WASHINGTON (Reuters) - Public retirement systems will have to make major changes in how they disclose their pension assets and liabilities, under new rules that the board in charge of accounting standards for U.S. state and local governments is set to approve on Monday.
The Governmental Accounting Standards Board will vote on the changes at an afternoon meeting.
The reforms were proposed nearly a year ago to give more detail on how pensions affect governments' finances. They will replace the menu of accounting options pension funds currently use with a single system, and will likely make some pension shortfalls appear larger than under current reporting methods.
Over the last two years, skepticism has risen about the financial health of public pensions and a week ago Pew Center on the States estimated the total shortfall is $757 billion and growing. Many systems do not have enough money to cover retirees' benefits and taxpayers and policy-makers are seeking more complete information about the depth of the gaps.
The new standards will provide "a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered," GASB Chairman Robert H. Attmore said in a statement.
The biggest change affects how the pension funds project rates of return on their investments.
Pension funds that are considered adequately funded could continue forecasting investment returns in line with their historic averages, usually around 8 percent, under the new GASB rules. It defined those pension systems as having sufficient assets to pay the pension of current employees and retirees, but did not set a funding ratio.
Funds lacking sufficient assets to cover future benefits must lower their projected investment rate to about 3 to 4 percent. Specifically, the investment rate would have to match "a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds," an information sheet on the changes said. On Friday, the yield for AA-rated municipal bonds due in 20 years was 3.12 percent, according to Municipal Market Data.
Although it sounds like a technical accounting move, this change is key to the pension wars.
Investment earnings provide 60 percent of pension fund revenue. When the investments fail to meet the forecasts, governments - essentially taxpayers - and employees must pitch in money to fill the void. At the depth of the recession in 2008, the return on pension investments fell by 25 percent, Pew found.
Conservative members of the U.S. Congress would like pension systems to use a rate they call "diskless" of about 4 percent. Pension funds counter that they should use rates in-line with historical averages.
According to Standard & Poor's Ratings Services, the rate of decline in U.S. state pension funding has slowed recently, which could result in more states continuing to use their current rates of return under the new GASB system.
Under GASB's changes, governments will have to count their pension obligations as liabilities for the first time. And they will have to post their net pension liability - the difference between the projected benefit payments and the assets set aside to cover those payments - up front on financial statements.
While funds can now spread their costs over many years, the timeline for "smoothing" pension expenses will be shortened.
(Reporting by Lisa Lambert; Editing by Anthony Boadle)