Over the last couple of years the biggest accounting news for local governments has been the requirement to report the unfunded pension liability as a long -term obligation on the government wide financial statements. First let’s talk about how this came to be then we can assess what the final results that are expected.
How did this come to be? The Governmental Accounting Standards Board (GASB) is the standard setting body for generally accepted accounting principles for governmental entities in the United States. In Kentucky, every municipality is required to prepare year-end financial statements that comply with those principles. This is required by KRS 91A.020 which was enacted in 1980. GASB was hearing from the investment community that the unrecorded pension liabilities were growing exponentially and needed to be recognized so that financial statement users could make better assessments of the ability to finance bonds or other public debt.
RFH warned our governmental clients regarding this change for a couple of years, but the June 30, 2015 statements were required to recognize the proportionate share of the total unfunded liability for each participating government.
WOW, the numbers very large and the effect in some cases was to change a positive net position to a negative net position. In other words, that surplus of assets over liabilities that you had the year before was now a deficit.
Our caution to government leaders is that this is an obligation but unlike a payable there will not be a check written to reduce the liability. The liability will change each year based on the determination of the unfunded net liability for benefits times your governments proportionate share. In other words, it is an estimate and the estimate will change each year.
Pension contributions for current participants is where the most significant economic change will occur. The percentage of payroll compensation that must be contributed to the pension fund must increase over time in order to significantly reduce the liability. When that contribution becomes a burden to your operating budgets is when the real effects will be felt. Contribution rate estimates of 25%-35% of current payroll costs are not unreasonable to predict. The impact on your operating budgets when pension contributions required are more than 25%-35% of compensation is our concern. Do you reduce compensation or the number of employees? How will your constituents accept those outcomes?
If you need any further assistance, please contact RFH, PLLC at 1-800-342-7299 or www.rfhcpas.com