The Real Issue Is Pension Funding

Aug 13, 2012 | ARTICLE


 The Governmental Accounting Standards Board (GASB)  issued new standards on June 25 aimed at separating the accounting for state and local government pension plans from the decisions about how to fund them. While pension accounting is important, the real issue for employers, taxpayers, and employees is pension funding.

In the absence of GASB standards, how will policymakers, employees and the general public know that public pensions are properly funded? Some states and local governments have made progress to improve their pensions’ funded status, but without objective, reliable data that is consistently reported, there could be considerable public confusion and the potential for politically driven “solutions.” 

Recognizing the need for an updated method to calculate and report the annual required contribution (ARC), ICMA and the national associations representing state and local governments have established a public pension task force. The task force’s goal is to develop recommended funding standards and practices as well as a method for voluntary compliance. 

These standards will promote five general policy objectives for pension funding:

  1. Pension funding plans are based on actuarially determined contributions
  2. Funding discipline ensures that promised benefits can be paid
  3. Intergenerational equity is maintained
  4. Employer costs are a consistent percentage of payroll
  5. Clear reporting shows how and when pension plans will be fully funded.

Public pension plan sponsors and representatives from the finance and actuarial community have participated in early task force discussions. The task force expects to report its recommendations by the time that the new GASB accounting standards are implemented. (See Pension Funding Background.)

In the meantime, local governments can expect somewhat higher accounting and auditing costs to address the new GASB accounting standards. Even local governments that participate in a multi-employer plan will be required to report a share of unfunded liabilities on its balance sheet.







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