Structural public pension reform replaces traditional Defined Benefit (DB) plans with plans that tie benefits more closely to contributions.  These include Defined Contribution, Cash Balance, and Hybrid plans.  In the legislative arena, such proposals face a set of objections under the heading of Transition Costs – claims that structural reforms will raise employer costs in the short run, even if they lower them in the long run.  Thus, it is suggested, it would be unwise to undertake these reforms, especially in times of fiscal duress. 

This paper will examine the most common of these claims, that structural pension reform requires an acceleration of payments to amortize the old plan's unfunded liability.  The claim has three components: 

(i) A rule set by the Government Accounting Standards Board (GASB) requires the amortization schedule for the "Annual Required Contribution" (ARC) to be accelerated if the old DB plan is closed to new members;

(ii) GASB rules for the ARC determine state funding policy, thereby driving actual contributions; and

(iii) The GASB rule for closed DB plans is sound policy, since covered payroll shrinks, ending the basis for a rising schedule of amortization payments. 

This paper will consider each of the claim's three components, based on:  (i) close reading of the GASB standards; (ii) a variety of actuarial opinions upon which state legislative decisions have been based; (iii) fact-checking analyses by pension advocacy groups; and (iv) several case studies of states that have found legislative solutions.  Preliminary findings are:

• The first claim is true.  GASB accounting standards unambiguously require a shift in amortization methods from "level percent of payroll" – a back-loaded method – to "level dollar" if the old DB plan is closed to new members. 

• The second claim is false.  GASB sets standards for financial reporting; it does not determine funding policy and does not claim to. 

• The third claim is false.  GASB's rule assumes that amortization payments must be based on the payroll of DB members alone, a base that shrinks following closure of the plan.  However, states can and do levy these payments on total payroll – old and new plans alike – and with sound justification.  Total payroll growth is unaffected by closure of the DB plan, so there is no policy reason to change amortization methods.  The rationale put forth by GASB for "level percent" amortization, based on a growing payroll, continues to be satisfied by total payroll.

The paper's case studies will show that reform-oriented states have based amortization payments on total payroll as they adopt new plans, and continue to use level percent amortization.  Other states considering reform may follow their lead.  The decision on how to schedule amortization payments on the UAL is a financial policy decision.  It is a separate decision from the pension policy decision on how to structure future benefits.  Pension reform proposals should be evaluated on their own merits, and not confused with amortization schedules.