Segal Says Current Pension Cost Measure Better than GASB Proposal

Under GASB proposals, governments would have to report as a liability on their accrual-based financial statements the unfunded portion of their pension plan (see GASB Proposal: Pension Underfunding Reported as Liability). Segal contends this expense measure does not provide a viable contribution standard similar to the ARC.  

Without the ARC as a de facto contribution standard, there will no longer be any generally recognized standard for actuarially appropriate funding. Segal says employers may relax their current funding policy, and it believes that removing a contributions-based ARC from the accounting standards will lead to less accountability regarding the funding of public pension plans.  

“It is important for users of financial statements to know what the Annual Required Contribution is and if that contribution has been satisfied,” Segal says in the letter.  

Segal also contends that the PV proposals could result in the public and other financial statement users having difficulty understanding the differences between the two cost numbers – the new GASB expense and the actuarially determined funding requirement – and would question which one should be considered the real cost. In addition, under the Preliminary Views calculation methods, funding the GASB expense would be so volatile as to be impractical for most plans, cost-prohibitive in some years and imprudently low – or even negative – in others.   

“This means that prudent systems could be open to attack for not funding the GASB expense, even though they are maintaining a sound funding policy,” according to the letter.  

Also given the lengthy and consensus budget-building process of most plan sponsors which may include legislative approval (sometimes within the confines of a legally required balanced budget), the year to year volatility, uncertainty and the timing of determining the pension expense under the PV would be impractical, Segal concludes, noting that this process is very different from that of the private sector, which can make these types of adjustments to the income statement even after fiscal year-end.