Pension Time Bomb Ticks As Disclosure Rules Toughen

New Jersey, like other municipal governments, used an accounting sleight-of-hand for years to boost pension-funding levels. New rules are putting an end to the practice.

Last month, the state became the first to disclose weaker funding ratios under the revamped approach, according to Fitch Ratings. Under the new regime, which officials nationwide have phased in starting in 2013, governments must determine when their pensions will run out of money and reflect that projected investment returns will taper off after that date.

New Jersey’s experience shows how funding ratios can plummet as a result. In documents for a bond sale last month, the Garden State said its plans will start running out of cash in 2021. Based on that calculation, it had 32.6 percent of assets to pay promised retirement benefits, down from 54.2 percent in 2013. By making pensions look worse off, the new rules may jolt localities into action, said Matt Fabian at Municipal Market Advisors.

“We’re optimistic that the new accounting treatment will generate a stronger policy response,” said Fabian, a managing director at the Concord, Massachusetts-based research firm.

U.S. state and local retirement plans are short at least $1.3 trillion because of investment losses triggered by the recession and insufficient contributions, according to Federal Reserve data. The deficit strains government finances, forcing officials to balance payments into pension plans with money for schools and roads.

GASB Says

The Norwalk, Connecticut-based Governmental Accounting Standards Board, which makes accounting rules for states and localities, released the rule in August 2012 to improve pension disclosure. The change transforms how governments report the cost in financial statements, in current dollars, of benefits that won’t be paid for decades. The overhaul followed criticism from investors in the $3.6 trillion municipal-bond market that governments were underestimating the expense.

California is among states that anticipated the shift and passed laws to increase funding or curb benefits, said Keith Brainard, the Georgetown, Texas-based research director for the National Association of State Retirement Administrators. Since 2009, almost every state, including New Jersey, has enacted such changes, according to Brainard’s group.