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Texas Leaves Taxpayers in Lurch Over $50 Billion in Benefits
By Darrell Preston
April 19 (Bloomberg) -- Texas owes state workers $50 billion in future retirement benefits and refuses to acknowledge the obligation.
Texas Comptroller Susan Combs says she won't follow a new national accounting standard that requires states and cities to disclose the estimated costs of benefits promised to retired workers, such as health care and life insurance. The government would need to set aside $4 billion a year over the next decade to keep from falling short on what it owes, according to a report by the state's Legislative Budget Board.
Disclosing its future costs may force Texas to raise taxes, increase borrowing, sell assets or cut programs to come up with the money. Refusing to recognize them may jeopardize the ratings on $22 billion of outstanding bonds and prompt investors to demand higher yields when they lend to the state.
``If they don't report it, they don't have to do anything about it,'' said Michael H. Granof, Ernst & Young professor of accounting at the University of Texas in Austin. ``It's much easier to just push it off to the next generation.''
Texas, which spent $629 million on health care for retirees in fiscal 2005, hasn't set aside any money to cover the future obligations, equal to two-thirds of annual state spending. Nationwide, states and cities have an estimated $1.5 trillion of unfunded costs for future retiree benefits, Credit Suisse Group estimated in a March report.
``I don't like that,'' said John B. Cummings, executive vice president at Newport Beach, California-based Pimco, which runs the world's largest bond fund and manages $14 billion in municipal debt. ``You're supposed to tell me what's going on.''
`Unintended Consequences'
The four biggest U.S. accounting firms warned Texas of ``unintended consequences'' for not reporting the obligation on financial statements. Withholding the information might prevent a government from obtaining an ``unqualified,'' or clean audit opinion, Deloitte & Touche USA LLP, KPMG LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP said in an April 4 letter to state lawmakers.
Some investors are demanding a higher premium on the state's bonds. The difference in yield, or spread, between 20- year Texas general obligation debt and top-rated municipal bonds with similar maturities is 0.09 percentage point, three times as large as at start of the year, according to data compiled by Bloomberg and Municipal Market Advisors.
Complete Picture
Combs, a Republican who took office in January, said the new standard shouldn't apply to Texas. The benefits don't count as long-term obligations in the same way as pension costs because they aren't guaranteed under labor contracts or defined benefit plans that require a state contribution, she said.
``The state has no legal obligation to provide such benefits,'' Combs, 62, said in an e-mailed statement.
Including costs of promised benefits in financial statements provides a more complete picture of a borrower's fiscal health, said Gerard Carney, spokesman for the Governmental Accounting Standards Board. The group, known as GASB, sets reporting standards for local governments under the authority of the U.S. Securities and Exchange Commission.
``We're not apologizing for trying to get transparency to the investors, taxpayers and other people with an interest,'' Carney said.
The rule took effect in December. It requires the biggest state and city governments to apply the standards immediately and gives smaller municipalities more time to comply.
`Inaccurate'
Combs wrote a letter last month to GASB Chairman Robert Attmore saying the state shouldn't have to adopt the standard. She sent copies to finance officials in other states, urging them to question whether they should comply, and warned that the disclosures may lead some governments to reduce benefits. Texas lawmakers have introduced a bill to let local governments opt out of the rule.
Texas appropriates an amount to fund health benefits every two years and the amount, if any, determines the benefits provided, Combs said in the letter. ``Texas can have no long- term liability,'' she wrote, ``and any such liability is inaccurate.''
While the state can cut promised benefits anytime, ``we don't expect them to ever do it,'' said William M. Pina, 58, president of Texas's Retired State Employees Association. The state has 67,000 retired employees, Pina said.
``The politicians are afraid that if they show a big figure, the taxpayers are going to say we can't afford it,'' said Pina, who lives in Bastrop County, east of Austin.
Texas has cut retiree benefits once in 25 years, said Mary Jane Wardlow, who oversees benefits for the Employees Retirement System.
