Practical Implications for the New Pension Standards on Virginia Localities

Transcription

1 Practical Implications for the New Pension Standards on Virginia Localities J E S S E H U G H E S D E B O R A H W H I T E V G F O A F A L L C O N F E R E N C E O C T O B E R

2 Why care NOW about new pension standards? Reactions and questions of your stakeholders to the negative publicity about underfunded public pensions (and OPEB) Governing bodies Citizens/taxpayers Bondholders Employees/retirees New requirements: Rating agencies Bond attorneys and underwriters SEC (threats to regulate if voluntary measures not implemented)

3 GASB 68: What Will Change Pension liability will be on government-wide balance sheet by FY 2015 (with prior period adjustments in year of adoption) Volatile pension expense will be on governmentwide Statement of Activities The UAAL equivalent will go up and funded ratios will sharply decline Teacher s VRS pool UAAL will be allocated to the Schools (and therefore, on each locality s CAFR) Actuary and audit fees will likely rise more complex calculations and disclosure requirements

4 GASB 68: What Won t Change Commonwealth of Virginia sets the minimum funding policy in the Code of Virginia for those using VRS (currently, VRS Board decides basis) Annual actuary report from VRS accounting changes do not alter the underlying fundamentals; $1,000 owed to a retired teacher in ten years under current standards will remain $1,000 owed in 10 years under the new standards. So policymakers should not let new numbers throw them off the path to sensible reform. (Boston College, June 2012)

5 Lessons Learned from the Private Sector FASB had similar standards implemented in 2006 because of seriously underfunded Defined Benefit pension plans in the private sector Congressional laws (ERISA 1974, PPA 2008) forced specific funding levels (now at 100%) Private companies had to make critical decisions in regards to cash resources fund pension trusts or fund revenue-producing expenses By 2009 only 16% had open DB plans Public sector must be smart to preserve DB plans

6 Virginia Reforms Most localities with single employer DB plans have closed them to new hires and joined VRS The state, via VRS, has initiated major reforms, including an upcoming hybrid DB/DC plan and new hire tiers The state required employees to start paying up to 5% member contribution (public perception of reform) Many localities have re-examined OPEB plans and have reduced benefits, at least for new employees

7 Bond Disclosure Requirements Most Official Statements now being released have more disclosures in regards to both pension and OPEB (narrative similar to CAFR) SEC (July 31 report) and National Association of Bond Lawyers considerations for more disclosures nothing yet changed for Best Practices Underwriters are driving additional disclosures, as needed

8 S&P Rating Criteria: Pensions While the funding schedule for pension and OPEB can be more flexible than that for a fixed-debt repayment, it can also be more volatile and may cause fiscal stress if not managed, in our opinion. The size of the unfunded liabilities and the annual costs associated with funding them, relative to the budget, are important credit factors in our review of state and local governments We will continue to differentiate credits where these long-term liabilities are large and growing, contributions are less than required, and there has been limited action on reform initiatives. (Article by S&P in Govt. Finance Review, 8/12)

9 Fitch Rating Criteria: Pensions Fitch generally considers a funded ratio of 70% or above to be adequate and less than 60% to be weak, while noting that the funded ratio is one of many factors considered in Fitch s analysis of pension obligation. Feb publication Fitch will calculate an additional long-term liability metric for use in the credit analysis of states. The new metric measures each state s net tax-supported debt combined with the unfunded actuarial accrued liabilities (UAAL) in its major pension systems against the state s wealth base, expressed as personal income...fitch believes that debt and pensions are fundamentally different types of obligations, and the combined metric is inherently more variable. (March 2012 special report)

10 Moody s Proposed Criteria: Pensions Moody s released an extensive draft methodology on July 2 with the comment period just ended (Sept. 30, 2012; original deadline of Aug. 31, 2012) Moody s received numerous comments asking them to revise their methodology: GFOA National Association of State Treasurers National Conference on Public Employee Retirement Systems As of today, Moody s has not finalized their new methodology

11 Moody s Proposed Criteria: Pensions Considers pensions debt-like obligations How local governments manage pension has an impact on how Moody s measures management Proposed adjustments to pension information: AAL discounted to 5.5% (or high-grade corp. bond index rate) and 13 year duration No asset smoothing (similar to GASB 68) Multiple-employer cost-sharing plans (like VRS teacher s pool) allocated to localities (similar to GASB 68) For states, contributions calculated using 5.5% discount rate and 17-year active employee duration (svc life similar to GASB)

12 Moody s Proposed Criteria: Pensions These adjustments will almost triple the UAAL Moody s: no effect on state ratings but they are still evaluating the full impact of the proposed pension adjustments on local government ratings. Also proposed: comparison of UAAL relative to full property value for local governments part of new score card Will take place immediately and will stay in place even after local governments implement GASB 68

13 Moody s Proposed Criteria: Pensions Moody s wants comparability but many feel this methodology will not do that GFOA feels the new numbers will cause confusion and undermine GASB 68 numbers in CAFRs HEADLINE RISK problem with perhaps arbitrary high numbers Boston College study shows Virginia needing only a 7.5% blended discount rate, very similar to VRS current discount rate Moody showing Virginia UAALs artificially high?

