Unfunded and Unreported Obligations

Under past accounting standards cities have not been required to report it's unfunded liabilities. This hidden debt is a result of outdated accounting methods used by city government officials, allowing a vast amount of pension and retirees’ health care benefits to be excluded from the cities’ financial reporting. The new pension reporting rules now in effect correct this deficiency in city's financial reporting, however, there are no requirements to report future health payment obligations. This latter deficiency needs to be corrected also.

Georgetown currently self-insures for health care for employees and retirees. This is accomplished by budgeting, annually, an amount to cover expected average medical expenditures plus a catastrophic insurance policy to cover those extraordinary expenses incurred by a limited number of individuals. Future health care obligations are not currently accounted for in the city's annual financial statements. A method needs to be developed to provide insight into these unfunded obligations.

The new pension account standards require a new discount rate for calculating net pension liability. The discount rate can continue to be the expected long-term rate of return, 7% per TMRS, on plan investments where current assets plus future contributions are projected to cover all future benefit payments. This requirement will be met if the employer funds the actuarially determined contribution, provided it pays off the unfunded liability over a reasonable period. However, plans where current assets plus future contributions are projected not to cover all future benefit payments must use a municipal bond rate to discount the noncovered payments.

The municipal bond rate is a yield or index rate for 20-year, tax-exempt general obligation bonds with an average rating of AA/Aa or higher (currently between  3.2% and 3.8%). Including a municipal bond rate as part of the discount rate increases liabilities. In addition, changes in the municipal bond rate or assumed rate of return on plan investments between measurement dates introduce more volatility into calculating liabilities and expense.

This new blended discount rate between the 83% funded liability and the 17% unfunded liability for Georgetown will cause the net unfunded liability to increase. The exact amount will not be known until TMRS reports to the city sometime next year.