Reporting pension liability could have big impact on public sector’s balance sheets
WILLMAR — New requirements for how public entities must report net liabilities for defined-benefit pension plans could have a big impact on local government.
Rice Memorial Hospital had a foretaste last week of the pending changes, and the hospital’s auditors said the impact will be widespread.
“This will affect every government entity,” said Dan Vandenberghe of McGladrey LLP, the financial firm that recently conducted the hospital’s annual audit.
Bill Fenske, chief financial officer of Rice Hospital, called it “a big issue that’s out there.”
“As auditors start rolling this out, it’s going to become a much more widespread and public issue,” he said.
The changes involve new pension reporting rules by the Governmental Accounting Standards Board. They take effect for fiscal years that start after June 15 of this year.
Traditionally, governmental bodies have reported their pension expenses as the amount of their contributions to the Public Employees Retirement Association. Under this standard, unfunded pension liabilities didn’t show up as a deficit on an individual entity’s balance sheet.
Government employers will now be required to calculate and report an amount that includes unfunded state and local pension liabilities. The new standard is expected to result in better financial reporting and accounting for public pension plans, along with more transparency regarding unfunded liabilities. But it could also take a large bite from the balance sheet of public employers.
Cities and counties will begin seeing the impact on their income statements over the next year. As a city-owned hospital, so will Rice.
McGladrey put Rice Hospital’s current estimated share of net liability for PERA at $33.6 million — in effect, half of the hospital’s overall $60 million in equity.
It has Fenske worried. “We just can’t absorb taking half our equity,” he said.
In some cases, the new standard will add pension liability to the balance sheet of public employers who didn’t previously have unfunded pension liabilities.
Ups and downs in the market that affect the value of pension plans will spill over onto the balance sheet as well.
PERA released its pension numbers only a few months ago and the impact is still being analyzed, said Jeremy Zabel of McGladrey LLP, director of Rice Hospital’s annual audit.
“I don’t think the market has had time to process it yet,” he said.
It will be challenging for public employers to manage the fluctuations and unpredictability in unfunded pension liabilities from one year to the next, he cautioned. “It’s going to add a lot more volatility to your income statement.”
To some extent, the changes in the accounting rules are simply a different way of reporting pension liabilities that are already known, Vandenberghe said. “Nothing really changed.”
But there’s concern over how the new rules will affect perceptions of an organization’s financial viability, especially among investors with an eye on the balance sheet, he said. “It’s unknown how the financial markets will respond to this.”