State Retirement Agency Provides Additional Clarification on Financial Reporting Decision

Director Dean Kenderdine shares critique of a recent Conduit Street article and insight into a State Pension Board determination. 

A recent post on Conduit Street updated readers on a decision of the State Pension Board about financial reporting of pension liabilities. MACo and MML had both expressed their concern to the State Retirement Agency about its initial method for pension financial reporting.

The MACo and MML concern was that the method used distributed an inappropriately large amount of the state pension liability to county and municipal members of the State Pension System. Following a meeting between representatives of the State Retirement Agency with MACo and MML, the State Pension Board appointed a special committee to consider the issue.

In December, the full Pension Board heard the recommendation of the special committee, called the Ad Hoc Joint Committee on System Financial Reporting. After some discussion, the State Pension Board followed the recommendation of the special committee to maintain the same method of financial reporting that was initially used.

Trustee Jim Harkins voted against the decision. Harkins represents the county and municipal “participating government units” on the Pension Board.

Conduit Street‘s December 18 article, State to Stick With Same Method for Pension Financial Reporting, reported the Board’s December determination. Using information from the report of the special committee, the article sought to describe the potential effect of the State Board decision to continue using the same method for pension financial reporting.

Following publication of the article, Executive Director of the State Retirement Agency, Dean Kenderdine, contacted MACo and offered the response below.

It appears that MACO has selectively referenced only certain content of the report issued by the Board of Trustees’ Ad Hoc Committee on Financial Reporting, and has not reported other key facts related to the committee’s conclusions which were basis for the Trustees’ decision.  This is particularly the case with the discussion of the “seven-pool” option.  The result is a misrepresentation of the Board’s reasoning behind its decision to maintain its current method of financial reporting.

Specifically:

  • The MACO article asserts that this option “Would decrease the state’s reported liability allocation to county, municipal, and other governmental units by approximately $277 million.” This statement, found nowhere in the report, tells the reader that the reduction of that scale would be certain.  In fact, the numbers provided in the report’s Attachment B are only an estimate, and as the text of the report states, “If the System were to report using seven pools instead of the five-pool approach, there would be an actuarial calculation of the total actuarial liability, as well as the assets allocated to each of the seven pools.  Upon completion of the actuarial valuation and allocation of assets across seven pools, such balances could be significantly different from what is shown in Attachment B.”
  • The MACO article ignores the report’s statement that the seven-pool option “could result in higher contributions from the individual employersor the State covering for all employers.  Higher employee contributions could also be an option, albeit highly unlikely.”  This references the fact that annual contributions coming into the Employees’ and Teachers’ Retirement Systems could be insufficient to pay the costs of those older plans and would thus necessitate higher contributions from the employers that have members in those plans.  Nothing that has been done to date in terms of GASB 68 implementation has affected employer contributions.  Going to the seven-pool approach most certainly could increase contributions for some county and municipal participants in the System.
  • The MACO article ignores the very important point made in the report that “It will be very difficult to split the assets and liabilities of the two pools in anything but an arbitrary (challengeable) manner when there have not been separate measurements of these amounts for an unknown number of years.”  Indeed, going to a seven-pool approach would require an arbitrary split of the Employees’ and Teachers’ assets and liabilities which could prove unacceptable to certain System stakeholders.

I am confident that each of these considerations above weighed more heavily in the Trustees’ decision than did the legislative, administrative, and administrative expense concerns which the MACO article reports.

For more information, see the report of the Ad Hoc Joint Committee on System Financial Reporting and our previous posts, State Retirement Agency Shares Reasoning on Recent Pension Decision, State Pension System Launches County Outreach On Liability Accounting, and State Retirement Agency Issues Revised Liability Allocation Letter.