NEWS RELEASE 06/25/12 - GASB
GASB Improves Pension Accounting and Financial
Reporting Standards
Norwalk, CT, June 25, 2012—The
Governmental Accounting Standards Board (GASB) today voted to approve two new
standards that will substantially improve the accounting and financial reporting
of public employee pensions by state and local governments. Statement No. 67,
Financial Reporting for Pension Plans, revises existing guidance for
the financial reports of most pension plans. Statement No. 68, Accounting
and Financial Reporting for Pensions, revises and establishes new financial
reporting requirements for most governments that provide their employees with
pension benefits.
“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,” said GASB
Chairman Robert H. Attmore. “Among other improvements, net pension liabilities
will be reported on the balance sheet, providing 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.”
Pension plans are distinguished for financial reporting
purposes in two ways. First, plans are classified by whether the income or other
benefits that the employee will receive at or after separation from employment
are defined by the benefit terms (a defined benefit plan) or whether the
pensions an employee will receive will depend only on the contributions to the
employee’s account, actual earnings on investments of those contributions, and
other factors (a defined contribution plan).
In addition, defined
benefit plans are classified based on the number of governments participating in
a particular pension plan and whether assets and obligations are shared among
the participating governments. Categories include plans where only one employer
participates (single employer); plans in which assets are pooled for investment
purposes, but each employer’s share of the pooled assets is legally available to
pay the benefits of only its employees (agent employer); and plans in which
participating employers pool or share obligations to provide pensions to their
employees and plan assets can be used to pay the benefits of employees of any
participating employer (cost-sharing employer).
Statement 68
(Employers)
Statement 68 replaces the requirements of Statement
No. 27, Accounting for Pensions by State and Local Governmental
Employers and Statement No. 50, Pension Disclosures, as they
relate to governments that provide pensions through pension plans administered
as trusts or similar arrangements that meet certain criteria. Statement 68
requires governments providing defined benefit pensions to recognize their
long-term obligation for pension benefits as a liability for the first time, and
to more comprehensively and comparably measure the annual costs of pension
benefits. The Statement also enhances accountability and transparency through
revised and new note disclosures and required supplementary information
(RSI).
Defined Benefit Pension Plans. The Statement
requires governments that participate in defined benefit pension plans to report
in their statement of net position a net pension liability. The net pension
liability is the difference between the total pension liability (the present
value of projected benefit payments to employees based on their past service)
and the assets (mostly investments reported at fair value) set aside in a trust
and restricted to paying benefits to current employees, retirees, and their
beneficiaries.
The Statement calls for immediate recognition of more
pension expense than is currently required. This includes immediate recognition
of annual service cost and interest on the pension liability and immediate
recognition of the effect on the net pension liability of changes in benefit
terms. Other components of pension expense will be recognized over a closed
period that is determined by the average remaining service period of the plan
members (both current and former employees, including retirees). These other
components include the effects on the net pension liability of (a) changes in
economic and demographic assumptions used to project benefits and (b)
differences between those assumptions and actual experience. Lastly, the effects
on the net pension liability of differences between expected and actual
investment returns will be recognized in pension expense over a closed five-year
period.
Statement 68 requires cost-sharing employers to record a
liability and expense equal to their proportionate share of the collective net
pension liability and expense for the cost-sharing plan. The Statement also will
improve the comparability and consistency of how governments calculate the
pension liabilities and expense. These changes include:
- Projections of Benefit Payments. Projections of benefit
payments to employees will be based on the then-existing benefit terms and
incorporate projected salary changes and projected service credits (if they
are factors in the pension formula), as well as projected automatic
postemployment benefit changes (those written into the benefit terms),
including automatic cost-of-living-adjustments (COLAs). For the first time,
projections also will include ad hoc postemployment benefit changes (those not
written into the benefit terms), including ad hoc COLAs, if they are
considered to be substantively automatic.
- Discount Rate. The rate used to discount projected
benefit payments to their present value will be based on a single rate that
reflects (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.
- Attribution Method. Governments will use a single
actuarial cost allocation method – “entry age,” with each period’s service
cost determined as a level percentage of pay.
Note Disclosures
and Required Supplementary Information. Statement 68 also requires
employers to present more extensive note disclosures and RSI, including
disclosing descriptive information about the types of benefits provided, how
contributions to the pension plan are determined, and assumptions and methods
used to calculate the pension liability. Single and agent employers will
disclose additional information, such as the composition of the employees
covered by the benefit terms and the sources of changes in the components of the
net pension liability for the current year. A single or agent employer will also
will present RSI schedules covering the past 10 years regarding:
- Sources of changes in the components of the net pension liability
- Ratios that assist in assessing the magnitude of the net pension
liability
- Comparisons of actual employer contributions to the pension plan with
actuarially determined contribution requirements, if an employer has
actuarially determined contributions.
Cost-sharing employers also will
present the RSI schedule of net pension liability, information about
contractually required contributions, and related ratios.
Defined
Contribution Pensions. The existing standards for governments that
provide defined contribution pensions are largely carried forward in the new
Statement. These governments will recognize pension expenses equal to the amount
of contributions or credits to employees’ accounts, absent forfeited amounts. A
pension liability will be recognized for the difference between amounts
recognized as expense and actual contributions made to a defined contribution
pension plan.
Special Funding Situations. Certain
governments are legally responsible for making contributions directly to a
pension plan that is used to provide pensions to the employees of another
government. For example, a state is legally required to contribute to a pension
plan that covers local school districts’ teachers. In specific circumstances
called special funding situations, the Statement requires governments that are
nonemployer contributing entities to recognize in their own financial statements
their proportionate share of the other governmental employers’ net pension
liability and pension expense.
Statement 67
(Plans)
This Statement replaces the requirements of Statement
No. 25, Financial Reporting for Defined Benefit Pension Plans and Note
Disclosures for Defined Contribution Plans and Statement 50 as they relate
to pension plans that are administered through trusts or similar arrangements
meeting certain criteria. The Statement builds upon the existing framework for
financial reports of defined benefit pension plans, which includes a statement
of fiduciary net position (the amount held in a trust for paying retirement
benefits) and a statement of changes in fiduciary net position. Statement 67
enhances note disclosures and RSI for both defined benefit and defined
contribution pension plans. Statement 67 also requires the presentation of new
information about annual money-weighted rates of return in the notes to the
financial statements and in 10-year RSI schedules.
Effective
Dates and Availability
The provisions in Statement 67 are effective
for financial statements for periods beginning after June 15, 2013. The
provisions in Statement 68 are effective for fiscal years beginning after June
15, 2014. Earlier application is encouraged for both
Statements.
Statements 67 and 68 will be available for download at no
cost from the GASB website in
early August. Bound copies of the Statements will be available for distribution
soon thereafter. A plain-language description of the new requirements also will
be available on the GASB
website.
About the Governmental Accounting
Standards Board
The GASB is the independent, not-for-profit organization formed in 1984 that
establishes and improves financial accounting and reporting standards for state
and local governments. Its seven members are drawn from the Board’s diverse
constituency, including preparers and auditors of government financial
statements, users of those statements, and members of the academic community.
More information about the GASB can be found at its website, www.gasb.org.