Blog entry Jack Ehnes

Changes Discussed in Public Pension Accounting

Some of our members have asked me about CalSTRS accounting standards and upcoming changes that have received some media interest.

The Governmental Accounting Standards Board (GASB, pronounced like the F. Scott Fitzgerald title character with a silent “T”) is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its 7 members are drawn from the Board’s diverse constituency, including preparers and auditors of government financial statements, users of those statements and members of the academic community.

CalSTRS follows GASB standards to the letter in our annual financial report. We welcome accounting changes that increase transparency and make information more useful to decision-makers. While the current GASB review is consistent with the agency’s normal practice, it occurs during one of the greatest financial market upheavals in history.

Without getting into the deep details, I’d like to summarize CalSTRS written response to the GASB “preliminary views” on accounting and reporting. In October we will provide testimony at their San Francisco hearing. There were two areas that were of the highest concern to us in the preliminary views:

  • What Makes CalSTRS Different: CalSTRS retirement plans have some unusual features. The State of California started the Defined Benefit Program in 1913 by combining the plans of several local retirement systems in one state-sponsored plan. Today, the state continues to be the sponsor, and is therefore legally responsible for any benefits not covered by the assets of the plan. The amount contributed by school districts is a fixed rate, set by law. The benefits of the plan are completely determined by the state. Therefore, CalSTRS pension plan is unlike most cost-sharing plans in that the employers (school districts) and sponsor (the State of California) are separate entities. The GASB preliminary views have not considered all the issues relating to cost sharing plans that have plan sponsors that are not the employer.
  • The Funding Approach is the Best Approach for Financial Reporting: Pension assets are invested over very long periods of time and actuarial assumptions and methodologies are developed to reflect decades of experience in order to ensure sufficient long-term funding of pension benefits. GASB’s proposal to develop pension accounting standards that deviate from current pension funding methods may fail to improve financial reporting and could diminish the usefulness of financial reports to decision-makers. The current accounting standards that are consistent with the funding approach both educate and provide practical information to the public and users of our financial statements and CalSTRS employers.

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