New government accounting rules will more than double the pension debt reported by CalSTRS, boosting an “unfunded liability” that is now about $71 billion to a newly calculated “Net Pension Liability” of $166.9 billion.
The CalSTRS board was told last week that it’s unclear whether the new liability figure will be reported by the state or spread among school districts, where more than doubling current debt might lower credit ratings and drive up borrowing costs.
If the “Net Pension Liability” is distributed among employers, the reported total debt of a typical small-enrollment school district might jump from $21 million to $49 million and the debt of a typical large district from $280 million to $728 million.
Neither the state nor the school districts have been including CalSTRS debt in their financial statements. The new accounting rules call for pension debt to be added to employer balance sheets.
“This Net Pension Liability is a hot potato,” Robert Yetman, a CalSTRS financial adviser told the board. “Nobody wants to be the one holding on to it.”
The new Governmental Accounting Standards Board rules, requiring a lower earnings forecast for some pension debt, take effect for CalSTRS financial reports this fiscal year and for the financial reports of employers next year, fiscal 2014-15.
The new rules are a “blended” solution to the controversy over whether the forecasts of investment earnings, often expected to provide about two-thirds of the money needed to pay future pensions, are too optimistic and conceal massive debt.
The usual earnings forecast (7.5 percent for CalSTRS) can be used to project assets needed to pay future pension obligations. But if the assets fall short, a lower bond-based forecast (the cost of borrowing) must be used for the remainder of the obligation.
The California State Teachers Retirement System, which has been seeking legislation for a rate increase for a half dozen years, is projected to run out of money in about 30 years and must “crossover” to the lower earnings forecast, 4.85 percent in one example.
While the new rules show a big CalSTRS debt change, most public pension systems, unlike CalSTRS, can set annual rates paid by employers, allowing them to project enough assets to reduce or avoid the switch to a lower earnings forecast.
A better match with the new GASB rules was one reason cited as the California Public Employees Retirement System, with the goal of full funding in 30 years, approved an employer rate increase in April of roughly 50 percent over the next seven years.
“We expect around the country, at least when you are looking at the larger state systems, most systems will not use a blended rate,” the CalSTRS actuary, Rick Reed, told the board. “They will in fact use a long-term rate.”
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