In this interview, Governmental Accounting Standards Board chairman David Vaudt discusses the entity’s new public pension accounting rules, the results they have produced so far, and what the rules mean for the finances of cash-strapped states.
Video credit: CNBC
Feature photo credit: www.SeniorLiving.Org
Under new GASB accounting standards, public pension funds are required to calculate their “depletion date” – or, the date where benefit payouts become larger than assets.
The dates help give context to the funding situations at the pension funds, says Fitch Ratings. For some of the country’s most underfunded plans, the depletion dates are startlingly close.
From Reuters:
New accounting rules for public pensions are exposing the damage done by U.S. states, including New Jersey, that have failed to adequately fund their retirement systems, according to a report to be released by Fitch Ratings on Friday.
With the first wave of pensions beginning to issue financial statements under the new rules, the impact of underfunding becomes clearer, the Fitch report shows.
[…]
Some retirement systems already known for their fiscal struggles reported depletion dates.
Six of New Jersey’s seven funds, for example, disclosed depletion dates as of their June 30, 2014 valuations. The two largest – covering retired state employees and teachers – said their tipping points would come in 2024 and 2027, respectively.
Under the previous actuarial methods, those plans were funded at 49.1 percent and 51.5 percent, a distressed level far off the minimum 80 percent generally considered healthy. Under the new calculations, which included a lower blended rate of return, those levels look even worse, at 27.9 percent and 28.5 percent.
Even Illinois, with among the worst-funded state retirement systems in the U.S., doesn’t have depletion dates until 2065 for two of its three biggest funds and is able to use higher blended rates. It has no depletion date for the third fund, Fitch Senior Director Douglas Offerman told Reuters in an email.
The nation’s most underfunded plan –the Kentucky Employee Retirement System – did not report a depletion date because recent reforms complicated the calculation.
Photo by Paul Becker via Flickr CC License
Public pensions are reporting higher asset values under new GASB accounting standards, according to Fitch.
That’s because the new rules require pensions to report the market value of their assets, as opposed to the “smoothed” value.
More from Fitch:
Most public pension systems are reporting materially higher asset values under the new GASB standards, reflecting immediate recognition of several years of strong market gains not yet fully incorporated under the asset smoothing practices allowed by previous GASB standards, according to a Fitch Ratings report.
‘In an accident of timing, the transition to GASB 67 is taking place at a very favorable moment in the economic cycle for reporting asset valuations. In most cases, the market value of assets reported by systems under GASB 67 is much higher than the smoothed asset value reported previously,’ said Douglas Offerman, senior director in Fitch’s states group.
The higher ratios of assets to liabilities being reported by many systems in fiscal 2014 should be viewed with caution. Reported asset values are now fully subject to market cyclicality, and thus the ratio of assets to liabilities reported by systems will rise and fall far more sharply than the funded ratio reported under prior GASB standards.
“Smoothing” takes into account the previous five years of investment returns – so even in 2014, the return figures produced by many pension funds were weighed down by losses experienced in 2009.
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In light of newly adopted GASB accounting rules, the Teacher Retirement System of Texas in 2015 will require school districts, colleges – and any other government entities that pay into the system – to declare their employees’ pension liabilities on their books.
From the Killeen Daily Herald:
School districts across the state will soon have more debt listed on their general fund balances and teachers could see a smaller paycheck…
[…]
“TRS does not want to put this liability on their books so they are taking the allocation to the districts and the cities and colleges and saying, ‘You record this amount; I’ll record this amount,” said Dane Legg, a partner at Lott, Vernon and Company PC, the Killeen Independent School District’s external auditing firm.
Legg reviewed the upcoming financial policy change with board members at their mid-December workshop.
In laymen’s terms, this means Killeen ISD will have to show a $48 million liability in its budget for about 28 years, the amount TRS said it owes toward Killeen ISD employees’ pensions.
The liability stems from the TRS Trust Fund, which is underfunded but will be fully funded in 28 years.
“It’s not set in stone — that number has not been set yet — but this was what they were charged to do to give people a heads up and go ahead and come up with their best guess,” Legg said.
TRS is $28.9 billion underfunded statewide, Legg said. And officials expect many government entities will take issue with the new GASB 68 policy because it will force some of them to look like they are in debt.
“TRS determines how that liability gets allocated by the district, and TRS is only taking a small piece of that $28 billion, and they are giving most of the rest to the district to record,” said Megan Bradley, the chief financial officer for Killeen ISD.
The district will not have to fund the liability, it will simply be a book entry, Legg said. TRS will fund it, however, by changing its member contribution rates and possibly the district’s match rate.
The Teachers Retirement System of Texas managed $124 billion in assets as of the end of 2013.
