The changes we are facing in governmental pension disclosure are being compared to the changes experienced with the implementation of GASB 34. GASB 34 made waves in the governmental community, and GASB 68 Accounting and Financial Reporting for Pensions is proving to follow suit. The effective date is for fiscal years beginning after June 15, 2014. This statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources and expenses. This statement will require a net pension liability if the present value of plan assets is less than the present value of pension liabilities. The measurement of a government’s total pension liability involves a three-step process: project future benefit for current and future employees; discount the payments to their present value; and allocate present value over past, present and future periods of employee service.
GASB 68 applies to two types of pensions that governments typically provide: defined benefit pensions and defined contribution pensions. Currently, a greater number of public pensions are defined benefit pensions, a type of pension that specifies the benefits to be provided to employees after retirement. On the other end of the spectrum are defined contribution pensions, which only specify the contributions to an active employee’s account. With defined contribution pensions, the benefits employees receive after retirement depend on contributions and the investment earnings of those contributions.
Pensions can be further broken down into single-employer plans as well as multiple-employer plans. There are two types of multiple-employer plans provided for in GASB 68: the agent multiple-employer and the cost-sharing multiple-employer plan. GASB 68 also covers a majority of pensions administered through trusts.
So why is GASB 68 so controversial? One reason is that the unfunded pension liability will appear on the face of the financial statements — strikingly different than the current note disclosure showing that government employers paid $X in 2014 as required by the pension. And the liability may be substantial. As the number of government employees continues to shrink, so do the contributions. On the other side of the coin is that the number of retirees drawing on pension funds is ever-increasing, and government pensions may have more retirees than current employees. How pension expense is calculated will change, and the cause of the change (annual benefits earned, interest on the total pension liability, changes in benefit terms, projected earnings on plan investments, and changes in plan net position other than from investments) must be reflected in the period in which it occurs.
Another reason GASB 68 is controversial is that note disclosures under GASB 68 will be greatly expanded to include:
- Description of the plan and benefits provided;
- Disclosure of significant assumptions used to measure the net pension liability;
- Descriptions of benefit changes and changes in assumptions;
- Disclosure of assumptions related to the discount rate;
- Disclosure of the impact a one percentage point increase or decrease in the discount rate has on the total pension liability;
- The net pension liability at the beginning of the year, the change in the net pension liability during the year presented by cause (service cost, benefit changes, investment earnings, etc.), and the ending net pension liability;
- The balances of deferred outflows and inflows of resources;
- The net amount of deferred inflows and outflows that will be recognized as pension expense and the amount of deferred outflows that will reduce the net pension liability – for each of the next five years and in the aggregate thereafter; and
- Cost-sharing multiple-employer pension plans in additional to the above will also have to disclose:
- The employer’s percentage of the collective net pension liability, how it was determined, and any change in the percentage since the previous measurement.
And lastly, each pension plan will also be required to present schedules of Required Supplementary Information (RSI) for each of the most recent 10 years. For single employers and agent multiple-employer pension plans, the following will have to be disclosed:
- The beginning and ending balances of the total pension liability, the plan assets available for pension benefits, and the net pension liability, as well as changes in those amounts during the year presented by cause;
- Total pension liability, plan net position, net pension liability, a ratio of plan net position divided by the total pension liability, the payroll amount for current employees in the plan, and a ratio of the net pension liability divided by covered-employee payroll; and
- If the employer’s contributions to the plan are actuarially determined based on statutory or contractual requirements: the employer’s actuarially determined contribution to the pension plan (or, if applicable, its statutorily or contractually required contribution), the employer’s actual contributions, the difference between the actual and actuarially determined contributions (or statutorily or contractually required contribution), and a ratio of the actual contributions divided by covered-employee payroll.
For cost-sharing multiple-employer pension plans, the RSI must contain:
- The employer’s proportionate share of the collective net pension liability, the employer’s payroll amount for current employees in the plan (employer’s covered-employee payroll), a ratio of the employer’s proportionate share of the collective net pension liability divided by the employer’s covered-employee payroll, and the pension plan’s net position as a percentage of the total pension liability; and
In addition, if a cost-sharing employer’s contributions are based on statutory or contractual requirements, it will present the cost-sharing employer’s statutorily or contractually required contribution, the employer’s actual contributions, the difference between the actual and the statutorily or contractually required contributions, and a ratio of the actual contributions divided by the employer’s covered-employee payroll.
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