On Monday, June 25, 2012, the Governmental Accounting Standards Board approved a new set of rules governing the accounting and reporting for public pensions. The new rules were developed after years of testing and analysis and are designed to increase transparency about pension liabilities.

The new rules are expected to decrease funding levels for most plans due to the fact that some will be required to use a lower, uniform rate to discount liabilities and because the new rules minimize the smoothing of investment gains and losses over a period of time. Under current rules, pension systems use varied discount rates and smoothing periods. Going forward, most plans are likely to calculate two figures – one to satisfy the GASB requirement and one to guide policymakers charged with making decisions about how to fund the plan.

Another important change is a new requirement that each employer’s share of its unfunded pension liability be placed on the balance sheet of the employer’s basic financial statements. Prior to the new ruling, the only pension obligation employers were required to report on their balance sheet was the shortfall in their Annual Required Contribution (ARC). Employers will now report Total Pension Liability, which will be based on the plan’s market value of assets rather than its actuarial value. This new figure should be larger for most employers and subject to more dramatic shifts.

A full analysis of the impact of the new GASB rules was produced by the Center for Retirement Research at Boston College.