The TEXPERS Blog

Pension Fitness

Accounting rules may be the thorn in the foot of pension systems

State and local pension plans often are in better shape than their accounting reports indicate, according to a new research report out of the University of California Berkeley’s Haas Institute for Fair and Inclusive Society.

The new report argues that a perceived crisis in public pensions is mainly due to misguided accounting practices mandated by the Government Accounting Standards Board, a private group that sets standards for pension accounting.

According to the report’s author, Tom Sgouros, the accounting rules were designed for the private sector and do not hold up to public sector needs. The report centers on pension obligations and the ratio between the assets and the future liabilities, or funding ratio.

Essentially, Sgouros says the rules are meant to insure against risks that public pensions systems do not face and fail to protect against the risks public pension systems do come up against.  That’s because governments do not operate in competitive investment markets and there is not much of a threat of liquidation. The rules, Sgouros wrote in the report’s abstract, “also encourage ‘reforms’ that frequently do not improve the financial situation of a given pension system.”

He suggests a new accounting system be adopted that would offer a better picture of a system’s financial health and reduce the waste of overfunding.

The Week’s Ryan Cooper reported that public pensions are in better shape than people think, and cited the Haas Institute’s report. You can read Cooper’s story here and access the full Haas Institute report by clicking here.