Federation of Connecticut Taxpayer Organizations

The Governmental Accounting Standards Board, a nonprofit based in Norwalk, Conn., will release a draft of changes to pension accounting rules Friday. These changes will first affect government balance sheets in fiscal year 2013.

The most significant change in the proposal will move unfunded pension liabilities out of a footnote and onto government balance sheets.

GASB officials emphasize the new rules won�t change how much states and cities owe � or how much they have to contribute to their plans � but they will increase transparency and uniformity.

�The economic reality is that nothing has changed; it�s the presentation that has changed,� GASB Chairman Robert Attmore told Stateline recently.

�We would encourage GASB to implement this tomorrow,� said Sheila Weinberg, founder and CEO of the Institute for Truth in Accounting. �Right now if you look at the balance sheet, the balance sheet is a bogus number.�

Weinberg said the changes bring �full transparency� to pension liabilities. She said it took her organization, experts on the subject, a year and a half to determine that all 50 states combined have more than $500 billion in unfunded liabilities. After the changes, Weinberg said this information will be more accessible to legislators and the general public.

�You can�t make good decisions if you don�t know the right number,� she said.

Under the current rules, Weinberg said, California had more assets than liabilities on its balance sheet as recently as 2008. �Obviously, that�s totally bogus,� she said.

Mark Zehner, an enforcement officer for the Securities and Exchange Commission�s Public Pension unit, told Watchdog.org that the uniformity also will help his agency better regulate the market.

�The multitude of options available generates complexity and the ability to hide a lot of problems,� he said. �In the long term, this (change) is a positive. We�re bringing to the surface what some of these numbers really mean.�

The GASB proposal would also:

Allow only one actuarial method for calculating pension costs (entry age normal, level percentage of payroll)
Limit the length of time over which governments can spread pension costs related to current employees (a weighted average of employees remaining service period)
Force pensions to immediately recognize costs or savings caused by benefit or assumption changes
Require governments to report their unfunded liabilities calculated in three different ways: using their chosen discount rate, the discount rate minus 1 percent and the discount rate plus 1 percent
Implement a new, blended discount rate for pension plans that expect to run out of assets
Include ad hoc cost of living adjustments � or COLAs � in pension liabilities if the COLAs are essentially automatic

GASB first mandated the reporting of pension liabilities in 1997. It more recently required governments to report their retiree health care liabilities, known as other post-employment benefits or OPEB.

Unions and other supporters of public pensions have blamed GASB�s rules for recent efforts to replace public employee pensions with defined-contribution plans, similar to private sector 401(k) plans.

The public will have 90 days to comment on GASB�s proposal, called an exposure draft. The board expects to finalize the changes by June 15, 2012.

John Bury, an actuary who serves private-sector clients and blogs about pensions, said the changes are an attempt to increase the annual required contribution, or ARC, but he doesn�t see the point when many governments don�t contribute the full amount anyway.

�If you give them a number of $5 billion and they put in $2 billion, what are you going to do, give them a number of $6 billion so they can put in $2 billion,� he said.

The Pew Center on the States has reported findings similar to Weinberg�s institute. State pensions around the country, according to Pew, have $2.28 trillion in assets set aside to pay $2.94 trillion in promised benefits, leaving an unfunded liability of $660 billion.

Both Weinberg and Pew collected information reported by state governments to arrive at their numbers. Many financial economists question the assumptions used by states, saying they drastically underreport their liabilities.

Joshua Rauh, an associate professor of finance at the Kellogg School of Management at Northwestern University, estimates the total unfunded liability of all 50 states is actually $2.5 trillion.

The difference between Rauh�s estimate and the numbers reported by state governments is the discount rate. GASB allows states to use their expected rate of return as the discount rate for future payments, while financial economists like Rauh argue those rates are arbitrary and too high.

This article is continued at http://www.raisinghale.com/2011/07/08/state-and-local-pension-accounting/