Muniland: The Referee: Government Accounting Standards Board – GASB

From reading our weekly bullets, you might think that there are only two players in the municipal market; the bond issuer and the bond buyer. But there is also a referee called the GASB. The Government Accounting Standards Board sets the accounting rules for municipal entities. When we analyze income statements and balance sheets, we think about how the GASB impacts the accounting data. We then adjust our analysis to account for potential risks that are implicitly missing. For example, certain long-term liabilities like pension obligations are not included. This is a big deal because without looking into the notes section of the annual financial report, we cannot determine the overall liability profile of a credit. Another way the GASB influences credit assessment is through the discount rate – or rate of return – used to calculate the present value of pension liabilities.
 
GASB statements 67 and 68 impacted discount rate assumptions for fiscal year 2014. GASB 67 requires the participant to use a conservative discount rate if the government has been inconsistent in their annual pension fund contributions. GASB 68 complements rule 67 insofar as pension plans are no longer able to smooth investment returns over a rolling period. Prior to the rule change, pension investment returns were smoothed over a set period, typically five years. The new rule makes the value of pension assets more variable and, therefore, pension funding ratios more volatile. Governing Magazine reports that the new accounting rules impacted the New Jersey Teachers Retirement System’s pension funding ratio significantly. The plan’s funding ratio fell to 34.1% from 57.1%. However, the implementation of the GASB rule was fortuitous for some pension systems. For instance, CalSTRS (the California State Teachers Retirement System) saw funding ratios improve almost 10%, rising to 76.5% from 67.0%, due to improving investment returns. In response to the new rule changes, we will be looking even harder for credits with management teams taking a proactive approach to pension management because the new rules increase pension funding ratio volatility.

Sources: Governing Magazine, GASB.org, SNWAM Research