete sustainability analysis requires evaluation of the benefits, the full cost of those benefits over the remaining service lives of today’s workers, and a multiyear financial forecast of the employer’s total revenues and expenditures to see if the benefits can really be supported. Only the CFOs and budget directors of the employer can pull all this information together, so they must take the lead on this work.
Although these accounting rules apply only to pensions, the net will widen. GASB has begun a parallel study project for OPEBs, such as retiree medical plans that will inevitably need to follow the same or similar standards.