(May 24, 2012) — Governmental Accounting Standards Board (GASB) criterion are accounting guidelines, not funding requirements, a recent letter to members of the Connecticut-based National Association of State Retirement Administrators (NASRA) has said.
“The new standards are expected to remove the link between pension accounting and funding, achieved in part by eliminating the Annual Required Contribution (ARC),” the letter noted.
The letter by Keith Brainard, Research Director for NASRA, stated: “Beyond transition costs and maintaining intergenerational equity, policymakers considering pension plan changes must also examine such factors as the ability of the new plan to meet key stakeholder objectives; the additional financing costs associated with extending the amortization period; the administrative costs associated with establishing a new plan; the potential response of bond analysts to a failure to comply with GASB standards, and the effects—on liquidity, asset allocation, and investment returns—of closing a plan.”
According to Brainard, the impact of a change in amortization policy is only one of many factors policymakers must consider when evaluating pension reform in the United States. “Just as every pension plan is unique, so also are the adjustments needed to preserve or restore a plan’s sustainability, which must reflect a wide range of variables,” Brainard wrote.
Brainard continued: “Although GASB standards do not directly tie the hands of governmental plan sponsors, the principles on which these standards are based are primary considerations and should, with cost and other analyses, be calculated for policy makers to determine the full impact of retirement plan changes.”
The letter by Brainard follows a paper released earlier this month by the Laura and John Arnold Foundation (LJAF) that aimed to debunk myths about fixing public pensions. LJAF Vice President for Public Accountability Initiatives Josh McGee told aiCIO following the release of the paper that GASB accounting rules do not bind policymakers when it comes to reforming pension systems. “Nevertheless, policymakers continue to be constrained by the false claim that they can’t transition to a new retirement savings system because of unfunded liabilities,” McGee said.
As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, proposals by GASB have aimed to change the formula that schemes use to determine the value of their pensions. Proposals outlined by GASB last year stated a requirement of public pensions to highlight net unfunded liabilities on their balance sheets. GASB asserted that governments should be required to report a net pension liability, or the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside to pay benefits to current employees, retirees, and their beneficiaries.
Read “Pension Quandary: Valuing Liabilities” in the Summer 2011 issue of aiCIO Magazine: a discussion of public fund discount rates – and what rates are and are not appropriate to use when defining a plan’s liabilities, by Charles E.F. Millard, the former Director of the US Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.