UAAL: Unfunded Actuarial Accrued Liabilities

When you talk to accountants, you need to learn a new vocabulary; talking to government accountants is even worse.

As St Johns County works its way through the fiscal 2013 budget during the ensuing weeks, there will be a lot of talk about millage rates, and cost cutting, and something called an “FTE” — an acronym for full time employee; which, in reality, is not an actual employee, but rather a budget placeholder of sorts.

Another acronym needs to become familiar to you and my bet is you’ve never paid attention to it. “UAAL” or, unfunded actuarial accrued liabilities, is a government accounting term that is important to rating organizations like Moody’s Investors Service, who gauge the creditworthiness of municipal, county and states who sell bonds to finance spending.

St Augustine public employees participate in a pension plan. The city hires a plan administrator to oversee the funds contributed by participants and the city.

St Johns County employees participate in the Florida Retirement System. Employees of the county’s elected constitutional officers (and the officers, themselves) are considered “county employees” for the purpose of participation in the pension plan.

Much has been said about the difference in cost to the taxpayers between “defined benefit” plans and “defined contribution” plans. The former, in which the majority of St Johns County employees participate, provides an “income for life” based on a formula that evaluates the number of years of service and the salary paid. The latter is like a personal 401K where you will never take out more than you put in plus any dividends or interest.

Just like banks and automakers, government bodies are not exempt from going broke. Organizations like Moody’s are supposed to help investors know the risk of purchasing bonds from those entities.

Pension plan costs to local governments are staggering. Employees in certain jobs deemed to be “high risk”, such as firefighters and police, cost cities, counties, and states, twice as much as other employees.

Moody’s is asking members of the Government Finance Officers Association of the United States and Canada for their comments on how the rating agency looks at unfunded pension debt, compared to other bonded debt, because they have detected inconsistency in actuarial methods and variability in assumptions across plans.

For example, following current standards in “Accounting for Pensions by State and Local Government Employers” of the Governmental Accounting Standards Board, governments may choose among six different actuarial cost attribution methods, are allowed “significant latitude” when estimating rates of return, and may choose the amortization period over which to pay for their pension systems’ unfunded liabilities.

Automatic cost-of-living adjustments also have a significant impact on pension liabilities. Each one-percentage-point adjustment can raise the present value of accrued liabilities as much as 10%. Florida has enacted reforms affecting current St Johns County employees, but not current retirees. The changes have been blocked by initial court decisions, although the state is weighing potential appeals.

Currently, a county employee, elected constitutional officer, or county commissioner is considered “vested” in their pension plan after six-years. For most elected county officials holding four-year terms, they need only be re-elected once in order to vest. In past years, you did not receive your “income for life” until you had been employed ten-years under the Florida Retirement System.