compliance alert

June 10, 2014

GASB's Second Implementation Guide on Pension Plan Financial Reporting Provides Guidance for Employers

The Governmental Accounting Standards Board (GASB) has issued an Implementation Guide for Statement 68, Accounting and Financial Reporting for Pensions.1This is GASB’s second Implementation Guide on pension plan financial reporting. In 2013, it issued an Implementation Guide for Statement 67, Financial Reporting for Pension Plans.2

After providing background on Statement 68, this Compliance Alert draws attention to the information in the Implementation Guide that Segal Consulting believes is most noteworthy. It also includes a text box on a new GASB statement (Statement 71) that amends Statement 68’s transition provisions.

Background on Statement 68

Statement 68, which was published in June 2012, covers the defined benefit (DB) pension plan accounting requirement for state and local government employers. Statement 68 first applies for reporting periods beginning after June 15, 2014.

The Statement eliminates the current measure of Net Pension Obligation (NPO) and defines a new method of calculating pension expense for public sector employers. Pension expense is defined to be the annual change in Net Pension Liability with deferrals allowed for differences between expected and actual experience, changes in assumptions, and differences in expected and actual plan earnings.

In addition, there are other significant changes made by Statement 68 to accounting requirements:

  • Information about funded status must appear in the balance-sheet portion of employers’ financial statements (instead of in the notes that supplement those statements).
  • Most employers’ balance sheets must include a measure of the unfunded (or overfunded) pension expense, called the net pension liability.
  • The entry age normal cost allocation method must be used to determine the total liability and the amortization period for recognizing changes in total pension liability in annual pension expense is based upon the average future service of plan members (much shorter than the 30-year period previously allowed).
  • Differences between assumed and actual investment returns on plan assets must be recognized as a pension expense over a five-year period (eliminating smoothing).
  • If current and expected future plan assets (related to benefits for current plan participants) are insufficient to cover future benefit payments for current employees and retirees, the new basis for discounting projected benefit payments to their present value would require using a “blended” discount rate tied to 20-year tax-exempt AA/Aa (or higher)-rated municipal bonds.
  • Employers must provide substantial additional disclosures, including detail on the development of net pension liability, fiduciary net position, and pension expense; a description of how the long-term expected rate of asset return was determined; details on the fund’s assumed asset allocation and expected rate of return by major asset class; and measures of net pension liability using discount rates 1 percent higher and lower than the current assumption.

The new accounting standards separate financial reporting from contribution requirements for funding.3

Overview of the Implementation Guide

Like last year’s Implementation Guide, the latest Implementation Guide is written in a question-and-answer format. It answers 272 questions that were raised by users, preparers and auditors of state and local government financial statements about putting the new standards into practice. In preparing the Implementation Guide, GASB consulted with an advisory committee consisting of representatives of jurisdictions, retirement systems, financial institutions and consulting firms, including Segal Consulting. In addition to questions and answers, the Implementation Guide includes several appendices, one of which defines terms and others that present illustrative examples, which should not be relied upon as accounting guidance.

Segal believes the following information in the Implementation Guide is most noteworthy:

Guidance on the Scope and Applicability of Statement 68

The Implementation Guide addresses the scope and applicability of Statement 68. It clarifies that Statement 68 applies to employers in the following situations:

  • Employers that are not required to contribute to their pension plan and/or that have a special funding situation in which a nonemployer entity is legally responsible for making contributions directly to their pension plan,
  • Employers with plans that are funded on a pay-as-you-go basis, and
  • Employers with plans that are negotiated through collective bargaining.

The Implementation Guide notes two instances where employers are not required to comply with Statement 68:

  • Employers that are not required to make contributions because the plan only covers retirees, and
  • Employers that make contributions to an Internal Revenue Code Section 457 deferred compensation plan, a plan type that is not classified as a pension plan for financial reporting.

Guidance on Types of DB Plans and Employers

For purposes of applying Statement 68, DB plans are classified as one of three types, as noted in the table below. To clear up confusion about these plan types, the Implementation Guide discusses several helpful examples, which are also noted in the table.

              
Plan Types and Examples

Plan Types

Examples

Single-employer plans

This includes state government plans that cover the component units of the state.

Agent multiple-employer plans

Characteristics:

  • Plan assets are pooled for investing
  • Separate accounts are maintained for each individual employer
  • Each employer’s share of the pooled assets is legally available to pay the benefits of only its employees
A public employee retirement system (PERS) administers a single trust fund through which pensions are provided to employees of local governments in a state. The assets and obligations are pooled for some but not all participating employers. If the assets of the “nonpool” employers cannot legally be used to pay benefits to the employees of any other employer participating in the plan, the portion of the trust that is being used to administer benefits of the employees of the nonpool employers is a separate agent multiple-employer plan.



