In an effort to improve the accounting and financial reporting for state and local government employee pension plans, the GASB approved two new accounting standards last month. Statement 67¹ changes the current guidance on pension plan financial reports, and Statement 68² creates new financial accounting and reporting requirements for state and local governments that provide pension benefits to employees through trusts or similar arrangements.

Government Employer Accounting for Pensions

Under Statement 68, which replaces the employer accounting and financial reporting requirements in Statements 27³ and 50,⁴ government employers must:

• Recognize their net pension liability in their statement of net position — The net pension liability is the difference between the present value of the projected benefit payments to employees for past service and the fair value of the plan investments.
• Improve the comparability of annual pension expense recognition and measurement — The standard requires several items to be immediately recognized as pension expense, including annual service cost, interest on the plan liability, and the effects of changes in benefit terms. Other expense items are recognized over the average remaining service period of plan participants. The difference between the actual and expected returns on plan assets is recognized in pension expense over a five-year period. Governments must use a single actuarial cost method, the “entry-age” method, to accrue pension benefits. Under this method, which numerous government employers already use, service cost is determined as a level percentage of pay.
• Provide enhanced financial statement note disclosures and required supplementary information (RSI) — Governments must describe the benefits provided by the plan, how the benefit contributions are determined, and the actuarial assumptions used to determine the pension liability.

Statement 68 also changes the accounting for and reporting of cost-sharing plans (i.e., plans in which multiple governments pool their pension obligations) by requiring each participating employer to record its proportionate share of the net pension liability and pension expense. In addition, the standard changes how governments determine their pension liability by including automatic benefit changes, such as cost-of-living adjustments, in the determination of projected benefit payments to employees. Further, according to the GASB’s news release about the new standards, the rate used to discount the projected benefit payments is a single rate that:

[R]eflects (a) the long-term expected rate of return on plan investments as long as the plan net position is projected under specific conditions to be sufficient to pay pensions of current employees and retirees and the pension plan assets are expected to be invested using a strategy to achieve that return; and (b) a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds to the extent that the conditions for use of the long-term expected rate of return are not met.

Pension Plan Accounting

Statement 67 replaces the financial reporting requirements under Statement 25⁵ for pension plans administered through trusts or similar arrangements. The new standard enhances the existing framework for plan financial reporting and improves the note disclosures and RSI for both defined benefit plans and defined contribution plans. Governments will be required to include new information about the annual money-weighted rates of return in the financial statement notes and in RSI.

Effective Dates

Once the standards are finalized in August 2012, Statement 67 will be effective for fiscal periods beginning after June 15, 2013, and Statement 68 will be effective for fiscal periods beginning after June 15, 2014. The GASB encourages early adoption of both standards.

[1] GASB Statement No. 67, Financial Reporting for Pension Plans.

[2] GASB Statement No. 68, Accounting and Financial Reporting for Pensions.

[3] GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers.

[4] GASB Statement No. 50, Pension Disclosures — an amendment of GASB Statements No. 25 and No. 27.

[5] GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans.

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