Accounting changes raise concerns in Waterford

Waterford - Finance officials are concerned about how changes in accounting requirements will impact the town's bond rating and the public image of town finances.

New standards from the Government Accounting Standards Board (GASB) for public pension accounting go into effect July 1 and will affect financial statements submitted in June 2015. GASB refers to the new standards as statements 67 and 68, also known as GASB 67 and 68.

An April 14 editorial published by financial news agency Pensions & Investments notes that the changes have "been met with grave concern" by public plan sponsors such as towns, but goes on to say "much of the hand-wringing over the issue is overblown."

The changes require that public pension sponsors report net liability, defined by the Journal of Accountancy as the total of their unfunded liabilities for pensions, in their financial statements. Previously, entities reported net liability only in the notes to financial statements. For municipalities, this means reporting a large number on the balance sheets when before nothing would be reported.

Board of Finance member John "Bill" Sheehan raised concerns about the new reporting requirement at a board meeting last month. He said in a recent interview that he is most concerned that the change will confuse residents trying to understand town finances.

"It's one of the few times where basically the accounting system has managed to fog the reality, as opposed to clarifying the reality," he said.

Public entities that wish to advertise their adherence to generally accepted accounting principles (GAAP), a collection of standards for financial reporting generally accepted in the U.S., must follow GASB guidelines.

Waterford will have to use the new accounting guidelines for its contribution and liabilities for the state-administered pension plan, Municipal Employees' Retirement System; the Professional Employees Retirement System, which remains active but which was closed to new enrollees after the town started using MERS in the 1980s; and possibly some other pension plans that enroll town employees.

At the state level, the changes apply to all pension plans. The Office of the State Comptroller said it does not anticipate any significant impact on state pension plans.

MERS is entirely managed by the state, so the state determines the portion of liability assigned to each municipality. Sheehan commented that the town's net liability would fluctuate based on the performance of the MERS fund investment portfolio, and that the fluctuation can cause further confusion.

Finance Director Rudie Beers worries the new practices could hurt the town's bond rating by making it appear that the town is in a deficit, when in fact it isn't. The town holds a AA rating with Moody's Investors Service and AA2 with Standard & Poor's Rating Services.

Still, she acknowledged that she believes rating agencies will take the change in stride, and Standard and Poor's has indicated that it anticipates no significant changes in bond ratings as a result of the changes at this time.

The agency is evaluating whether it will have to change its metrics to adapt to the new rules, said Standard and Poor's credit analyst John Sugden.

Beers also said the changes are set for implementation sooner than the town anticipated.

"So now we're all scrambling," she said.

The City of Norwich is already planning on taking steps to change how it manages its pensions to adapt to the new standards. Norwich differs from Waterford in its pension situation, because it strictly enrolls employees in its own plan, and not in MERS.

During a budget presentation last month, Norwich Comptroller Josh Pothier told the City Council that bonding agencies are recommending steps for improving the city's pension outlook based on the GASB 68 reporting standards - basically lowering the rate of return on the pension fund and decreasing the debt period.

To accomplish both goals, Pothier said the city should increase its contribution to the pension fund by 15 percent per year until it is fully funded. The 2014-15 city budget includes the 15 percent increase.

Staff Writer Claire Bessette contributed to this report.

t.townsend@theday.com

c.bessette@theday.com

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