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New public pension accounting rules raise red flags -Fitch

NEW YORK (Reuters) – New accounting rules for public pensions are exposing the damage done by U.S. states, including New Jersey, that have failed to adequately fund their retirement systems, according to a report to be released by Fitch Ratings.

With the first wave of pensions beginning to issue financial statements under the new rules, the impact of underfunding becomes clearer, the Fitch report shows.

The Governmental Accounting Standards Board rules, required for retirement systems for fiscal years ending after June 15, 2014, for the first time mandate that pension funds disclose when benefit payouts would exceed projected assets – or their so-called “depletion date.”

Some retirement systems already known for their fiscal struggles reported depletion dates.

Six of New Jersey’s seven funds, for example, disclosed depletion dates as of their June 30, 2014 valuations. The two largest – covering retired state employees and teachers – said their tipping points would come in 2024 and 2027, respectively.

Under the previous actuarial methods, those plans were funded at 49.1 percent and 51.5 percent, a distressed level far off the minimum 80 percent generally considered healthy. Under the new calculations, which included a lower blended rate of return, those levels look even worse, at 27.9 percent and 28.5 percent.

Even Illinois, with among the worst-funded state retirement systems in the U.S., doesn’t have depletion dates until 2065 for two of its three biggest funds and is able to use higher blended rates. It has no depletion date for the third fund, Fitch Senior Director Douglas Offerman told Reuters in an email.

“Deep as the state’s pension problems are, Illinois is much closer to making full contributions to its plans than, say, New Jersey,” Offerman said.

That impact of underfunding led even some better-off plans to report depletion dates, Fitch found. Texas’ Employee Retirement Fund is about 63 percent funded under the new rules or 77 percent under the old – better than New Jersey either way.

But it reported a depletion date of 2041, because of its “longstanding practice of underfunding an actuarially sound contribution level,” the report said.

Kentucky’s Employee Retirement System was funded at just 22 percent. But it did not report a depletion date because of recent reforms and the payment of its entire required contribution this year, Fitch said.

The new information is unlikely to alter the way states budget for pensions, since those decisions rely on actuarial calculations and other factors. They’re also unlikely to be a significant ratings driver, Fitch said.