A widely anticipated letter from the Maryland State Retirement and Pension Systems spelled out procedures for reporting unfunded liabilities among the local governments who participate in the state pension system — and requires them to report a share of the whole state system’s unfunded liability, not just that of the local participants. The administrative decision to assign the system-wide costs, which MACo and MML had jointly questioned in the lead-up to this letter, will place substantially higher reported liabilities on county and municipal “books.” The decision does not, however, trigger any change in contribution rates or the calculation of withdrawal terms for any member.
The Maryland State Retirement Agency previously shared an April “dry run” of this calculation, and MACo and MML have been engaging with the Agency staff on this process, seeking to ensure that local participants are not assigned an improper level of unfunded liability. There are over 120 county and municipal members or withdrawn members of the State Pension System, including sixteen county governments and numerous county-supported units. In a joint letter to the Maryland State Retirement Agency’s Executive Director, MACo and MML asked the Agency to reconsider its dry-run allocation of unfunded liability to local governments (in pension parlance, PGUs, or “participating government units”) to account for the relatively lower liability of the municipal pool, stating,
The State Pool is, by all accounts, more deeply underfunded than is the Municipal Pool. Thus, the “dry run” decision to commingle liabilities of the two pools for these reporting purposes results in an arguable overstatement of the municipal share of liabilities. Bolton Partners, a firm representing numerous PGUs on these issues, estimates that the commingling of the two pools causes the PGU share of liability to increase by some $280 million. While our member PGUs recognize that GASB 68 obliges reporting of appropriate liabilities, they understandably seek to avoid reporting figures that are significantly larger than the actual liabilities owed to the Municipal Pool.
The one-pool approach without the adjustments described in Paragraph 120 of GASB 68 also causes irrational outcomes for withdrawn units, some of which operate under standing agreements with the System regarding withdrawal payments to resolve their assigned liabilities. Any calculation of such liabilities that materially betrays the remaining fixed schedule of payments could place those governments in a particularly difficult circumstance regarding their own financial statements.
This week’s letter from the State Retirement Agency confirms that the State did not revise its “dry-run” calculations. The letter states,
During the course of implementation of GASB 68, we have been asked why not use the muni-pool only net pension liability for the spread of the net pension liability. As noted above, the System is considered one cost sharing plan and has been historically reported as such to be compliant with standards. Therefore, use of a single total net pension liability is consistent with the historical reporting for the System.
Throughout discussions with the Agency, MACo and MML have also advocated for clarification from the Agency that its liability calculations will be used for the limited purposes of GASB 68 implementation. The State Retirement Agency included the following clarifying language in its letter, which states,
While this calculation is required under the new GASB reporting requirements, it does not change any practices for the administration of participating governmental units in establishing their contribution rates and any terms of their withdrawal.
For additional background on this issue, see our previous post, MACo, MML Pursue Pension Liability Reporting Process.