Public pensions are reporting higher asset values under new GASB accounting standards, according to Fitch.
That’s because the new rules require pensions to report the market value of their assets, as opposed to the “smoothed” value.
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Most public pension systems are reporting materially higher asset values under the new GASB standards, reflecting immediate recognition of several years of strong market gains not yet fully incorporated under the asset smoothing practices allowed by previous GASB standards, according to a Fitch Ratings report.
‘In an accident of timing, the transition to GASB 67 is taking place at a very favorable moment in the economic cycle for reporting asset valuations. In most cases, the market value of assets reported by systems under GASB 67 is much higher than the smoothed asset value reported previously,’ said Douglas Offerman, senior director in Fitch’s states group.
The higher ratios of assets to liabilities being reported by many systems in fiscal 2014 should be viewed with caution. Reported asset values are now fully subject to market cyclicality, and thus the ratio of assets to liabilities reported by systems will rise and fall far more sharply than the funded ratio reported under prior GASB standards.
“Smoothing” takes into account the previous five years of investment returns – so even in 2014, the return figures produced by many pension funds were weighed down by losses experienced in 2009.
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