The accounting board for U.S. state and local governments is set to propose on Friday radical reforms to the disclosure practices of public pension systems.

The biggest change the Governmental Accounting Standards Board will suggest will offer compromise in a fight currently rocking public pensions: how to calculate rates of return.

The board would require pensions lacking sufficient assets to cover future benefits to lower their projected rate of return on investments to about 3 to 4 percent. Adequately funded pension systems could continue to forecast higher rates in line with what they have historically received on investments, which for most is around 8 percent.

In a draft of rules expected to be released late on Friday, the board will also propose governments put pension liabilities up front on their financial statements, instead of tucked into the footnotes of the documents.

It will create the appearance that the government is in a weaker financial position. I say appearance because the reality is that nothing has changed except the display, said the board's chairman, Robert Attmore.

The board will also propose public pensions abandon spreading expenses over several years. That will push losses and changes into a shorter timeframe for many pensions, making them appear greater than when smoothed.

The systems will also have to explain how they have derived expected rates of return and what else is influencing the sizes of their liabilities, such as a recession or a policy change.

Because of the long-term nature of these promises and these costs, most public pension actuaries believe the current information is more 'decision-useful', said Paul Angelo, senior vice president and actuary at the Segal Company. By having numbers that are so affected by short-term changes ... you're going to have a very volatile measure when the thing you are going to account for is not volatile.

After a comment period, the proposals will become final sometime in 2012 and will likely take effect in 2013. The board began working on the reforms in 2008, and has held numerous public meetings to understand what officials, investors, and workers would like to know in pension financial reports.

Most money to pay public retirees comes from earnings on investments, which were devastated during the financial crisis. As states' revenues collapsed after the longest and deepest downturn since the Great Depression, many also cut funding contributions to the plans each year.

While almost everyone agrees the funds can pay current retirees, taxpayers and investors in the $2.9 trillion municipal bond market are nervous about how they will cover costs in the coming decades. Of late, their investments have been returning to health, mostly on a rising stock market.

Pension funds currently choose from a menu of accounting practices. The board wants to create a single system to reduce complexity and improve comparability, Attmore said.

People will question the cost-benefit of providing this extra information, Attmore also said. We've heard from many users that this information is essential to understanding the liability.

Two pension groups -- the National Association of State Retirement Administrators and the National Council on Teacher Retirement -- have already raised questions about putting the liability on financial statements.

It is equivalent to an individual needing to report on a finance statement, not his or her monthly mortgage payment, but the entire outstanding home mortgage, including interest, so that the debt-to-asset ratio is drastically changed, they said in a statement issued on Thursday.

Future pension shortfalls are currently forecast at anywhere from just over $600 billion to $3 trillion, depending on the projected rates of return.

Those advocating for lower return rates say pension funds will never see the investment gains they made before the financial crisis. The other side says pension funds make long-term investments and, given that timeline, it is more rational to follow long-term historical rates.

(Reporting by Lisa Lambert; Editing by James Dalgleish)