Model Policy

{Title, enacting clause, etc.}

Section 1. {Title.} This Act shall be known as the Unfunded Pension Liabilities Accounting and Transparency Act.

Section 2. {Definitions.}

(A) Funded Ratio. The funded ratio is the actuarial value of assets divided by the actuarial accrued liability (the total obligation).

(B)  Covered Ratio. The covered ratio is the unfunded actuarial accrued liability (the difference between the total obligation and the actuarial value of assets) divided by the total payroll of employees covered by the plan.

(C)  Market Value of Liability. “Market Value of Liability” means value of pension liabilities by discounting future liabilities at an interest rate that matches their risk and represents the amount a private insurance company would demand to issue annuities to cover all benefits owed by a plan.

Section 3.

(A) The {state retirement board or other responsible entity} of {insert state} shall, no later than 60 days from the enactment of this legislation, report to the Legislature the Market Value of Liability for each of the state’s several pension funds, as calculated using a rate of return equal to the current yield of the 20 year United States Treasury Bond. This report shall otherwise retain all actuarial assumptions as utilized in the most recent edition of the several funds’ consolidated annual financial reports.

(B)  In {month} of every year, beginning the calendar year after the enactment of this Act, the {state retirement board or other responsible entity} of {insert state} shall report to the Legislature the Market Value of Liability for each of the state’s several pension funds, as calculated using a rate of return equal to the current yield of the 20 year United States Treasury Bond. This report shall otherwise retain all actuarial assumptions as utilized in the most recent edition of the several funds’ consolidated annual financial reports.

(C)  The reports required by sections (A) and (B) shall report the difference between the Market Value of Liability as calculated according to this Act and the Actuarially Accrued Liabilities as reported in the most recent edition of the several funds’ consolidated annual financial reports.

(D) Annually the state retirement board or other responsible entity of {insert state} shall report to the Legislature the actuarial model of the following scenarios based on investment returns of 6 percent, 7 percent, 7.75 percent, and 8 percent:

(1)      The state’s employer contribution rates over the next 40 years should the state fully funds its pension system

(2)      The state’s pension fund should the state freeze its contribution rates at {insert year} levels

(3)      The state’s pension fund should it freeze contributions at {insert year} levels for three years and five years

(4)      The contribution rates should the state close its existing systems and put all new employees on a new retirement program with employer contributions of 8 percent

(E)  The reports required by sections (A);  (B) and (D) shall be posted online in a searchable, non-proprietary format within 48 hours of their delivery to the Legislature, by the {state retirement board or other responsible entity}.

(F)   Based on the Market Value of Liability the Legislature shall project annual required contribution by the state for a period of 20 years.

(G) In accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 158, unfunded liabilities should be reflected on the financial statements of the employer.   The annual report of a pension plan should reflect the liabilities for each plan segment but states’ financial statements should only reflect the portion of liabilities attributable to state employees.  Liabilities pertaining to employees of local government entities and school districts should be reflected on the financial statements of their respective employers.

Section 4.

(A) For any pension or retirement system controlled by the state of {insert state} benefit enhancements must be concurrently funded at the time the benefit is authorized.

Section 5. {Severability clause.}

Section 6. {Repealer clause.}

Section 7. {Effective date.}

Explanatory Notes

• It is clear that citizens are demanding greater transparency in accounting for the costs of state and local government. Given the large and growing unfunded liabilities in pension and other post employment benefit plans, it is crucial for state and local governments to meet accounting standards for these plans established by the Generally Accepted Accounting Principles (GAAP).

• ALEC’s intent is to make citizen access to GAAP information as open, transparent, and publicly accessible as possible. Increasing transparency significantly contributes to governmental accountability, public participation, and the understanding of the cost of government services.

• Consumers of financial information about state and local governments have found the funding status of pension and Other Post Employment Benefits (OPEB) for public employees to be valuable. The degree to which sufficient resources have been set aside to pay future benefits is of particular importance.

• ALEC firmly believes that state and local governments should meet GAAP standards for reporting pension and Other Post Employment Benefits (OPEB) costs and obligations in their financial statements.

• These standards require the presentation of a schedule of funding progress that shows whether the funded status of these plans is improving or worsening over time. This schedule compares a plan’s actuarially calculated total obligation with the value of assets that have been accumulated to pay benefits. Two ratios are provided to assess progress toward funding and the magnitude of a government’s obligation.

• State budget office should strive to make publicly available an online searchable database that discloses all liabilities in public pension and other post employment benefit systems in the state.