GASB Urges Greater Transparency Over State, Local Government Pension Obligations

(December 7, 2011) — State and local governments may soon be forced to disclose more information about their pension obligations under new accounting rules. 

According to a release by the Governmental Accounting Standards Board (GASB), the new proposal seeks “to better enable taxpayers, bondholders and other interested parties to assess the government’s financial condition.”  

GASB accounting rules proposed Tuesday call for five-year projections of cash inflows and outflows and other financial obligations, including pensions obligations and long-term contracts, “with explanations of the known causes of fluctuation.” 

“The GASB is issuing this document for public comment because of significant concerns expressed by users of state and local government financial reports regarding the importance of understanding whether governments are on a financially sustainable path,” said GASB Chairman Robert Attmore in a statement. “The current economic downturn has emphasized what has been known for a long time: information is not always publicly available regarding the financial challenges facing governments.”

While the proposals have been developed over the last 10 years, GASB is expecting opposition from governments, concerned over the costs of the rules. Once the proposals are released, GASB expects two of its own board members to present alternative viewpoints.

In July, GASB presented a set of proposals to improve the way public pension funds in the US report their liabilities. “Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees,” GASB Chairman Robert H. Attmore stated in a release. “The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.”

As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aimed to change the formula that schemes use to determine the value of their pensions. The proposals by GASB would require 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. Specifically, proposed changes to how a government would calculate its total pension liability and pension expense include:

Read “Pension Quandary: Valuing Liabilities” in the Summer 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 U.S. Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.