Are growing pension liabilities the reason Detroit, Stockton, and San Bernardino, California, had to declare bankruptcy?  That was just one of the questions participants asked at the August 28 webinar, “Getting a Grip on GASB and Pension Funding."

While pension costs are a factor, the fiscal challenges that put these three cities on a credit watch involved a range of issues. Speakers Elizabeth Kellar, President and CEO, Center for State and Local Government Excellence, and Richard Harris, Finance and Compliance Officer, Denver Employees Retirement Plan (DERP), discussed ways local governments can strengthen pension funding and what they need to know about the new pension accounting standards from the Governmental Accounting Standards Board (GASB).

Looking at lessons learned from pension plans that have strengthened their financial position over time, Kellar recommended that government officials use long term financial modeling when evaluating plan benefits, hire their own actuary, obtain annual briefings from plan sponsors, and provide pension plan education and governance training to elected and appointed officials."

Harris emphasized three keys to pension fund sustainability: (1) managing the assets, (2) managing the liabilities, and (3) paying the full annual required contribution each year. DERP does an experience study every five years to compare its actual results compared to its assumptions. This is important as it is not realistic to predict actuarial gains and losses with precision. Adjustments to the plan design and/or contribution levels may be needed if the differences are significant.

While the new GASB accounting standards do not change the importance of funding discipline, they will be challenging to explain as GASB has disconnected accounting measures from funding measures. Kellar said that there are three sets of pension numbers to understand: 

1. Books – GASB accounting standard calculation
2. Bonds – Ratings agencies calculations to determine credit worthiness and
3. Budgets – Annual actuarial calculation required to fund pension benefits.

Each calculation generates a different figure and serves different purposes and audiences.  For local governments, the most important number is the budget calculation.  Because GASB no longer provides guidance on funding measures, the Pension Funding Task Force has issued pension funding policy objectives.

How can local governments and pension plans incorporate these recommendations into their pension funding policies?  The Illinois Municipal Retirement Fund  has done just that. For regular updates on pension funding policy information go to ICMA's Public Pension Funding page.