WASHINGTON — Two congressmen joined issuers in urging the Governmental Accounting Standards Board to retool or withdraw a proposal that would change how cash-strapped states and localities report pension liabilities, saying the new standards would prove destructive in the current economy.
GASB in July outlined the proposal that would require state and local governments, for the first time, to report unfunded pension liabilities on their balance sheets.
Currently, many governments disclose pension information in the footnotes to their financial statements, and generally only report the contributions they are required to make in a given year, as well as what they actually paid.
GASB said the proposed standards — one for reporting by government employers that provide pension benefits and a second for pension plans that administer the benefits — would lead to “significant improvements” in its pension standards.
But the congressmen and issuers stressed the proposal would subject state and local governments to a new accounting system for which they had insufficient resources and time to prepare.
“While changing accounting standards as you have proposed would be destructive, counterproductive, and unjustified during any economic circumstances, it would be particularly damaging now,” wrote Reps. Gerald Connolly, D-Va.. and Edolphus Towns, D-N.Y., in a two-page letter, dated Aug. 11, to GASB chairman Robert Attmore.
The congressmen said the proposed changes were unnecessary, “given the reliability of most public pension plans and their sponsors.”
Specifically, they said, public pensions over the past 25 years have generated average annual returns of 9.25%, with very low default rates among cities and counties.
“Local governments are managing their money just fine without having arbitrary and destructive new standards imposed on them by GASB,” they wrote.
In addition, Connolly and Towns said GASB’s proposed changes would “impose gratuitous volatility and economic hardship on cash-strapped localities” and likely “exacerbate” existing economic difficulties, particularly for “the smallest governments.”
Issuer groups and issuers echoed these concerns, focusing on one proposed change in particular: a recommendation that public sector plans report net pension liabilities on their balance sheets, not just payment of the annual required contribution, or ARC.
A coalition of 21 issuer, public pension and public sector union groups submitted a joint two-page comment letter, dated Oct. 14, saying this recommendation was a “radical departure from long-held practice.”
Specifically, they said, the proposal would significantly alter how state and local government account for pension benefits and create “much confusion.”
Collectively, the groups — including the Government Finance Officers Association, the National League of Cities, the U.S. Conference of Mayors and the American Federation of State, County and Municipal Employees — said GASB should “clearly and specifically articulate” in its final rules, slated for release in June 2012, that the new accounting measures are not based on, and should not be used for, government pension funding and budgeting.
Separately, the GFOA submitted a comment letter saying it “adamantly opposes” the board’s proposal to “abandon” the ARC as the basis for measuring pension cost.
Such a move “would mark a major step backward,” the GFOA said. In particular, the group noted, “the unfunded actuarial accrued liability is simply too volatile to display as a liability on the face of the financial statements.”
The GFOA also said there was no “cause to jettison” the ARC “in favor of an alternative approach that promises little in the way of information of practical use to actual public-sector decision makers.”
Issuers — large and small — picked up on this theme as well.
Denison, Texas, for example, told GASB the proposed standards would impose “significant expense and reporting burdens” on state and local governments.
Susan Way, the city’s finance director, also wrote that the proposal was “needlessly complex,” would reduce transparency and should be withdrawn.
A large issuer made a similar point, saying the board’s proposal would impede, not enhance, reliability in financial reporting.
In a letter dated Sept. 14, Mark Page, director of New York City’s Office of Management and Budget, wrote that the “first priority” in pension reporting should be to indicate whether a government is “responsibly and systematically” contributing to its pension plans.”
But, Page wrote, GASB’s proposal would shift from “a funding based approach” toward a “'point in time’ estimated measure of a net pension liability.”
Such a measure is “insufficiently reliable” for inclusion on a government’s financial statements and would introduce “volatility” that could obscure a government’s contributions, be they “responsible or otherwise.”
“We continue to believe that an actuarially calculated annual required contribution, based on an acceptable actuarial measurement approach and regularly monitored assumptions is the best available proxy for the burden current period taxpayers should be bearing for current services,” he wrote.
GASB’s proposal would also change the formula states and localities use to convert projected pension benefits into present value, based on an assumed “discount rate.”
Specifically, GASB recommends that pension plans use a historic rate of return — typically 7% to 8% — only to the extent the plan has sufficient assets, set aside in an irrevocable trust, to make projected benefit payments.
When a plan reaches a point of no longer having sufficient assets set aside in a trust for long-term investments, it would have to shift to a so-called risk-free rate of return pegged to a tax-exempt, high-quality, 30-year municipal bond index, typically 3% to 4%.
In its comment letter, the GFOA said it supported the board’s “principled decision” to retain the long-term expected rate of return,” especially in view of criticism “from those advocating the use of a risk-free rate of return.”
The Public Employee Pension Transparency Act, introduced Feb. 9 by Republican Reps. Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin, would require state and local governments to determine pension liabilities using a risk-free rate and report them to the federal government. Issuers who failed to comply would lose their ability to issue tax-exempt, tax-credit or direct-pay bonds.
