New changes in GASB rules could help states transition to defined contribution plans

On Tuesday the Kentucky General Assembly’s Public Employee Pension Task Force received some good news from the Pew Center. The Commonwealth could potentially save a significant amount of money and ensure the viability of the public employee pension system if lawmakers create a defined-contribution or hybrid retirement plan for new state employee hires.

The Government Accountability Standards Board (GASB) made changes to their accounting methods; specifically, the way pension systems calculate the liabilities as it relates to annual required contribution (ARC). In the past, the pension plans have been judged based on the percentage of the ARC which is funded. Under the new rules, GASB will require plans to put a new “net pension liability” figure directly on the balance sheets, in addition to the funding projections.

This is great news, according to Pew, because it eases the “transition costs” of moving from a defined benefit plan to a defined contribution plan for new hires, a proposal supported by the Kentucky Chamber. Under the new GASB rules, states can take longer to fully fund the “ARC” for those under the defined benefit plan and no longer have to front load all the costs of running both a defined benefit plan for existing employees and a defined contribution plan for new hires.

The Public Employee Pension Task Force is charged with producing a report to the legislature in December 2012 with recommendations on how to address the state’s growing unfunded pension liability problem. The next monthly meeting is scheduled for August 21 in Frankfort and will also be televised on KET.