The GFOA weighs in on pensions.

• Author: Gauthier, Stephen J.
• Position: Governmental Accounting Standards Board

At the end of March, the Governmental Accounting Standards Board (GASB) issued an Invitation to Comment (ITC) document on Pension Accounting and Financial Reporting. The ITC invited interested parties to comment on certain crucial aspects of accounting and financial reporting for pensions. On August 26, 2009, representatives of the Government Finance Officers Association (GFOA) testified at a public hearing on the ITC held by the GASB at its offices in Norwalk, Connecticut. That testimony was developed by two of the GFOA's standing committees (the Committee on Accounting, Auditing, and Financial Reporting, and the Committee on Retirement Benefits and Administration) and was delivered jointly by representatives of both committees. This article will examine the details of that testimony.

APPROPRIATE FOCUS OF ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS

How an employer incurs an obligation to employees for pension benefits is one thing; how that same employer finances pension benefits can be quite another. Current GASB standards focus on whether an employer is meeting its actuarially determined funding requirements (financing focus). Private-sector pension guidance, on the other hand, focuses on the employer's obligation to its employees for benefits as of the reporting date (obligation focus). The GFOA has taken the following position:

The ultimate cost of pension benefits is reduced by earnings on related investments. The rate of return on investments is much more predictable, of course, over the long term than over the short term. Consequently, a measure of pension cost that focuses on a single point in time (employer's obligation for benefits earned as of the reporting date) will likely be significantly more volatile than one that takes a longer-term perspective (obligation reflective of employer funding requirements). There is no reason to believe that a given private-sector enterprise will still be in business next year, let alone 30 or 40 years from now. Consequently, a serious case can be made for adopting a point-in-time/termination focus for private-sector employers, despite the inherent volatility of such a measure. State and local governments, on the other hand, are perpetual entities for all practical purposes. That being the case, taking a point-in-time/termination perspective for the measurement of a long-term obligation that is highly susceptible to market fluctuations only serves to inject a needless element of volatility...