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SEC’s Gallagher Wants More Pension Plan Accounting Amendments

Last month at the Municipal Securities Rulemaking Board’s securities regulator summit, the U.S. Securities and Exchange Commission’s (“SEC”) Daniel Gallagher voiced concerns over the Governmental Accounting Standards Board’s (“GASB”) lack of amendments regarding pension plan accounting for state and local governments. Despite praising GASB Statement (GASBS) No. 67, Financial Reporting for Pension Plans, and GASBS No. 68, Accounting and Financial Reporting for Pensions, for being a good starting point, the SEC Commissioner believes more amendments requiring state and local governments to publicly disclose complete range of their pension obligations and other post-employment benefits (OPEB) are necessary.

Currently, it is estimated that state and local pension plans are underfunded between $1 trillion to $4 trillion. Due to governments conducting lenient financial reporting practices, Gallagher believes full disclosure of liabilities is being masked and retirement plans with higher investment risks may have made the shortfall worse. Additionally, he said the plans are using a discount rate that underestimates their expected losses while concurrently exaggerating expected returns.

Though GASBS No. 67 and GASBS No. 68 require liabilities previously listed in the footnotes to be on the face of financial statements and eliminates the mandated disclosure of a plan’s annual required contribution, Gallagher says both standards still permit state and local governments to mask the full scope of their liabilities. In his view, all governments should list liabilities using an applied risk-free discount rate. In addition, Gallagher wants state and local governments’ disclosures to be similar to financially troubled companies facing an auditor’s going concern opinion.

In the meantime, Gallagher has endorsed the GASB’s approval of three proposals that improve OPEB accounting standards and encouraged quick adoption of the changes. In response to Gallagher’s comments, a spokesperson for the GASB’s Financial Accounting Foundation says the organization looks forward to further discussions and receiving additional feedback concerning future amendments.

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