State Retirement Agency Issues Revised Liability Allocation Letter

The State Retirement and Pensions System’s Executive Director recently issued a revised letter to county and municipal governments, with additional detail on the Agency’s guidance to local governments implementing GASB No. 68. The letter does not change the Agency’s former decision not to recognize the separate liabilities of individual Systems within the State Pension System in its accounting guidance. At the same time, the letter states that “individual state Systems have separate actuarial liabilities.”

Following a release of the Agency’s dry-run allocations of the liability of county governments for the State Pension System, MACo and MML jointly asked the Agency to re-visit its decision not to recognize the lesser unfunded liability of local governments (who did not follow the state’s “corridor funding” method of artificially depressing contribution rates). For more background on this issue, see our previous Conduit Street posts, State Guidance: Locals Must Report Share of State Unfunded Pension Liability and MACo, MML Pursue Pension Liability Reporting Process.

The county and municipal members of the State Retirement and Pension System are part of a Municipal Pool that has separate actuarial liabilities from the rest of the System. As stated on page 26 of the System’s June 30, 2014 Comprehensive Annual Financial Report,

The System is made up of two cost-sharing employer pools: the “State Pool” and the “Municipal Pool”. The “State Pool” consists of the State agencies, boards of education, community colleges, and libraries. The “Municipal Pool” consists of the participating governmental units that elected to join the System. Neither pool shares in each other’s actuarial liabilities, thus participating governmental units that elect to join the System (the “Municipal Pool”) share in the liabilities of the Municipal Pool only.

MACo’s concern regarding the Agency’s action is that the dry-run allocations spread the total unfunded liability of the State System among participants, instead of separating out the municipal pool (which is not as poorly funded as the state pool). Bolton Partners estimates that the commingling of the two pools causes the county and municipal share of reported liability to increase by some $280 million.

The revised letter to county government member of the State Pension System (called participating governmental units or PGUs) states,

For purpose of funding the System, all calculations are determined on an actuarial basis and are completed through the development of rates based on two separate asset pools, one for employees of the State of Maryland (the State) and one for the PGUs (this pool referred to by the System and its actuary, as the “Municipal Pool”). These pools are kept on an actuarial basis and allow for the State to fund only State employees and PGUs to fund only PGU employees.

The letter continues to state that even though the separate liabilities were not used by the state to develop the allocation of the net pension liability for the purposes of GASB Statement No. 68, the net pension liability for the various State systems is available by written request. The letter also addresses a more technical issue, responding to questions about the correct wages employed as the basis for the apportioned distribution.

For more information, read the full revised letter here, and read the original letter here.