New Accounting Rules Cause Concern

Blog entry Jack Ehnes

It’s important to share with you some information about a little-known organization, the Governmental Accounting and Standards Board, who sets industry standards for how government finances are reported. On July 8, 2011 GASB released Exposure Drafts which include new accounting rules for how public pension fund liabilities are reported.

Concern has been raised that GASB’s new rules may sidetrack or misinform efforts to address a solution to the funding shortfall. I would like to assure you that CalSTRS is taking every opportunity to educate the public, school districts and the Legislature about what these new rules may mean for pension reporting.

Although GASB is not a regulatory agency and has no enforcement authority, its Board does wield a tremendous influence on accounting practices and principles used by governmental agencies such as CalSTRS.

Proposed Changes

The proposed GASB standards do not accurately address the accountability structure of the CalSTRS pension system. CalSTRS is a unique, cost-sharing pension system in which the responsibility for the funding shortfall belongs to the State of California—the plan sponsor.

The standardized accounting treatment recommended by GASB would require school employers or individual educational entities to report on their balance sheets their portions of the State’s unfunded obligation to fund CalSTRS benefits. If adopted as written, this policy would inaccurately attribute the financial burden to school employers, rather than the State of California, and negatively affect their day-to-day business operations.

On balance sheets, this would add a “Net Pension Liability”; consequently this new liability has the potential to dwarf most other liabilities on balance sheets and may result in a negative fund balance position for school employers.

Action Taken

Another significant change is the use of a blended discount rate which I’ve detailed in a letter sent to all California Legislative members. This letter briefly explains the current financial situation and why GASB’s proposed accounting standards, if adopted as written, will not change the actual funding needs facing CalSTRS, but will substantially overstate the magnitude of those needs.

On October 13, 2011, CalSTRS, along with a number of stakeholder groups, participated in GASB’s public hearing and formally recommended that GASB remove cost-sharing plans, such as CalSTRS, from the proposed amendments until more appropriate accounting standards can be implemented.

Action Needed

As I’ve stated in the letter to the Legislature, right now the most important change CalSTRS needs is a plan to address its long-term funding shortfall, which only the Legislature and Governor have the authority to execute.

CalSTRS has and will continue to educate decision makers on the need to adopt a responsible funding strategy that upholds the State’s constitutional promise to teachers and protects the General Fund.


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