Standard setter to propose new state pension rules

June 21, 2011, 5:09 p.m. EDT - MarketWatch

Standard setter to propose new state pension rules

By Jessica Holzer

(Adds more details on the changes and comment from GASB's Attmore and other panelists)

--Proposals aim to ensure states and local governments account for the pension costs of their workforce while the employees are still on the job

--The change would make it easier for investors to compare public pension plans across states

--Pension plans would be required to record their unfunded obligations over a shortened period averaging 10 to 15 years

WASHINGTON (MarketWatch) -- The accounting board for governments is set to propose changes next month that would force most U.S. states and towns to increase the amount of unfunded pension liabilities they report on their balance sheets for investors.

The proposals, being readied by the Governmental Accounting Standards Board, aim to ensure states and local governments account for the pension costs of their workforce while the employees are still on the job, GASB Chairman Robert H. Attmore said at a panel in Washington on Tuesday, providing the latest update of the board's long-debated proposal.

They don't change how fast public pension plans must pay off their unfunded obligations, he said.

"We want people to be transparent and disclose exactly what it is they're doing and the market will make their judgments based on that," Attmore said. "The economics don't change."

He added the change would make it easier for investors to compare public pension plans across states.

Public pension plans spread the cost of paying off their unfunded pension liabilities over a long period, like a home mortgage. On average, plans distribute these costs over a 24- to 25-year period, according to National Association of State Retirement Administrators Research Director Keith Brainard, who also spoke on Tuesday's panel.

Under GASB's proposal, plans would be required to record their unfunded obligations as if they were paying them off over the remaining service life of employees in the system--a period that averages about 10 to 15 years for all public plans, Brainard said.

The shortened period means that the costs reported by most states and towns on their balance sheets will increase.

GASB is also proposing to make the size of governments' pension shortfalls clearer to investors.

Governments normally don't display their unfunded pension obligation as a liability on the balance sheet. Instead, they list only the shortfall in the annual required pension contribution, while the unfunded pension obligation is included in the notes to the balance sheet.

Under the proposed changes, the displayed number would be changed to the total unfunded pension liability, typically larger than the annual obligation.

The GASB meets next week to consider issuing the proposals. Attmore said he expected the proposals to be issued in July, after which the GASB would open a 90-day public comment period and hold public hearings before finalizing them. He said he doesn't expect the changes to take effect for another year and a half to two years.

Currently, public pension plan financial statements typically reflect the plan's funding decisions. But the proposed changes would force most plans to begin producing two sets of financial statements, Brainard predicted, because they wouldn't initially be able to pay off their obligations under the shortened period. One set of books would satisfy GASB and another would reflect the plan's funding decisions, he said.

Mark R. Zehner, deputy chief for the U.S. Securities and Exchange Commission's municipal securities and public pensions division, said he generally welcomed the proposals but said governments must disclose the differences between the two sets of statements.

Two sets of books could "create a lot of possibility for mischief," he warned.