Even though taxpayers in the rest of America eventually may find out what public pensions really cost them, Kansas school accounting practices and the way school retirement is funded may let school districts avoid reporting the true cost of district employee pensions.

Some estimates show the unfunded actuarial liability of the Kansas Public Employees Retirement System will more than double from its current official $8.3 billion based on optimistic assumptions to more than $20 billion using the more realistic calculations (pdf).

The first step to fixing a problem is admitting you have one. That’s exactly what is intended with the Government Accounting Standard Board’s pending change in calculating and publicly reporting pension liability.

According to Christine Klimek, communications manager for the Financial Accounting Foundation, GASB’s parent, the rule change is intended to openly connect promises made to unions and government employees with fiscal reality.

If the government accounting rule change, technically an Amendment to Statement 27, goes into effect as planned in June 2013, elected officials and the public will be able to see that government employee pension plans are much deeper in debt than current estimates.

The rule change will require more realistic calculation of how much money is needed to pay existing pension obligations and how much is unfunded. It will also require government employers, including local governments and school districts, to report those liabilities on year-end financial reports that are used to determine credit ratings that determine borrowing costs.

About 1,500 government entities, mostly local governments and school districts, provide retirement benefits for 279,000 employees through KPERS. School districts and other government employers don’t currently report retirement system funding in their financial statements.

Under Kansas law the state is obligated to make payments to school districts to fund KPERS which they in turn pay back to the state to fund KPERS. The GASB amendment says, “A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the collective unfunded obligation.”

USD259 Wichita, the second largest participant in KPERS after the State of Kansas, accounted for 4.25 percent of participants in KPERS in 2010 and, if obligated to follow the new rule, would report a proportionate share of the state’s potential $20 billion unfunded actuarial liability. The exact amount will depend on the actual pension obligations for participating USD259 employees and retirees.

State, county and city governments in Kansas will be required to follow the new rule because state law requires they follow Generally Accepted Accounting Principles. School districts have successfully resisted efforts to impose a standard accounting practice and are thus not subject to the GASB rule change.

Though GASB has no authority to enforce its standards, auditors and bond rating agencies do consider whether a government follows GAAP standards when they give opinions on the soundness of potential investments and set bond ratings that determine borrowing costs.

Kristen Basso, spokesperson for KPERS, told KansasWatchdog that planning for the change is just beginning at KPERS. “We are currently working on an employer survey we will use to find out which employers will need reporting information from us.” She said the survey will be the first communication with government employers about the change.

Basso said KPERS will provide the information needed to do the liability reporting for any employer whether or not they are required to do the reporting. “We’ll have to do it for everybody,” Basso said. “It’s allocated down to the individual employer and the individual member so whether one or all 1,500 want the numbers we need to do the numbers for everybody.”

Awareness leads to change

In Utah, unlike Kansas, the legislature has consistently made the necessary payments to fund it’s public employee retirement system, but the 2008 market crash still put retirement funding in a deep hole.

Like most states, Utah faced strong opposition to pension reform from unions and the education lobby.

Utah State Rep. Dan Liljenquist recently told members of the Kansas Legislature about his state’s efforts to fix Utah’s $6.5 billion unfunded pension liability and what Kansas might do.

“When we translated that into how many teachers each district would have to lay off to pay that, that’s when we started getting movement,” Liljenquist said. “We did not make a breakthrough with the public until we said 2008 just cost the state of Utah 8,000 school teachers for the next 25 years.”

“People of the state of Kansas should realize that the old way of doing pensions is going to cost the state of Kansas teachers and police officers and firefighters for decades because of the 2008 crash and they shouldn’t be in that game,” Linjenquist told KansasWatchdog in a recent phone interview.

“Reality is not negotiable,” Liljenquist said. “You’re out of money as are we.”

Liljenquist said it’s important to take ownership of the problem. “These liabilities are still there. Bond ratings agencies know that you still have that liability. Those are the people that are waking up to the liabilities. Whether or not you count them one way or another doesn’t change the fact that they’re there and they will sink Kansas unless you change your system.”

“The bond markets are waking up to the fact that these liabilities could lead to defaults on everything else and they’re starting to ask about pensions and OPEB (other post employment benefits such as retirement health care) and what are you doing to get it done. That’ll lead to differential bond rates depending on who is fixing this problem, like Utah, and who isn’t,” Liljenquist said. “That should matter to every district.”

In Utah exposure of the problem built public support for a statewide change from a defined benefit pension to a defined contribution system more like a 401k for public employees.

It also led to change by the school system. “Our state school board voted to get rid of teacher tenure because they want to try to fire bad teachers because of pension costs. It’s really remarkable.”

Legislation passed in Kansas this year requires both taxpayers and government workers to make larger contributions to KPERS. It will help pare some of the funding deficit, said state Sen. Jeff King, R-Independence. King co-chairs the 13-member KPERS Study Commission that must recommend a permanent fix to legislators in January. King told KansasReporter.org in September the legislation at best may cover only about half the possible $20 billion newly calculated shortfall.

King told KansasWatchdog the KPERS study commission will look at the GASB change as a tool to help fix KPERS funding. “It’s our job, looking at what GASB is doing and information from actuaries, to come up with policy that can help address that. We were committed to it before, we’re committed to it now and certainly we’ll view GASB as a tool that can help do that.”

King also said getting schools on a uniform accounting procedure would help. “I have supported numerous times, in votes of the house and as well votes from the Senate, the imposition of uniform accounting standards and uniform accounting forms to be used by school districts to let us better compare school district conditions relative to other districts in the state.”

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Related:

GASB’s Robert Attmore discusses new pension rules (stateline.org)

Just How Big are Public Pension Liabilities (pdf, stateline.org)

Kansas pension gap may more than double (kansasreporter.org)

State Pensions Fall Off a Cliff (alec.org)