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In a new report from Moody’s, the ratings agency warns that two of New Jersey’s largest state-level pension systems – the New Jersey Public Employees Retirement System (PERS) and the Teachers’ Pension and Annuity Fund (TPAF) – could dry up in the next decade.
Reported by the Associated Press:
The finding by Moody’s comes after the state’s recent announcement that public pension liabilities nearly doubled to $83 million, due to new accounting rules.
The agency laid out its concerns in a report this week. Among the concerns it raises are the possible depletion of public worker and teacher pension funds by 2024 and 2027, respectively.
Despite the concerns, Moody’s said the new liability figure is in line with its own calculations. Moody’s has downgraded the state’s credit rating twice, in part due to the pension fund.
Gov. Chris Christie cut the state’s contribution to pensions earlier this year amid budget hardships by nearly $1 billion, lowering it to almost $700 million.
New Jersey recently began implementing new GASB accounting rules. The rules change the way the state calculates pension liabilities, which is why the funding ratio of the state’s pension systems dropped 20 points last week.
But the change was expected, and was already figured into Moody’s analysis of the state’s pension funding situation.
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Last week, the funding ratio of New Jersey’s pension system dropped 20 points. That’s because the state began measuring funding under new GASB accounting rules, which requires using market asset values instead of actuarial ones.
This new way of measuring liabilities puts New Jersey in an even deeper hole. But as Leo Kolivakis of Pension Pulse points out, this is a hole that New Jersey dug for itself – with poor pension governance, below-median investment performance and by diverting state pension payments to other parts of the budget.
Here’s Kolivakis’ take on New Jersey’s situation, the new GASB rules and compensating pension fund staff.
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Originally published at Pension Pulse:
You can read more on GASB’s new rules for pensions here. I note the background for these changes:
On August 2, 2012, the GASB published accounting and financial reporting standards that improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations.
The guidance contained in these Statements will change how governments calculate and report the costs and obligations associated with pensions in important ways. It is designed to improve the decision-usefulness of reported pension information and to increase the transparency, consistency, and comparability of pension information across state and local governments.
For example, net pension liabilities will be reported on governments’ balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.
In particular, Statement 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits.
The new GASB rules will impact all state and local pensions, not just New Jersey. This will be another important measure to determine whether U.S. public pensions are indeed on solid footing.
As for New Jersey, back in March, I commented on its pensiongate scandal and didn’t mince my words:
The article doesn’t capture the real problem at U.S. public pension plans, namely, lack of proper governance. You basically have politicians appointing political bureaucrats in charge of public pensions, paying them peanut salaries and getting monkey results. There are exceptions but this is typically how U.S. public pension funds are mismanaged.
And who benefits most from this? Of course, the Paul Singers, Dan Loebs, Steve Schwarzmans, and all the rest of the who’s who managing hedge funds and private equity funds. It’s one big alternatives party — for the big boys. Everyone is making a killing except for these public pension funds, praying for an alternatives miracle that will never happen. These alternatives managers and their sophisticated marketing are milking the public pension cow dry. They basically have a license to steal.
And why not? There are plenty of dumb institutions listening to their useless investment consultants who are more than happy to recommend the latest hot hedge fund or private equity fund to their ignorant clients. It’s a frigging joke which is why the Oracle of Omaha is 100% right when he warns us that the worst is yet to come for U.S. public pensions.
As far as New Jersey, Gov. Christie has done some good things on pension reform but a lot more needs to be done. Double-dipping pensioners are bleeding New Jersey dry. Unions can bitch all they want about rich alternatives managers meddling in their state’s politics but they must accept shared risk of their plan, which includes raising the retirement age and cuts in benefits as long as the plan is chronically underfunded. The state of New Jersey, however, should make sure it tops up its public pension plan which it neglected to do for years (the major cause of the pension deficit).
The biggest factor explaining the pension deficit in New Jersey and other states is how successive state governments failed to make their pension contributions, using the money to fund other things (no doubt in an effort to buy votes).
But there are plenty of other factors that didn’t help, like lack of sensible pension reforms, lousy investment performance and poor governance.
On this last point, Michael B. Marois of Bloomberg reports, California Pension Fund Bonus Payouts Climb 14% From Prior Year:
The $300 billion California Public Employees’ Retirement System, the largest U.S. public pension, paid $9 million in bonuses last fiscal year, up 14 percent from a year earlier as earnings exceeded benchmarks.
The fund, known as Calpers, paid $8.7 million in bonuses to investment staff in the year ended June 30, and almost $300,000 to four non-investment executives, according to data provided by the system. The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios, said spokesman Brad Pacheco.“These awards are part of the overall compensation we provide to recruit and retain skilled investment professionals needed to ensure success of the fund,” Pacheco said.
