The Hard Pension Questions That Are Coming
New reporting requirements are going to make many pensions look worse off -- even if they're not. Public officials need to be ready to talk about that.
If your government provides its workers with traditional defined-benefit pensions, you should know about recent changes in accounting and financial reporting requirements. They're about to make your life uncomfortable. New pension reporting will likely prompt challenging questions from the media, plan participants and taxpayers.
The changes in the way governments must measure and disclose information about pension plan assets and liabilities are the result of new rules from the Governmental Accounting Standards Board (GASB). The changes will mean that the pension funds of many governments -- those that haven't been doing as well as others in funding their retiree obligations -- will "appear significantly worse off than a year ago," as an article in the January issue of Governing noted.
Before sensational stories about pension underfunding begin appearing in the media, elected and appointed officials and others involved with administering governmental retirement plans need to understand the changes so that they can respond to questions in a better-informed way.
Although many public pension plans will appear to be less well funded, it is important to remember that the new GASB rules don't change the economic reality of the existing pension obligations. They do not require changes in the way plan-funding contributions are determined. The new rules do make it easier for plan participants, unions and taxpayers to monitor pension plan performance and current financial status, and they improve the information available to policy-makers to make key decisions.
Under the new GASB requirements, all state and local governments participating in defined-benefit pension plans will use the same method to calculate and report their net pension liabilities and pension expenses. Use of a standardized calculation method means that, for the first time, policy-makers can make meaningful comparisons of ratios of fund assets to employer liabilities and other key measures across plans, governments and time. Increased comparability makes it easier to evaluate requests for cost-of-living or other benefit increases and to resist pressure to underfund pension obligations.
Pension plans and some state and local governments are now issuing fiscal year-end 2014 financial reports that include these new and different pension disclosures, and it won't be long before the headlines about widespread underfunding of pension plans begin, along with challenging questions from concerned plan participants, advocacy groups and taxpayers. Now, before those questions start rolling in, is the time to communicate three simple facts:
1. Actual pension obligations have not changed because of the new accounting standards; only the way they are measured and reported has changed.
2. Many pension plans will appear to be less well funded. This does not mean plan participants' benefits are less secure than they were when the amounts and ratios were computed differently.
3. The GASB accounting and reporting changes do not require changes in the way plans are funded. Funding decisions are made by policy-makers, not by accountants or accounting standards.
This new era of transparency and prominence for information on public pensions certainly will present challenges for public officials, but proactive communications now should mitigate some concerns and minimize the spread of misinformation. Helpful articles, summaries, fact sheets, videos and implementation guidance that can be used to improve public understanding of the pension accounting and reporting changes are available in GASB's free, downloadable Pension Toolkit.
There's another good reason for officials to make the effort now to learn how to answer difficult questions about pension liabilities: GASB is actively considering requiring governments to recognize and report retiree health-care liabilities following an approach similar to the new pension reporting standards. If that happens, it's likely that those mostly unfunded liabilities are also going to cause the government's financial position to look worse than previously. That will put an even higher premium on clear, concise and timely communications.