Public pension funds likely soon will get a step closer to rule changes for discount rates they use to value liabilities. In June the Governmental Accounting Standards Board (GASB) apparently will release an exposure draft of its proposed pension accounting-rule changes, after revealing its preliminary views in June 2010. A GASB spokesperson declined to confirm the June date or provide information on the implementation timeline after the exposure draft’s release.
At least one focus area already seems clear. The discount rate is “where the fistfights occur,” David Bean, GASB director of research and technical activities, reportedly said at an April meeting of municipal analysts in New York, where he also revealed the June date. The GASB spokesperson declined to confirm statements Bean made, but two experts talked about changes that the exposure draft may include, based on GASB’s preliminary views.
GASB is proposing changes in the discount rate, says Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a nonprofit research organization. Public pension funds now use the expected rate of return to discount all future obligations, and GASB may let them continue using that for the funded part of their obligation, but wants them to start using a high-quality municipal bond index rate for unfunded obligations. GASB has rejected use of a risk-free rate, she says.
“Financial economists are going to argue that they are still not doing the right thing with the discount rate. They would like them to apply only the risk-adjusted rate to the liability,” says Eileen Norcross, senior research fellow at the George Mason University Mercatus Center. But in GASB’s preliminary views, “They are saying, apply one discount rate to the unfunded portion as opposed to the funded portion. So in that sense, it is a compromise. It seems like they are trying to hit on a middle ground.”
Even a compromise means potentially higher liabilities. “By decreasing the discount rate on at least one portion of the liabilities, that will raise the amount of money that these pension funds need to set aside,” Norcross says.
And GASB may also require faster amortization of liability changes. “Right now they can amortize the unfunded liability for up to 30 years,” McNichol says. “Now they are saying that plans should tie it to individual employees’ expected remaining service and when they will receive the expected benefits. That will increase the liability on paper.”
Public funds also potentially face a new requirement to disclose their unfunded pension liability on the balance sheet, as opposed to in the notes now. “There would be a number on the balance sheet that is not there now,” McNichol says. “That will not necessarily make a difference in states’ costs for pensions. The intent is to increase transparency.”
The new GASB rules likely will bring public pension-accounting rules closer to the Financial Accounting Standards Board (FASB) rules that companies follow. “They are trying to look at the issues holistically,” Norcross says. “They clearly are listening to critiques of pension accounting.”