July 8, 2011

New GASB Rules Aren't the Right Fix for Pension Crisis

Eileen Norcross

Senior Research Fellow

The Governmental Accounting Standards Board issued proposals for a last round of public comment today that aim to make the cost of public pension plans more transparent. However, it sounds like the new proposals for selecting a discount rate are attempting to solve the problem by throwing darts at it.

Putting the liability on the balance sheet is a good idea, but you have to value it correctly first. They need to use the rate that matches the liability and treat it like government debt, which means using the Treasury rate.

Choosing a muni-bond rate is not a fix, and they shouldn’t even be considering it. They’re misvaluing the liability because they’re not taking into account that pensions are guaranteed by the government and must be paid out.