The way state and local governments are required to account for the money they have set aside to pay retirement pension benefits was revised this week.
The new rules set up by the Government Accounting Standards Board will for the first time require municipalities, school boards, fire departments, etc., to report net pension liability on the front page of their financial statements. Net pension liability is the difference between what actuaries calculate these government entities will eventually have to pay retirees and the assets set aside to cover those payments.
In the private pension world, pensions are considered reasonably well-funded when the company required to pay them has at least 80 percent of the money available. The world of public pensions hasn't been forced to make these calculations -- or at least it hasn't been required to make the information available to taxpayers. But the early line on some of the larger communities that have already done the math is that there are entities where less than 40 percent of obligations are funded. That's retirement planning bad news math.
Some say that these new rules make things look worse than they are because public entity financing is different than that of public companies. But whether the change is fair or not, these new rules are likely to be expensive.
A change that could potentially hit taxpayers, public employees and retirees in the pocketbook soonest is the requirement that public entities that aren't sufficiently funded use current municipal bond rates -- about 3.1 percent as of this week -- rather than historic rates -- about 8 percent -- to forecast how much money the municipality, school board or whatever will need to pay its obligations. This reduced rate of return will quickly be reflected in what taxpayers or public employees or both -- depending on state and local laws -- will have to pay to make up the shortfall.
Many communities are already strapped with fewer and older residents and lower home values. If this bill comes due soon, before the economy improves and interest rates rise, there won't be any easy answers.