How GASB Changes Will Affect Public Pensions Part III

• By: Ady
• On: 02/22/2013 17:52:33
• In: In the News

Mr. Schultze has presented the impact of the accounting changes for his state at several public meetings and at a forum hosted by the National Conference of State Legislatures. He shared this presentation with PensionDialog.

VRS maintains five defined benefit plans, including one for the state's more than 146,000 teachers in 147 school divisions.

As of 6/30/2012, the unfunded liability for the teachers' plan was reported as $14.70 billion; applying the new GASB rules, the amount comes to $15.16 billion.

The funding hasn't changed; simply the calculations.

This is due to several factors including using a new requirement to mark pension assets at market as of the date of the actuarial valuation (6/30/12).  This is because the new rules preclude the use of “asset smoothing” to gradually recognize excess investment gains and losses over several years (Virginia currently smooths such gains and losses over a five-year period).

Where the most significant change is apparent, however, is what's referred to as pension "expense" – not what it costs each school board for its pension, but the cost that will be reported on its income statement.

In the following chart, Mr. Schultze contrasts three different dollar amounts: what the school divisions actually paid in fiscal year 2012 (6.33 percent), what the actuary recommended should be paid (12.91 percent), and what the new GASB calculations, not meant for funding, would state on financial statements:

There is a significant difference, example, for the school board of Newport News reporting an expense of $9.7 million versus reporting one of $31.3 million.

The reason for the jump, as Mr. Schultze explains, is that accrued pension expenses will increase significantly due to shorter amortization of unfunded liabilities. The new GASB pension expense number is for accounting purposes, not funding, meaning it is not intended to reflect an actual pension cost.

However, the accrued pension expense will be placed on employers' income statements and turn what may have been a cash surplus into a big deficit on an accrual basis.

At a public meeting in Kentucky, the media reported:

The newly reflected debt won't alter those cities' actual pension obligations. Public employers will pay for liabilities through annual pension contributions, as they do now.

But the sudden upsurge in documented liabilities — the largest ever for many local governments and agencies — is expected to cause a seismic shift on balance sheets that could damage their credit ratings and loan agreements.

GASB contends the new calculations and their required placement on employers' financial statements will promote greater transparency and comparability. Whether or not this proves to be the case, the new numbers certainly will require significantly more financial literacy.