(Sept. 6, 2013) Although the city’s position remains fairly steady or even slightly improved regarding its pension system, city leaders last week bemoaned upcoming accounting standards changes that will force them to incorporate their projected pension liabilities into the city’s total debt burden.
Under the Government Accounting Standards Board’s new protocols for 2014, municipalities must show a ‘net position’ of their pension plans on any GASB-supervised balance sheets, including the required Comprehensive Annual Financial Report.
This position could be an asset, if the municipality’s pension investments exceed the current projected value of its future costs and payouts. If not, as is the case in Ocean City and most municipalities around the county, the position will be a liability.
This will not actually change the town’s financial position, but will present it a different way on paper.
“We’re not going to divorce this marriage of accounting and funding,” said John Garret of Cavanaugh MacDonald, the city’s pension actuary. “These are going to be balance sheet items now for the employer to report. There are going to be some years where you may have a communication issue.”
Given mounting public pressure regarding the town’s debt, city leaders are already bracing themselves for a negative spin on the changes.
“There will be those with a political motive that will say the city is increasing its debt,” City Manager David Recor said.
“I think we need to be ready to communicate with the public that this isn’t changing the picture,” Mayor Rick Meehan said.
The city has two separate trust funds for pension benefits – one for general employees, and another for public safety employees, who pay into the fund at a higher rate but may retire earlier as is typical with police and fire personnel.
Estimated future pension payouts are paid for in two ways. First, both the employee and the employer pay a certain amount into the fund on a per-paycheck basis. This is known as “normal cost.”
However, due to changes in the plan or variations in real experience versus the actuarial estimate, the city’s plans gradually accrue additional liability. A portion of this may not be covered by the current assets of the plan, and this net is known as “unfunded accrued liability,” or UAL.
The general employees’ trust currently has roughly $7.5 million in UAL — $50.7 million of outstanding liability and $43.2 million in assets — creating a funding ratio of 85.2 percent. These numbers are improved over last year’s 82.4 percent.
The public safety plan, likewise, has $11.8 million in UAL, for a ratio of 78.4 percent, an improvement over 76.6 percent last year.
Currently, however, the city is able to count its pension investments as assets on its Comprehensive Annual Financial Report (CAFR), but does not have to realize its payouts on its balance sheet until they actually come due.
But under the new Accounting Standards Board standards, the city will have to show its total projected pension costs for all current and living former employees, including future normal costs, as a net of its current pension allocations.
With $137.3 million in combined future benefits for both funds, versus $86.1 in combined assets, the city will be looking at a new debt line of roughly $50 million on the CAFR.
“We’ll be funding that over a number of years, but the financial report will show that in a much shorter period,” Garret explained.
However, many of the Accounting Standards Board’s other rules will not apply to the city, Finance Administrator Martha Bennett noted. The city is already paying off its UAL at a rate exceeding the projected retirement of those involved, and does not have a cost-of-living increase as part of the benefit.
“A lot of these things they’re introducing do not apply to us because we have a relatively conservative plan,” Bennett said.
As they city moves forward with funding its pension obligations, the most critical factor will be how much pension payments continue to burden the city’s general fund, at a time when the town is looking for new revenues to bolster its coffers.
With both normal costs and the gradual pay-off of UAL factored in, the town paid $3 million this year into the general employees’ pension trust and another $3.96 million into the public safety employees’ trust.
However, Bennett said, this total was still $14,000 less than what the city had budgeted for its fiscal year 2012-2013 pension costs.