Muniland: GASB 68/71 Rules Take a Bite Out of State Balance Sheet Strength

The Governmental Accounting Standards Board’s (GASB) role is to establish and improve the standards of state and local governmental accounting and financial reporting. In 2012, GASB published new rules on the accounting and financial reporting for pensions. These new rules were implemented in fiscal year 2015 annual financial reports. Specifically, Rules 68 and 71 were implemented in an attempt to better recognize and measure net pension liability. Net pension liability is the difference between a pension plan’s assets and liabilities. We can see the impact of the new rules on a state’s credit quality by analyzing its various credit ratios, specifically undesignated fund balance to expenses. For example, Illinois has a pension funding ratio of about 39%, and as a result of the new rules shows a material drop in undesignated fund balance to expenses (UdesFBtoExp) from fiscal year 2014 to 2015 (see table below). What this ratio measures is the amount of discretionary assets a government has available to pay expenses, which includes debt service. In other words, the ratio measures a government’s savings for expenses and debt service. A government with a positive ratio, like Tennessee (see table below), is in a much better financial position to address unexpected events and will benefit from cheaper financing. The Tennessee example also shows that the GASB rules change did not have a material impact because the state’s pension funding ratio is above 90%. 

It should be noted that net pension liability is one way to measure pension liability. The SNWAM preferred measure of pension liability is unfunded actuarial accrued liability (UAAL). UAAL is a forward-looking measure of a pension’s funding progress. On an actuarial basis, the pension funding ratio can look significantly different than the net pension liability. In all, the GASB rules are an improvement to the previous accounting rules, but still don’t tell the whole story.

Sources: Credit Scope, SNW AM Research