Public employee retirement system director reacts cautiously to GASB drafts
Published: July 21st, 2011
In an exchange of emails with CapitolBeatOK, the director of the Oklahoma Public Employee Retirement System (OPERS) has reacted cautiously to the recently-unveiled “exposure drafts” from the Government Accounting Standards Board (GASB).
Tom Spencer, stressing he was commenting with a “personal opinion and not on behalf of OPERS,” explained he had not discussed the GASB exposure drafts with his Board of Trustees. He offered what he characterized as “personal opinions on the general issues highlighted” in the exposure drafts.
Concerning “the issue of disclosing the ‘net pension liability’,” Spencer said he did not think “there is a current lack of disclosure. OPERS publishes its actuarial evaluation each year which discloses the ‘unfunded liability’ of OPERS as well as the funded ratio on a market basis and an ‘actuarially smoothed’ basis.”
He continued, “We summarize this information in the Actuarial Section of our Consolidated Annual Financial Report (CAFR) which we publish annually. Any member of the state Legislature, the state Executive Branch, member of the public, or member of the media can easily find this information on our website in our CAFR or in the actuarial valuation.
“I think GASB is simply requiring the information to be stated formally as a liability in the financial statements themselves. So in the case of OPERS I think it will be matter of the information appearing in the CAFR but in a different place. I don’t personally see this as a negative thing or having a big impact on OPERS.”
Spencer continued, saying he needed further study of the drafts’ push for “immediate recognition of . . . certain pension expenses.”
He asserted it “is not clear to me what this proposal entails. As a practical matter, Oklahoma is not likely to be passing benefit increases in the foreseeable future which would trigger this. We have a state law that requires all benefit increases to be fully funded. OPERS has had no such bill pass since the law was enacted in 2006. This year pension reform reduced liabilities.”
However, “for actuarial purposes the entire liability is recognized if there is a benefit increase. However, the increase can be paid for and amortized up to 30 years. My further reading of the proposal may alter my view, but it appears that this is more of an issue of over what period state and local governments finance this extra cost as opposed to when the actual liability is recognized.”
Spencer then discussed “discount rate”, saying the issues raised are “legitimate.” He reflected, “I believe that it is reasonable (& GASB agrees) for pension systems to use the expected rate of return on assets as the discount rate on their liabilities. But GASB is correct to state that this only works for the amount of actual assets that the plan has set aside to pay the liabilities.
“So, if a plan has $10 billion in pension liabilities but only $8 billion in assets set aside to pay for them, it may be reasonable to use a 7.5 percent discount rate on the $8 billion but not the full $10 billion. The 7.5 percent rate for OPERS is a pretty reasonable assumed rate of return based on the last 20 to 30-year period, including the horrible markets in the early 2000s and 2008-2009.”
He continued, “I think there is room for debate on the appropriate rate to discount the ‘remainder’ liability. I personally think a long-term AA tax-exempt rate is too low but I can see why it is being proposed. It is similar to the method used by private companies, which must use private taxable bond rates to discount corporate pension liability. I think it would be more reasonable to use long-term U.S. treasuries or long-term taxable municipal bonds.”
Spencer concluded his reflections for CapitolBeatOK, pointing to “disclosures in notes.” He said it is possible that “there are some plans around the U.S that are doing the bare minimum.” However, “The state plans with which I’m familiar do an excellent job of putting all of the relevant facts out there for all to see. We err on the side of disclosure at OPERS.”
Taking Spencer’s comments along with the reflections of a diverse group of Oklahoma fiscal analysts and individuals responsible for administering state pension plans, it is clear that the new GASB standards amount to a substantive strengthening of transparency and accountability.
A “plain-language” supplement from GASB can be studied online here.