Tuesday, June 26, 2012

GASB Improves Public Pension Plan Accounting and Disclosures

Yesterday, the Governmental Accounting Standards Board (GASB) approved  two new standards  related to accounting and disclosure for public retirement plans. GASB 67 will change the plan level reporting and disclosure while GASB 68 will change the employer level reporting. This comes after much debate and public controversy as the media has had many a field day trumpeting the cumulative underfunding of public pension plans.

Statement 67, according to the GASB press release, enhances note disclosures and required supplementary information for public defined benefit and defined contribution plans. Among the new requirements are annual money-weighted rates of return and 10-year supplemental information schedules.

Here I warn the reader, particularly the unknowing one, about the value of the new requirement as compared to the cost of providing it. Any of these 10-year projections will be supplied by actuaries. Actuaries, as a group, are smart people. I am proud to say that I am an actuary. So, to be sure, I am not denigrating my profession here.

However, when an actuary presents various measures of plan liabilities and forecasts of future costs to a plan sponsor, be it a public sponsor or a private one, one thing we are sure of is that the numbers are not perfect. What they are is a best estimate based upon a set of actuarial assumptions and methods. Based upon our experience and training, our estimates will likely be better than yours, but the likelihood that the plan liability that we calculate will be a precise measure of the present value of benefits accrued to date is essentially nil.

So, consider what happens when, even with our level of training and experience, instead of looking one year into the future, we look ten years into the future. I don't know anyone who knows what will happen to the economy over the next ten years. The last 10 years or so illustrate this well. Suppose I had asked you on June 26, 2002 whether interest rates would increase, decrease, or stay relatively steady over the next 10 years. What would you have said? Well, in July 2002, I did ask that question to a group of roughly 100 professional asset managers. As a group, these people were pretty savvy about the economy. About half a dozen of them thought that rates would stay relatively steady over the next ten years; the remainder thought they would increase and most thought they would increase significantly.

Statement 68 makes three significant changes to accounting for public pensions:

  • Projections of benefit payments will now include assumed projections of pay increases, projection of service credits, projections of automatic cost-of-living adjustments (COLAs) and projections of ad hoc COLAs if those ad hoc COLAs are nearly automatic. Over time, a meaningful number of public employers have kept their reported liabilities down by providing annual ad hoc COLAs rather than automatic ones. While they were essentially the same, the reporting for them was very different, but no more.
  • Perhaps the single most key actuarial assumption used in calculating a pension liability is the discount rate. Statement 68 will allow generally well-funded public pensions (there aren't too many of them right now, but they do exist) to use an expected long-term rate of return on assets to discount the liabilities so long as the assets are invested in such a way as to reasonably expect that rate of return to be achieved. Plans that do not meet the criteria to use a long-term rate of return must use what is essentially a risk-free rate for governmental entities -- a yield or index rate on 20-year AA or higher-rated municipal bonds.
  • Finally, plans are to be valued using an entry age [normal] actuarial cost method. To the extent that a plan is pay-related, this method should produce roughly a level percentage of pay annual cost. If the plan is not pay-related, the method should produce roughly a level dollar amount annual cost. To my mind, this is a significant improvement and a step that other rule-setting bodies including the United States Congress should [have taken] take a lesson from.
What will this ultimately do for public pensions? I suspect that we will see a better picture of the levels of underfunding of public pension plans, but will not unfairly punish those that have been funded responsibly. The new standards are not perfect, but in my opinion, this is a step in the right direction.


  1. I am a CPA that audits local governments. Thanks for the actuarial perspective. Good post.

  2. Charles, thanks for reading and commenting. I see you are only a few hours away from me, just a short trip down 75.