New accounting rules for state and local governmental pension plans and the sponsors of those plans are going into effect. In 2012, the Governmental Accounting Standards Board (GASB) released new standards in Statements No. 67 and 68. GASB Statement No. 67, Financial Reporting for Pension Plans, significantly revises the existing rules for the financial reports of most pension plans for state and local governments. Similarly, GASB Statement No. 68, Accounting and Financial Reporting for Pensions, revises and establishes new financial reporting requirements for most state and local governments that provide their employees with pension benefits.
The significance, as well as the complexity, of these changes can hardly be overstated. Prior accounting standards focused on pension plan funding. The new guidance shifts from the funding-based approach to an accounting-based approach. Under this new accounting-based approach, governments will be required to report the amount by which the total pension liability exceeds the pension plan's net assets as a liability in their accrual-based financial statements. GASB believes this approach will more clearly depict the government's financial position, even though in many cases it will give the appearance that a government is financial weaker that it was previously.
Measuring the pension liability under the new standards involves three steps:
- Projecting future benefit payments for current and former employees and their beneficiaries;
- Discounting those payments to their present value; and
- Allocating the present value over past, present and future periods of employee service.
Special rules apply to cost-sharing multiple-employer plans. Under the new standards, cost-sharing governments must report a net pension liability, pension expense and pension-related deferred inflows and outflows of resources based on their proportionate share of the collective amounts for all the governments in the plan. Other special rules apply where a nonemployer contributing entity (such as a state government) is legally responsible for contributions directly to a pension plan that is used to provide pensions to the employees of another government (such as school districts located within that state).
Statement No. 67 takes effect for pension plans in fiscal years beginning after June 15, 2013. Statement No. 68 will take effect one year later for employers and governmental nonemployer contributing entities in fiscal years beginning after June 15, 2014. It is essential that public plan sponsors work closely with their actuaries, accountants and legal advisors on the impact of these new accounting standards.
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