A set of small changes to things most people don’t pay attention to might cause serious problems across the academic world. The changes are new guidelines from the Governmental Accounting Standards Board (GASB), the nonprofit group that determines how public sector entities calculate their financial statements.
While the GASB has been reviewing its standards for pensions—a type ofretirement plan that obligates employers to continue providing compensation and benefits to their former employees—since 2006, the late June vote to update the rules came amid a flurry of bad news for U.S. pension plans. Public pension plans across the country have been going to the bond market and borrowing heavily to cover a massive shortfall, which ratings agencies and think tanks estimate that—taken as a whole—ranges from $1 trillion to $4.6 trillion.
The guidelines, which will take effect in fiscal year 2015, will require publicly funded, not-for-profit colleges to more fully disclose their pension obligations. The National Association of Colleges and University Business Offices estimates that 75% of public colleges participate in multiple employer pension plans, which means that they do not have to disclose their pension liability, only what they pay into the plan. Schools that participate in a multiple employer pension plans, like a state plan, are often bound by state law as to how much they can pay into the plan—which makes it much harder to reduce their liability.
Schools are also being told that they have to stop “smoothing out” the yearly gains and losses their pension plans experience. Currently, plan administrators report their plans’ investment returns over a five year period, which means that losses in 2008 and 2009 are still dragging down 2012 values and the recovery years of 2010 and 2011 won’t start being seen until 2015. The GASB wants pension plans to report the yearly market value of their plans instead of a five-year average.
The new rules would also reduce the rate at which colleges and other public entities calculate the future earnings of their pension plans. Currently most schools estimate the rate of return, known as the discount rate, between 6% and 9%. The GASB is requiring schools to reduce their predicted return to a rate similar to that of municipal bonds, currently 3/7%. The decision to set a lower estimated rate reflects the ongoing pressure public pensions are facing due to continued uncertainty in the market, with some plans posting returns aslow as 1%.
Reducing the projected rate pension administrators use to predict their funds’ returns is expected to drop the amount of pension obligations that are currently funded from an average of 76% to 57%, reports Boston College’s Center for Retirement Research. In other words, governmental and other pensions—including universities—have only 57% of the funds necessary to meet long-term needs.
In a report, NPR explained that the new rules won’t change how much money is in a school’s pension fund, what the fund pays out or when the checks are sent, just how a school’s pension looks on paper. And a school’s liabilities and pension obligations are part of the considerations used to calculate the financial health of a university.
The disclosure of possibly billions of dollars in previously unreported obligations could have a massive effect on the business side of many colleges. The education blog Inside Higher Ed speculated that requiring the placement of such a large liability on a university balance sheet could potentially endanger a school’s credit ratings, state financial support, federal financial aid qualifications, and—possibly—accreditation.
“Lowered credit ratings could result in higher borrowing costs. Institutions deemed financially unhealthy by the U.S. Department of Education are ineligible from participating in federal student aid programs. Accrediting agencies place institutions under increased scrutiny if their financial ratios fall below a certain threshold,” wrote Kevin Kiley for Inside Higher Ed.
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