The Case for New Pension Accounting Standards.

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...