The Governmental Accounting Standards Board is proposing some far-reaching changes in the field of pension accounting that should affect public employees and state and local governments across the country.
GASB made the exposure drafts of the proposals public on its Web site,
GASB chairman Robert Attmore recently explained to Accounting Today what some of those proposed changes would be (see
Attmore has chaired GASB since July 1, 2004. He began his second and final term as chairman on July 1, 2009, after being reappointed in October 2008 and is scheduled to complete the term in 2014.
Prior to joining GASB, Attmore headed his own consulting business. Previously, he worked for New York State for more than 23 years, including serving as deputy state comptroller and state auditor from 1986 until 2003. Attmore has served as president of the National State Auditors Association and as a member of the executive committee of the National Association of State Auditors, Comptrollers and Treasurers. He is a Trustee of the Academy for Government Accountability and has served as a member of the U.S. Comptroller General’s Advisory Council on Governmental Auditing Standards. He also served on the National Executive Board of the Association of Government Accountants. He is a graduate of Villanova University and is a CPA and a Certified Government Financial Manager.
Could you tell me about some of the changes that GASB has been proposing with pension accounting?
We’re going to soon be issuing a couple of exposure drafts on pension accounting and financial reporting, and the reason that we think this is a big deal is governments are labor intensive entities. They have large employee compensation costs, both in terms of current compensation with salary and benefits, as well as deferred compensation in the form of pensions and other post-employment benefits. There has been a lot of attention recently. The issue of state and local government pensions has been getting significant attention … at all levels of government whether it’s at state legislatures or city councils, etc., and it’s also been getting attention in Washington and Congress and the media. A lot of people are focused on this issue right now because it is a big deal. One of the things, just as an aside: frequently people who talk about this issue confuse accounting and financial reporting issues with public policy issues that deal with items like contribution policies, or plan design, or benefit formulas, those sorts of things, and they really are different than accounting and financial reporting. Based on GASB research that we do periodically, to see if our existing standards are doing what they were expected to do, we began a review all the way back in 2006, long before the start of the Great Recession, before this became a hot topic for everybody, our staff went through and did some research, evaluated what was currently being reported, and so forth, and in 2008 they presented their research findings to the board, and suggested that they felt there were significant improvements that could be made to our existing standards, and with that the board reviewed the research and agreed with the staff and decided to add a project to our technical agenda to update and improve our current standards. So in 2009 we issued a first due process document, something called an invitation to comment that we sent out and got feedback from constituents.
Based on that, we went through another round of deliberations and in 2010 issued a preliminary views document on pension accounting by employers. We got a lot of feedback to that, did public hearings and roundtables and so forth, and are now at the point where we’ve evaluated all feedback and made some additional decisions, and next week our board will be meeting to presumably approve, and I say presumably, it’s not over till it’s over, but the board will vote next week and my guess is we’ll approve the issuance of two exposure drafts, which is the last stage of our process before we finalize new rules. The two exposure drafts will presumably be available in early July, probably shortly after the holidays, and one will address accounting and financial reporting by governments—the employers—and the other will address accounting and financial reporting by the pension plans themselves, which are separate legal entities that set up trusts to manage and disburse the pension assets.
What kinds of feedback have you been getting so far from people about the changes?
