Public retirement systems in the US have experienced the first wave of change in the Governmental Accounting Standards Board (GASB) rules. Rolled out in 2014, GASB 67 requires a different treatment of the discount rate, making public plans use a market discount rate to value the pension liabilities that are not covered by projected performance. The resulting blended discount rate, for many plans, is often lower than previously assumed.
According to a recent analysis by Governing, 28 out of the 80 surveyed pension plans decreased their discount rates in fiscal year 2014. However, the average funded status rose from 70 percent in 2013 to 74 percent in 2014, thanks to the new accounting rule requiring plans to report the market value of assets, which have recently seen large gains, instead of the smoothed value. Some plans did see a significant drop in their funded status. For example, the Kentucky Teachers’ Retirement System had its funded ratio fall by 6 percentage points in 2014 after reducing its discount rate by two points to 5.23 percent. Similarly, the funded status of New Jersey’s state employee retirement plan sank to 28 percent from the previous 46 percent due to the plan’s discount rate adjustment.
The second wave of change will come later this year, with the new rule GASB 68 requiring cost-sharing employers to record their share of unfunded liability on their balance sheet. The rule is expected to force governments to recognize the role pension obligations play in their overall finances.
Despite these positive changes, the new GASB standards still have serious limitations, and only structural reforms would bring long-term sustainability to government pension systems.
To read the Governing analysis, go here.
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