The Governmental Accounting Standards Board has put out for public comment a proposed revision to accounting for public retirement systems that tilts strongly in favor of the current method for valuing liabilities and continues to stand at odds with the corporate approach.
The standard-making process itself isn't up for comment. It should be. Reforming the GASB's structure would contribute to ensuring credibility of its standards.
The GASB has set for itself lofty core values and goals, including independence and transparency to encourage an open process that values public participation. But it doesn't appear to have always lived up to them.
For an organization that establishes accounting standards for the public sector, it is disappointing how backward it has been in some major ways.
The GASB is less transparent than its corporate accounting counterpart, the Financial Accounting Standards Board. Plus, the GASB operates on a shoestring compared to FASB and needs to change its financing model. One of the GASB's strategic goals is to promote “increased long-term dedicated financial support.”
Currently, the GASB standards are available only for purchase, unlike at the FASB, which makes them available free online. The GASB has not made comments on its proposals easily available to the public. Those interested have to venture to its Norwalk, Conn., office to read them or purchase a CD containing them.
To its credit, the GASB has relented on comments it expects to generate for its pension accounting proposal, and will make them freely available on its website. That shift in practice will create a more vibrant and open forum for discussion that the GASB should have been doing more to foster all along. But the pension accounting proposal was shaped without the type of fuller forum that could have developed by putting the comments online.
Its pension accounting and other standards affect everyone in the country — from officials at governmental units to taxpayers, helping to determine costs and affordability.
Yet, the structure of the GASB is from another century.
Of the seven-member board, six are part time and one, the chairman, serves full time. The part-time members include the mayor of Highland Park, Ill.; auditor-controller of Orange County, Calif.; chief of accounts of Tennessee, serving as the state's controller; and the assistant municipal manager of Mount Lebanon, Pa.
The board is dominated by public officeholders. That makeup gives rise to concern about conflicts of interests and appearance that the GASB might follow too closely the inclinations of public-sector statement preparers, rather than the needs of investors, taxpayers and other statement users. The GASB should have full-time members, like the FASB.
By all accounts, many public officials and the external actuarial consultants they employ have been highly resistant to even considering any change in accounting that might offer a better way to reflect economic costs, rather than expected long-term investment assumptions.
The GASB's current and proposed pension accounting standards have been controversial, especially because they don't reflect economic reality in valuation.
Current GASB accounting rules contributed to putting public plans at risk. The standards promoted a lack of understanding of the economic cost of pension benefits that led to unrealistic expectations of their affordability, and presented a financial image of projected costs being lower than they have turned out to be. This comes at the expense of participants, who contribute to the pension plans, and taxpayers, both of whom face increasing costs.
Across the country, many public pension systems are deeply underfunded. In response, public sponsors are reducing benefits or changing — or thinking of changing — to defined contribution plans.
The GASB proposal for revising its accounting standard is only preliminary. In evaluating the proposal, the GASB and those commenting should ask why public pension accounting standards differ from corporate pension accounting standards, even though they reflect the same type of liabilities, costs and investment risk.
Other elements of the proposal, however, seek to overturn current methodology and put them more in line with the corporate approach.
The GASB organization should more closely follow the FASB's structure and its pension accounting standards. By having an independent and more open process, the GASB can ensure its new set of pension accounting standards achieves the objectivity and credibility the organization promises, and investors and other financial statement users, as well as preparers, deserve.