WASHINGTON - The Governmental Accounting Standards Board unveiled a pension accounting proposal Friday that would fundamentally alter how state and local governments report pension liabilities.
In an eight-page draft overview, GASB said it had approved the proposed standards, dubbed exposure drafts, which would lead to “significant improvements” in the usefulness of pension information. In a departure from earlier guidance, published as preliminary views in June 2010, the accounting-standards setter released separate documents — one for reporting by government employers that provide pension benefits and a second for pension plans that administer the benefits. The preliminary views focused only on reporting by employers.
GASB’s latest guidance, like its preliminary recommendations last year, would require governments to report the unfunded portion of their retirement plans as a liability on their balance sheets. The board is also proposing to change the formula states and localities use to convert projected pension benefit payments into present value, based on an assumed “discount rate.”
Specifically, GASB recommends that pension plans use a historic rate of return - typically 7% to 8% - only to the extent the plan has sufficient assets, set aside in an irrevocable trust, to make projected benefit payments. When a plan reaches a point of no longer having sufficient assets set aside in a trust for long-term investments, it would have to shift to a lower, so-called risk-free rate of return pegged to a tax-exempt, high-quality, 30-year municipal bond index rate, typically, 3% to 4%.
“As I’m sure you know, this is a big deal,” GASB chairman Robert Attmore said in an interview.
Currently, many governments disclose pension information in the footnotes of 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.
“Recognition in the financial statements alongside other liabilities such as outstanding bonds, claims and judgments, and long-term leases, will clearly put the pension liability on an equal footing with other long-term obligations,” the board said.
As for the rate of return, GASB said: “if any projected benefit payments are discounted using the lower rate, then the present value will be higher. As a result, the liability would be larger.”