Budget & Finance

New Guidelines Proposed for Reporting Pension Costs

By Sean Cavanagh — July 14, 2011 3 min read
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Across the country, governors, lawmakers, and budget hawks have become increasingly concerned about the unfunded liabilities in state pension plans that cover teachers and other public workers, warning that those expenses will bring huge future costs to taxpayers.

But coming up with agreed-upon estimates of how to calculate those pension bills is no easy thing. Some workers and union members argue that states’ costs have been greatly exaggerated by elected officials for political gain, while financial experts have said that the costs are even worse than they appear on paper.

Now, the Governmental Accounting Standards Board has proposed guidelines meant to bring more clarity to how to calculate and report the costs of pensions. The GASB is an independent, nonprofit organization that creates financial reporting and accounting standards for state and local governments.

“Users of state and local government financial reports told the GASB that current standards do not provide enough information to adequately understand the cost and liability for benefits promised to active and retired employees,” GASB Chairman Robert H. Attmore said in a statement.

The goal, he said, is to “make financial reporting of pensions more transparent, comparable, and useful to citizens, legislators, and bond analysts.”

Under the draft proposal, governments would be required to report a net pension liability, meaning the difference between the total pension liability and the net assets set aside in a qualified trust to pay benefits to current workers, retirees, and their beneficiaries.

Another one of the proposed changes, which are now out for public comment, would require public entities to acknowledge more components of pension expense than is currently required, including how changes in benefit terms affect pension liability, rather than deferring and amortizing costs over as long as 30 years, according to the GASB.

In calculating pension liabilities and expenses, governments also would be required to use certain assumptions about the projected rates of return on their pensions that are necessary to cover future obligations. The GASB explains it this way:

As long as plan assets related to current employees, retirees, and their beneficiaries are projected to be sufficient to make the projected benefit payments for those individuals, governments would discount projected benefit payments using the long-term expected rate of return. "For some governments, however, there will be a point at which the plan assets are projected not to be available to be invested long term and, therefore, would be insufficient for paying benefits to current employees, retirees, and their beneficiaries. The GASB believes that at this point, the projected benefit payments take on attributes that are similar to other forms of debt. In this circumstance, governments would incorporate into the discount rate a tax-exempt, high-quality 30-year municipal bond index rate to reflect that future benefit payments are not expected to be made from long-term investments. High quality would be defined as being rated AA or higher (or an equivalent rating)."

Governments would also be required to disclose more extensive information about their pensions and the assumptions about costs.

While the GASB’s proposed rules are voluntary, not following them has consequences for state and local governments, explained Neal McGarity, a spokesman for the GASB, in an e-mail. In order for those entities to issue debt instruments or bonds, he said, governments’ financial conditions have to be certified by auditors, who will not certify if those entities are not following the GASB.

One of the organizations that has been immersed in fights over pensions and cost estimates is the 3.2-million member National Education Association.

In a statement, Bill Raabe, the NEA’s director of collective bargaining and member advocacy, voiced concerns about the proposal.

"[W]e fear that if the proposed standards are finalized, they would open the door to greater politicization of pension data,” he said. “If unfunded liabilities move from annual report footnotes into financial statements, for example, as the GASB recommends, there is potential for public pension opponents to claim that the financial status of plans has all of a sudden deteriorated and that plans are unsustainable.”

In addition, “some of the current proposals will increase pension contribution volatility, confuse the consumers of financial data, and lead decision makers to adopt short-term approaches to the long-term issues raised by pension plans.”

The GASB’s deadline for turning in written comments on the proposal is Sept. 30, and it will hold public hearings in October. There’s no set date for when the rules would become final, but it’s estimated to be around this time next year, McGarity said.

For those of you who’ve studied pensions, and pension liabilities, do you see the proposed rules as a step in the right direction?

A version of this news article first appeared in the State EdWatch blog.