We will get a lot of feedback once we put these out. But on the earlier documents I mentioned, the invitation to comment and the preliminary views, we got a lot of feedback, almost 200 letters I believe it was, in response to the preliminary views document that we put out last year. And we also did some public hearings and roundtables, so we got some face-to-face feedback as well. These are potentially and likely to be controversial issues. There are people who take very different views of pension accounting and financial reporting, from one extreme where people think our current standards are just fine—if it’s not broke, don’t fix it—to the other extreme where people think we ought to throw out our standards and start over, and everywhere in between on the continuum. We’re not going to either one of those extremes, but we’ve got proposals that will significantly improve the current accounting and financial reporting. Our intent is to improve the decision usefulness of the information that gets reported on the face of the financial statements. That’s a key point because for the first time this proposal would require that the unfunded pension liability of a government be placed on the face of the financial statements, on its balance sheet. That’s not currently required, so that would be a big change. I saw another article recently on something else. It wasn’t related to pensions, but the title caught my eye. It was called “Out of the Footnotes and into the Spotlight.” I thought that was appropriate and could be used in our case as well. We don’t call them footnotes anymore, but we would be taking the information about pension liabilities that are currently in the notes to financial statements and putting them on the face of the statement, and therefore increasing the spotlight on those unfunded liabilities.
Is the aim to make sure that the costs are being accounted for while employees are still on the job?
That’s a big part of it, but it’s not just the liability. … It’s just another form of compensation when the employee is working and providing a service, the compensation is broken down into two pieces—current and deferred—but they’re actually earning both of those pieces while they’re providing services, and those expenses ought to be reflected currently while the employee is working.
Another impact that may concern people by putting that unfunded liability on the balance sheet, that may create the appearance, and “appearance” is the key word here, that the government may be in worse financial condition, and that’s because you’ve put this big unfunded liability on the balance sheet. Therefore the net position of the government looks weaker because there’s a liability that wasn’t there previously. I saw “appearance” because financial analysts, the rating agencies, etc., are all already aware of this obligation and when they do their credit ratings and so forth they already account for this so the economic reality isn’t changed because the display or the financial reporting looks different. The economic reality stays the same. It’s just more transparent and easier to understand what the obligation is because it’s right there on the balance sheet.
Will people also be able to get a better idea of the pension plans’ shortfalls, and they won’t be hidden in the footnotes?
I have a tough time with “hidden in the footnotes” because people are supposed to read the footnotes. It’s obviously more clearly focused when the number is on the balance sheet. That will get people’s attention more than having to find the number in the footnotes.
Will investors also have an easier time of comparing the pension plans’ liabilities across the different states?
If these changes get implemented, what we will be doing is reducing complexity because we’ll be eliminating some of the options that currently exist. We’ll be increasing transparency for doing things like putting the unfunded liability on the face of the statements and then requiring much more disclosure in the notes about the different components of the net pension liability. They will be able to see how those changes affect the net pension liability. Ultimately there will be more consistency in the way governments report and more comparability then across governments. Some of the more significant things that we’re planning to do is we’re switching from what is now a funding-based approach to an accounting-based approach. That’s also a big change. Instead of, what we do currently is focus on funding, and say that if a government makes its annual required contribution, meaning that they have a plan that will get the plan funded over a certain number of years, the only thing they need to record as a liability is anytime they don’t make that contribution, at every point in the total unfunded liability. … By eliminating options and standardizing measurement approaches for items like the actuarial cost methods or deferred expense recognition periods, we will reduce complexity. Right now, for example, there are six different allowable actuarial cost methods to do the calculation of the pension liability and pension expense. What we’re proposing, going forward, from an accounting perspective, again not a funding perspective, but from an accounting perspective, is we’re only going to allow one method: the entry age normal. That will eliminate a lot of the differences and reduce the complexity. When it comes to recognition periods for deferred expenses, right now there is no standard period of years to recognize deferred amounts. We will be proposing standardized periods to do that recognition so that will increase the consistency and the comparability as well.
