Government Finance Officers Association
Testimony before the
GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB)
Concerning its Invitation to Comment on
PENSION ACCOUNTING AND FINANCIAL REPORTING
August 26, 2009
We are here today on behalf of the Government Finance Officers Association (GFOA) to
offer testimony on the Governmental Accounting Standards Board’s (GASB) recent
Invitation to Comment (ITC) on Pension Accounting and Financial Reporting. This
testimony was prepared and approved jointly by two of the GFOA’s standing
committees—the Committee on Accounting, Auditing, and Financial Reporting and the Committee on Retirement Benefits and Administration. Following are our comments on
the issues raised by the ITC.
Focus of Accounting and Financial Reporting for Pensions
The ultimate cost of pension benefits is reduced by earnings on related investments. The
rate of return on investments is much more predictable, of course, over the long-term than
over the short-term. Consequently, a measure of pension cost that focuses on a single
point in time (employer’s obligation for benefits earned as of the reporting date) will
likely be significantly more volatile than one that takes a longer-term perspective
(obligation reflective of employer funding requirements).
There is no reason to believe that a given private-sector enterprise will still be in business
next year, let alone thirty or forty years from now. Consequently, a serious case can be
made for adopting a point-in-time/termination focus for private-sector employers, despite
the inherent volatility of such a measure. State and local governments, on the other hand,
are perpetual entities for all practical purposes. That being the case, taking a point-in-
time/termination perspective for the measurement of a long-term obligation that is highly
susceptible to market fluctuations only serves to inject a needless element of volatility
that significantly detracts from the usefulness of the information to decision makers and
could easily lead to decisions that are detrimental to the best interests of all concerned
(benefit increases in the wake of transient market gains).
Furthermore, the key issue for decision makers in the public sector regarding pension
benefits is the sustainability of employer funding. A funding-focused approach provides
information directly relevant to the assessment of sustainability, whereas an obligation-
focused approach confuses the issue by highlighting temporary fluctuations that have
little import on long-term funding requirements.
Accordingly, we strongly support maintaining the current focus on employer funding
requirements in accounting and financial reporting for pension benefits.
Issues Related to Liability and Expense Recognition
We acknowledge that an argument can be made that the unfunded actuarial accrued
liability for pension benefits meets the basic definition of an accounting liability set forth
in GASB Concepts Statement No. 4, Elements of Financial Statements. However, GASB
Concepts Statement No. 3, Communication Methods in General Purpose External
Financial Reports That Contain Basic Financial Statements, indicates that a potential
element of a financial statement must also be “measurable with sufficient reliability” to
qualify for display on the face of the financial statements (paragraph 34); otherwise, it
should be disclosed instead in the notes to the financial statements (paragraph 35c). In
our view, the unfunded actuarial accrued liability is not sufficiently measurable for
display purposes, but is more appropriate presented as a note disclosure.
At the same time, we are persuaded that the accumulated underfunding of past required
contributions both meets the basic definition of a liability and is reasonably measurable.
We therefore support its continued presentation as a liability on the face of the statement
of net assets.
In our view, the deferral and amortization of actuarial gains and losses is logically
consistent with the long-term focus inherent in a funding-based approach to measuring
pension cost. The deferral and amortization of the cost of retroactive benefit
enhancements, on the other hand, is a very different matter. We appreciate the concerns
of those who question the logic of amortizing such costs over a lengthy period not clearly
connected to any anticipated “future benefit” resulting from the enhancement.
Accordingly, we would be open to the possibility of substantially limiting deferral and
amortization to a period logically consistent with the anticipated future benefit of the
enhancement (remaining service life of benefiting employees or contract term), or even to
the possibility of eliminating deferral and amortization altogether for retroactive benefit
We are convinced that the principle of interperiod equity is best served when fluctuations
unrelated to the value of the service performed by employees in a given period (actuarial
gains and losses) are prevented from having an undue impact on the period in which they
happen to occur (amortization v. immediate recognition of actuarial gains and losses).
Approaches to Measurement
It is our opinion that projected benefits should reflect all factors reasonably expected to
affect the ultimate level of future benefit payments to employees because that amount
constitutes the economic substance of the compensation arrangement, as understood by
both the employer and the employee.
We continue to believe that the discount rate should reflect actual anticipated earnings
based on the type and mix of investments that will be used to pay benefits. Using a risk-
free rate or some similar unrealistically conservative measure would violate interperiod 1equity by artificially raising the amount of pension cost recognized in the current period.
Just as the estimated useful life of a capital asset for purposes of depreciation should
reflect the government’s individual experience and circumstances rather than some
abstract norm, so too, the discount rate used for pensions should reflect a particular
government’s earnings prospects in its specific circumstances.
We believe that a genuinely funding-driven approach ought to be comprehensive enough
to allow for the use of any acceptable actuarial cost allocation method applied in a
manner consistent with professional actuarial standards. At the same time, we share the
concerns of critics of open amortization. Indeed, we would be supportive of a change in
standards that would prevent the amount to be amortized from actually increasing rather
Accounting by Employers in Cost-Sharing Plans
We believe that a cost-sharing plan is similar in many ways to an investment pool or
mutual fund. Just as it normally is not appropriate to attempt to “look through” a pool or mutual fund to its individual investments, so too we believe that it would be inappropriate
to attempt to “look through” a cost-sharing pension plan to a participating employer’s “share” of assets and liabilities. Those interested in more information on the cost-sharing
arrangement should be referred to the plan’s financial statements.
The GFOA appreciates the opportunity to respond to the GASB's ITC on pension
accounting and financial reporting.
1 In our view, the discussion of conservatism in the Financial Accounting Standards Board’s (FASB)
Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, paragraphs 91-95, is
helpful in underscoring the conceptual flaws inherent in deliberately applying unrealistic conservatism to