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State Must Face True Pension Liabilities

By MARCIA MARIEN

July 09, 2012

Hartford, we have a problem. And, as with Apollo 13, fixing the problem — reporting the state government's full pension liability — begins by acknowledging it. We must admit it. We must quantify it. We must deal with it.

Last month, the Governmental Accounting Standards Board, which sets the standards for U.S. state and local governments' financial statements, changed the rules. Governments must now report how much they owe in pension promises on their financial statements as a liability. This would be calculated starting with the total dollar amount that the actuaries have determined would be needed to fund the pension promises minus the total dollars that have been put aside.

You might say, "Of course, this is a no-brainer." But governments are slow to change. We all think governments will be here forever. They don't go out of business. They don't go bankrupt. They don't need the same rules. For these reasons, governments have had special rules when it comes to financial reporting.

Up until now, a government reported a liability on its financial statement as the amount that the actuary says should be paid into the pension for the current year to cover the current year's costs minus the cash that was set aside for the current year. This is based on the government's funding approach and not the real liability. The current method does not take into account certain changes in expectations, changes in benefits and shortfalls in expected returns on investments.

If we look at Connecticut's audited financial statements from June 30, 2011, we see that the net pension promises after subtracting the cash that has been set aside (unfunded actuarially accrued liability) is $20.9 billion. This is only reported as a footnote to the financial statements. It is not reported on the balance sheet as a liability.

If we look at what is actually reported on the balance sheet, we see a liability of $2.4 billion. We are only reporting $2.4 billion of our actual $20.9 billion pension shortfall on our balance sheet. We are not reporting $18.5 billion of our pension liabilities. The new accounting rules would correct this and cause us to report the real and larger liability on our balance sheet.

We, the 6,000 certified public accountants who are members of the Connecticut Society of Certified Public Accountants, are concerned about the financial health of the state and our leaders' long-term plans for addressing and correcting it. We are concerned that our leaders will look to regulations exempting the state from the new standard. Although this might make the leaders look better for today, it hurts us, the citizens. Ignoring the costs does not exempt us from paying the bill for the promises we have already made.

We are especially concerned because the last time the Governmental Accounting Standards Board came out with a pronouncement that would cause a large liability to be shown on the financial statements, for Other Post Employment Benefits, Connecticut's leaders tried to do just that. Approximately five years ago, the state was required to start reporting the costs of health insurance promises that we had already made to our retirees on the financial statements. Our leaders looked to create state regulations exempting the state from these standards. Fortunately, they were unsuccessful.

We can't let our leaders repeat that maneuver by trying to avoid the new requirement that the amount the state owes in pension promises be reported as a liability on their financial statements. Ignoring the problem doesn't make it go away.

We cannot pretend this problem does not exist. We cannot have leaders making short-term political decisions with long-term consequences for the citizens. We cannot pass these problems on to our children and grandchildren. We must fix our future. We must start today with honest accounting of our liabilities.

Marcia Marien, CPA, is past president of the Connecticut Society of Certified Public Accountants.