Pensions: Top Legislative Issue To Watch In 2015
by GOVERNING: The States and Localities magazine
GOVERNING is the nation’s leading media platform covering politics, policy and management for state and local government leaders. Recognized as the most credible and authoritative voice in its field, GOVERNING provides nonpartisan news, insight and analysis on such issues as public finance, transportation, economic development, health, energy, the environment and technology.
The booming stock market of the past few years has helped stabilize many public pension plans around the country. But 2015 will be a difficult year for states that haven’t been stocking their pension funds the way they are supposed to.
New accounting rules will cause these plans to appear significantly worse off than they were a year ago. The changes will likely spur more governments into making changes aimed at paying down their plan liabilities, particularly in states, such as Illinois and Pennsylvania, that have been slow to address the problem.
In simple terms, the new rules created by the Governmental Accounting Standards Board (GASB) will force two major changes. First, they will require pension plans to apply a more conservative formula in calculating the actuarial value of plan assets. The new formula applies to governments that have not been making their full actuarial payments. These plans, which typically have a high unfunded liability, will now look even more unhealthy in their fiscal 2014 annual reports, which some states started releasing late last year.
The second big change will come up later this year as governments begin filing their comprehensive annual financial reports for fiscal year 2015. GASB will require governments to report unfunded pension liabilities on their balance sheets, instead of relegating them to the notes section of the report. This will have a profound impact on a number of governments’ perceived financial positions, as some plans have billions of dollars in unfunded liabilities. “The impact could have serious political consequences,” says Paul Angelo, an actuary with the firm Segal Consulting. “Although it doesn’t change the actual cost of government, someone who doesn’t like pensions is going to look at that and say, ‘See, you’re insolvent because of this giant pension liability.’”
The new accounting rules are unlikely to affect credit ratings, because the formal status of pension plans isn’t changing — what’s changing is the way in which the health of these plans is reported. — Liz Farmer of GOVERNING