DOVER — With the current fiscal year having just passed the halfway mark, Dover officials are beginning to prepare for Fiscal Year 2015.
There’s been much discussion about how the city is facing a shortfall of more than $7 million over the next five years, but that won’t be the only challenge facing senior staff and elected officials in preparing next year’s budget.
Part of that process will be taking into account new pension accounting standards issued by the Governmental Accounting Standards Board in 2012, which change the way public pensions and sponsoring governments report their pension liabilities.
City controller Donna Mitchell said GASB is making these changes to bring government agencies more in line with private industry and to have more responsible handling of government funds. While she understands the practicality of the changes, it doesn’t mean they aren’t frustrating.
When Ms. Mitchell began working for the city, GASB had just issued statement 34. Now it’s at 70.
“We constantly have to explain something new and then it changes again,” said Ms. Mitchell. “It’s tough to be proactive.”
The first GASB change will affect the assumed return rate the city sees on its investments.
Currently, the city assumes a 7-percent return through the length of the amortization plans it has for the Police and General pensions and its Other Post-Employment Benefits fund.
Beginning in FY15, they will only be able to assume that 7-percent return on what it actually has in assets. For the remainder of the liability, government agencies will have to assume a municipal bond rate return. In the city’s case, this means it will be able to assume a 7-percent return on a total of $54.582 million in assetts (an estimated asset amount for three funds through the end of FY14 that was done in December) and a municipal bond rate on $91.297 million in liabilities (the difference between the total liabilities and the assets).
The municipal bond return rates can be as low as 3 percent, said Ms. Williams, which means it will take longer to pay off liabilities because what the city is earning on its investments is helping to pay down the liabilities.
The lower the interest rate, the more of an increase in liabilities, explained Ms. Mitchell. At this time the effect the lower interest rate will have on the city’s liability is unknown, because the actuary hasn’t done the work yet.
The second adjustment by GASB will change the way government agencies recognize their unfunded liabilities on their balance sheets. Currently, they only have to recognized their annual contributions, which in the case of the city is about $9.73 million between the two pensions and OPEB.
The new method will require government agencies to show their full debt amount, which in the case of the city the estimated amount for FY14 is $91.297 million between the three pensions when the total assets (54.582 million) is subtracted from its total liabilities ($145.879 million).
In the case of the city, the numbers are large, but Ms. Mitchell explains the change using more manageable figures. If there’s a $100,000 mortgage on an item and the annual contribution is $2,000, the total liability left is $98,000. Currently, the city only had to show the $2,000 on its statements, but beginning with FY15 it will have to show the $98,000.
“It’s a way to show the true debt,” said Ms. Mitchell.
These regular changes may be frustrating and difficult to plan for, but that doesn’t mean the city hasn’t tried in the past.
Ms. Mitchell said city council has taken some steps to try and lower the liabilities and impact on the budget that occur when GASB makes changes.
In 2000, the city implemented a 401a Defined Contribution Plan and provided the employees the option of the 401a plan or the defined benefit pension plan. The city matches three percent up to 6 percent of the employee contribution, she said.
On Sept. 29, 2009, the city closed the Defined Benefit plan to new hires. The city has also not approved Cost of Living Increases for retirees in the past several years, as this would impact the liability, Ms. Mitchell said. The police pension plan has a 2 percent automatic cost of living adjustment (COLA) in the ordinance.
“COLA’s have been granted in the past by the pension board making a request to council. Since the 401a plan is not structured as a defined benefit plan, the employees in that plan will never receive a COLA,” said Ms. Mitchell.
Changes have been made for OPEB as well, such as the cost sharing the city has been negotiating with the unions.
Staff writer Chris Flood can be reached at 741-8230 or email@example.com.