WASHINGTON–(BUSINESS WIRE)–Public pension accounting methodologies devised by the Governmental Accounting Standards Board (GASB) produce flawed results and are in urgent need of improvement, according to an independent study released by the National Conference on Public Employee Retirement Systems (NCPERS).
“When things go awry for some pension plans, it is often not because the accounting rules are ignored but because they are followed,” the study’s author, Brown University researcher Tom Sgouros, wrote in “The Case for New Pension Accounting Standards.”
GASB rules can mislead decision-makers’ views as to the health of a pension system, prompting poor decisions, the study found. The study recommended developing different rules that will address some of these shortcomings. By improving the rules, GASB could provide a better way to evaluate pension system health and provide better guidance to decision makers.
“One of the many quirks of today’s pension accounting rules is that they value the promise of future contributions at zero, which is unlike any other government obligation, from revenue bonds to purchase orders,” Sgouros said. “As a result, the strength of the economy behind the pension plan counts for nothing from an accounting perspective. That is clearly a disservice to pension plan participants.”
“We hope this study will help policymakers recognize that the rules themselves promote flawed decision making about public pension systems,” said Hank H. Kim, NCPERS executive director and counsel. “For example, the intense focus on the funding status of pension systems overlooks the fact that pension systems continue to meet all their obligations.”
Among the study’s criticisms: GASB’s rules are inconsistent in the way they regard pension “debt,” downplay the collective nature of pension investments, and downplay or mask risk in a variety of ways, such as treating all asset categories as equal. For example, the accounting rules imply that closing a fully funded pension plan is nothing more than applying pension assets to extinguish the debt, while in reality it is quite risky and many closed plans wind up costing plan sponsors millions of dollars.
The result of GASB’s approach is an analysis of public pensions’ health that is focused on the highly subjective measure of their funding status.
For public pension funds, “Following the rules closely means hiding some risks and exaggerating others, attending to unimportant details while ignoring important assets, and basing momentous decisions about the distant future on layers of guesses while delaying the consequences of poor decisions until the decision makers are long gone,” the study found.
The report outlines nine specific proposals to change accounting methodology and the way accounting is used to inform policy, with the goal of providing more realistic assessments of pension systems’ financial position. For example, the study made the case for abandoning the funding ratio as a key indicator of pension systems’ health. Instead, pension plans should shift to a depletion date estimate using risk-weighted assets as a key indicator.
In another example, the study said estimates of net pension liability figures should not be held out as a basis for policy decisions. These calculations are inherently flawed because they result from subtracting low-accuracy liability figures with high-accuracy asset figures, the study found.
The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $4 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education for the benefit of public sector pension stakeholders.
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