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GASB Statements 68 and 71 on Public Pension Plans: A Primer for Local Governments
When the Governmental Accounting Standards Board (GASB) released Statements Number 68* and Number 71** (effective for fiscal year-ends beginning after June 15, 2014), it fundamentally changed the way local governments report defined benefit public pension liabilities and expenses.
Many governmental entities are still confused about the changes, what some of the statements’ terms mean, what they must do to comply, and how they will fund the liabilities. Here is a primer with basic information that may lend some clarity and help local governments make better sense of the new standards.
Three major reporting changes
For governments that prepare their financial statements in accordance with generally accepted accounting principles, GASB Statements Nos. 68 and 71 make three significant changes:
- First, and most notable, is the new requirement for governments to record their proportionate share of any net pension liabilities (or assets, if any).
- Next, pension expense is no longer equal to the pension contributions made by member governments. It is now equal to the change in net pension liability from year to year, with adjustments for deferred amounts.
- Finally, governments are now required to include fairly extensive footnote disclosures and additionally required supplementary schedules related to each of their defined benefit pension plans.
New pension reporting requirements more accurately reflect liabilities
GASB Statements Nos. 68 and 71 arose from a need for clearer financial information. Based on feedback GASB received from users of government financial statements (such as taxpayers and bond rating agencies, among others), it concluded that if governments were to report and disclose their shares of unfunded defined benefit pension plans, the statements would more accurately reflect their true net positions. GASB also concluded it would be more appropriate to account for pension liabilities the same way other liabilities are accounted for and recognized when goods or services are received, as opposed to paid by a government. In the case of pensions, the underlying service is rendered when employees are actually paid, thus creating a liability at the time of service. The GASB statements are intended to make the reports better reflect these actualities.
Glossary of terms
GASB Statements Nos. 68 and 71 created some new terminology and concepts. When you know their meanings, the standards will make more sense.
- Net pension liability — This is determined by the plan itself and the difference between the present value of future pension benefit payments to members and the fair market value of the plan’s investments. The plan will use an actuary to determine the present value of future pension benefit payments.
- Net pension asset — Similar to the net pension liability above, but in this case the fair market value of the plan’s assets exceed the present value of future pension benefit payments.
- Deferred outflows of resources — This is the government’s consumption of net position that is applicable to a future period. It is similar to a prepaid asset. The most typically deferred outflow is related to pension contributions made to the plan after the net pension liability’s measurement date and prior to the government’s fiscal year-end.
- Deferred inflows of resources — This term means the government’s acquisition of net position that is applicable to a future period — similar to a liability. Under Statements Nos. 68 and 71, the most common deferred inflows are related to the difference between projected and actual investment earnings, changes in proportionate share of the net pension liability, changes in actuarial assumptions, and differences between expected and actual economic experiences for the plan as a whole and typically amortized over a certain number of years to smooth year to year fluctuations. It should be noted these could also be deferred outflows if they are negative amounts instead of positive amounts.
- Pension expense — This is the government’s change in net pension liability between fiscal years, adjusted for the effects of other certain changes in the net pension liability (the amortization of deferred inflows and outflows of resources). The amount attributable to a local government is actuarially determined similarly to a government’s proportionate share of the net pension liability.
- Special funding situation — This term is defined as a circumstance in which a non-employer entity is legally responsible for some pension contributions. Although this results in additional revenues and pension-related expenses the government must record, it does not result in additional liabilities being recorded and thus has no effect on net position.
Calculating pension expenses
The pension expense is no longer simply the current-year contributions to the pension plans. Now it is the change in the net pension liability adjusted for amortization of various deferred inflows and outflows, which GASB allows to help smooth out annual fluctuations in plan investment returns and proportionate shares of the liability, i.e., changes in actuarial assumptions.
Funding liabilities and effects on bond ratings
One of the biggest questions governments have is, “How are we going to pay for this liability?” Currently governments aren’t expected to make lump-sum payments to help fund pensions. Statewide pension plans have plans to fully fund the liabilities that range from a few years to more than 50 years, based on their current funding status. Member governments will continue to make their required contributions, as set by the plans themselves.
Another question a lot of governments have is, “How will my bond rating be affected?” Rating agencies have been aware of governmental pensions and have historically incorporated pensions into their ratings, even when there was not a number included on a government’s financial statements. Standard & Poor’s and Moody’s have indicated, for the most part, that they don’t anticipate significant revisions to ratings because of these GASB statements.
Likely increase in public scrutiny
As governmental entities across the country begin implementing the new GASB requirements, the majority will record a new liability, and a few will add a new asset to the statement of net position. No matter what your government records, you can probably expect scrutiny from the general public. Local governments that belong to public pensions have very little control over how they are funded. Your best response to aggrieved taxpayers is to share accurate information about how contributions are determined, how well the plans are funded, and whether funding is increasing or decreasing.
How we can help
CLA’s state and local government practitioners have extensive knowledge and understanding of GASB Statements Nos. 68 and 71 and can help your entity incorporate the related changes into your financial statements and reporting practices.
*Statement Number 68: Accounting and Financial Reporting for Pension Plans — An Amendment of GASB Statement No. 27, June 2012
**Statement No. 71: Pension Transition for Contributions Made Subsequent to the Measurement Date – An Amendment of GASB Statement No. 68, November 201