Will tougher reporting help fix N.J., Pa. pensions?
Will GASB 67 cost taxpayers more?
Tighter pension accounting standards imposed this year by the Government Accounting Standards Board (GASB) will make it more obvious how far public pensions in New Jersey, Pennsylvania and other states are underfunded, compared to the promises the states have made to workers and retirees, Governing magazine reports here.
GASB rule 67 will make both states' pension savings look smaller -- and, perhaps, more realistic -- relative to what they will have to raise to keep checks coming without paying in billions in increased "employer contributions" in future years. "Best case, GASB rules will help accelerate the funding schedule," says Matt Fabian, partner at Municipal Market Advisors, a bond advisory fund in Concord, Mass.
But the rules don't actually obligate states to put across any more cash. "GASB created a different set of standards for accounting only. Our actuarial funding methodology and the process for establishing the employer contribution rate are unchanged. The GASB standards do not impact the PSERS funding or contribution rates," says Evelyn Williams, spokeswoman for Pennsylvania's school employee retirement system (PSERS).
Under the new standard, GASB 67, pension plans have to take into account, not just their current investment targets, or an estimate of what an employer ought to be contributing to the plan each year, but also the state's actual record for contributing to the plan. Plans that are consistently underfunded are now obliged to accept lower investment targets; which sounds like it ought to be easier, vs. meeting higher targets; but since the liabilities (future pensions) are meanwhile getting larger, the result is that the plans with lower return targets are showing even bigger deficits than before.
In New Jersey's case, the teachers' pension plan is now reported at just 35% funded (assets/liabilities) for 2014, vs. 57% the year before. The New Jersey state workers' plan is just 28% funded. Local and police-and-fire plans are better funded but still show a deficit compared to their assets.
NJ Treasury Spokesman Chris Santarelli notes the state started reporting under GASB 67 in November. "GASB statements solely govern financial reporting, and the change in reporting requirements does not materially impact New Jersey's fiscal position or the system's current assets, and has had no effect on our budgeting. All other states must adhere to the new reporting requirements going forward in their disclosures to financial markets and many have seen similar adjustments in the reported funding ratios." More at: http://www.state.nj.us/treasury/pdf/DebtReportFY2014.pdf
According to Governing: "New Jersey enacted pension reform in 2011 that called for the state to ramp up payments into its pension funds over the course of seven years. But New Jersey has failed to follow through on those payments. A New Jersey Superior Court judge ruled in February that Gov. Chris Christie violated state law when he twice declined to make the full payment into the state's pension system. Now, Christie is pushing controversial pension legislation that cuts the benefits current employees can earn in the future."
The tougher new reporting standard gives Christie's push for further cuts to NJ pensions/increased funding an "air of urgency," Governing adds. Santarelli told the magazine that "this new reporting system only underscores the urgent need for additional, aggressive reform of a pension and health benefits system that if fully funded would eat up 20 percent of New Jersey's budget."
GASB 67 also trims Pennsylvania's school pension (PSERS) funded ratio (assets/liabilities) to 57%, from 64%. It did not run a comparison for the state workers' (SERS) plan. SERS, which is also underfunded, is still crunching the numbers: "GASB 67 & 68 reporting standards are required for the 2014 valuation, which our actuaries are working on now for publication in June," SERS spokeswoman Pamela Hile told me. "The goal of the new standards is to improve consistency in accounting and reporting across pension systems."
Which might not always mean larger apparent deficits: "In an effort to get a handle on the new GASB 67 and 68 reporting standards in advance of the 2014 requirement, we worked with our employers, actuary and auditor to prepare an unofficial, unaudited 2013 special valuation, which resulted in an estimated net pension liability of about $4.2 billion less than the actuarial accrued liability reported in our 2013 valuation. While that is an unofficial "drill", we expect a similar experience with our 2014 valuation when it is complete." (Emphasis added by me.)