Public-pension funds are recouping investment losses suffered during the 18-month recession that ended in June 2009, which wiped out a third of Calpers’ value. Still, the crisis left U.S. pensions short more than an estimated $915 billion needed to cover benefits promised to government workers. Taxpayers have been asked to make up the shortfall.
The biggest bonus earner was Ted Eliopoulos, the chief investment officer who recorded a $305,810 bonus last year in addition to his $412,039 base pay.
Top Job
That bonus was paid when Eliopoulos was acting chief investment officer after his predecessor Joe Dear died in February from cancer. Prior to that, Eliopoulos headed the fund’s real estate portfolio. He now earns $475,000 in base pay after he was tapped for the top investment job in September.
Eliopoulos announced in September that the fund was divesting all $4 billion it had in hedge funds, saying they were too expensive and too complicated and not worth the returns.
The pension fund earned 18.4 percent last fiscal year, 12.5 percent a year earlier and 1 percent in 2012. It estimates it need 7.5 percent annually to meet its long-term obligation to pay benefits promised to state and local government workers.
Calpers is still short $103.6 billion needed to cover those promises based on market value as of June 30, 2012, the latest figure that was available. That shortfall is up 19 percent from a year earlier.
The California fund says it must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street. Pacheco said spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees.
Wall Street bonuses, which rose 15 percent on average last year to $164,530 — the highest since 2007 — may climb again as a result of payments deferred from previous years, New York Comptroller Thomas DiNapoli said last month.
Four executives outside the Calpers investment office were paid a total of $295,930 in bonuses last year, the fund said. Anne Stausboll, chief executive officer, got $113,679; Chief Actuary Alan Milligan earned $75,748 and Chief Financial Officer Cheryl Eason was paid $89,703, almost double a year earlier.
Calpers paid a total of $7.9 million in bonuses in the prior fiscal year.
Compensation is part of pension governance and if you ask my expert opinion, CalPERS’ compensation is fair and accurately reflects the market, their performance and their ability to attract and retain professionals to manage billions. The only thing I would change is base it on four-year rolling returns, like they do at Canadian public pension funds.
All this hoopla on compensation at U.S. public pension funds is totally misdirected. I happen to think most U.S. public pension fund managers are grossly underpaid, just like I think some Canadian public pension fund managers are grossly overpaid (read my comment on PSP’s hefty payouts and the subsequent ones on its tricky balancing act and its FY 2014 results which were likely padded by skirting foreign taxes).
Getting compensation right is critical to the long-term health of any public pension fund but supervisors of these funds should make sure they’re paying their senior investment staff properly based on benchmarks that truly reflect the risks they’re taking. I believe in paying people for performance, not for taking dumb risks to trounce their silly benchmark (that contributed to Caisse’s ABCP disaster which the media is still covering up).
Ohio’s top auditor, Dave Yost, publicly stated earlier this month that new GASB accounting rules – ones that change the way pension liabilities are reported – would hurt Ohio and its local governments.
In an op-ed on the Heartland Institute website, he explains why. From the piece:
Ohio is one of six states treating pensions as a “simple property right.” By Ohio statute, the amount a public employer must contribute to its pension obligation is capped. If a portion of the pension liabilities of the state’s five systems continues to be unfunded, the impact could be shouldered by a combination of the local government, individual employees, reforms from current contributors, or capital shifts from non-mandated benefits (such as health insurance).
The concern in Ohio is that the GASB 68 requirement for local governments to report this liability could dramatically distort the financial condition of a local government. It is important to keep in mind that this new standard creates an accounting liability, rather than a legal liability.
In Ohio, there are no legal means to enforce the unfunded liability of the pension system as against the public employer.
Upon receiving this new standard and recognizing the challenges that GASB 68 poses, my office got to work to determine how Ohio’s local governments can accurately report their financial positions while also following accounting standards.
To comply with GASB 68, our office suggests Ohio governments report the proportionate share of the unfunded pension liability, as a separate line item on the entity’s Statement of Net Position, with the detail of multiple pension systems’ participation in the footnotes, as necessary.
Governments should also include language in their Management Discussion & Analysis (MD&A), explaining Ohio’s legal environment and the limitations on enforcement of the unfunded pension liability as against the local government.
Yost also claims that ratings agencies, including Moody’s and Fitch, could downgrade the state’s bond ratings due to the new way liabilities are reported. But the downgrades wouldn’t be fair, Yost argues, because the financial health of the state is the same even if the numbers look different.
Yost testified earlier this month in front of the GASB regarding the negative impact the rules could have on the state.
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