Staying Out of the Red: A State Auditor’s Take on Pension Reporting Standards

Published September 29, 2014

A hot topic of discussion amongst taxpayers and public employers alike is how to properly manage our public employee pension systems and make sure that pension obligations are met.

In June 2012, the Government Accounting Standards Board (GASB) issued Statement 68, requiring governments that provide defined benefit pensions to recognize their long-term obligation for pension benefits as a liability on their financial statements.

In Ohio and across the country, public employees provide their labor to a public employer, in exchange for wages and a benefits package, which includes a promise of a future pension.

Traditionally, public employees saw this promise of a future pension, as a trade-off for their historically lower wages than those employed in the private sector. GASB states that pension obligations are part of the “employment exchange,” and should be reported by the government as a liability since they received the benefit of the exchange.

Real Problems or Paper Problems?

Ohio is one of six states treating pensions as a “simple property right.”  By Ohio statute, the amount a public employer must contribute to its pension obligation is capped. If a portion of the pension liabilities of the state’s five systems continues to be unfunded, the impact could be shouldered by a combination of the local government, individual employees, reforms from current contributors, or capital shifts from non-mandated benefits (such as health insurance).

The concern in Ohio is that the GASB 68 requirement for local governments to report this liability could dramatically distort the financial condition of a local government. It is important to keep in mind that this new standard creates an accounting liability, rather than a legal liability.

In Ohio, there are no legal means to enforce the unfunded liability of the pension system as against the public employer.

Upon receiving this new standard and recognizing the challenges that GASB 68 poses, my office got to work to determine how Ohio’s local governments can accurately report their financial positions while also following accounting standards.

To comply with GASB 68, our office suggests Ohio governments report the proportionate share of the unfunded pension liability, as a separate line item on the entity’s Statement of Net Position, with the detail of multiple pension systems’ participation in the footnotes, as necessary.

Governments should also include language in their Management Discussion & Analysis (MD&A), explaining Ohio’s legal environment and the limitations on enforcement of the unfunded pension liability as against the local government.

Future Concerns

My office has received numerous concerns from local governments, regarding how this will impact an entity’s financial health indicators and their bond ratings. In Ohio, the Auditor of State’s office will not be using this liability in the calculation for determination of fiscal caution, watch or emergency for any local government.

In addition, I have met with representatives from Fitch Ratings and Moody’s. Both have indicated that the implementation of GASB 68 will not affect their ratings. Each use methods of analysis that are different from the accounting of the liability GASB 68 requires.

On the horizon is another GASB requirement currently under discussion — an Exposure Draft (ED) for Accounting and Financial Reporting for Post-employment Benefits Other Than Pensions (OPEB). This proposal would require local governments to recognize other post-employment benefits outside of pensions, like health care, as a liability on their financial statements.

In September, I testified in front of the Governmental Accounting Standards Board (GASB), on behalf of Ohio’s local governments. My testimony addressed the proposed OPEB rule and explained the negative impact it could have on our local governments, namely the creation of misleading financial statements and potential issues with bond rating determinations.

This proposed statement, similar to GASB 68, is based on the assumption that OPEB is an obligation of the employer, because the employee has provided services. However, unlike pensions which are promised to employees in Ohio, additional post-employment benefits are not assured in our state.

Post-employment health care coverage, for example, is offered to public employees in Ohio by the pension systems, not the local governments, and is not guaranteed. The benefit is offered at the discretion of the pension system with the ability to rescind, modify or change coverage at any time.

Therefore, I believe that OPEB, in Ohio, should not be considered part of the “employment exchange.” like pensions. With no guarantee of future benefits, local governments should not be held accountable to increase their liabilities, when there is no legal or constructive obligation.

Each state will need to evaluate their own OPEB structure to determine the impact of this proposed rule on their local governments. In Ohio, we will continue to work with GASB and our local officials to protect the integrity of financial reporting while providing the transparency taxpayers deserve.

Dave Yost ([email protected]) serves as Ohio’s Auditor of State.