Earlier this summer, the Governmental Accounting Standards Board (GASB) released proposed new standards for state pension accounting and financial reporting.  One of the reasons GASB has proposed these changes is the “increasing need among the users of governmental financial reports for comparable information about pensions.”  The WRC looked at public pensions in a policy brief this spring.

Some of the GASB proposals include:

• A government (the employer) should “report in its financial statements a net pension liability equal to the difference between the total pension liability and the value of assets set aside in a pension plan to pay benefits to current employees, retirees, and their beneficiaries.”
• Currently, automatic cost-of-living adjustments (COLAs) are included in benefit projections.  The proposals would require “ad-hoc COLAs” (that is, COLAs that are “not written into the pension provisions” but “made at the discretion of the government”) to also be “included in benefit projections if an employer’s past practice and future expectations of granting them indicate that they effectively have become automatic.”
• Governments must now use a discount rate equal to the expected future rate of return (Washington uses 8 percent).  Under the proposals, if plan assets are projected to cover the projected benefit payments for current employees, retirees, and their beneficiaries, governments would continue to “discount projected benefit payments using the long-term expected rate of return.”  If there is a point when plan assets are projected to be insufficient for paying benefits, “governments would incorporate into the discount rate a tax-exempt, high-quality 30-year municipal bond index rate to reflect that future benefit payments are not expected to be made from long-term investments.”  As GASB notes, most of these municipal bond rates have interest rates that are lower than the rates states are currently using.  Consequently, this would result in a larger net pension liability for the state.
• Governments may currently choose from six methods for “attributing the present value of benefit payments to specific years.”  The proposals would require that all governments use the same method: entry age normal, as a level percentage of payroll.
• The proposals change when certain inputs are incorporated as pension expenses in financial statements.  This includes requiring that “the difference between actual investment earnings and what was projected” be incorporated as an expense over a five-year period.  Currently, states may choose their own period (Washington smooths its earnings and losses over eight years).

A “plain-language supplemental” describing the proposals is available here.  For all the gory details, the proposals themselves are here and here.  Public comments are due by September 30, and public hearings will be held in October.