The report noted that GASB proposes two major changes for reporting purposes:
- Assets would be valued at market rather than smoothed; and
- Liabilities would be discounted by a blended rate using:
- the long-run return for liabilities covered by projected assets; and
- the high-grade municipal bond rate for liabilities covered by other resources.
The researchers found the aggregate funded ratio using market assets was only 67% in 2010 compared to 77% using actuarial assets. Estimates of the blended discount rate that will result from GASB’s new procedure show the funded ratio will decline in 2010 – the latest year for which data are available – from 77% to 53%.
The GASB outlined its new proposals in two exposure drafts released in July (see GASB Makes Pension Reporting Proposals).
According to the CRR report, the main implementation problem with GASB’s proposed blended rate is it requires a complicated calculation based on a number of assumptions. The determination of the portion of benefits funded requires a projection of plan assets available each year to cover promised benefits. The asset projection would include assumptions not only about plan returns, but also about future contributions from the government and from employees. These contributions may or may not come to pass.
In addition, the researchers noted in order to produce useful analysis, the data need to provide meaningful measures of government obligations and be consistent across states and localities and over time. They contend that the new GASB discounting proposal fails on a number of counts.
GASB’s proposals will affect the reported Annual Required Contribution (ARC) for pension plans – the payment required to cover normal cost and amortize the unfunded liability over 30 years – in two ways. First, the move from actuarial to market value of assets and the new liability measure increase the unfunded liability and thereby the required amortization payment. Second, a blended discount rate will raise the normal cost. Therefore, reported ARCs are likely to increase substantially.
However, the report said the feedback GASB has received suggests that employers will continue to use the traditional actuarial smoothing techniques to calculate their ARCs for funding purposes.The Issue Brief can be viewed from http://crr.bc.edu/briefs/how_would_gasb_proposals_affect_state_and_local_pension_reporting.html.