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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 Disclosures. 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. Background 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. Summary Comments 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 requirements. 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 system. 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. Sincerely, 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.
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