Photo: Flickr Vertigogen
In an effort to increase transparency about the size and liabilities of the country’s troubled public pension funds, the Government Accounting Standards Board has proposed a new set of rules to fix unsound pension bookkeeping.In a report released today, the board — which sets accounting rules for state and local governments — said it has approved “significant improvements” in how governments report and calculate unfunded pension liabilities.
The most significant — and controversial — proposal would change the formula pension funds use to determine the value of their pensions. Investors and pension experts have recently raised concerns that unrealistic expectations for investment returns have masked the true size of many unfunded public pension obligations.
The new GASB rules would require public pension plans to use a discount rate based on how many years the pension funds assets are projected to last. Adequately funded pension plans will be able to continue using their expected rate of return, while governments who have not set aside money to cover their long-term liabilities would be required to use a low-risk rate based on tax-exempt muni bond yields.
Mary Williams Walsh of the NYT reports:
This method might not satisfy critics, [GASB Chair Robert] Attmore acknowledged, but it would shine a bright light on the public plans at greatest risk of running out of money, or those whose burdens would crowd out required government services. If adopted, the new rules would give governments an adjustment period, rather than demanding big, controversial changes overnight.
Here are some other highlights from the GASB proposal:
- Governments would be required to report pension liabilities on their balance sheets. (Liabilities are now reported in documents attached to financial statements, according to the WSJ.)
- The new rules ban accounting techniques that some states and cities use to make it look like pension cuts for future workers already produce savings. The NYT reports that this would affect state pension funds in Illinois, Rhode Island, Ohio, Texas and Arkansas.
- Municipalities that participate in state-run pension systems would be required to report their share of the systems’ total obligations. Not all local governments currently do this, which makes it impossible to figure out who owes what to the pension fund.
The GASB is offering a public comment period on the proposed changes until Sept. 30. Final rules are expected to be released by July 2012 and go into effect in 2013.
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