The quality and transparency of reported financial information regarding pensions must be improved to prevent future problems like those currently threatening taxpayers and retirees.

California taxpayers are being asked to reach deep into their pockets to rescue a substantially overextended public pension system. So far, those requests have been rejected. But it may be only a matter of time before Sacramento returns with hat in hand.

Finding the right public policy solution to the immediate crisis will be challenging and painful, whatever the right solution turns out to be. But even more important than finding the way out of the current crisis is preventing another in the future.

The first step is make certain that, going forward, California’s public pension funds report, reliable information about their financial standing, so that all lawmakers and taxpayers are clearly informed about the magnitude of the liability being incurred today.

That’s why it is extremely important to support an effort underway by the Governmental Accounting Standards Board (GASB) to make critical improvements to the quality of accounting and financial reporting for public pension systems. The proposals, if enacted, would take effect in June 2013.

The GASB, the independent, non-profit organization that sets accounting and financial reporting standards for state and local governments, has proposed modifying pension plan reporting to require public pension fund managers to clearly disclose how much taxpayers really owe to these pension funds and retirees. Only when we have set this realistic baseline can states like California really talk about how to solve the long-term challenge of pension reform.

State and local workers and their unions negotiated these retirement plans with the expectation that governments would hold up their end of the bargain and manage the funds intelligently. But it is clear now that many state and local governments used unrealistic projections of investment earnings when devising their pension plans.

Since 2006, the GASB has been reviewing pension accounting and financial reporting standards, and talking with a wide spectrum of interested parties—taxpayers, labor unions, elected officials, pension fund managers, actuaries, economists, accountants, auditors and others. Officials at the state and local levels have told the GASB that current accounting and financial reporting standards do not provide them with the information they need to adequately understand the costs of benefits promised to active and retired employees and the related pension liabilities.

Public pension fund executives in California have participated in the GASB’s due process. Even they admit that changes must be made. But the issue is when. Many of these funds are requesting the GASB to push back the June 2013 deadline for adopting these new standards.  But in response to the funds’ requests for more time, California’s exasperated taxpayers must be thinking, “If not now, when?”

The proposed fix
The GASB’s proposal is a rational means for attributing government pensions costs to the time periods in which employees render the services that earn the promised pension benefits.  This process will allow taxpayers to know the costs of the services that are currently being provided. Governments collect money to fund pensions from government employees and employers, and from returns on the related investments held by pension plans. The proposed solution for calculating investment returns asks governments to show what they reasonably expect to earn, and how much taxpayers will have to make up through government employer contributions.

The proposed standards will “fix” how expected investment rates of return are calculated, and make these assumptions more realistic. Instead of looking at specific interest rates, these new standards are designed to work well in any economic environment. They will reflect reasonable expectations regardless of interest rates at any given time. They help governments make adjustments to answer this key question: Will future assets be there to pay future pension costs? They narrow the range of assumptions governments can use, so that people who rely on this information can make better comparisons from one pension plan to another.

While improved pension accounting and reporting rules will not solve all the current problems facing state and local governments, they will give taxpayers and their elected representatives a clearer picture of their retirement exposures. It is clear that decisions about how to change existing plans to make them solvent might require unpleasant political decisions; better accounting that results in more transparent reporting should produce a more informed decision making processing the future.

The people of California cannot begin to work on meaningful public pension reform without access to high-quality, reliable information on the financial state of their pension funds. The GASB’s goal is to make California’s long-term pension obligations clear to all stakeholders so that taxpayers, public employees, bond buyers and state and local authorities can make informed decisions. These improvements to accounting standards will help ensure that taxpayers know what are the current costs, and what costs are being passed  on to future generations.