Cost-sharing multiple-employer plans

   

Characteristic:

   
       
  • Pension obligations of more than one employer are pooled
  •      
  • Plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan
  •    

In the PERS scenario noted above, the portion of the trust that is being used to administer the benefits of pool employers’ employees is a cost-sharing multiple-employer plan. However, if the assets in a PERS-administered trust may legally be used to pay benefits of the employees of any of the employers (pooled or nonpooled), the arrangement is one cost-sharing multiple-employer plan for financial reporting purposes.
 

Another example is a plan that provides pensions to separate classes of employees (e.g., public safety employees and general government employees) of multiple employer governments that make contributions for each class at separate rates and that receive separate actuarial valuations. Under Statement 68, that plan is a cost-sharing multiple-employer plan if the assets, which in this example are administered by a PERS, are available to pay benefits to any employee. The classification of this plan as a cost-sharing multiple-employer plan would not change even if the separate actuarial valuation for each employer was based on their employees and an allocation of assets to each employer, rather than for separate classes of employees.
 
 

The important point is that the classification of a DB plan that provides pensions to the employees of multiple governmental entities as either a cost-sharing multiple-employer plan or an agent multiple-employer plan depends on how the plan’s assets can be used. If the plan assets can be used to pay the benefits of the employees of any of the governmental entities participating in the plan, the plan would be classified as a cost-sharing multiple-employer plan. Otherwise, the plan would be classified as an agent multiple-employer plan.

The classification matters because some accounting requirements are different for cost-sharing multiple-employer plans from those for single-employer plans and agent multiple-employer plans. Moreover, under prior accounting standards, cost-sharing multiple-employer plans had no reporting obligation in statements, footnotes or schedules.

Guidance on Special Funding Situations

Nonemployer entities that have made contributions to a DB plan (despite having no legal responsibility for doing so) are not accounted for as a special funding situation because special funding situations depend on there being a legal responsibility for making contributions. During periods when it makes contributions, the nonemployer entity should follow GASB Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, as amended, for guidance related to “on-behalf” payments of fringe benefits.4

Guidance on Recognition and Measurement in
Financial Statements

The Implementation Guide clarifies reporting for a single or agent employer that has the same fiscal year-end as the pension plan through which it provides benefits. That employer can report a net pension liability as of a measurement date that is one year earlier than the measurement date of the net pension liability reported by the plan. GASB notes this will avoid a circumstance in which employer financial reports could be delayed awaiting information that also is included in the pension plan’s financial report. This guidance is welcome news for employers that were concerned about timing.

The Implementation Guide confirms that a negative net pension liability should be displayed as an asset (not a negative liability) in a single or agent employer’s statement of net position.

Each employer that participates in an agent-multiple employer plan should use a discount rate for calculating total pension liability that is specific to the employer and is dependent upon the employer’s individual facts and circumstances. Those might include the timing and amount of projected benefit payments to employees, the individual plan’s fiduciary net position and the employer’s contribution policy.

Employers may use one discount rate even if multiple contribution rates are determined for the employer. If different rates are determined for separate classes of employees, each rate is the result of a separate actuarial valuation. Moreover, there is separate tracking of the assets held for each employee class.

The Implementation Guide addresses when an actuarial valuation date is earlier than a single or agent employer’s measurement date and the long-term expected rate of return assumption remains the same at the measurement date as it was at the actuarial valuation date. In that scenario, the discount rate should be evaluated for significant changes between the actuarial valuation date and the measurement date. This guidance suggests that employers should use the municipal bond yield as of the measurement date (rather than as of the actuarial valuation date) and update the calculations, if necessary.

The portion of the change in the net pension liability attributable to service cost can be calculated based on the results of the actuarial valuation used to determine the prior year’s net pension liability. GASB notes that use of a service-cost measure based on the results of the actuarial valuation that determined the beginning net pension liability for the reporting period is consistent with the requirement to calculate interest on the total pension liability over the period. Interest on service cost should be included in the amount reported as interest on the total pension liability. (This differs from private sector accounting practice).

The Implementation Guide addresses a technical question: Should the effect on the total pension liability of an assumption change made because of a plan amendment (e.g., modification of the mandatory retirement age) be included with the effect of the change of benefit terms for purposes of determining pension expense? GASB notes that the answer is, “Yes.”

The Implementation Guide clarifies that employers participating in multiple plans with different measurement dates need not use the same measurement date for reporting purposes. This is good news for these employers because different measurement dates would require extra work.

Guidance for Cost-Sharing Employers

The Implementation Guide clarifies that employers participating in cost-sharing plans do not have to divide the liability for employees who work for more than one of the plans’ employers. GASB notes:

In a cost-sharing plan, the cost of the pension provided to an individual employee is not directly associated with the employer to which the employee provides services. Instead, the pensions of all employees are pooled, and the pooled costs are shared among the participating employers through the assessment of periodic contributions.

 

GASB acknowledges that Statement 68 does not establish specific requirements for allocation of a cost-sharing employer’s proportionate share of the collective net pension liability if a portion of the liability will be paid from an enterprise, internal service or fiduciary fund. In those instances, employers should look to their professional advisors for guidance.

