On July 9, TEXPERS Executive Director Max Patterson was invited to testify before the Texas House Pension Committee regarding the implications of GASB rule changes on local pension funds. The following remarks were submitted by Patterson to the Honorable Bill Callegari (R-Katy), Chairman of the House Pension Committee.
Honorable Chairman Callegari, thank you for this opportunity to provide testimony on the Implications of GASB on local pension funds.
I am Max Patterson, Executive Director, Texas Association of Public Employee Retirement Systems (TEXPERS).
GASB is intended to show all of the cities debt obligations and in this effort this rule change requires the disclosure of cities pension obligations to be “moved” from the footnote section in its annual financial disclosures (CAFR) to its balance sheet. It should be pointed out that any pension obligations by the city have “always” been disclosed. The primary reason for debt disclosures are to insure that all obligations are disclosed when a city attempts to raise money by the selling of bonds. Pension obligations have always been disclosed but GASB is attempting to highlight any pension obligations because of the growing obligations by cities. It is important to note here that those cities who have been deferring pension payments have increased their debt obligations significantly as compared to the cities that have consistently made their pension payments.
Unfortunately, because of the GASB 68 change people have directed there attention towards the pension plans rather than to the cities and ask why are you deferring payments when you have previously agreed to these obligations.
When people look at municipal debt it is important to look at all debt not just the pension debt. In most cases, if not all, pension debt is a much smaller debt obligation than other debt the city has accrued. In the Texas Comptroller’s report for August 31, 2013 the City of San Antonio had tax supported debt amounting to $1,406,185,000 and revenue supported debt of $8,426,715,000. As of December 2013 the San Antonio Fire & Police Fund had a $214,876,634 unfunded liability.
If you look at Houston as of August 31, 2013 they have a tax supported debt of $3,383,060,000 and revenue supported debt of $9,293,693,288. The three city pension plans have a combined unfunded liability of $3,051,388,000 as of December 2013.
It is also important to note that these numbers reflect only what is true on that one day and do not reflect a total picture. They don’t reflect on whether a city can make its obligations in the future or if there may be a trend.
When trying to determine if a pension fund is able to meet its obligations we also look at numbers on a specific date and often do not look at other factors to answer the same question.
When trying to determine if a pension fund is able to meet future obligations one has to consider at a minimum three factors; returns, amortization and its unfunded liability. You must look at all three and in conjunction with past numbers to determine if there is a trend. This analysis is a function of the actuary and pension boards depend heavily on the analysis and reporting performed by its actuary and usually on a yearly basis.
In summary GASB focuses primarily on the city and all its debt obligations, but unfortunately some people are seizing the opportunity to transfer the focus toward the pension funds. This discussion could very easily be an issue around a city’s infrastructure, neglected roads and bridges and a failure to set aside sufficient funds to keep up with daily maintenance. Consequently at the end of the day the repair cost is much higher than what it would have been if the repairs were made earlier.
I can’t speak for the rating agencies but in the course of rating a city the bonding agencies look at more than just the numbers on the financial statement. They look at the city’s history of paying its obligations and the ability of the city to meet its obligations going forward. And, they look at all obligations, not just the pension obligation.
As we have always said local pensions in Texas, for the most part, are in good shape. Those cities who are meeting their commitments by making their pension payments are in good shape. Looking at the projected future pension obligation of a pension system can be misleading if that is all you look at. Look at the whole picture before passing judgement.
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