New GASB pension standards ask
governments to take long view

A new set of standards from the Governmental Accounting Standards Board (GASB) will require government entities to report net pension liabilities in their balance sheets, a change that GASB Chair Robert H. Attmore said will give a better sense of just how big some pension obligations are.

The standards, GASB Statement 67, Financial Reporting for Pension Plans, and GASB Statement 68, Accounting and Financial Reporting for Pensions, were approved by the board on June 25, about a year after the initial exposure draft was first released.

Prior to the passage of GASB 67 and GASB 68, public pension plans were governed mainly through GASB 27, Accounting for Pensions by State and Local Governmental Employers, and GASB 50, Pension Disclosures, according to the GASB press release. Under GASB 27, governments recognized pension costs on their balance sheet based on annual expenditures, whether they were direct costs, as in the case of a single-employer or agent–employer, or annual required contributions, as in the case of a cost-sharing, employer-defined benefit plan. GASB 50 later amended some parts of GASB 27 by requiring note disclosures pertaining to the plan’s funding status and contribution rates.

Under GASB 68, governmental entities will need to address net pension liability in their statements. Net pension liability refers to the difference between the total pension liability, defined as the present value of the projected benefit payments to employees based on past service, and the assets, generally considered to be the investments set aside to pay retirees and current employees. If a government takes part in a cost-sharing plan, it will need to recognize its proportionate share of the collective net pension liability and expense for the plan.

Governments will also need to immediately acknowledge annual service costs and interest on the pension liability, as well as the effects of any changes in benefit terms. And because pension expenses will now be viewed over the service period of the plan member, governments also have to grapple with how changes in economic and demographic assumptions used to project benefits affect the pension, as well as differences between assumptions and actual experiences. Governmental entities will also need to recognize, over a five-year period, the effects of differences between expected and actual investment returns.

GASB 67 pertains more to footnote disclosures and requires reporting of fiduciary net position—the amount held in a trust for paying retirement benefits—and any changes to that position, as well as information about money-weighted rates of return, in the notes to the financial statement.

According to Attmore, the new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations. “[They will provide] citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered,” he said.

NYSSCPA Secretary/Treasurer and Govern-ment Accounting and Auditing Committee member Scott M. Adair, who serves as the CFO for Monroe County, immediately noted the similarities between GASB 68 and GASB 45, which was enacted in 2006 and mandated that governments quantify nonpension postretirement employment benefits like health care in terms of the total cost over the life of the retiree. Some of the issues that came up with GASB 45, he said, might come up with this newer standard as well.

“In the beginning, when [GASB 45] was issued, there was a lot of confusion on funding vs. just reporting it, and there still seems to be some of that confusion out there,” he said. “So I think it’s important that the GASB get out in front when they publicize the passage of this standard, [and make it clear] that it does not require funding the liability but recognizing the liability.”

Thomas J. Goodfellow, a past chair of the Government Accounting and Auditing Committee, who also immediately brought up the similarities between GASB 68 and GASB 45, said that, as it pertains to New York state itself, municipalities and other local government entities probably won’t be dramatically affected or see large changes in their reported unfunded obligation because New York has a well-funded shared pension system.

This is in contrast, he said, to other states like Texas and New Jersey, which have large unfunded pension liabilities and, consequently, “are really crunched.” The standard change will require them to recognize an even larger liability than they do now, he said.

Adair added that the standard change is both a reflection of new trends in how people think about government expenses, partially fueled by the problems many states are experiencing with their pension systems, as well as a driver for future change.

“I think as we move forward, people are really focused on the cost of what it is to run a government today, and I think this is one more thing that brings it further to the forefront of balance sheets,” he said. “As we go down the path of additional transparency, it will create a sort of different attitude.”

Goodfellow said he welcomed the change, and that he is generally “100 percent in favor of the disclosure aspects on both the plan side and the employer side and accruing estimated liabilities.”

“I think it’s clearly a transparency and responsibility issue that needs to be addressed,” he stressed.
GASB 67 is effective for periods beginning after June 15, 2013; GASB 68 is effective for fiscal years beginning after June 15, 2014. Both, however, can be adopted early.