Bad News for Public Pension Funds and Taxpayers

(June 4, 2010) — The Government Accounting Standards Board (GASB) is preparing to release a preliminary view of proposed pension accounting reforms, which could increase the need for higher contributions to finance public pension funds.

The board’s preliminary views document, a culmination of years of research, is expected to be issued later this month, GASB’s Neal E. McGarity confirmed with ai5000. “The document intends to improve transparency and financial reporting, enhancing the usefulness of pension information,” he said. “Improvement in sizing up accountability to state and local governments regarding commitments is essential — a lesson learned from the economic hardships that have emerged around the world.”

The accounting changes, if adopted, reflect the latest move in a trend to require state and local governments to fund promises they made to future retirees.

The document will encapsulate 1) the areas of defined benefit pension processes subject to financial reporting 2) recognition of employers’ pension liabilities and expenses 3) alternative approaches to the measurement of pension obligations for accounting and financial reporting purposes 4) the use of actuarial methods in accounting measurement, and 5) issues specific to employers’ participation in cost-sharing multiple-employer pension plans.

“If the final rules are the way the draft is laid out, it would probably raise market liability by one-third to one-fourth,” said economist Andrew Biggs, a senior fellow at the American Enterprise Institute and former deputy commissioner for the Social Security Administration, to the Pittsburg Tribune-Review. He said the proposed changes could force struggling state and local governments to allot a greater percentage of cash each year for pensions.

GASB, an independent professional organization that establishes accounting and financial reporting standards for state and local government, suggests it may recommend lowering the number of years pension funds use to calculate amortization of liabilities. This change could lead to increases in annual contribution rates, the Pittsburgh Tribune-Review reported.