Cost of Refusal
Fitch Ratings analyst Amy Laskey on a conference call last month said that the rating company doesn't expect ``large-scale downgrades'' among U.S. municipal bonds once the numbers are reported. Refusing to record the liability may lead to a ratings review. Withholding the information may make it harder for investors to gauge a borrower's fiscal health, she said.
Fitch rates Texas's general obligation debt AA+, the second-highest grade. Moody's Investors Service rates the debt a comparable Aa1 and Standard & Poor's one level lower at AA.
A downgrade might raise borrowing costs by 0.10 percentage point, according to data compiled by Bloomberg. That would add $1 million in annual interest costs on borrowings of $1 billion.
`Bad Public Policy'
Houston Controller Anise Parker opposes the Texas legislation that would allow local governments to avoid the new disclosure rule, calling it ``bad public policy.'' Houston's long-term liability for retiree medical coverage is estimated at $3.2 billion, according to city projections.
``Texas's reaction is to stick its head in the sand,'' said Richard Larkin, an analyst with JB Hanauer & Co. in Parsippany, New Jersey. ``If they don't start looking at it now, it will escalate until it becomes a real political problem.''
Texas is willing to disclose the projected cost as long as it isn't in financial statements because ``actuaries have told us it's nearly impossible to calculate numbers 30 years into the future,'' Combs said.
That hasn't been an obstacle for New York City, which disclosed estimated obligations for retiree benefits of more than $50 billion in its financial statements. Washington, D.C., has put the cost at $562 million, while San Diego estimated it owes $639.5 million, according to a March 22 report by Fitch.
Even before the new rule took effect, some cities began raising money for benefits. Gainesville, Florida, sold $35.2 million of taxable bonds in July 2005 and invested the money until needed to fund health-care costs for retirees.
Granof, the accounting professor, said offering the retirees health-care coverage is compensation, which should be noted as a cost on financial statements.
``Why does the state offer these benefits to employees?'' said Granof, who works for the state. ``It's not charity, so obviously it is deferred compensation for past service.''
Texas Leaves Taxpayers in Lurch Over $50 Billion in Benefits
By Darrell Preston
April 19 (Bloomberg) -- Texas owes state workers $50 billion in future retirement benefits and refuses to acknowledge the obligation.
Texas Comptroller Susan Combs says she won't follow a new national accounting standard that requires states and cities to disclose the estimated costs of benefits promised to retired workers, such as health care and life insurance. The government would need to set aside $4 billion a year over the next decade to keep from falling short on what it owes, according to a report by the state's Legislative Budget Board.
Disclosing its future costs may force Texas to raise taxes, increase borrowing, sell assets or cut programs to come up with the money. Refusing to recognize them may jeopardize the ratings on $22 billion of outstanding bonds and prompt investors to demand higher yields when they lend to the state.
``If they don't report it, they don't have to do anything about it,'' said Michael H. Granof, Ernst & Young professor of accounting at the University of Texas in Austin. ``It's much easier to just push it off to the next generation.''
Texas, which spent $629 million on health care for retirees in fiscal 2005, hasn't set aside any money to cover the future obligations, equal to two-thirds of annual state spending. Nationwide, states and cities have an estimated $1.5 trillion of unfunded costs for future retiree benefits, Credit Suisse Group estimated in a March report.
``I don't like that,'' said John B. Cummings, executive vice president at Newport Beach, California-based Pimco, which runs the world's largest bond fund and manages $14 billion in municipal debt. ``You're supposed to tell me what's going on.''
`Unintended Consequences'
The four biggest U.S. accounting firms warned Texas of ``unintended consequences'' for not reporting the obligation on financial statements. Withholding the information might prevent a government from obtaining an ``unqualified,'' or clean audit opinion, Deloitte & Touche USA LLP, KPMG LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP said in an April 4 letter to state lawmakers.
Some investors are demanding a higher premium on the state's bonds. The difference in yield, or spread, between 20- year Texas general obligation debt and top-rated municipal bonds with similar maturities is 0.09 percentage point, three times as large as at start of the year, according to data compiled by Bloomberg and Municipal Market Advisors.
