How much indebtedness does Iowa really have?

The Governmental Standards Accounting Board (GASB) is a national organization that sets generally accepted accounting principles (GAAP) for state and local governments.  Among the reasons such standards are useful is for comparability (everyone’s financials can be compared) and transparency (we know what we’re getting).  

This year, new national standards for public pension reporting are being implemented following nearly ten years of development and much controversy. Now, for the first time, its share of total net pension liability (the amount by which liabilities exceed assets) will be reported on the face of the balance sheet of individual government entities as a long-term debt, right along with other long-term debt such as outstanding general obligation (GO) or revenue bonds. In addition, alternative estimates of net pension liability using different return assumptions will be provided. This is important because the estimated return on investment of pension assets has a huge impact on the calculation of total net pension liability.  A small downward adjustment in the assumed return results in a giant expansion in estimated net pension liability.

In requiring governments to disclose net pension liability as a long-term obligation, among other things, GASB hopes to help the public recognize that unfunded pension liability is much like any other kind of debt – it represents an obligation that must be paid off over a period of time in the future for something that has already been purchased/built/consumed, in this case retirement benefits earned for past service.

Not enough principal has been set aside to pay for benefits already earned in Iowa’s four state pension plans: Iowa Public Employees Retirement System (IPERS), the Municipal Fire and Police (MFPRSI), the Peace Officers Retirement System (PORS) and Judicial Retirement System. The shortfall that must be made up through future annual payments into the pension funds amounts to $400 million per year.

In disclosing the sensitivity of pension debt to the choice of investment return, GASB hopes to help policy makers better understand the risk that goes with these plans. Unlike GO or revenue bonds, where the interest rate is known up front, pension debt can be larger or smaller than the estimate depending on whether the assumptions turn out to be correct. So it’s useful to see a range of estimates based upon different return assumptions. In Iowa, the big public pension models mostly assume a 7.5 percent return over the next 30 years. Under GASB rules, the calculation is now also made based on a 6.5 percent and an 8.5 percent return. (No one has suggested that pension models should use a rate higher than 7.5 percent, but many have suggested the use of a lower rate. While its pension model is based on 7.5 percent, the ten-year projection for IPERS’ current investment portfolio is 5.95 percent, meaning the 20 years after that would need an 8.3 percent average annual return.)

While the comprehensive annual financial reports (CAFR’s) for fiscal year 2014 won’t be issued until December 2015, we are now beginning to see the data that each local government is being given regarding their share of total net pension liability. To put the information in perspective, we have made a comparison of these estimates to the total amount of all other indebtedness, or the total debt we thought we had, for a few local governments.

 

Comparison of Net Pension Liability With All Other Long-Term Obligations
(June 30, 2014, $ in Millions)

 

 

            Entity

Treasurer’s Report of Outstanding Debt  
(Does Not Include Pension Debt)
Net Pension Liability
(Assumes 7.5% Return)*
Comparison of Net Pension Liability vs. All Other Debt (7.5%)  Net Pension Liability
 (Assumes 6.5% Return)*
Comparison of Net Pension Liability vs. All Other Debt (6.5%)
City of Ankeny 171.2 11.3 6.6% 21.4 12.5%
City of Des Moines 464.2 105.2 22.7% 200.6 43.2%
City of Urbandale 50.3 11.3 22.4% 21.4 42.6%
City of West Des Moines 75.8 20.3 26.8% 38.7 51.0%
           
Ankeny Community School District 145.0 35.2 24.3% 66.6 45.9%
Des Moines Indep. School District 196.0 121.0 61.7% 228.7 116.7%
Urbandale CSD 93.1 16.5 17.8% 31.2 33.6%
West Des Moines CSD 78.6 34.6 44.0% 65.5 83.2%
           
Total IPERS and MFPRSI (Statewide, Non-Regents)  13,365  4,328  32.4%  8,492  63.5%
 

Sources:
Outstanding Debt: Treasurer of Iowa, Outstanding Obligations Report June 30, 2014
Pension Debt: Iowa Public Employees Retirement System (IPERS) and Municipal Fire and Police Retirement System of Iowa (MFPRSI)

* Pension debt calculations vary depending on the assumption made for average annual return on investment over the next 30 years.  Both systems assume 7.5%. 

Statewide, the total net pension liability for the two largest systems, the Iowa Public Employees Retirement System (IPERS) and the Municipal Fire and Police Retirement System of Iowa (MFPRSI) is $4.3 billion, representing 32.4 percent more than the total of all other outstanding debt for governments in these systems.  In other words, if we thought we had $13.4 billion in total debt, we really have 32.4 percent more than that. 

The chart also shows the net pension liability for the two largest systems assuming a rate of return of 6.5 percent rather than 7.5 percent. The result is nearly a doubling of the net pension liability, in which case it is a 63.5 percent increase compared with all other debt. So our actual level of indebtedness is more than 60 percent higher than what we thought it was.

Individual government entities are also shown in the chart. The figures range from a low of 12.5 percent in the City of Ankeny to a more than doubling of the long-term obligations in the Des Moines School District.

Iowans are traditionally very conservative when it comes to debt. It is typically used for long-lived assets, where the payments are spread into the future but they match the long service life of the asset. In the case of public pension debt, we are in effect borrowing from future generations to pay for past operating costs – services that were rendered in the past by employees of state and local government. And we have a lot more of it than we thought. 

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