Where public companies go, state and local governments often follow. A few years ago when it was discovered that the pensions of some publicly owned companies were underfunded, it was clear it was only a matter of time before the same issue would come into play in state and local governments.
So, after six years of research, the Government Accounting Standards Board (GASB) has released GASB 67 and 68. And although they did not make huge changes to the way local and state governments make disclosures of their pension liability — it signals the start of the process of exploring pension liabilities.
GASB 67 and 68 were intended to provide better information about defined benefit pensions in governments’ annual financial statements. Reporting requirements are going to change so that there is a more easily accessible number that can be evaluated by boards and the public. Because we know that many pensions are underfunded, governmental organizations should expect some public and political pressure. Some groups might push to disband defined benefit plans altogether; others may look at changing cost-sharing between the government entity and plan members.
The key to successfully addressing this situation is to gradually educate people about financial reporting and begin the conversation about future options early on.
What actions do state and local governments take now?
GASB 67 and 68 signal the start of this discussion, but this is a conversation that will take time. The first thing state and local governments need to find out is how sustainable their pension plans are. Then they need to clearly communicate the situation to the public and to their board members. Finally, they need to talk about the long-term structural changes needed to shore up the pension plan, if it is currently unsustainable. From an accounting perspective, the books will actually appear different, so it is also important to understand where the technical changes will occur.
What should state and local governments plan to do in the future?
Each pension will have to evaluate the circumstances specific to its financial state and the demographics and economics of the region. So although there will be many alternatives, decision-makers will essentially have two basic options: change the structure or discontinue the pensions.
Since the status quo for many organizations will not be sustainable, the ideal situation would be to have unified leadership and action at all levels.
While corporate America is fairly nimble, a government entity will likely take longer to address an unpopular mandate. The very first priority is to promote the understanding of the financial reporting so that public opinion is informed rather than reactionary. The simple message is this: just like the issues of accountability and transparency, pensions in corporate America have been changing, and state and local governments are following the same path.
The issue of underfunded pensions is not going away, and the pressure is on state and local government leaders to start addressing it.