GASB “made a break and it has been referred to as a 'divorce’ between funding and accounting for pension costs,” Pat Robertson, executive director of Mississippi’s public employees’ retirement system, told attendees Monday at the Government Finance Officers Association annual conference here.
GASB’s shift in focus on unfunded liabilities from annual required contributions, or ARC, “is the most significant change that has happened as it relates to pension accounts in the last 20 years,” she said. “Everyone who has historically looked at that funding are going to have to look at these financial statements with a whole different perspective in order to interpret them.”
Robertson made the remarks while on a panel that explored GASB’s proposals and how they will affect state and local government pension systems.
GASB will vote on whether to finalize the standards on June 25, but if approved, they would go into effect on a phased basis.
Plan trusts that administer pension benefits would have to comply with them for fiscal years beginning after June 15, 2013. Employers that sponsor pension plans would have to comply for fiscal years beginning after June 15, 2014.
If the final statements are approved at the June 25 meeting, they will be published within the next two months, , GASB chairmanRobert Attmore wrote in an email.
GASB first outlined the pension proposals last July. They would require state and local governments, for the first time, to report unfunded pension liabilities on their balance sheets.
Currently, governments disclose pension information in the footnotes to their financial statements, and generally only report the contributions they are required to make in a given year, as well as what they actually paid.
The new accounting rules would require governments to disclose a “net pension liability” figure on their balance sheets in addition to funding projections.
“The changes proposed by GASB will necessitate a clear and well-developed, comprehensive written funding policy as a guide in order to sustain the pension benefit promise made to those who serve in the public sector,” Robertson said.
GASB has said that the proposed standards would lead to “significant improvements” and make financial reporting of the public pensions more transparent.
State and local groups have protested the new proposed standards, charging they would create confusion and that they should not be used for government pension funding and budgeting.
The GASB standards are not binding, but state and local governments must meet them in order to receive clean, or nonqualified, opinions from auditors on their financial statements.
“Everyone is going to be paying more for audit and accounting services because there are additional calculations that are now required for GASB purposes,” Elizabeth Kellar, president and chief executive officer of the Center for State and Local Government Excellence, told attendees at the conference. “This is quite a burden on city and county finance departments.”
Kellar spoke on a panel Tuesday that discussed how governments will establish funding-level guidelines.
State and local groups have argued that the most controversial rule change was the elimination of the ARC, which has served as a guideline on how employers reported progress on pension funding.
In response to that change, GFOA joined with 11 other state and local government groups last November to create a six-member Pension Funding Task Force. The group has held monthly meetings to address the link between pension accounting and funding.
“Without the ARC being a standard anymore that is accepted, the national associations have become really worried,” said Kellar, a task force member. “What are going to have to deal with if we didn’t have our own standards?”
A national approach is needed because state and local governments need to have some objective data, some way to benchmark themselves in how they are doing and what progress they are making, she said.
The task force will develop recommended standards and practices as well as identify a voluntary compliance method for pension funding policies.
Currently the task force has created a working draft of objectives based off of the California Actuarial Advisory Panel, which provides best practices on pensions to public agencies on an annual basis.
“We thought they had a logical structure in terms of the general objectives, the elements that need to go into a funding policy and how to think about the standards,” Kellar said.
The goal of the new task force is to publish the standard funding policies to coincide with GASB’s pension implementations in 2013. As they continue to work on their draft, members on the task force will educate other state and local organizations about the project and seek input.
Kellar has developed a two-page educational tool that she is handing out to associations to inform them on the task force’s progress to date.
“Just as GASB is voluntary standards, this was viewed as voluntary but hopefully with enough acceptance that it would carry — you would have to want to be with us as opposed to not fall within these guidelines,” she said.