Thanks to new pension accounting rules put forth by the Governmental Accounting Standards Board (GASB), Kentucky, along with a handful of other plans, has been forced to lower its discount rate -- that is, the rate of return on its investments that it uses to determine the value of its total pension liabilities. The higher the expected rate of return, the lower the amount of funding a government needs to pay into its pension plan. The opposite is true when the rate of return is lowered. For Kentucky, which had to bring its rate down by more than two points to 5.23 percent, the effect was to increase the total liability. With the lower rate for investment performance, the plan will need more money to pay its pension obligations.
In a
Governing analysis of 80 pension plans that had comparable data available, about one-third adjusted their discount rate downward but just nine plans in four states lowered it by more than a half-percentage point. The results for most of those plans were dramatic changes in their total pension liabilities while their assets on hand either improved somewhat or stayed the same.
Overall, the total liability of the plans reviewed increased an average of only 9 percent, a hike generally attributed to retirees living longer. But some plans saw more dramatic changes. In New Jersey, pension liabilities for the state employee retirement plan increased 55 percent. While the aggregate average plan saw a boost in its funded ratio of 4 percentage points, New Jersey’s funded status fell by nearly one-fifth to 28 percent.
The discount rate rule, known as GASB 67, is just part of the story. Another piece of the new rule, GASB 68, will hit financial statements starting later this year. Under that new rule, governments that are members of a pension plan -- say, localities that pool their money with a state plan -- are required to report their share of that plan’s unfunded liability on their governmentwide balance sheet for the 2015 fiscal year, something most of those governments have never before had to do. Now most will be adding millions of dollars in liabilities, forcing lawmakers to acknowledge the role pension payments play in their government’s overall financial picture.