New pension measure 'could impact' PA, NJ bond ratings

The gap between what state pension plans have promised retired workers and the money they have set aside to pay them is about to start looking worse -- twice as bad, for major PA and NJ pension plans -- now that the Government Accounting Standards Board (GASB) is belatedly trying to impose standard reporting on the wildly differing state and city pension systems, says a group of pension scholars at Boston College.

GASB's new pension reporting standards -- approved in a vote yesterday though detailed guidelines won't be issued til later this year -- are expected to reduce the gap between what pension plans own and what they owe, as used by investors and ratings agencies to calculate state solvency and rate financial risk.

Read the BC study estimating just how much state pension funded ratios are going to fall under GASB proposals, here.

Below is a short list showing the self-reported assets/liabilities ratio for PA, NJ, DE pension plans: under the current system (center column); and under the BC researchers' estimates applying the new GASB guidelines (right column). (A 100% ratio would mean the system is fully funded; lower ratios project long-term deficits that will have to be made up by higher financial contributions or improved investment returns.) 

Plan Name Current

Delaware State Employees 96.0% 83.3%

New Jersey PERS 62.0% 31.2%

New Jersey Police & Fire 69.0% 35.0%

New Jersey Teachers 57.6% 25.9%

Pennsylvania School (PSERS) 75.1% 34.2%

Pennsylvania State (SERS) 75.2% 50.7%

(Compare the PA SERS ratios with the valuations and ratios reported by SERS in its new annual financial report, posted here today.)

According to the BC study, GASB ends the practice of "smoothing" asset numbers over multi-year periods, which states used to make recent investment losses look less bad; sets new, more conservative investment targets; and takes closer note of how many future pensioners are close to retirement.

BC uses those principles to calculate new discount (annual increase) rates for each plans; in the case of the PA and NJ plans BC figures the discount should drop from the current state targets of more than 7%, to below 5%.

Evelyn Tatkovski, spokeswoman for PSERS, called that a "wrong" and "inaccurate" method and says PSERS stands by its 7.5% annual target return and a resulting asset/liability ratio higher than BC projects -- around 57%, once you eliminate "smoothing."

UPDATE: BC has since posted this footnote on Page 14 -- a "correction," Tatkovski told me: 

  Since July 1, 2004, Pennsylvania Schools has not fully paid its ARC.  Under Act 120 of 2010, the Pennsylvania School 
Employees Retirement System (PSERS) is moving to fully fund the plan by gradually increasing the contribution rates each 
year.  Based on the funding provisions of Act 120, PSERS is not required to use a blended rate to discount liabilities and its 
2010 funded ratio under the proposed GASB accounting standards is 57.7 percent.

""Under Act 120 of 2010, the Pennsylvania School Employees Retirement System (PSERS) is moving to fully fund the plan by gradually increasing the contribution rates each year.  Based on the funding provisions" of current PA law, "PSERS is not required to use a blended rate to discount liabilities and its 2010 funded ratio under the proposed GASB accounting standards is 57.7%." In short, if Pennsylvania doesn't cut back the funding formula again, PSERS will be able to say it's on the road to full funding.

Heather Tyler, spokeswoman for SERS, said the system expects to receive an "implementation guide" for the new guidelines in August and to implement them starting in 2014.


"The GASB standards are a reporting mechanism not a funding mechanism," she reminded me. BC's estimate for the state system seems over-conservative, given long-term SERS returns. Still, SERS has already acknowledged its "funding ratio will deteriorate for the next few years before we head back in the right direction. So, frankly, from our perspective the study didn't reveal anything new about our system in that respect... With time and discipline," the ratio can "be restored to fully-funded status."

In sum, Tyler said, public workers and taxpayers should "understand the seriousness of the funding situation without alarming retirees... Their pension checks are not in danger." 

The new formulas don't make the real situation any worse -- BC notes that many states (including PA and NJ) have lately taken steps to limit future pension spending. But it sure does look worse.

More from McAneny: "
GASB governs accounting standards, not funding requirements...   Pennsylvania has not complied with GASB funding recommendations for over a decade, and is not expected to do so in the immediate future.

"GASB reporting requirements, however, are mandatory to the extent that no licensed CPA will simply reject them.  We can [still] expect to see multiple valuation methods used in pension fund accounting, resulting in substantial spreads in funded ratios and liability measures.

"As to the specific numbers cited in the BC report, they utilized 2010 figures... The analysis appears to be fairly accurate given the information available from that time... 

"GASB has no inherent enforcement powers, but GASB standards are considered by bond lawyers and credit reporting agencies in determining the level of interest to be charged for a government bond. 

"With pension obligations now included in governmental general financial statements, and GASB requiring the use of more restrictive valuation standards in determining those pension obligations, there could be an impact upon the Commonwealth’s bond rating...

"The GASB reporting standards do not alter the funded status of either pension plan, they just provide additional methodologies for use in evaluating that funded status.  The systems acknowledge that they have a combined unfunded actuarial accrued liability of approximately $40 billion. 

"The Boston College report uses the same information, but a different measurement, to arrive at an [unfunded actuarial accrued liability] in excess of $100 billion. 

"It will be no more difficult to pay down the $40 billion owed under the systems’ methodology than it would be to pay down the $100 billion using the BC calculation method.  It is simply a factor of the time value of money ($40 billion today vs. $118 billion over 30 years). 

"Either way, it is a hard nut to crack, and there is no easy or painless solution."