What You Need to Know About New GASB Accounting Standards
The Governmental Accounting Standards Board is scheduled to release new accounting standards that will significantly change the way pensions are reported.
It’s important to note that the CalSTRS projected unfunded liability of $64.5 billion is not changed by the new GASB accounting rules. The calculations required by GASB will significantly increase the appearance of the unfunded liability for accounting purposes only, but will not change the actual amount of the funding shortfall.
Impact on School Employers
The new measures could require school employers or individual educational entities to report on their balance sheets their portion of CalSTRS unfunded obligation. If the new measures add a “Net Pension Liability” on school employer balance sheets, this new liability has the potential to dwarf most other liabilities and may result in a negative fund balance position for school employers. A final statement of the proposed standards is expected to be adopted by June 18, 2012 and take effect for school financial reporting periods beginning after June 15, 2014 (fiscal year 2014-15).
CalSTRS Participates in GASB Hearing
In the fall of 2011 GASB held public hearings to solicit feedback on Exposure Drafts that proposed amending GASB Statements 27 and 25. CalSTRS testified before the board and recommended that GASB defer the application of the revised accounting and financial reporting standards outlined in the Exposure Drafts for employers participating in cost-sharing plans due to the complexities of these plans. In meetings following the hearing GASB indicated that it planned to pursue the originally proposed recommendations.
Impact on the Unfunded Liability
CalSTRS uses a 7.5 percent annual rate of return to forecast earnings and discount future obligations. Based on that investment assumption, the June 30, 2011 snapshot of the CalSTRS fund’s assets and liabilities shows a $64.5 billion shortfall.
GASB proposes a different accounting approach that will not change the actual amount of the shortfall, but will significantly increase its amount as presented in financial statements. The GASB proposal uses a ‘blended’ discount rate that considers a long-term rate of return on plan assets, which reflects a pension fund’s long-term investment strategy, and a high-quality, non-taxable municipal bond index rate, to account for the potential need to borrow funds to pay pension benefits after net assets have been fully depleted.
Using this new blended discount rate may cause plans with outstanding unfunded liabilities, like CalSTRS, to appear to have an increased net pension liability. However, although the liability may be reported on a financial balance sheet as a new, significantly higher amount, the actual current shortfall of $64.5 billion projected by CalSTRS will not change as a result of any action taken by the GASB.
Regardless of the new accounting standards, 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 is currently working with the Legislature, the Administration and our stakeholders to help enact such a program. To the extent that enactment of such a plan reduces or eliminates the shortfall, the impact of these new standards on school financial balance sheets will be reduced.