14 VRA Credit Analysis VRA performs in-house credit analysis for every loan The VRA loan portfolio must meet the rating criteria of AA (GO/MO bonds) or AAA (utility bonds)-- therefore they are reactive to Rating criteria of Moody s and other rating agencies Underwriter disclosure requirements Currently, VRA uses Moody s 2009 GO Rating Methodology and will mention pension details in the credit report when Funding ratio is below 80% (state average was 76% in 2011) UAAL is over 50% of payroll (state average was 98% in 2011)

15 Analysis of Virginia Localities: Source of Data Latest CAFR (June 30, 2011) VRS (teacher s pool) Pew Center for the States Center for Retirement Research, Boston College Association of Municipal Securities GASB Analyzed all Virginia local governments with a population more than 40,000

16 Potential Problems with Database Pensions and OPEB not always allocated to entities where employees work (including regional organizations/schools) Fixed assets not consistently allocated between primary government and School Board. Economic Development Authorities and other non- School component units not included Retirement Health Insurance Credit not included in OPEB since local government UAAL is small and Teachers Pool allocation not known.

17 Database Analysis With no change in pension accounting, how did Virginia localities do as of June 30, 2011?

18 Funded Pension Ratio for VA Localities as of 30 June Average R a t i o Cities Counties Fitch Bond Rating Benchmark Cities and Counties

19 Virginia Localities Below Fitch Rating Benchmark of 70% as of 30 June 2011 Cities: Alexandria (supplement & Fire/Police), Charlottesville, Hampton, Lynchburg, Newport News, Portsmouth (supplement & Fire/Police), Richmond Counties: Arlington (Law Enforcement), Bedford (Fire/Rescue), Chesterfield (School Board Supplement) This simple ratio does not tell the whole story and needs to be put in context of the size of the UAAL relative to the localities assets, payroll or revenue.

20 Database Analysis: Net Assets Without any change in how the UAAL is calculated, what would happen if the UAAL appeared on the government-wide balance sheet? A simple calculation is to divide the current net asset value for the general government by the UAAL, a number greater than 1.0 would mean the net assets would remain positive; a number less than 1.0 would mean net assets are negative (possible fiscal sustainability issues)

21 % Net Assets Available for Pension UAAL (excludes VRS) for VA Localities as of 30 June R a t i o Cities Counties Problem Area Cities and Counties

22 Virginia Localities With Net Asset Availability Below 1% as of 30 June 2011 (without VRS Allocation) City: Newport News City School Boards (non-professional employees): Chesapeake, Lynchburg, Norfolk Counties: Fairfax, Fauquier, Prince William, Rockingham County School Boards (non-professional employees): Chesterfield, Montgomery

23 Database Analysis: VRS Teacher Allocations VRS has informally determined an allocation of the 2011 VRS teacher UAAL (current rules) to each locality based on the contributions paid in Can a school system cover its own UAAL? Can a locality cover the school s UAAL on top of its own? (Most School teacher UAAL allocations are at least as large as the locality s.)

24 % Net Assets Available for Pension UAAL for VA Localities as of 30 June 2011 (includes VRS UAAL) Problem Area 6.0 Cities Counties R a t i o Cities and Counties

25 Virginia Localities With Net Asset Availability Above 1% as of 30 June 2011 (with VRS Allocation) No change to previous table for cities and counties (School UAAL has not been combined with the locality) City School Boards: None! County School Boards: only Arlington, Bedford, Fauquier, Loudoun, Prince William, Rockingham, Spotsylvania, Stafford, and York

26 % Net Assets Available for Combined Pension UAAL for VA Localities as of 30 June Cities Counties Problem Area R a t i o Cities and Counties

27 Virginia Localities With Net Asset Availability Above 1% for Pensions within Whole of Government as of 30 June 2011 Cities: All (except Alexandria and Newport News) Counties: All (except Campbell, Fairfax, Pittsylvania, Shenandoah, Tazewell, and Washington)

28 Database Analysis: New Standards Moody s is projecting the UAAL will triple with its new methodology if so that would add another 50% increase to the locality and school board combined UAAL Under GASB, the combined UAAL in Virginia may only increase slightly because the blended discount rate may be close to the 7% used by VRS however, using a market value for plan assets is currently decreasing the value of assets assume a 50% increase on the combined UAAL as a worse-case scenario

29 % Net Assets Available for Combined Pension UAAL for VA Localities as of 30 June 2011(includes 1.5X UAAL) Cities Counties Problem Area R a t i o Cities and Counties

