Earlier this week, the Texas Comptroller issued a new report on pensions that is filled with lots of great data and analysis (see our write-up on it here). Upon reading the report, one is left with the sense that while some tweaks are needed and with a few exceptions, Texas’ state and local government retirement systems are in relatively good standing. And they are…at least with how they are currently evaluated.
But new rules aimed at improving the accuracy of financial reporting have been put forth by the Governmental Accounting Standards Board, or GASB, and are set to take effect in fiscal 2014 and 2015. These new accounting standards entail some pretty significant changes that could shake our confidence in the stability of our state and local pension systems.
Here’s what the changes entail:
The new standards require plans to use a market-based valuation of their assets for reporting purposes. Under existing standards, changes in assets due to market volatility are “smoothed” over three to five years; as a consequence, for instance, the effect of 2008 market losses are still being seen today for some plans. The new standards eliminate smoothing for reporting purposes.
The new standards also require plans to use a different rate of return in evaluating liabilities:
- At present, pension plans discount liabilities using a rate of return reflecting their long-term investment experience – an “assumed” rate of return.
- Under the new standards, the share of liabilities expected to be covered by plan assets would be discounted by the assumed rate of return, but the remaining unfunded liabilities would be discounted by a more modest municipal bond rate that reflects the sponsoring government’s responsibility for its liabilities. This combined rate would effectively increase many plans’ liabilities and thus significantly decrease funded ratios.
Under these new guidelines, the health of Texas’ state and local pension plans don’t appear quite as rosy as some have said. Take a look at the red and green columns in the chart below.
In the red column is the “funded ratio” for some of the state’s major pension systems for fiscal 2010. Funded ratio is a measure of assets to liabilities and plans with a ratio at or above 80 percent are generally regarded as sound, while plans below the 80 percent threshold are deemed to be actuarially unsound. Under current accounting methods, the state’s plans look to be fiscally sound; but under the new guidelines, a bleaker picture emerges.
All of the plans, save TMRS, suffer a decline in their funded ratios under GASB’s new rules and ERS and TRS, the state’s two major pension funds, suffer big declines. In fact, both plans fall well below the 80 percent threshold under the new guidelines, indicating that neither is sustainable over the long-term.
Whether or not ERS, TRS, or any of the other state or local systems choose to go with GASB’s new reporting requirements is anyone’s guess, as they are not currently required to do so under state law. But hopefully, when the time comes, these systems do so that taxpayers have a better understanding of the health of Texas’ pension systems.