“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, wrote Hank Kim, Executive Director for NCPERS. Amen, we say to that!
For more than eight years, we have crisscrossed the U.S. highlighting the fact that public pensions are being negatively impacted because of GASB accounting standards. “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.” Sgouros also stated, “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.”
Ron Ryan, Ryan ALM, highlighted several years ago the negative impact of accounting rules on pensions in his outstanding book, titled “The U.S. Pension Crisis”. One of his points was the fact that future contributions should be treated as an asset of the plan when calculating the funded status. Sgouros highlights the same issue in his study. “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.”
Managing a pension plan is difficult under the best of circumstances. Let’s eliminate the many impediments that are created through accounting standards that mask the truth. We stand ready to share our insights on where other opportunities for improvement exist. Are you?