The Huge Pension Liability Bomb that Will Hit Municipalities in 2014

I was reading through the Journal of Accountancy and came across some information I think you'd be interested in. The governmental Accounting Standards Board (GASB) has voted to approve two new GASB standards for local and state governments set to take effect for fiscal years beginning after 6/15/14 relating to governmental pension accounting. These changes move governmental pension accounting more in line with US GAAP (used in business accounting).

 http://journalofaccountancy.com/News/20125927.htm

Here are the key parts of the article relating to GASB #68:

"Currently, the pension liability on a government’s balance sheet is based on the difference between the contributions they are required to make to a pension plan in a given year versus what they actually funded. The change reflects the view that pension costs and obligations should be recorded as employees earn them, rather than when the government contributes to a pension plan or when retirees receive benefits."

AB note - This is a big change. Businesses are required to report Net Pension Liability as the difference between the Projected Benefit Obligation (future plan payouts) and the fair value of plan assets. Government's don't need to do that. This is the liability that crushes companies.

“The new GASB standards will benefit users of these financial statements, as well as taxpayers, since state and local governments for the first time will have to report unfunded pension liabilities in their balance sheets, providing a clearer view of pension obligations,” AICPA President and CEO Barry Melancon, CPA, CGMA, said in the release.

"A report by the Pew Center on the States, a national public policy think tank, indicates that the gap between states’ public employee retirement benefit obligations and the funds set aside to pay those benefits was approximately $1.38 trillion in fiscal year 2010."

I assume most people don't bother to read about approved governmental accounting rule changes but I believe this is particularly important given how constrained local and state government budgets already are. Overburdened Balance Sheets are about to be hit with undoubtedly large liability increases relating to the pension accounting change. Taking things a step further, and more importantly, this change could potentially put big upward pressure on municipal bond rates by way of lower credit ratings from the credit agencies due to deteriorating Balance Sheets.

The moral of the story continues to be stay away from municipal bonds.