Fitch Warns of Volatility in Public Pension Reporting

The higher ratios of assets to liabilities being reported by many public pension systems in fiscal 2014 under new Governmental Accounting Standards Board Statement 67 (GASB 67) should be viewed with caution, Fitch Ratings warns.

The agency says 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 Fitch, 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.                   

“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,” says Douglas Offerman, senior director in Fitch’s states group.

The agency notes the transition is having little effect on the way total liabilities are calculated for the majority of systems that had already used certain actuarial assumptions required by the new standards. Minimal credit impact is expected from the transition.

A special report titled ‘New Pension Perspectives’ is available on the Fitch Ratings web site at www.fitchratings.com. A subscription is required.