In June of 2012 the Governmental Accounting Standards Board finalized two new standards related to pension accounting. GASB No. 67, Financial Reporting for Pension Plans replaces GASB No. 25 and will be effective for years ending on or after June 30, 2014. GASB No. 68, Accounting and Financial Reporting for Pensions, replaces GASB No. 27 and will be effective for years ending on or after June 30, 2015. The following provides a summary of the key changes that will impact accounting and reporting for pension plans and future pension obligations.
The new standards are intended to provide more comparable and visible information within the annual financial statements of governments that provide defined benefit pensions. As such, GASB No. 68 requires:
- Employers to report the difference between the actuarial total pension liability and the fair value of the legally restricted plan assets as the net pension liability on the statement of net position. Previously, a liability was only recorded if the actual contributions made to the plan were less than the actuarial calculated contributions for the year.
- The entry age actuarial cost method to be used to calculate the pension liability for reporting purposes. This differs from prior guidance which allowed one of six actuarial methods.
- Ad hoc cost of living adjustments or other benefit changes that are approved with such consistency that they are effectively automatic will not be considered in the projection of future benefits. Historically benefit changes were only included in the projects if they were incorporated into the plan.
- If the projected plan assets and future contributions are not sufficient to meet the projected future benefits a blended discount rate will be used incorporating the long-term expected rate of return on investments until such time as resources are exhausted and then based on the municipal tax-exempt, high quality 20-year bond rating. This change from the historical practice of using the long-term expected rate of return will likely decrease the discount rate and increase the total pension liability.
- In addition to the benefits earned each year the annual pension expense will also include interest on the total pension liability and the impacts of changes in benefit terms, projected investment earnings and other plan net position changes. Changes in assumptions or differences between anticipated and actual benefits or earnings will be recorded as deferred inflows or deferred outflows of resources and included in the calculation over a closed period of either the average remaining years of employment for benefit changes or a five year period for investment differences. In the past the expense was only the required annual contribution unless those requirements had not been met in the past. In addition, the new requirement accelerates the inclusion of changes in assumptions or differences between expected and actual results in the calculations.
- Utilities participating in cost-sharing multi-employer plans will now be required to report a liability for their proportionate share of the net pension liability of the plan as well as the related pension expense and any deferred inflows or deferred outflows of resources. This is a new requirement as these employers historically have only included their required contributions as an expense.
- The footnotes will provide the reader with additional information including the assumptions and methods used in measuring the net pension liability and in determining the discount rate, any changes in assumptions or benefits from prior years, the impact on the total pension liability of a change in the discount rate of one percentage point in either direction and details of the net pension liability and related deferred inflows or deferred outflows of resources for the year.
- The required supplemental information for utilities providing sole or agent plans will include additional details for the total liability, plan position and net liability as well as accumulate up to ten years of information. Utilities participating in any type of defined benefit plan, including cost-sharing multi-employer plans, will be required to show up to ten years of information on funding including the actuarially or statutorily determined required contribution, the actual contribution, the difference between these two, the covered payroll and the ratio of the actual contributions to the covered payroll. Finally, RSI will include information on key assumptions and changes that impact the trends presented.
These new standards relate to the accounting and reporting of defined benefit pensions within the GAAP based financial statements of governmental entities. They do not establish requirements as to the actual funding of these benefits nor do they address how an entity following enterprise fund accounting should recover these costs through its rates. These decisions are left to management, the governing body and the regulatory body on a local level.
In addition, the Governmental Accounting Standards Board has a project on its agenda to discuss OPEB accounting and reporting in light of these recent changes to pension accounting and reporting. It is anticipated that GASB will release its exposure drafts related to proposed changes for OPEB accounting and reporting in late 2013 with new standards to be finalized in 2014. Based on the timing of the pension standards we would anticipate the new OPEB rules to become effective in 2016 and 2017.
These statements may have a material impact on recorded pension liabilities compared to application of current standards. Your business processes should be updated to incorporate the new information requirements and begin gathering information now to determine impacts on financial reporting and rates to your customers.