The new accounting standards of the Governmental Accounting Standards Board (GASB) could add up to $600 billion to official estimates of the holes in US states' pension funds.
One GASB proposal would affect how public pension funds report their assets. Currently, funds measure their assets using “smoothing”, a controversial accounting technique that has enabled governments to spread losses over several years and prevent reported assets from fluctuating along with their market values. The GASB proposal would require them to mark to market annually.
Another GASB proposal could result in higher reported liabilities. Currently, public pension fund liabilities are typically discounted by 8 per cent annually – the projected long-term rate of return on investments for most public pension funds.
Under the new standards, states would project how long current assets, expected returns and contributions will cover expected benefit payments. For that period, they will be permitted to use their own discount rate. Beyond that, states would have to assume the much lower rate of a municipal bond – currently around 3 per cent.
The measures could enlarge the current shortfall in public pension funds from 24 per cent to 43 per cent, according to the Center for Retirement Research, pushing overall liabilities from $3.4 trillion to $4 trillion. That assumes that states continue to contribute to public pension funds in the same way.
The GASB standards if approved would begin to take effect from June 15, 2013.
Press release
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