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Hawaii pension officials aren’t the only ones promising taxpayers increased openness when it comes to the financial condition of the state’s public retirement system.
The accounting community, too, has altered its own guidelines to force greater transparency when it comes to pension fund financial disclosures — a subject upon which taxpayers and many public officials have been frequently kept in the dark.
Almost 20 years ago the Governmental Accounting Standards Board — or GASB, an independent organization that sets accounting and financial reporting standards for state and local governments in the United States – issued rules requiring public pension funds for the first time to disclose the status of their funding along with other information explaining the methods used in calculating the data.
Buried deep within hundreds of pages of complex and arcane GASB standards were provisions for amortizing the outstanding debt over 30 years, in a manner similar to paying off a home mortgage. To accomplish this, GASB required the calculation of an Annual Required Contribution, or ARC, the amount of money governments would need to contribute each year to cover the cost of current pension payments and a portion of the unfunded liability.
These annual payments are determined by using complicated actuarial assumptions involving, among other things, the estimated amount necessary to cover monthly pension checks, the present value of future pensions for employees still working and the annual amount of money needed to pay down the outstanding debt – all of this based upon presumed interest rates, projected investment returns and other economic expectations decades into the future.
Although governments largely complied with the GASB rules, much of the information provided to taxpayers was sketchy and buried deep within financial statement footnotes. Average citizens who actually read the reports found it difficult to understand how retirement costs directly impacted their own communities.
Hawaii’s ERS is a cost-sharing multiple-employer defined benefit plan, meaning the state and counties are considered separate employers contributing on the basis of their respective number of participating employees and retirees. These contributions must factor in any new or renegotiated provisions written into labor contracts that would include wage increases, overtime pay and the value of unused sick leave.
Beginning with the 2015 fiscal year, each government participating in the ERS will be required to disclose their share of annual pension costs and accumulated debt, among other things. These liabilities must be added to balance sheets, so average citizens, rating agencies and Wall Street municipal bond investors can see them in the context of the government’s overall financial condition. That could increase the cost of borrowing, because governments pay higher interest rates depending upon the size of their outstanding debt.
No longer will state and local governments be allowed to merely present abbreviated summaries of what pensions are costing them. They will be required to provide hard numbers. Whatever the new, more detailed disclosures ultimately reveal, the amounts will be sizable.
State Finance Director Kalbert Young said he and ERS officials are upping their efforts to inform the public.
“We’re trying to get more transparent and bluntly clear about the actual health of their pension system,” he said.
Discussing Hawaii’s pension and other long-term retirement costs last March at an event sponsored by the Grassroot Institute, a libertarian Honolulu public policy think tank, Young unveiled preliminary estimates of how the unfunded ERS liabilities will be divvied up.
Based upon 2012 ERS data, state government, as the largest employer, will shoulder the lion’s share of the unfunded debt — $6.3 billion — with $4.4 billion allocated to the general fund and $1.9 billion to other state funds.
An illustration of this obligation’s magnitude: At the end of the state’s 2013 fiscal year, Hawaii general fund assets totaled $1.8 billion – $2.6 billion less than its share of the ERS obligation.
Local governments, too, will see substantial additional long-term debt on their balance sheets. The City and County of Honolulu (including its Board of Water Supply) is expected to have $1.4 billion in ERS liability obligations, Maui and Hawaii about $340 million apiece, and Kauai’s share, $170 million.
“The challenge is it is a central pot managed by the state,” says Jay Furfaro, Kauai County Council chair. “The question will always be, even if we pay our fair share, how are we assured our fair share will really be focused on our employees — Kauai employees?”