LGA Lyceum

Pension Bill Signed into Law

Submitted by Colleen Deer,
Mockenhaupt Benefits Group
412.394.9333 (direct and fax)
800.405.3620 (toll-free)
Colleen.Deer@MBGbenefits.com

On Friday, September 18, the governor signed House Bill No. 1828 into law. The primary purpose of the bill, now known as Act 44 of 2009, is to provide financial relief to local government pension plan sponsors in the wake of significant financial losses in 2008.

Some of the provisions of the bill offer widespread financial relief to plan sponsors statewide, while others are targeted at the most distressed, underfunded plans. Municipalities whose Minimum Municipal Obligations for their defined benefit plan(s) for 2010 will be calculated based on the 2007 actuarial valuation report may not see any relief from this bill until 2011.

Highlights of the bill include:

• Assignment of new distress scoring system based on the aggregated funding ratio of all of a municipality’s pension plans (total actuarial value of assets divided by total actuarial accrued liabilities) at the last valuation
* Distress Level 0 – funding ratio of 90% or more
* Distress Level 1 – funding ratio of 70% - 89%
* Distress Level 2 – funding ratio of 50% - 69%
* Distress Level 3 – funding ratio of less than 50%

• An increase in the maximum value that can be used for the actuarial value of assets in the 2009 valuation from 120% of market value to 130%; extension of this provision to the 2011 valuation for Level 1 and to the 2013 valuation for Levels 2 and 3

• Decrease in the amortization periods for discretionary changes that increase or decrease the plan’s unfunded liability (such as assumption changes or locally modified benefits)

• Increase in the assumption periods for non-discretionary changes that increase or decrease the plan’s unfunded liability (such as actuarial losses, actuarial gains, and state mandated benefit enhancements)

• Permit payment of MMO with 75% of amortization payment for distressed municipalities for up to 6 years, depending on Distress Level

• Mandatory aggregation of plan assets for municipalities with more than one defined benefit plan that are Level 2 or 3 Distress, and voluntary aggregation for Level 1

• Mandatory submission of a plan for administrative improvement for Level 2 and 3 municipalities (voluntary for Level 1)

• Special taxing authority for Level 2 and 3 Distress municipalities

• Establishment of a new plan for new hires for Level 3 Distress plans (voluntary for Level 2)

• Authorization of DROP provisions for all pension plans

• Standardized DROP provisions for all new DROPs

• Specific relief measures for Pittsburgh and Philadelphia

• New regulations on professional services contracting to reduce "pay to play"

The legislation will affect municipalities differently, and you should contact your Actuary for further information.

Towards Better Pension Accounting: A Practitioner's View

On July 28, 2009 LGA convened a Roundtable discussion in order to provide comments in response to the Governmental Accounting Standards Board’s (GASB) Invitation to Comment (ITC) on Pension Accounting and Financial Reporting. The comments were provided to the GASB in order to communicate the group’s suggestions on how to proceed with this important topic. We asked one of our participants, Bob Lentz, Assistant Deputy for Accounting, Allegheny County Controller’s Office, to provide some insights and opinions on the ITC process and what is needed in terms of changes to pension accounting.

The ITC is a useful document that gives governmental officials and financial managers, as well as the public, a forum to express their opinions to the GASB before they adopt standards on an accounting issue.

With regard to Pension Accounting and Financial Reporting, the main two calculations associated with the basic premise of the Pension ITC currently exist in Allegheny County’s government-wide statements or within the notes of its financial statements. For example, the first calculation determines the Annual Required Contribution (ARC) that is expected to provide sufficient resources for funding both normal costs and the Unfunded Actuarial Accrued Liability (UAAL) over an amortization period of 30 years or less. The County’s cumulative deficiency of underfunding the required annual contribution on December 31, 2008 was $27.8 million. As required, this deficiency is recorded on governmental-wide statements. However, the second calculation that estimates the UAAL is only disclosed in the notes and is $181.4 million. Based on the distinct possibility that this liability may be recorded in the near future, the County’s unrestricted net deficit at December 31, 2008 would have grown from $30.7 million to $184.3 million.

To remain consistent with private industry and GASB 34 standards, which indicate that government-wide statements should assess government finances in their entirety, the pension UAAL should be recorded. Most users of governmental financial statements are well aware of the unfunded long-term pension liability.

Though I agree with recording the full liability, calculating and liquidating the liability remains a more difficult enigma to solve. At present, the County uses a rate of return of 8% on the investment of present and future assets. While this rate may seem high for the last two years, the County utilizes an aggressive 15 year amortization period. In order to ensure that governments produce consistent and comparable financial data, the GASB must ensure that the number of acceptable actuarial cost methods is reduced; amortization periods be standardized; discount rates be determined objectively and address whether cost-of-living adjustments should be included in projected pension benefits.

But, once accurate and consistent liabilities are recorded, what plan does the government have to fund these liabilities? Although the UAAL is recorded, there is no guarantee that funds will be available to liquidate the liability. The most feasible process would be to pay the ARC, calculated using standards adopted above, to prevent future generations from being saddled with the entire unfunded liability. In addition, steps should be taken to reduce the UAAL by eliminating excessive overtime, lump sum payments and other one-time enhancements from the pension calculation.

Also crucial is that the County and municipalities avoid reacting to short-term economic changes. In 2000 and 2001, the County reduced the employee and employer contribution, through its Pension Plan, to 3.8% of covered payroll from its previous and current rate of 6%. The Pension Plan would have better withstood the poor investment returns of the past two years if it had not reacted to the previous boon years.

Finally, the ITC expressed that many participants in the GASB’s research group would like to see the UAAL recorded in the Plan’s statements and include a statement of changes in the liability from year to year. Because the primary government negotiates labor contracts and has the ability to exert pressure for pension plans to increase or decrease contribution rates, the ARC and/or UAAL liabilities should only be recorded on the County’s government-wide financial statements.

The invitation to comment is only the start of the GASB standard setting process. Watch for future LGA events providing opportunities to engage and express opinions on emerging standards and expectations for local governments.