US Public Pensions Subject to Accounting Changes Under GASB Proposals

(July 10, 2011) — The Governmental Accounting Standards Board (GASB) has issued proposals to improve the way public pension funds in the United States 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.”

He added: “It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials.”

As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aim 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. As outlined in the release, GASB asserts 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:

• Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years which is common for funding purposes.
• Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
• Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.

Final rules are expected out by July 2012.

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.