The Sept. 5 editorial “Actuarial overbearing” is based on a faulty premise: Those who oppose certain changes to public pension reporting standards are somehow against meaningful disclosure. That is simply not true. This is not the first time there has been pushback on a public pension reporting standard. In 1980, the Financial Accounting Standards Board issued Statement 35, Accounting and Reporting by Defined Benefit Pension Plans.
The FASB took the position that this standard also applied to governmental plans. (Prior to this FASB pronouncement, generally accepted accounting principles for governmental activity had been considered to be the domain of the National Council on Governmental Accounting with FASB standards being applicable to non-governmental activity.) The FASB maintained that Statement 35 was intended for going concerns, yet disregarded the impact of future salary increases on the accrued liability for active plan participants. Implementation of the standard would have generally resulted in a significant and misleading increase in the apparent funded status of governmental plans. Members of our organization vigorously opposed this proposal due to the potential harm caused by this misleading “disclosure.”
This event was also a significant contributor to the establishment of the Governmental Accounting Standards Board. One of the first GASB projects resulted in reinforcement of the notion that, for a governmental going concern, future salary increases needed to be included in the determination of the obligation for accrued pension benefits, with the projected liability being higher than would have been the case under the FASB standard.
Now there is a contingent within the actuarial community that suggests additional public-sector resources should be spent to have actuaries calculate the liabilities of the plan if it were immediately terminated and sold at a market price, a scenario that is legally impermissible in nearly all jurisdictions. Although such a disclosure might be relevant for a company that can be merged, acquired, or declared in bankruptcy, our organization is concerned that this calculation is not decision-useful to public-sector stakeholders and policymakers, and, as in 1980, this calculation has the potential for a significantly misleading inference. To suggest that the pushback is solely to make plan funding look rosier belies history and the intent of plan disclosures — to help policymakers make informed decisions with decision-relevant facts.
GASB recently completed a multiyear, transparent process of reviewing and revising its standards on public pension plan reporting. Numerous significant changes are now in effect regarding how pension obligations are calculated and disclosed by state and local governments. The new standards also require modified liability calculations, including alternative discount rates if the funds set aside to pay pensions are projected to be insufficient. GASB determined that a market price of public pension liabilities is not appropriate. Those who disagree with this outcome are now suggesting the actuarial standard-setter — i.e., the Actuarial Standards Board — impose such a disclosure requirement. While a different venue, the same concerns remain.
Actuarial calculations are critical for the systematic funding of pension obligations. The National Association of State Retirement Administrators' Standing Resolution on Funding Discipline in Public Employee Retirement Systems encourages all state and local retirement systems to adopt a clear funding policy and to commit to meeting actuarially determined contributions. However, given that public plans are going concerns, the resolution also states, that it “is a fundamental objective of public employee retirement systems to establish and receive contributions which will remain approximately level as a percentage of payroll over time, to ensure affordability and sustainability of benefits, intergenerational cost equity and consistent budgetary operations.” Market price calculations, which are based on current interest rates, are volatile and counter to such funding policies. In fact, even corporations have continually asked Congress for, and received, relief from using current interest rates to fund their plans.
Journalistic skepticism is reasonable and expected, but it should not be limited to one side of an issue: Those pushing for this new calculation could just as easily have a financial interest in the outcome, such as the additional actuarial work, or the desire to paint public pensions in a more dismal light, as those who oppose it. Yet, reviewing the history of public pension reporting standards reveals that the public pension community has supported disclosures they believe provide for stable, systematic funding of the plan, whether the disclosures currently make them look better or worse. n
Dana Bilyeu is the Portland, Ore.-based executive director of the National Association of State Retirement Administrators.
