Billions of Unfunded Pension Liability Transferring to County Governments?

With the proposed transfer of a portion of teacher pension costs to county governments, county officials wondered whether a portion of the system’s unfunded liability would also transfer to the county’s balance sheet.  According to a letter recently received by the Department of Legislative Services (DLS), under a GASB Exposure Draft (meaning that the report is not yet final), it appears counties would be liable for approximately 25% of the unfunded actuarial liability should a portion of teacher pension costs be transferred to local governments.  Following are excerpts from the letter sent by CHEIRON, the General Assembly’s consulting actuary :

Under the Exposure Draft, cost-sharing employers would be required to disclose on their financial statement their proportionate share of the unfunded actuarial liability. The proportionate share would be a measure of each employer’s projected long term contribution effort to the pension plan as compared to the total of all projected contributions of the employers.   Under the proposal, we would expect that about 75% of the unfunded actuarial liability would re recognized by the State and the other 25% allocated to the local governments.

In questions posed to the actuary, DLS did ask if there were any strategies that would enable local governments to assume responsibility for a portion of teacher pension costs without transferring any of the pension system’s liabilities.  CHEIRON responded,

It should be understood that the Exposure Draft does not represent a final standard, and even if it did represent a final standard, some of the rules might be further clarified by GASB through an Implementation Guide or other guidance.  However, we can offer a couple of ideas:

  • If it was clear that the State was solely responsible for the unfunded actuarial liability (UAL) at the time of implementation of the new contribution arrangements, then it might be argued that the entire UAL should be allocated to the State.
  • Suppose the current plans were frozen for future service and new plans were established to fund future accruals. The State could be responsible for the frozen plans (which would have the entire initial UAL) and then there would be a sharing of costs for the new plans set up for future service.

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