How Pension Standards Can Help Cities Chart Their Future Path

The Government Accounting Standards Board’s (GASB) recent changes to pension and retiree healthcare liability disclosure shine a light on the long-term fiscal burden of these benefits – even when they are not controlled by the city.

(Getty Images)

A recent study by the Pew Charitable Trusts put the unfunded liabilities for retiree healthcare benefits for the 30 largest cities at more than $100 billion. (Getty Images)

This is a guest post by David A. Vaudt. This post is the second in NLC’s Public Sector Retirement Initiative blog series.

I’m very pleased to be a part of the National League of Cities’ Public Sector Retirement Initiative to help raise awareness in the city government community about the significant obligations related to postretirement benefits and what can be done to manage them.

The GASB pension standards – which are now fully in effect – and the other post-employment benefit (OPEB) standards for retiree healthcare benefits – which take full effect in 2018 – are bringing dramatic improvements to the disclosures around the postemployment benefits governments provide.

Why is this important? Imagine having bad eyesight and trying to drive a car without your glasses on. You can’t see where you are going very well, and you might end up in a ditch before you realize it. These new disclosures are akin to putting your glasses on. Now, cities and their stakeholders have a much clearer view of the road ahead – and how to navigate it successfully.

The Numbers

There is no question that the road ahead has challenges. A recent study by the Pew Charitable Trusts put the unfunded liabilities for retiree healthcare benefits for the 30 largest cities at more than $100 billion. Meanwhile, unfunded OPEB liabilities for the 50 states exceed $500 billion, according to Standard & Poor’s. Keep in mind, these obligations do not reflect unfunded liabilities for pension benefits, which Pew pegged at an even higher number – $900 billion – back in 2014.

Figures like these underscore the need to get down to work – together – and start to think about how to make sure we can honor the promises that have been made to city employees.

Managing the Liabilities

The GASB pension standards help to clarify the challenge, but of course do not provide answers. How to fund these obligations is a policy matter for elected officials to resolve.  In the simplest terms, city officials will need to focus on managing these liabilities and setting aside the right level of assets to meet the postemployment benefit promises that have been made. Different cities will come to different conclusions about the best way to proceed, based on legal, local economic, political and social considerations.

With the net pension liability now appearing on the face of the financial statements, it will be much easier to assess choices than in the past. Over time, as the net pension liability shrinks, that will be a sign that the government is on the right track. But if that net liability grows, that may indicate the government is pushing current costs down the road to be dealt with in the future – and may be putting the city on an unsustainable course.

The issue of whether the net liability is growing or shrinking is key because it speaks to how well the liabilities are being managed. If pension and OPEB liabilities aren’t well managed, it could have a negative impact on the city’s credit rating and drive up its borrowing costs.

The Economics

It is important to know that the economics of pension promises don’t change because of the GASB’s pension standards. The economics are the same. It’s the level of attention pensions are receiving that is changing. The focus is on how large these promises are and how well governments are managing for those promises.

To help get the word out and answer questions, I’m pleased to tell you that NLC and GASB are partnering later this year on a webinar that will address these and other postemployment benefit issues.

GASB is also working to put an OPEB Communications Resource Group together to help communicate with elected officials and others in the state and local government community about many of these same issues from an OPEB perspective.

No Easy Fixes

There are no easy fixes here; these issues are going to be with us for some time into the future. But we’re now in a better position than ever to talk about what the future looks like and work out what needs to be done.

With so much talent, knowledge, and passion assembled in this group, it is critical to make sure each of our organizations are heard. Great solutions can come from any quarter, for the benefit of all.

Working together, we can’t help but made a difference – it’s deciding how much of a difference that will be our challenge.

About the Author: David A. Vaudt is the Chairman of the Government Accounting Standards Board (GASB). Mr. Vaudt has served as president of the National State Auditors Association, chair of the National Association of State Boards of Accountancy, and chair of the Iowa Accountancy Examining Board. He also served on the boards of numerous nonprofit service organizations in Iowa.