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Battle of the balance sheet

GASB rules have pension execs prepping own accounting standards

Sweeping new accounting rules for public pension plans that highlight liabilities have plan executives preparing their own standards to counteract a possible chilling effect on funding.

The new accounting rules first proposed by the Governmental Accounting Standards Board in July 2011 after years of deliberation, were aimed at bringing what GASB Chairman Robert H. Attmore called “more robust disclosure” to public pension plans, similar to accounting standards used in the corporate world.

Public pension plan executives worry that shifting the focus to liabilities will exacerbate fears about a plans' financial conditions and lead to short-sighted funding changes.

“We have a lot of educating to do” to avoid that, said Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence, Washington. “We have to have some sense of how we're doing on funding.”

The Norwalk, Conn., accounting standard-setting body developed two sets of rules, for government employers and for public pension plans, and will vote on final versions June 18. The biggest change the new rules will bring is the need for pension plans to produce two different numbers.

Until now, pension plans have focused on the annual required contribution, which highlights their funding targets, while keeping liabilities in the footnotes. Now, the GASB will require plans to put a new “net pension liability” figure directly on the balance sheets, in addition to the funding projections.

In accounting terms, the change means that the unfunded actuarial accrued liability will use traditional entry-age projections offset by the fair value of plan assets. Currently, pension plans vary in which ages they use in their projections.

In practical terms, it means that pension plans will have to produce two numbers and spend considerable time explaining them to policymakers.

“A big part of this will be educating decision-makers as to what the new numbers mean, and to help them understand how the numbers will move in different economic environments,” said Paul Zorn, director of governmental research for Gabriel Roeder Smith & Co., a Southfield, Mich., actuarial and pension consulting firm.

To help decision-makers make long-range decisions, the Center for State and Local Government Excellence convened a task force of public pension employer and administrator groups to develop their own recommended standards and practices for pension funding that can be supported by the actuarial community and lead to consistent reporting.

“One of the greatest contributions GASB made (in previous standards) was that they helped policymakers understand what they needed to do to get funded,” said Ms. Kellar of CSLGE, a non-partisan, non-profit organization researching public retirement issues. “Before, most were ‘pay as you go,' but having the ARC really helped. Now, we're trying to replace the standards for an ARC so that people will continue to do that.”

GASB's changes also highlight the importance of written funding policies, which groups like the Government Finance Officers Association have been advocating for years.

One of the biggest collective sighs of relief was when GASB abandoned the idea of requiring all plans to use a lower discount rate based on government bond rates, instead of the current approach, which is a discount rate based upon expected earnings on investments. Plans can continue to use their earnings forecasts, unless assets are projected to run out before covering benefits for current members. If that happens, plans would have to switch to a “crossover” discount rate based on a lower bond rate.

“If this focuses the conversation on the long-term earnings assumptions and how those assumptions are developed, that's a legitimate conversation to have,” said actuary Paul Angelo, senior vice president in the San Francisco office of The Segal Co. who served on the GASB taskforce for the new rules.

GASB officials took pains to vet their proposals using a series of public hearings and field tests with 18 government employers and plans. Even then, detailed changes have earned the new rules the nickname of “Actuaries Employment Act,” as consultants like Segal and Gabriel, Roeder Smith keep busy helping pension plans figure out how to comply, particularly when it comes to producing two sets of numbers. An implementation guide due out later this year will also provide crucial answers.

“Most clients are waiting to see what the final decisions look like,” said Bill Hallmark, a public-sector retirement consultant in the Portland office of actuarial consultant Cheiron, who also served on the GASB task force.

Plan sponsors were relieved that GASB cut them some slack on timing. Originally slated to kick in for plan years after June 15, 2012, implementation of the new standards was delayed until June 2013 for fiscal years including that date, and for employers with fiscal years beginning after June 2014.

Though not all states require their public pension plans follow GASB standards, pressure is likely to come from auditors and credit ratings agencies, who like standardized numbers for comparison.