Local governments that haven't put sufficient resources into a pension trust to pay for future pension benefits should stop calculating their pension obligations as if they had.
That’s the feeling of David Walker of the Comeback America Initiative.
On the website Politico.com, Walker says that the Governmental Accounting Standards Board wants state and local governments throughout the country to clearly show all their pension liabilities on financial statements, something that's not currently a legal requirement.
Walker argues that the adoption of these standards, “will most likely increase liabilities reported on the balance sheet, making many governments appear in worse financial shape.”
Walker adds that such a move “will not change financial reality [but] instead provide a more truthful picture of a government’s financial position.”
The objective of the new guidance would be for pension liabilities to be listed next to other liabilities so that everyone can see clearly the future pension commitment that must be addressed. Funding of pension plans is usually a policy decision by local officials and is often guided by other priorities during the budget approval process. This process is usually political and does not provide the kind of transparency in accounting for pension costs that the GASB would like to see.
These new standards move away from what’s called a funding-based measurement approach for reporting the costs of pensions.
According to the Pew Center on the States, all 50 states had a cumulative shortfall of $757 billion on their 2010 pension obligations. Pension commitments are generally expected to be funded at 80 percent, and the Pew Center found that 34 states were funded below that level.
Governments currently use the long-term expected rate of return on the investments and consider this to be what’s known as the discount rate. The new standards will instead require another type of discount rate, the interest rate governments use to calculate the current value of what taxpayers will be expected to pay in the future for these benefits.
“As long as governments can show they will have enough assets to pay future benefits when due, they will still be allowed to use their long-term investment rate as the discount rate,” says Walker.
“[Yet] if a point is projected in the future when the assets in the pension plan are no longer sufficient to pay the benefits due, governments must use the interest rate on tax-exempt 20-year, AA-or-higher-rated municipal bonds — a rate now significantly lower than the long-term expected rate of return on investments.”