After years of deliberation and debate, the Governmental Accounting Standards Board has unveiled a draft of what could be game-changing rules for public pension plan accounting.
The key draft rules are:
• moving net unfunded pension liabilities from the notes to a prominent place on the balance sheet;
• changing the discount rate for plans whose assets do not cover projected benefits, to a 30-year municipal bond rate from one based on an expected rate of return;
• requiring all plans to use the entry-age normal actuarial cost method to allocate present value of projected benefits;
• requiring immediate recognition of a government's net pension liability in the event of changes, instead of doing so over a 30-year basis; and
• requiring municipalities that are part of larger statewide pension systems to report their portion of the collective liability, instead of just annual costs and payments.
The GASB unveiled the two sets of proposals — one for government employers and one for pension plans — on July 8. A 90-day comment period follows, along with three public hearings this fall; final rules are expected a year from now.
Backers and detractors agree the proposals will change both balance sheets and perceptions about public pension plans.
On one side are actuaries and accountants, who commend the GASB for taking on the project as a way to increase transparency and uniformity among public plans. On the other side are public fund groups and state officials who, while understanding the quest for more complete disclosure, warn that by focusing on balance sheets and an immediate accounting of pension expenses, the proposal gives a skewed version of public plans' financial health.
“The concrete isn't set. If people have convincing arguments, we're going to listen,” GASB Chairman Robert Attmore said in an interview. “We think we've heard most of them, and we think we've selected the best answers. The point (of the new rules) is so people have the best information to make the best decisions.”
A hallmark of the latest proposal is what Mr. Attmore calls “more robust disclosure” in notes and other supplemental information that now will be required. The disclosure includes a calculation of how liabilities would differ with a one percentage point change in either direction in the discount rate.
One of the biggest changes concerns unfunded pension liabilities. GASB casts them as “net pension liability” and puts them front and center by moving that information from the footnotes up to the balance sheet itself. The change was designed to increase transparency, yet many plan executives fear it will have the opposite effect, making plans appear to be in worse financial condition than they really are.
“It will distort reality,” Gary Findlay, executive director of the Missouri State Employees' Retirement System, Jefferson City, said in an interview. The system has $7.26 billion in defined benefit assets.
Mr. Attmore counters that while liabilities will appear bigger, “the economic reality doesn't change. People who do financial analysis do that now. anyway.”