30 Virginia Localities With Net Asset Availability Above 1% for Pensions with 50% add-on within Whole of Government as of 30 June 2011 Cities: All (except Alexandria, Newport News, Norfolk, Portsmouth, and Richmond) Counties: All (except Albemarle, Augusta, Bedford, Campbell, Fairfax, Fauquier, Franklin, Frederick, Henry, Montgomery, Pittsylvania, Prince William, Rockingham, Shenandoah, Tazewell, and Washington)

31 Database Analysis: Smaller Cities Looked at all cities with populations under 40,000 Their behavior does not differ from the larger cities in Virginia Only Falls Church has non-vrs plans The VRS Teacher UAAL allocation is often much higher than the City s UAAL No cities would have negative Net Assets using their FY2011 Govt Wide Statement of Net Assets with the VRS Teacher Allocation UAAL added to the City s UAAL Only the following cities will have negative Net Assets with both the VRS Teacher Allocation UAAL and an additional 50% liability: Hopewell, Martinsville, and Colonial Heights.

32 Database Analysis: Smaller Counties near Cville Only Goochland, Fluvanna, Louisa, and Orange had CAFRs available on website All had significantly higher VRS Teacher Pool UAAL than their own (4 to 10 times more) Of these, only Fluvanna would have a negative Net Asset if the County UAAL is combined with Teacher Allocation UAAL plus 50% more

33 Funded Pension Ratio for Smaller VA Localities as of 30 June Average R a t i o Fitch Bond Rating Benchmark Cities and Counties Cities Counties

34 Database Analysis: Select Authorities Looked for Authorities that are not component units of related local governments Richmond Metropolitan, Western Virginia Water, Prince William Co. Service, Central Virginia Service, Loudon Water, Fauquier Co. Water and Sanitation, Charlottesville-Albemarle Airport, Albemarle Co. Service, Rivanna Water and Sanitation, and Augusta Co. Service Authorities All had more than enough Net Assets to cover double their own UAAL with the Central Virginia Service Authority having the lowest available net assets. Average of funded ratios for this group slightly higher than other local governments

35 Database Analysis: UAAL % of Property Value Database: last group of smaller cities and select counties with Albemarle and Charlottesville (AAA rated) for reference Ratio as defined in potential new Moody rating criteria (we used total assessed property value found in CAFR statistical tables) Moody s will look for outliers to determine strong and weak local governments

36 Total Pension UAAL as % of Assessed Property Values for Smaller VA Localities as of 30 June % 9.0% Average R a t i o 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Cities Cities and Counties Counties

37 Database Analysis: UAAL % of Property Value AAA rated reference local governments: Albemarle County 1.5% Charlottesville 2.5% Strong? Goochland County 0.9% Louisa County 0.9% Weak? Martinsville 9.1% Does this look like a usable ratio?

38 Database Analysis: OPEB GASB: The new GASB standards do not address any changes to the accounting of OPEB GASB is reviewing OPEB accounting with a possible Exposure Draft as early as the 2 nd Quarter 2014 OPEB funding and UAAL are included in the discussions on new bond issues and in credit rating reviews

39 Funded OPEB Ratio for VA Localities as of 30 June R a t i o Cities Counties Average Cities and Counties

40 Funded OPEB Ratio for VA Localities above 5% Average as of 30 June 2011 Cities: Alexandria, Charlottesville, Chesapeake, Newport News, Roanoke, Suffolk, Virginia Beach City School Boards: Alexandria, Newport News, Portsmouth, Suffolk, Virginia Beach Counties: Arlington, Chesterfield, Fairfax, Fauquier, Hanover, Henrico, Henry, Roanoke, Stafford County School Boards: Arlington, Prince William

41 % Net Assets Available for Pension and OPEB UAAL for VA Localities as of 30 June Cities Counties R a t i o Problem Area Cities and Counties

42 Virginia Localities With Net Asset Availability Above 1% for Pensions with 50% add-on + OPEB within Whole of Government as of 30 June 2011 Cities: All (except Alexandria, Chesapeake, Newport News, Norfolk, Portsmouth, and Richmond) Counties: All (except Albemarle, Augusta, Bedford, Campbell, Fairfax, Fauquier, Franklin, Frederick, Henry, Montgomery, Pittsylvania, Prince William, Roanoke, Rockingham, Shenandoah, Spotsylvania, Tazewell, and Washington)

43 Resources PFM s July 2011 What will GASB Changes Mean for Public Employers and Debt Issuers (devoted to local/state govt) Center for Retirement Research, Boston College (crr.bc.edu) and Center for Local and State Government Excellence (slge.org) easy to read white papers Recent Journal of Govt Financial Mgmt (AGA, Summer 2012) and Govt Finance Review (GFOA) articles GASB s Implementation Guide for GASB 68, to be released January 2014