The Governmental Accounting Standards Board (GASB) approved two new standards that will substantially change the accounting and financial reporting of public employee pensions by state and local governments. Statement No. 67, Financial Reporting for Pension Plans, revises existing standards for pension plans. Statement No. 68, Accounting and Reporting for Pensions, requires employers to report unfunded pension liabilities on their balance sheet for the first time. Key provisions in the standards are highlighted below.
- Balance Sheet Reporting. Employers must report net pension liability (total pension liability minus plan assets) on their balance sheet.
- Cost-Sharing Employers. Employers that participate in plans that pool or share obligations and use plan assets to pay benefits of employees of any employer must report a proportionate share of the collective net pension liability and expense for the cost-sharing plan.
- Actuarial Changes. A "blended" discount rate must be used to determine the present value of projected benefit payments if projected assets (including expected contributions) are insufficient to cover future payments. All plans are required to use the "entry age" normal cost allocation method to determine liabilities for the reporting period. Previously, plans could choose from six different methods.
- Annual Pension Expenses. Annual changes in net pension liability must be reported as pension expenses each year and cannot be deferred. Annual changes include plan amendments and experience gains or losses.
- Shorter Amortization Periods. Changes in liabilities for retired members and any changes due to plan amendments must be expensed immediately. Changes in liabilities for active members (other than for plan amendments) can be amortized over their future working lifetimes. Differences between actual and assumed investment returns must be recognized as pension expenses over a five-year period. Previously, the amortization period for recognizing changes in pension liability for both active and retired participants could be up to 30 years.
- Additional Disclosures. