Changes in a national accounting guideline a decade ago helped set the stage for California’s ballooning pension liabilities by obscuring the long-term costs of providing the richest benefits in the nation, a former CalPERS consultant says. Under changes by the Governmental Accounting Standards Board, pension funds can amortize the cost of retroactive benefit increases over 30 years and public employee unions can negotiate to defer salary increases in favor of better pension benefits. But the shifts meant officials often were unaware of the full costs of their decisions, Citrus Heights accountant Marcia Fritz wrote in a Sept. 30 letter to the board. That’s because complex actuarial calculations are simplified to a percentage increase in the government’s contribution to pensions for only the first few years. “Within a year after the rules took effect (in 1998), public employee unions successfully lobbied for changes in funding policies that enabled them to receive increased pension benefits at younger retirement ages for their members and mask the costs to decision-makers,” wrote Fritz, who has worked with Assemblyman Keith Richman on pension reform proposals. The pension enhancements were retroactive, and employees were allowed to calculate their pensions using their highest salary year, Richman said, adding California is the only state in the nation that does this. “CalPERS went around the state and told cities and counties that increasing pension benefits was not going to cost them any additional money, and they were just wrong,” said Richman, a Granada Hills Republican who plans to run for state treasurer next year. “As a result, the Legislative Analyst says pension benefits in California are 25 percent higher than the next highest state.” Rob Feckner, president of CalPERS’ board of administration, denied Richman’s charge. “That is a stunning distortion of the truth,” he said. “We told each and every public agency, in their customized reports, on how every single proposed benefit change would affect their immediate and long-term costs.” In her letter, Fritz noted that the changes coincided with a surge in pension income from stock investments. And she also noted that by using a methodology change allowed under 1999 legislation, the state actually saved $547 million in the first two years after the benefit increases. But, she said, “When market values later decreased, the board again changed its methodology … Each change reduced contributions and increased insolvency in pension funds administered by CalPERS.” Gerard C. Carney, spokesman for the independent, nonprofit GASB, which sets financial accounting standards for government agencies, said the guidelines that took effect in 1998 gave pension boards across the nation ample opportunity to assess their unfunded liabilities. The guidelines just set new standards on how governments should disclose their pension obligations, allowing more flexibility in how pension increases were accounted for, he said. “Ultimately, officials make the decisions on how to rationally and fully fund the pensions,” Carney said. “We only set the financial reporting standards that, if followed, disclose the results of those decisions.” Robert Walton, assistant executive officer for governmental affairs at the California Public Employees Retirement System, said Fritz’ assertion that the guideline changes created an atmosphere for pension abuse is “ludicrous.” Walton denied CalPERS underestimated the costs of enhanced benefits. CalPERS has an unfunded liability of $22.3 billion. “CalPERS did not go around the state and tell employers that benefit improvements wouldn’t cost anything,” Walton said. “We just didn’t do it. Any time a public employer asks for a benefit increase, we are required by law to give them the cost of that increase.” But James F. Antonio, the retired state auditor of Missouri who served as chairman of the accounting standards board from 1984 to 1995, said he objected to the rule change a decade ago because it removed “virtually all of those constraints on funding approaches” and failed the “fiscal responsibility” test. Antonio said the guideline didn’t “go far enough in requiring recognition of pension costs. It had to do with the period of which we were amortizing the unfunded liabilities.” Mary Bradley, a member of the League of California Cities’ Pension Reform Task Force and finance director for Sunnyvale, agreed with Fritz that public employee unions persuaded elected officials to use the pension surpluses in the late 1990s to grant benefit increases. Bradley said elected officials may have made poor decisions because the pension fund data some were presented was two years old and didn’t reflect the debts that had begun to mount after the stock market began to drop. In her letter Fritz encouraged the accounting standards board to revise its rule and recommend government agencies fully amortize the costs of pension enhancements while employees are working. “I would not say that elected officials are uninformed, but I can sure say that on complicated issues such as pension reform they take staff recommendations,” said P. Anthony Thomas, a pension reform lobbyist for the 478-member League of California Cities. “And the majority of the time staff are taking recommendations from actuaries.” Troy Anderson can be reached at (213) 974-8985 or by e-mail at [email protected] local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! AD Quality Auto 360p 720p 1080p Top articles1/5READ MOREWalnut’s Malik Khouzam voted Southern California Boys Athlete of the Week Fritz’s letter follows a recent Los Angeles Daily News review that found Los Angeles area taxpayers are on the hook for at least an extra $110 billion in the years to come to pay for retiree pensions, health care and workers’ compensation benefits. National pension expert Stephen D’Arcy, a professor of finance at the University of Illinois, agreed that stronger accounting standards could have given elected officials a more accurate picture of the impact of pension enhancements. “The key problem really is that legislators are interested in gaining political support, and one way to do that is to be generous with pension benefits,” D’Arcy said. “It’s possible to defer recognition of the costs of pension benefits to later generations, and unless taxpayers pay attention to this — making it a priority in the voting process — then it will continue, regardless of the accounting standards applied.” Several years after the accounting rule changes, board members of the state’s largest pension fund, the 1.4 million-member California Public Employees Retirement System, made recommendations and state, county and city elected officials soon agreed to allow employees to retire at younger ages with more pay, Richman said.