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CCH® PENSION — 7/25/11

GASB Proposes Shorter Recognition Periods And Reporting On Financial Statements

from Spencer’s Benefits Reports: The Governmental Accounting Standards Board (GASB) has issued two Exposure Drafts proposing improvements to financial reporting of pensions by state and local governments. The first Exposure Draft, Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No. 27 (Pension Exposure Draft), primarily relates to reporting by governments that provide pensions to their employees. A second related Exposure Draft, Financial Reporting for Pension Plans, an amendment of GASB Statement No. 25 (Pension Plan Exposure Draft), addresses the reporting by the pension plans that administer those benefits. Both Exposure Drafts also make amendments to GASB Statement No. 50, Pension Disclosures.

The Pension Exposure Draft proposes that governments be required to report in their statement of financial position a net pension liability, which is the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries.

If adopted, there would be significant changes to how a government would calculate its total pension liability and pension expense, including the following:

• Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years which currently is common for funding purposes.
• Investment gains and losses would be amortized over a five-year period.
• Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments; and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
• Use of a single actuarial cost allocation method—entry age normal—rather than the current choice among six actuarial cost methods.
• Requiring governments participating in cost-sharing multiple employer pension plans to record a liability equal to their proportionate share of any net pension liability for the cost-sharing plan as a whole.
• Cost-of-living adjustments (COLAs) that are automatic would continue to be included in projections of pension benefit payments. The proposals would require ad hoc COLAs to be valued in liabilities if they occur with such regularity that they are substantively automatic. Currently, the recognition of ad hoc COLAs is discretionary.

Reported In Prominent Place

The GASB proposals would require that governments recognize their pension liabilities on the face of their financial statements rather than disclosing them in the notes, as is done currently. According to the GASB, “recognition in the financial statements, alongside other liabilities such as outstanding bonds, claims and judgments, and long-term leases, will clearly put the pension liability on an equal footing with other long-term obligations.”

The proposals also would require governments in all types of covered pension plans to present more extensive note disclosures and supplementary information. Included in the required disclosures would be the following:

• descriptions of the plan and benefits provided;
• numbers of retirees and beneficiaries;
• numbers of active and inactive employees;
• significant assumptions employed in the measurement of the net pension liability;
• descriptions of benefit changes and changes in assumptions;
• a schedule of changes in net pension liability;
• assumptions related to the discount rate and the impact on the total liability of a 1% change in the discount rate; and
• net pension liability, deferred outflows of resources, and deferred inflows of resources, and pension expense.

“Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees,” stated GASB Chairman Robert H. Attmore. “The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.”

Mr. Attmore added, “It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials.”

The deadline for submitting written comments is September 30. Comments should be sent via email to director@gasb.org or by regular mail to Director of Research and Technical Activities, Project No. E-34, GASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116.

The GASB will hold public hearings on the Exposure Drafts on October 3 (New York), October 13 (San Francisco), and October 20 (Chicago). User discussion forums will be held on October 4, 14, and 21 in the same cities. The Exposure Drafts are available for download at http://www.gasb.org. In addition, the GASB has released a comprehensive plain-language supplement to assist non-accountant users of financial statements in commenting on the Pension Exposure Draft. This supplement also is available for download at http://www.gasb.org.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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