The first batch of public pension fund financial reports under new accounting standards will be out this fall, and after a bumpy adjustment period, the preliminary results so far are good — or at least not as bad as expected.
Governmental Accounting Standards Board rules for the plans become effective in fiscal 2014 under GASB Statement 67. Those for contributing employers are effective in fiscal 2015 under GASB Statement 68. Both the plans and their sponsors now must report net pension liability, which is based on valuing assets and liabilities on a mark-to-market basis, instead of smoothing.
Until now, public pension plan officials stressed in their reports their actuarially required contribution number, used to set annual pension funding targets. That number — the ARC — is slipping to the footnotes, and unfunded liability is moving to the balance sheet from the footnotes.
As a result, some underfunded plans are expected to look worse because they might have to use a more conservative discount rate to measure their unfunded liabilities, which will now have a more prominent place on their balance sheets. And for even relatively well-funded plans, the change had officials worried that a more prominent liability figure would add to confusion and misconceptions about public-sector pensions.
Now, thanks to strong investment returns since GASB proposed the rules in 2012, public pension officials are breathing more easily.
“The timing was good for the onset of the new GASB statements because of the markets,” said Keith Brainard, Georgetown, Texas-based director of research for the National Association of State Retirement Administrators. “The stars aligned.”
“A lot of plans are going to be very happy,” said Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence in Washington.
But Ms. Kellar hasn't stopped worrying. She fears even good GASB numbers could take too much attention away from the bigger decisions about setting annual contribution rates. “The focus should be on what GASB is not doing, which is helping elected officials focus on a funding plan. We may be letting down the taxpayers,” said Ms. Kellar.
It “will create a degree of confusion among many important factions,” said Rachel Barkley, vice president of Loop Capital, Chicago, an investment services firm that tracks public pension funding annually. “GASB will definitely generate significant debate about pensions.”
“For all the people arguing for market rate for liabilities, it's still the wrong concept,” said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. “For funding purposes, it doesn't really matter. We feel that there's not going to be a huge change because the majority of plans are committed to paying the full ARC.”
On a more optimistic note, Ms. Kellar recalled that GASB disclosure requirements implemented in 1986, although controversial at the time, helped to stimulate better funding practices among many public pension funds. “It had been pay-as-you-go, then people started paying (ahead),” she said. ”