Over the past couple of years, the GASB (Governmental Accounting Standards Board – they write the public employer accounting rules) has started the process of updating the accounting rules for public employer pension and retiree health plans. They issued an invitation for ideas/comments in 2009 and now we are getting our first sneak peek at the direction that GASB is thinking of going. Their website has been updated with a list of Major Tentative Decisions that could have a HUGE impact on the way retiree benefit costs are accounted for under GASB 27 and GASB 45. The three biggest changes appear to be:
1. Moving the Unfunded Actuarial Accrued Liability (UAAL) onto the balance sheet instead of just showing it in a footnote.
2. Switching from a single liability discount rate (based on expected return of plan assets) to a bifurcated discount rate. Liabilities covered by current assets will still use the old assumption, but unfunded liabilities will be discounted using a “high-quality tax-exempt municipal bond index rate”. The latter rate will likely be much lower than the old discount rate for pension plans (which will increase the liability calculations), but it remains to be seen how the mechanics of this process will actually work.
3. Less smoothing of unexpected asset and liability changes. Currently these unanticipated changes can be spread out and recognized over a period of up to 30 years. It appears the GASB is proposing that this period be shortened to the remaining service period of current employees (probably closer to 10 – 15 years).
The net effect of these proposed changes will likely be that accounting costs for public pension benefits will go WAY up. The impact on retiree health and OPEB liabilities is less clear since they are now usually valued using a very low “risk-free” interest rate. Moving to a (presumably higher) municipal bond index rate will decrease the UAAL, but this could be totally offset by the other proposed methodology changes.
Once we learn more from the GASB in June, we’ll provide additional analysis. For now, Girard Miller at Governing.com has a good summary of the possible ramifications and explores the proposed changes in greater detail. The proposed GASB accounting changes likely wouldn’t go into effect for several years but, as Mr. Miller points out, public plan sponsors should start exploring the potential effects now so that there is adequate time to prepare and develop solutions.