For many years, the majority of governments have been following the guidance in GASB No.25 and No. 27, as amended by GASB No. 50, for their pensions. This will all be changing in the next few years as governments will be required to follow GASB No. 67, Financial Reporting for Pension Plans – an amendment of GASB Statement No. 25 and GASB No. 68, Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27. The primary objective of these statements is to improve financial reporting by state and local governments for pensions and for the pension plans themselves.
GASB No. 67
This new statement is applicable to pension plans administered through a trust or equivalent arrangement, or otherwise referred to as “trust.” Pension plans not administered through a trust will still follow GASB No. 25 and GASB No. 50. Pension plans administered by a trust have the following characteristics:
- Contributions and earnings on those contributions are irrevocable.
- Pension plan assets are dedicated to providing pensions to plan members in accordance with benefit terms.
- Pension plan assets are legally protected from the creditors of employers, non-employer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets are also legally protected from creditors of the plan members.
For defined benefit pension plans, this statement establishes standards of financial reporting for separately issued financial reports. In addition, it specifies the required approach to measuring the pension liability of employers for benefits provided through the pension plan (the net pension liability), about which information is required to be presented. Distinctions are made between single-employer pension plans, agent multiple-employer pension plans (such as the Illinois Municipal Retirement Fund), and cost-sharing multiple-employer pension plans (such as the Wisconsin Retirement System).
What is changing?
There are few changes to the plan financial statements themselves; however, there will be changes to note disclosures and required supplemental information (RSI). GASB No. 67 also changes the method for determining the total pension liability and net pension liability for employers and non-employer contributing entities.
A significant change is the value used for discounting the projected benefits. That single value should reflect:
- the long-term expected rate of return on pension plan investments that are expected to finance the payment of benefits to the extent that (a) the pension plan’s fiduciary net position is projected to make projected benefit payments (GASB’s example projects out one hundred years) and (b) pension plan assets are expected to be invested using a strategy to achieve that return, and
- a yield or index rate for twenty-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher (or equivalent quality on another rating scale), to the extent that the conditions in (1) are not met.
To put this a different way, the discount rate may be something other than the investment rate of return, if that rate is not considered sufficient to finance the future benefits. The lower the discount rate, the higher the liability.
Actuarial studies will be required every two years. The assumptions must follow the Actuarial Standards of Practice issued by the Actuarial Standards Board, with the entry age normal cost method required for reporting, and with service cost based on a level percentage of pay and attributed to each plan member individually from the period when the member first accrues benefits to the point the member retires. As previously noted, the statement specifies the actuarial cost method to be used for financial reporting purposes; however, the actuarial cost method used for funding purposes may be different, as the accounting and funding measurements are no longer linked. Accordingly, the accounting and funding methods may be the same, but it is likely that the actuarial methods used by pension plans for accounting and funding purposes will be different.
These changes will take place for fiscal years beginning after June 15, 2013 or June 30, 2014 year ends.
GASB No. 68
This statement relates to employer accounting and reporting for pensions that are provided through pension plans administered through a trust having the characteristics described earlier. This statement impacts the employers, whereas GASB No. 67 impacts the plan itself.
GASB No. 68 established standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expenses/expenditures. For defined benefit pensions, this statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Distinctions are once again made between single-employer pension plans, agent multiple-employer pension plans (such as the Illinois Municipal Retirement Fund), and cost-sharing multiple-employer pension plans (such as the Wisconsin Retirement System).
What is changing?
The biggest change relates to the potential liabilities that employers will have to report in their full accrual financial statements. Not only will employers report a liability to the pension plan for contributions due at year end in relation to the Annual Required Contribution (ARC), but also a liability to the employees themselves. This is called the Net Pension Liability (NPL) and was formerly an amount that was disclosed only in the footnotes. Single employers will recognize one hundred percent of the NPL, while cost-sharing employers will recognize their proportionate share of the NPL. This liability will not impact governmental funds such as the general fund.
Changes related to the actuarial method, assumptions, and discount rate are similar to GASB No. 67.
There are specific requirements for recognizing the pension expense on the full accrual financial statements and for reporting deferred outflows of resources or deferred inflows of resources, if those requirements have not been met.
There will also be changes to note disclosures and RSI, depending on the type of pension plan.
These changes will take place one year after GASB No. 67, for fiscal years beginning after June 15, 2014, or June 30, 2015, year ends.
For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.