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"Sticker shock" from new pension rules

GASB guidelines, by forcing governments to confront retirement costs, will "swamp the balance sheet" in states and cities, warns PFM's Girard Miller

    by Joseph N. DiStefano
    Published 
Public pension funds in Pennsylvania, New Jersey and other states, already pressing taxpayers for big increases in their yearly contributions, face "sticker shock" as new accounting guidelines threaten to "swamp the balance sheet" by forcing governments to confront the real cost of retirement plans for legislators, judges, teachers, police and corrections officers, writes Girard Miller, senior strategist at PFM Group, the Philadelphia-based national pension adviser.

The Government Accounting Standards Board (GASB) guidelines (draft here; summary here) will, among other things:

- List pension funding deficits (estimated to total $2 trillion for state and local government plans) on their balance sheets, increasing pressure to either put more money aside for pensions, or cut future benefits.

- Force underfunded plans (which is most plans) to cut their unrealistic 7%-8% yearly profit target down to a rate based more closely on bond yields.

- Stop pension plans from stretching the amortization (funding period) for paying future liabilities, from the current 30-year limits, to shorter 12- or 15-year periods based more closely on "the average remaining service lives" of government worker sbefore they qualify for pensions.

That will increase the funds' (and the governments') apparent deficit, forcing them to either set aside more money for pensions, or cut future pension benefits. It will also make pension results more volatile, forcing taxpayers to set more aside to cover pension liabilities when markets go down, even though those years are usually a tough time to raise taxes.

Miller estimates even a small change in target investment reeturns could result in a "40% increase in annual catch-up contributions," or a "60 to 100% increase in pension costs" in recession years. He expects many funds will choose not to conform to standard accounting procedures if GASB rules are adopted.

Pennsylvania State Employees' Retirement System is reviewing the proposed rules, says spokeswoman Pamela Hile. So is the Public School Employees' Retirement System, says spokeswoman Evelyn Tatkovski.
    JN
    Joseph N. DiStefano