Small towns, big debts: assessing impact of new pension accounting standards

Sept. 07--When it comes to school districts and municipalities fessing up to what their public pension costs really are, Pennsylvania -- and by extension local governments -- are either ahead of the curve or behind the eight ball, or maybe both.

New accounting guidelines coming into play are intended to improve pension fund reporting in ways most expect will expose red ink previously kept off the books. But the change comes five years after the state introduced a pension rating system to expose all that municipal debt in biennial reports.

The new standards were created by the Government Accounting Standards Board, which issued two sets of guidelines: one for public pensions with a single employer paying into the fund -- typically municipalities -- and another for pensions with co-payers such as public school teacher fund, where the districts and states split the "employer contribution."

Go to the state Public Employee Retirement Commission's website and you can readily download detailed data from 2010, 2012 and this year showing a municipality's total public pension assets and liabilities. PERC calculates a "funding ratio," showing the percent of liability that is covered by assets. That number, in turn is used to label pension funds as "not distressed" or one of three distressed levels: minimally, moderately or severely.

So, for example, anyone can check to see Hazleton City's employee pension funds -- police, firefighter and non-uniform -- had combined assets of $31 million in the 2014 report against liabilities totaling $61.5 million, for a funding ration of 50 (worst in Luzerne County) and a designation of "moderately distressed."

It's a small step up from 2012 when the city had a ratio of 49 and the designation of "severely distressed." Comparison with 2012 data shows the city's assets increased by about $3 million while liabilities climbed $5.6 million.

So with numbers like that at your fingertips, how big a difference can the new accounting standards have?

What changed here

Start with those municipal pension numbers. As handy as it may be to put all that information in one place, there's a flaw, business consultant and actuary Richard Dreyfuss said. PERC uses data provided by the individual municipalities, and different municipalities may do their calculations in different ways.

"They can use a rolling average," in calculating the pension fund assets, Dreyfuss said, using, say, the average investment return over five years. This can be substantially different than looking at the "market value" of assets, something the new standards call for. One University of Notre Dame study found the difference between the two methods could run as high as 20 percent.

The new standards curb use of another "smoothing" technique, Dreyfuss said: Spreading projected costs over too long a time frame.

The costs of a plan should be amortized over a relatively short period, he said, ideally 15 years. Pennsylvania's two biggest public pension agencies, the State Employees' Retirement System (SERS) and the Public School Employees' Retirement System (PSERS) use 30 years and 24 years respectively.

Dreyfuss used the example of a 45-year old teacher. A properly managed pension fund would make sure that person's contributions coupled with employer contributions and investment return would add up to enough money to cover his or her retirement costs in 15 years.

Using longer time frames means the person will retire before his pension is fully paid for in the fund, thus masking an unfunded liability, Dreyfuss said. "Probably the best feature of these standards is that the unfunded liability costs now have to be recognized over more appropriate and shorter duration."

Municipal impact

In a bit of a quirk, the changes could have no impact on the smallest municipalities, said Gerald Cross, Executive Director of the Pennsylvania Economy League Central PA office in Wilkes-Barre.

That's because GASB standards do not have the weight of law and GASB has no enforcement powers. The standards are widely adopted because independent auditors look for compliance with GASB, and state and federal money may depend on that compliance.

Theoretically, a small township that has an elected auditor rather than a contracted auditor could disregard GASB standards, Cross said, though the risk to state and federal funds would still exist.

There's another quirk in Pennsylvania, and Luzerne County, that complicates how these standards play out: The high number of municipalities managing their own pension funds, creating a wide disparity in the size of those funds.

The pension liabilities in Luzerne County reported by PERC this year ran from as little as $49,706 in Shickshinny to as much as much as $121 million in Wilkes-Barre. (Hazleton Transit Authority had the lowest liability but is a defunct entity).

On the one hand, the sheer number of municipalities and authorities may prevent big swings in the numbers once the new standards are used, simply because so many pension plans cover only a handful of people in many townships and boroughs.

On the other hand, Dave Davare, retired director of research at the Pennsylvania School Boards Association, noted that the dollar figures are so small it wouldn't take much of a change to move a fund from surplus to deficit.

Dreyfuss pointed out that the standards do not require a municipality to meet pension obligations, simply to report them differently. From the municipality's point of view, the most important number in Pennsylvania is the state-mandated "Minimum Municipal Obligation," or MMO. Fail to pay the MMO, and state money can be at risk.

Hanover Township Manager Sam Gusto said that's the focus at his office, and that there is no way of knowing the impact of the new GASB standard until the actual book work changes are implemented.

With $7.4 million in assets and $13.4 million in liabilities in the current report, the township pensions were "moderately distressed" according to PERC. The goal, Gusto said, is "to make every effort to close that gap while having no impact on any of our people." To do that, the MMO is being increased this year, he added.

School Districts

The standards may impact school districts very differently, Davare and Dreyfus noted, because although they pay into the fund, they don't manage it. That's handled by PSERS, and while the fund is currently suffering from a big shortfall, the debt is not broken down by districts.

Davare said PSERS is supposed to be calculating the amount of total pension obligation for each district. He and Dallas School District Business Manager Grant Palfey said they have not seen any such calculations.

School Districts are also different because the state pitches into pension costs. The theory is that, since the state legislature sets pension benefits for school teachers and PSERS sets the contribution rate for districts, the state and districts are essentially co-employers.

Except that's not how it will look on the balance sheets when the new standards kick in and districts start reporting their share of pension debt, Davare said. "The various school districts actually make the contribution to PSERS, and the state reimburses roughly 55 percent," Davare said. Under the new standards, "the entity which makes the contribution has to reflect the entire unfunded liability."

District officials have long bemoaned the fact that their pension costs are set by forces beyond their control, and Davare said he appreciates that, but also noted the flip side: Districts, not the state or PSERS, determine how many teachers and administrators they need, and negotiate their salaries, which become the basis for pension contributions.

Even with the new liability on the books, Palfey predicted "no real impact" on most school districts. Districts have already gone through several big accounting changes in recent years thanks to GASB, including revising the reporting of health insurance liabilities for future retirees and calculating a total market worth for buildings.

In both cases, the potential impact seemed great but in reality little changed beyond more complicated bookkeeping, he said.

"The audit now says we have an unfunded health care actuarial liability for benefits of $7.3 million," Palfey said. "But when does that ever come into play? Are we going to close and say we've got to pay all that now?"

Just as municipalities focus on meeting their pension MMO each year, School Districts operate on annual budgets, making sure all obligations can be met, Palfey noted.

Which, when it comes to actually running the district efficiently he added, "is the accurate way to do it."

___

(c)2014 The Times Leader (Wilkes-Barre, Pa.)

Visit The Times Leader (Wilkes-Barre, Pa.) at www.timesleader.com

Distributed by MCT Information Services