Cities, states could suffer friction over state unfunded pension liabilitiesNews added by Benefits Pro on January 19, 2016

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By Marlene Y. Satter

Several large cities could end up arguing with their states over their share of state unfunded pension liabilities.

According to a report from the Center for State and Local Government Excellence and the Center for Retirement Research at Boston College, the new (2015) requirement from the Governmental Accounting Standards Board (GASB) that requires employers that participate in cost-sharing pension plans to report their share of a state’s “net pension liability” on their balance sheet is having a substantial impact on many large cities that participate in cost-sharing state plans.

Cost-sharing plans are a type of multiple-employer plan.

GASB divides multiple-employer plans into two types: agent plans and cost-sharing plans.

The agent plan pools assets for investment purposes, the report explains, but maintains separate accounts so that each employer’s share is legally available to pay benefits only to its employees.

Cost-sharing plans, on the other hand, pool both assets and pension obligations, and the assets can be used to pay the benefits of any participating employer.

GASBB’s rule change not only requires employers to move pension funding information from footnotes onto their balance sheets, but also requires those who participate in cost-sharing plans to provide information regarding their share of the net pension liability on their books.

A city such as Newark, New Jersey, for example, participates in three of the state’s cost-sharing plans, since it doesn’t administer its own plan. So now it’s required to report its share of the funded pension liability of those three plans.

The liability isn’t new, and does not affect the funded status of a pension plan.

However, reporting their share of such liabilities has nearly doubled the burden of the 92 cities in the study that are in such plans.

Cities already have to work with their actuaries to determine what to budget each year for their employer contribution. Now they also have to deal with a more public assessment of their liabilities.

“Simply reporting part of state plan unfunded liabilities on local government balance sheets will not change the required payments made by local governments: their (annual required contributions) already reflect their share of both the normal cost and the payment to amortize the unfunded liability of the state plan,” the report said.

“But, local governments — now saddled with a portion of the state plan’s unfunded liabilities on their books — may be more interested in seeing the unfunded liability decline over time and will have a vested interest in ensuring that their contributions are doing just that.”

In its footnotes, the study reported that, because of the change, “political tensions have already begun to emerge between a state and the local governments involved in its cost-sharing plans.”

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