Canadian Investment Review

Fully Expose Liabilities: U.S. Accounting Board

Written by Caroline Cakebread on Tuesday, March 30th, 2010 at 4:27 pm

953402_95129777Local governments in the U.S. could be required to increase the pension liability displayed on balance sheets if The General Accounting Standards Board has its way – so reports the Wall Street Journal. That could add up to tens of billions of dollars in liabilities to be laid bare on balance sheets. According to the article:

One thing GASB is looking at is how pension liabilities should be calculated. Governments normally don’t display their unfunded pension obligation as a liability on the balance sheet.

Instead, they list only the shortfall in the annual required pension contribution. As a result, states and municipalities that pay the annual contribution report zero pension liabilities. The total unfunded liability is reported in the notes section of the balance sheet.

Under tentative decisions by GASB’s board, the displayed number would be changed to the total unfunded pension liability, typically larger than the annual obligation.

For example, New Jersey hasn’t paid its annual contribution of $2.5 billion for the current fiscal year, but its underfunded pension liability currently stands at $46 billion.

Another issue: how to calculate the unfunded pension obligation. Currently, the total projected benefits obligation is lowered based on how much the fund is expected to reap in investments, commonly 8%.

Critics argue that rate, which for accounting purposes is known as the discount rate, is inappropriately high. GASB has looked at several alternatives that are currently lower than 8%.

The drop of one percentage point in the discount rate means a 10% to 20% increase in the total pension obligation, according to James Rizzo, senior consultant and actuary at Gabriel, Roeder, Smith & Co., a consulting firm for the public sector. For example, a pension system with a total liability of $100 billion would have an obligation of as much as $120 billion after a decline of one percentage point in the discount rate.

Read the full article here.

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