A scheduled accounting change in the way governmental entities must treat pension debt has local city and school financial officers sweating potential higher borrowing costs.
Beginning in Fiscal Year 2015, the Governmental Accounting Standards Board is set to require many Oklahoma schools and cities to list millions of dollars of pension debt on their financial statements even though they “don't owe it” and “can't legally pay it,” said state Auditor Gary Jones.
“It could be devastating for the schools. It could be devastating for the cities,” Jones said.
That should concern taxpayers, since the change could potentially prompt credit rating agencies to downgrade the credit ratings of Oklahoma cities and schools. That, in turn, could lead to higher interest rates on bond issues that taxpayers would have to finance, he said.
State Treasurer Ken Miller said he and other Oklahoma State Pension Commission officials were concerned enough about the situation that in September 2011 they sent a letter to Governmental Accounting Standards Board officials asking for changes in the proposal.
State treasurers, as a group, also have voiced unified opposition to the accounting change, he said.
Jones said the only way he knows to possibly stop it now is through special legislation.
“We need for the Legislature to look at creating what's called a special funding situation that basically says this pension obligation rests with the state and we're not going to push it down to somebody that doesn't owe it,” he said.
At issue is who is truly financially responsible for about $11.4 billion in pension debt accumulated by the state's seven retirement systems.
Jones said state statutes and a state Supreme Court ruling say the State of Oklahoma is responsible for all the pension fund debt, not individual cities and school districts.
Nevertheless, the Governmental Accounting Standards Board has decided to change accounting rules and require schools and cities to list their proportionate share of the state's pension debt on their individual balance sheets.
“It is an accounting nightmare. It is an auditing nightmare,” Jones said.
Kenton Tsoodle, assistant finance director for Oklahoma City, said cities are closely watching to see what the state does.
Tsoodle said cities are “absolutely” concerned that their borrowing costs could go up if they are required to list a proportionate share of pension debt on their balance sheets.
If the city “had these extra liabilities booked, there is always the possibility that could hurt your bond rating, which in theory then leads to higher borrowing costs anytime you issue bonds,” he said.
“Any increase in liability that's unfunded that goes on your books will always be looked at negatively by rating agencies. The question is always how negative is it looked upon,” Tsoodle said.
Lori Smith, chief financial officer for Edmond Public Schools, said the change is expected to be a significant problem for many of the larger school districts in the state that use the Generally Accepted Accounting Principles method of accounting.
“This would look terrible on your balance sheet to have this huge liability and no assets,” she said.
Edmond Public Schools use a different method of accounting, and Smith said she and the school's auditor don't believe they will be required to show pension debt on the school's financial statements.
Some school districts may want to consider changing their accounting methods to avoid the problem, she said.