Response to ITC from the Government Finance Officers - NASRA Home

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Response to ITC from the Government Finance Officers - NASRA Home

    Government Finance Officers Association

    Testimony before the


    Concerning its Invitation to Comment on


    Norwalk, Connecticut

    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

    committeesthe 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.

Actuarial Methods

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

    than decreasing.

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

    accounting estimates.

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