Complete Picture
Combs, a Republican who took office in January, said the new standard shouldn't apply to Texas. The benefits don't count as long-term obligations in the same way as pension costs because they aren't guaranteed under labor contracts or defined benefit plans that require a state contribution, she said.
``The state has no legal obligation to provide such benefits,'' Combs, 62, said in an e-mailed statement.
Including costs of promised benefits in financial statements provides a more complete picture of a borrower's fiscal health, said Gerard Carney, spokesman for the Governmental Accounting Standards Board. The group, known as GASB, sets reporting standards for local governments under the authority of the U.S. Securities and Exchange Commission.
``We're not apologizing for trying to get transparency to the investors, taxpayers and other people with an interest,'' Carney said.
The rule took effect in December. It requires the biggest state and city governments to apply the standards immediately and gives smaller municipalities more time to comply.
`Inaccurate'
Combs wrote a letter last month to GASB Chairman Robert Attmore saying the state shouldn't have to adopt the standard. She sent copies to finance officials in other states, urging them to question whether they should comply, and warned that the disclosures may lead some governments to reduce benefits. Texas lawmakers have introduced a bill to let local governments opt out of the rule.
Texas appropriates an amount to fund health benefits every two years and the amount, if any, determines the benefits provided, Combs said in the letter. ``Texas can have no long- term liability,'' she wrote, ``and any such liability is inaccurate.''
While the state can cut promised benefits anytime, ``we don't expect them to ever do it,'' said William M. Pina, 58, president of Texas's Retired State Employees Association. The state has 67,000 retired employees, Pina said.
``The politicians are afraid that if they show a big figure, the taxpayers are going to say we can't afford it,'' said Pina, who lives in Bastrop County, east of Austin.
Texas has cut retiree benefits once in 25 years, said Mary Jane Wardlow, who oversees benefits for the Employees Retirement System.
Cost of Refusal
Fitch Ratings analyst Amy Laskey on a conference call last month said that the rating company doesn't expect ``large-scale downgrades'' among U.S. municipal bonds once the numbers are reported. Refusing to record the liability may lead to a ratings review. Withholding the information may make it harder for investors to gauge a borrower's fiscal health, she said.
Fitch rates Texas's general obligation debt AA+, the second-highest grade. Moody's Investors Service rates the debt a comparable Aa1 and Standard & Poor's one level lower at AA.
A downgrade might raise borrowing costs by 0.10 percentage point, according to data compiled by Bloomberg. That would add $1 million in annual interest costs on borrowings of $1 billion.
`Bad Public Policy'
Houston Controller Anise Parker opposes the Texas legislation that would allow local governments to avoid the new disclosure rule, calling it ``bad public policy.'' Houston's long-term liability for retiree medical coverage is estimated at $3.2 billion, according to city projections.
``Texas's reaction is to stick its head in the sand,'' said Richard Larkin, an analyst with JB Hanauer & Co. in Parsippany, New Jersey. ``If they don't start looking at it now, it will escalate until it becomes a real political problem.''
Texas is willing to disclose the projected cost as long as it isn't in financial statements because ``actuaries have told us it's nearly impossible to calculate numbers 30 years into the future,'' Combs said.
That hasn't been an obstacle for New York City, which disclosed estimated obligations for retiree benefits of more than $50 billion in its financial statements. Washington, D.C., has put the cost at $562 million, while San Diego estimated it owes $639.5 million, according to a March 22 report by Fitch.
Even before the new rule took effect, some cities began raising money for benefits. Gainesville, Florida, sold $35.2 million of taxable bonds in July 2005 and invested the money until needed to fund health-care costs for retirees.
Granof, the accounting professor, said offering the retirees health-care coverage is compensation, which should be noted as a cost on financial statements.
``Why does the state offer these benefits to employees?'' said Granof, who works for the state. ``It's not charity, so obviously it is deferred compensation for past service.''
