Jeff Kempker, CEBS, CRC
If you haven’t already, you may begin to hear about new accounting standards required of employers that participate in LAGERS. These standards may make some LAGERS employers look worse off when it comes to their LAGERS pensions – even if they’re not. The important thing to remember is the only thing that is changing is the reporting and measurement of pension costs, not how much a pension costs.
As these new standards take effect, here are four important facts to remember:
- Neither actual pension costs nor obligations have changed, only the way in which they are measured and reported. The Governmental Accounting Standards Board (GASB) is the entity that sets such standards. Historically, GASB standards have always held a close link between accounting and funding measures. As the new standards are implemented, accounting and funding measures will become disconnected.
- Some LAGERS employers may appear to be more under-funded as a result of these new standards, even if they’re not. One reason for this is that LAGERS-participating employers will now have to publish future pension obligations on their balance sheets. For some employers, this will show up as a liability. Pension liabilities have always been fully reported and transparent, but placing them on the balance sheets will make them more visible than before. In addition, GASB now says that some employers may have to use a different discount rate to determine pension liabilities in today’s dollars. In the past, pensions have calculated liabilities using the long-term expected rate of return on pension plan investments. While most LAGERS employers will not be in this position, a few may have to discount at least a portion of liabilities using the municipal bond rate. Since the municipal bond rate is lower than the long-term expected rate of return, this could make some participating employer pensions appear more underfunded than before.
- Benefits for employees and retirees are still as secure as they have ever been. LAGERS has a 50 year history of sound, structured, stable funding procedures. These new GASB accounting standards will not affect any of that. Retirees will continue to be paid on-time, each month and members can expect their earned benefits to be fully paid for without interruption.
- LAGERS employers will not have to pay more for their benefits. LAGERS participating employers diligently pay their full bill each and every month. This will continue, as normal, with no changes whatsoever in this process. LAGERS will be providing new reports for employers to comply with the GASB standards in the Fall of each year and employers will work with their auditors to comply, but the month-to-month funding mechanisms and calculation of employer contributions will remain in place.
Initially the new GASB standards may cause some headaches for participating employers. But we will be here every step of the way to help. LAGERS has set up a page dedicated to GASB on our web site. Employers can refer to this page for updated information on resources that are available regarding these changes.
Jeff Kempker, Manager of Member Services