Employers in cost-sharing plans can use a historic measure, such as contributions, rather than projected payroll as a basis for determining their proportions.

Employers in cost-sharing plans may not use the measure of employer plus employee contributions as the basis for determining their proportions. Statement 68 requires that employee contributions be excluded so that only employer contributions are used.

The Implementation Guide confirms that when a state is legally required to make contributions to a cost-sharing defined benefit pension plan as a nonemployer contributing entity, the state’s contributions affect the determination of the employers’ proportions. The table below is based on GASB’s example.

            
Example of the Relationship Between Contributions and Employers’ Proportions in a Cost-Sharing DB Plan in Which a State is a Nonemployer Contributing Entity
 
   
Contributions to the DB Plan During the Measurement Period
Employer’s Proportion
   (the Total of Direct Plus Associated Contributions Divided by the Total of All Contributions)
Employer A $5 million 13/36
Employer B $7 million 23/36
State:    
   For Employer A’s Employees $8 million N/A
   For Employer B’s Employees $16 million N/A
   State’s Total $24 million N/A
Total $36 million N/A

Moreover, all employers participating in a cost-sharing plan are not required to use the same basis to establish their proportions. For example, one cost-sharing employer can determine its proportion based on contributions during the measurement period, while another can use the average of contributions over the past five measurement periods as the basis for its proportion. This eliminates the need to recalculate other employer’s proportions based upon the choice of basis of a single employer. This means that the sum of the individual employers’ net pension liability and expense could be different from the amounts for the plan as a whole.

The Implementation Guide confirms that cost-sharing employers must recognize the net effect of a change in its proportion over a period equal to the average of the expected remaining service lives of all participants covered by the plan. The plan can provide that information to the contributing employers.

The Implementation Guide also notes that plans that only perform actuarial valuations biennially must also update to the total pension liability in the “off” years for cost-sharing employer financial reporting purposes so there is a new measurement each year.

            
GASB Amendment to Statement 68

In November 2013, GASB issued Statement 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, which amends Statement 68 to correct a potential understatement in a government’s first year of implementing Statement 68. The amendment concerns the treatment of contributions made subsequent to the measurement date when transitioning to Statement 68, sometimes referred to as the “all or nothing” rule.


Statement 68 requires an employer or nonemployer contributing entity to recognize a net pension liability as of a date (the measurement date) no earlier than the end of its prior fiscal year. If an employer or nonemployer contributing entity contributes to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government’s reporting period, Statement 68 requires that the contribution be recognized as a deferred outflow of resources. In addition, Statement 68 requires recognition of deferred outflows of resources and deferred inflows of resources when reporting changes in the net pension liability that arise from other types of events. At transition to Statement 68, if it is not practical for an employer or nonemployer contributing entity to determine all of the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, paragraph 137 of Statement 68 requires that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported.


Consequently, if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, contributions made after the measurement date of the beginning net pension liability would not be reported as deferred outflows of resources at transition. This could result in a significant understatement of an employer or nonemployer contributing entity’s beginning net position and expense in the initial period of implementation.


Statement 71 requires that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation. This amount will be recognized regardless of whether it is practical to determine the beginning amounts of all other deferred outflows of resources and deferred inflows of resources related to pensions.


The provisions of Statement 71 are effective simultaneously with the provisions of Statement 68.

* Statement 71 can be accessed from GASB’s website. Appendix 2 of the Implementation Guide covers the introduction, standards, and effective date and transition sections from Statement 68, as amended by Statement 71.

●  ●  ●

Segal Consulting can be retained to work with state and local government employers, plan sponsors and their auditors to comply with GASB’s pension accounting standards.

 

1 GASB’s Guide to Implementation of GASB Statement 68 on Accounting and Financial Reporting for Pensions, which was issued on January 31, 2014,can be accessed from the Implementation Guides page of GASB’s website. (Return to the Compliance Alert.)

2 GASB’s Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans was discussed in Segal’s September 9, 2013 Compliance Alert. (Return to the Compliance Alert.)

3 GASB Statement 68 and Statement 67, Financial Reporting for Pension Plans, which took effect for reporting periods beginning after June 15, 2013, were discussed in Segal’s December 2012 Public Sector Letter, “Gearing Up to Comply with GASB’s New Accounting Standards for Public Sector Pension Plans and Sponsoring Employers.” On March 24, 2014, GASB voted unanimously not to delay the implementation date of Statement 68. The Government Finance Officers Association (GFOA) was one of the groups that had requested a delay. On February 28, 2014, GFOA’s Executive Board had passed a resolution asking GASB to delay Statement 68’s effective date. (Return to the Compliance Alert.)

4 GASB Statement 24, which was published in 1994, can be accessed from the GASB website. (Return to the Compliance Alert.)

 

Share this page