ATLANTA – Soon, taxpayers will get a truer picture of how much debt state and local governments have amassed as new, national accounting standards take effect.
Finance officials with school boards, city councils and county commissions across Georgia are getting documents from the state listing their share of the built-up costs of providing retirement checks one day for current workers. The local and state governments will be required, for the first time, to publicly list the unfunded amounts as part of their debt.
“In the year of implementation, the pension liability will significantly reduce the net position of many governments, including school districts,” notes the Department of Education’s instructions to local districts. “A negative balance in net position essentially means that the school district does not currently have all of the resources needed to satisfy its liabilities.”
It’s likely to be surprising to some taxpayers and lead to uncomfortable conversations with voters questioning the amounts – especially if a tepid stock market makes the deficit grow.”
Governments have been hiding massive amounts of future financial liabilities for years, according to Certified Public Accountant Shelia Weinberg, founding and CEO of Truth in Accounting. In Georgia, where the state manages its own pension plans that many local governments also use, the amount of unfunded pension liability is $5.5 billion.
“Most people thought everything was fine because they were balancing the budgets,” she said. “…We totally believe you’re not balancing your budget if you’re not including pensions on your balance sheets.”
The new accounting rules require posting of unfunded pension liabilities for financial reports of the fiscal year that ends June 30. When the next year ends, governments will also have to report unfunded medical expenses for future retirees, which in Georgia total $7.4 billion.
Georgia has a 30-year plan to catch up, but the University System of Georgia only put one-fifth of what it should have in the current budget year — $120 million compared to the $410 million, actuaries figure is necessary. That makes for a bigger deficit and a steeper path to catch up.
The accounting standards changed because paying the expense of the medical claims and pension benefits when they are doled out means that future taxpayers will be stuck with the costs when they’re not the ones getting the benefit of the government workers’ activity today.
Weinberg’s organization rates Georgia at the middle of the pack compared to other states. But it is one of just a handful that all three of the respected bond-rating agencies, Moody’s, Standard & Poor’s and Fitch, have awarded their highest grade of AAA. Last week, Georgia sold $1.25 billion in bonds, and the rating agencies renewed the state’s top rating for the 25th year, notes Sen. Jack Hill, chairman of the Senate Appropriations Committee.
“Analysts cited Georgia’s conservative fiscal management, replenishment of reserves, moderate debt level and a diversified economy,” said Hill, R-Reidsville. “They noted the state was fully funding its retirement plans and had a history of rapidly amortizing debt.”
The rating agencies consider pensions fully funded if the current minimum contributions have been made.
Another plus, according to Hill, is that the state is wrapping up the current fiscal year with a $513 million surplus which will go into reserves to bring that total above $1 billion, or about 5 percent of total expenditures.
For state officials, the AAA is the prized distinction that proves they’re doing a good job.
“That’s my biggest health check,” said State Accounting Officer Alan Skelton. “That’s important. We talk about it all the time.”
Georgia has never borrowed from its pension or health funds, according to Skelton, who said leaders here are too conservative for that.
Plus, they’ve been able to shrink projected deficits with proactive measures, he said.
There are three ways to manage benefit liabilities, adjust the input, the output or the financial assumptions.
Input adjustment means putting more money in, either through the employer or the employee contributions.
From that standpoint, Georgia leaders have an advantage over many states and large city governments in that its employee unions have no collective-bargaining rights. That means governors here have total flexibility to adjust input or output at any time to shore up the finances without the threat of a worker strike.
Unionized governments are often left with simply tinkering with the assumptions, such as assuming the invested assets will earn an unrealistically high rate of return so that it appears that smaller annual contributions are needed from workers and taxpayers. Such tricks may lessen political turmoil today, but they create a time bomb like Detroit experienced when the bills come due.
One way the state has adjusted the pension output was to half the guaranteed benefits of anyone like Skelton hired in 2009 or later. The other half of their pension comes from a “defined contribution” plan similar to 401(k) investments available to private-sector employers.
In the State Health Benefit Plan, the output shrinks as co-pays increase or coverage shrinks. Higher premiums affect the input side of things.
“We’re not one of those states where, ‘Oh my God. I didn’t know,'” Skelton says of the new accounting rules.
Still, Weinberg, with the Chicago-based Truth In Accounting, says taxpayers need to understand the significance of Georgia’s unfunded employee liabilities. Paying the currently required minimums as figured by actuaries doesn’t mean there’s no deficit.
“Keep in mind, because I am paying my credit card’s minimum payment each month, doesn’t mean that I don’t have a credit card balance I should be concerned about,” she said.
Follow Walter Jones on Twitter @MorrisNews and Facebook or contact him at walter.jones@morris.com.
