What Happened?
If you haven’t heard, on June 25, the Governmental Accounting Standards Board approved two new standards that will impact the accounting and financial reporting of public employee pensions by state and local governments. As most Gov1 readers know, the board that made the changes, known as GASB, is an independent non-profit responsible for setting such standards. The changes have been in the works for years; since 2006, the board has been advocating for changes to governmental financial reporting.
Who Cares?
The new rules are effective for all state and local governments, and have somewhat aggressive timetables. In classic GASB form though, the statements are not yet even available; they should be posted on GASB’s Web site in early August. In the meantime, GASB’s press release with details on the changes can be viewed, as can a plain English article on key provisions.
The Objective
The new standards will change how governments calculate and report the costs and obligations associated with pensions in important ways. GASB’s goal was to increase the transparency, consistency, and comparability of pension information across governments, and to make the data more useful.
Are You Effected?
According to GASB, the new standards apply specifically to governments and pension plans in which a government’s contributions to the trust used to administer a pension plan are irrevocable, restricted to paying pension benefits, and beyond the reach of creditors. Pension benefits provided through trusts that do not meet those three criteria are not addressed in the new Statements, and those pension benefits would continue to be accounted for using existing standards.
It’s also important to note that the new Statements relate to accounting and financial reporting issues only. That means they impact how pension costs and obligations are measured and reported in audited external financial reports. The Statements do not address how governments approach pension plan funding. In other words, a government’s policy regarding how much money to contribute to its pension plan is not addressed in the new standards.
Effective Dates
There are two key provisions, which we will outline below. The earliest effective date is for financial statements for periods beginning after June 15, 2013. This is important to understand, considering your particular fiscal calendar. For example, if your municipal fiscal year runs from July 1 to June 30, the new provisions will be effective for statements for the period beginning July 1, 2013.
The Provisions
There are two key provisions:
- 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.
We will take them in reverse order, as GASB did in its announcement. We’ll also provide the information in bulleted form, so it’s easy to follow and find what you need:
Statement No. 68, Accounting and Financial Reporting for Pensions
- REPLACES: For the record, this statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and Statement No. 50, Pension Disclosures, particularly as they relate to “governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria.”
- GENERAL REQUIREMENTS: Governments providing defined benefit pensions must recognize their long-term obligation for pension benefits as a liability for the first time, and must more comprehensively and “comparably” measure the annual costs of pension benefits.
- DISCLOSING NET PENSION LIABILITY: Governments that participate in defined benefit pension plans must report in their statement of net position a “net pension liability.” In GASB’s statement, net pension liability is defined as 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. Changes have also been made for defined contribution pensions.
- NEW NOTE DISCLOSURES AND “RSI”: Employers will also need to provide extensive note disclosures and “required supplementary information” or RSI. This will include disclosing descriptive information about the types of benefits provided, how contributions to the pension plan are determined, assumptions and methods used to calculate the pension liability, and more
- BETTER DISCLOSURE OF EXPENSES: The Statement calls for “immediate recognition” of more pension expense than is currently required. This includes annual service cost and interest on the pension liability, as well as the effect on the net pension liability of changes in benefit terms.
- PROPORTIONAL SHARES: Cost-sharing employers must record a liability and expense equal to their proportionate share of the collective net pension liability and expense for the cost-sharing plan.
- STANDARDIZATION OF CALCULATIONS: To ensure the comparability and consistency of how governments calculate the pension liabilities and expense, numerous additional changes will also effect the projections of benefit payments, the discount rate, the attribution method, and other calculations.
- EFFECTIVE DATE: The provisions in Statement 68 are effective for fiscal years beginning after June 15, 2014. According to GASB, earlier application is “encouraged.”
Those are the general basics of Statement No. 68; additional details are in GASB’s press release. Here is the second change:
Statement 67, Financial Reporting for Pension Plans
- REPLACES: Again, for the record, 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 No. 50, Pension Disclosures as they relate to pension plans that are administered through trusts or similar arrangements meeting certain criteria.
- GENERAL REQUIREMENTS: 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.
- NEW NOTE DISCLOSURES AND “RSI”: As was the case with Statement 68, above, this 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 DATE: The provisions in Statement 67 are effective for financial statements for periods beginning after June 15, 2013. Again, earlier application is “encouraged” by GASB.
More Information
The official Statements won’t be posted until August, but a press release includes plenty of detail on the upcoming changes. A plain English article on the changes is also available. Some of the original exposure drafts are available, but please be advised these are draft documents and are not final versions. Here was the exposure draft announcement from last year.
If you’re desperate for more information contact John Pappas at GASB.