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CCH® PENSION — 08/5/11

GASB proposes shorter recognition periods and reporting on financial statements

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 Pensions 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:

• 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.

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."

Source: The Exposure Drafts are available for download at www.gasb.org. The supplement is also available for download at www.gasb.org. The deadline for submitting written comments is September 30, 2011.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

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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