Washington Society of
Certified Public Accountants
February 22, 2007
David R. Bean, Director of Research
Governmental Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
RE: Pension Disclosures Project No. 31
Dear Mr. Bean:
The following is the response of the Government Accounting and Auditing
Committee of the Washington Society of Certified Public Accountants
(WSCPA). The views expressed are the views of the Committee and not
necessarily the views of the individual members or the WSCPA as a whole.
We are pleased to have the opportunity to respond to the Governmental
Accounting Standards Board's (GASB) Exposure Draft (ED) on Pension
We support the mission of GASB, to establish and improve standards of
state and local governmental accounting and financial reporting.
We are supportive of this ED on Pension Disclosures because it provides
a higher level of consistency between existing standards related to
reporting by pension plans, employers and other post employment benefits
(OPEB). We also support this ED because it attempts to address problems
inherent in the use of the Aggregate Cost Method for actuarially
determining liabilities at any point in time. However, we would prefer
a more streamlined disclosure that focused on informing readers about
the solvency of the plan, and less focus on actuarial details.
Since 1986, with the issuance of GASB Statements Number 4 and 5, our
Government Accounting and Auditing Committee has struggled with the
pension accounting, reporting and disclosure issues on which the GASB
has deliberated. While we have been in agreement, over all of these
years, that governments should report its pension obligations in its
Balance Sheets based on current benefit plan design and actuarial
accrued liabilities in relation to pension assets, we have disagreed on
how this should be accomplished. Some of our members would have
preferred an adoption of FASB statement number 87, whereby the projected
unit credit actuarial method would be used to measure all liabilities by
all reporting organizations, thus establishing a true reporting
comparability among governments. These individuals supported a "balance
sheet" approach whereby liabilities are determined at each fiscal year
end and the change between fiscal year ends is recorded in the operating
statement. However, many other committee members appreciated the GASB's
final approach to measure the employer's liability in terms of actual
contributions in relation to actuarially computed contribution
requirements over a "look-back" period and that the accounting
measurements and related financial reporting would be consistent with
the selection of actuarial funding methods.
Our committee has consistently been in favor of reducing note
disclosure, to focus on only critical financial analysis needs. We
believe that certain users of financial reporting, such as bond rating
agencies, has been provided too much accommodation, and therefore, the
result has affected the preparers and attesters in a way that is not
proportional to the benefits derived. We believe that these certain
users have established ways to obtain the information they seek without
codifying their needs into the GASB's financial reporting standards.
We believe the users of the financial statements should easily ascertain
whether the government has fully funded its pension and OPEB
obligations, stated in current dollars, as well as whether the expected
inflation in obligations is more than or less than the expected return
on assets held in "trust" on behalf of pension beneficiaries. In
addition, we believe that financial statement users should easily
ascertain the current cost of benefit changes (in relation to prior
service costs) enacted by a state legislature or local government
council during any given reporting period. The use of the aggregate
cost method obviously obscures the balance sheet impact of legislative
benefit changes that affect prior service costs that would be reflected
in other actuarial cost methods. We believe that the proposed
additional disclosures could replace certain current disclosure
Specific ED Paragraph Comments
If not specifically listed below, we support the provisions of this ED.
Paragraph 4c: If the specific plan is managed by a retirement system
that uses other actuarial cost methods for its other managed plans, then
the actuarial cost methods used by those other plans should be
sufficient. For example, if the system uses the projected unit credit
method, the entry age normal or the attained age method for its other
plans those methods should be allowed, so that there is some consistency
among different retirement plans administered by the same system. This
may save actuarial consultant costs incurred by the system.
While some of us would prefer using one actuarial method for all
entities, the GASB has decided to allow multiple methods in measuring
liabilities and costs. To be consistent with is measurement guidance,
we believe the disclosure requirement in relation to the Aggregate Cost
Method should allow the same multiple measurement methods.
Paragraph 4. d. (5) (c) and (d): The current disclosures, as well as
the proposed changes do not tell a reader why they should care about
these specific statistics. We urge the GASB to consider a "plain
language" approach to the note disclosure similar to the GASB's method
of using a plain language interpretation of its standards. (For WSCPA
GAAC members, see alternative insert attached).
Paragraph 6: We agree that additional information is required because of
the selection of the Aggregate Cost Method. Consistent with our response
to paragraph 4.c. above, since the GASB has allowed multiple measurement
methods, the GASB should allow methods consistent with other plans to
provide the disclosure regarding the funded status of the plan.
Paragraph 7, 8 & 9 should be consistent with the final promulgation in
relation to the Plan requirements under Statement 25. We refer to our
comments above regarding the amendments to Statement Number 25.
Specifically, we wish to restate that the employer should be allowed to
use actuarial cost methods used by other plans administered by the same
government. For example, if the system uses the projected unit credit
method, the entry age normal or the attained age method for its other
plans, those methods should be allowed, so that there is some
consistency among different retirement plans administered by the same
Thank you for the opportunity to respond. If you have any questions or
need additional information regarding this response, please contact me
at (360) 725-5376 or Steve Miller at (206) 281-0281.
SENT VIA E-MAIL
Kelly Collins, Chair
Government Accounting and Auditing Committee
Alternative insert into GASB response
An illustration of this concept is attached to this response. While we
understand that this is a very simplistic approach to pension
disclosures, we challenge the GASB to streamline its disclosures while
it is considering additional disclosures.
Example of a Simple Employer's Pension Note (as a possible attachment)
The state/city provides retirement pension and health/death benefits to
its employees, subject to certain eligibility requirements. We have
funded our future obligations for these retiree benefits by placing
assets in trust for these current employees and retirees. We use an
actuary to determine how much we should transfer into the trust every
two years. Our consulting actuaries use the XYZ method to determine the
estimate of current obligations for our employees and retirees expected
in the future. Such calculations are only estimates based on some
important assumptions. The important assumptions used in the latest
valuation of our current liabilities as of December 31, 20XX include:
How much will we earn on our investments? The actuaries assume a future
rate of return of 7.5% on our investments. This is slightly less that
our actual average annual return on assets of 7.8% for the last twenty
years. As such, our actuaries are using a conservative assumption.
How much will salaries and the general cost of inflation increase over
the next 43 years? Our actuaries have assumed a salary increase of 4.5%
(affecting current employees) and a general cost of living increase of
4.0%. Over the past twenty years, our average annual salary increases
is 5.2% and the general annual inflation rate for our area is 4.3%. As
such, these assumptions are aggressive in that the assumptions of future
increases are less than historical averages.
How do we value the trust assets set aside for these benefits? To avoid
wide swings in market valuations for our assets from year to year our
actuaries use a 4 year smoothed market method.
How do recent changes in the benefit package passed by the legislature
affect the solvency of the plan? Because changes in each legislative
session can have a significant impact on the obligations that the
state/local government will pay in the future, our actuaries spread the
cost over the next 30 years. This affects how much the government
contributes to the fund each year. Last year's legislature enacted a
change to the pension plan that enhanced benefits to survivors and
increased the COLA for existing and future retirees. The effect of
these benefit provisions added $300 million to the past service costs
and will require an additional $10 million in contributions to the plan
over the next 30 years.
While some of the assumptions uses in the calculation of our pension
obligations are conservative and others are aggressive, the effects on
the actuarial calculations are substantially offset. Therefore, the
actuarial assumptions used to develop the reported costs of the plan are
reasonable in relation to past long-term actual experience.
Using these assumptions our actuaries provide us with the amount
necessary to fund our retirement plan each year. For the last three
years we have fully funded this Required Actuarial Contribution (ARC) as
reflected in the following chart.