And we’re proposing a principle-based method for determining an appropriate discount rate. This is also a big deal. The discount rate is something that there’s been a lot of focus on. Right now we allow governments to use an expected rate of return on investments as their discount rate. Going forward, we’re saying only to the extent that there are assets set aside in an irrevocable trust to be invested long term can you use the expected long-term rate of return. But when we have pension plans that are not adequately funded because they have contributions or whatever it may be, we require that a cash flow projection be done and a comparison be made to see if the assets that are set aside in the trust for benefits will be adequate to make those benefit payments in the future, and in those cases where they won’t be adequate, we will require that governments use a discount rate that is based on a tax-exempt high-quality municipal bond index rate, which in today’s environment means using a lower rate. And the way the formula works, that means the liability is larger. So, to the extent that money has been set aside, governments have prepaid part of these benefits by putting money into an irrevocable trust, they get credit for that because the earnings on those investments will be what you use to pay benefits. To the extent that they haven’t done that, then they don’t get to use the expected rate of return because they won’t have assets invested to earn that return.
Are state and local governments generally open to these changes, or worried about them?
Yes to both. It is a hot topic right now. Everybody understands there is great attention and scrutiny being placed on pension plans right now. There are all sorts of predictions from people who think that pensions could be a major factor in potential fiscal crises in state and local governments. Then there are those who think these are long-term obligations, governments have plenty of time to make adjustments necessary, and they’ll deal with them as they do everything else. The truth is probably somewhere in between, and it will depend on the facts and circumstances for each specific government. Maybe some governments out there who aren’t stressed because their plans are seriously underfunded, but I would say that’s the minority, not the majority. But there will be lots of views and opinions shared with us once we put this proposal out.
How long do you think it will be before the standards are finalized?
The process is that we put it out as an exposure draft and we provide a 90-day comment period, so that people will have an opportunity to understand it and put together their thoughts and get back to us with their suggestions, or comments, or criticisms, whatever it may be, and we’ve got some public hearings scheduled around the country. We’ve got one in San Francisco, one in Chicago, one in New York in October. We’ve got some roundtable meetings set up, some focus groups with users to get feedback, and then after we get all that feedback, we begin a redeliberation process where we consider all that feedback that we’ve got, and decide whether or not people have made convincing arguments and we have to make changes, or whether or not we’re ready to go forward. That whole process will probably play out. We’ll collect comments through October, so in November through probably late spring, early summer, I would say, by this time next year we should have two final documents with revised, improved pension accounting and financial reporting rules.
So it’s going to be two different sets of standards that you’ll come out with ultimately?
It will be standards that apply to reporting by the pension plans themselves. Those are separate legal entities. And the standards that apply to the governments, the employers.
Are these changes going to help protect the pensions and keep them more viable? Some of the states have been making changes lately or pushing for changes how much the employees need to contribute to the pension plans, and is that going to be part of this set of new rules?
No, you see, that’s the difference between accounting and financial reporting requirements, versus public policy decisions that deal with plan design and contributions and that sort of thing. A number of governments have made changes. They’ve looked at their public policy decisions and plan designs and decided that they needed to make changes to make them more sustainable. But those are choices that are made by elected officials.
So it’s mostly in terms of transparency? This wouldn’t make them more solvent or last longer?
From our perspective, we will clearly be improving the transparency, improving the consistency and comparability, so that policy makers, the folks who do make those public policy decisions, have information so they can make informed decisions.
Are there any other changes that you wanted to mention in these proposals?
There is one other big change that I don’t think I mentioned. There are different types of pension plans. There are single-employer plans or agent multiple employer plans and there is something called cost-sharing plans, and the changes we’re going to propose related to cost-sharing plans will be pretty significant and I expect that we’ll hear back from folks involved in those kind of plans. This is a plan where people get together and pool their resources and share risks gong forward. To the extent that those cost-sharing plans that are made up of a number of employers, and the plans themselves have unfunded liabilities, we’re going to propose that the participating employers should record in their financial statements their proportionate share of that unfunded liability, and that will be a big change that will cause some concerns.
When do you think is the earliest this will go into effect? Will it be next year?
Well, assuming that we won’t get through this process until the timeline that I just shared with you, we probably won’t have final rules until this time next year. We would give at least a year for folks to implement, because they would have to have cost studies done. They would have to change systems and so forth.
So probably at the earliest, 2013?
Right.
