CHICAGO — Newly proposed pension fund accounting and reporting guidance from the Governmental Accounting Standards Board could pressure some governmental units to boost their contribution levels, Moody’s Investors Service concluded in a new report.
GASB last month issued its Preliminary Views aimed at improving accounting and financial reporting standards for pension benefits. The proposals come as many states are dealing with faltering revenue and reduced public pension fund assets due to the market downturn.
If adopted as proposed, a governmental unit would be required to recognize the unfunded portion of its pension obligation in financial statements and to use a lower discount rate to calculate the portion of the pension obligation of unfunded plans. Governmental units would also be required to more quickly recognize expenses caused by plan amendments and some actuarial gains and losses.
While the rules are likely to increase the size of liabilities and expenses for reporting purposes, they do not alter how entities calculate funding requirements. That means governments would not be required to increase the the level of annual required contributions, Moody’s wrote in its review of the proposed changes released yesterday.
However, Moody’s believes that some governmental units might feel political pressure to act because the pending revisions will more closely align public pensions’ reported expense and obligations with economic reality.
“With new insight into the true cost and funded positions of state and local pension plans, elected officials might choose to increase employer or employee contributions to boost funding levels,” Moody’s wrote. “At the same time, it will improve transparency and comparability.”
Any increased pension funding pressure from GASB’s rule revisions will be felt across the board, according to Moody’s, which said the biggest impact would be for governments out of line with the GASB proposal.
Under existing GASB standards, neither the total pension obligation nor the unfunded portion is reported as a liability in a government’s financial statements. Instead, a liability is reported if a government contributes less than the ARC as calculated by actuaries based on GASB standards.
The proposed changes state that as the government is primarily responsible for the unfunded portion of the obligation, it should be recognized in the financial statements.
The revisions proposed on the use of discount rates in calculating the unfunded portion of a plan are expected to lower the average discount rate currently used to present value plan obligations.
A reasonable long-term expected rate of return on the plan’s investments would continue to be the basis for discounting projected benefit payments to their present value, but only to the extent that the current and expected future plan net assets are sufficient to cover future benefit payments.
Benefit payments anticipated beyond the point when expected plan assets are projected to be exhausted would be discounted to their present values using a high-quality municipal bond index rate. Moody’s estimated that a 100 basis point decrease in the discount rate would generally result in an 8% to 12% increase in the plan’s underfunding for reporting purposes.
GASB has made clear that its proposals only affect accounting and financial reporting. The changes are pending as states continue to suffer the effects of the decline in public pension fund assets from the market downturn of 2008, forcing some to reconsider benefit levels or shift spending at the expense of core services, Standard & Poor’s warned in a recent report.
Pension funding is receiving heightened attention now as some states struggle with the need to increase their contributions due to the drop in their retirement funds’ asset ratios. The challenge comes as they struggle with a lackluster recovery in many key revenue sources and the end of federal stimulus aid.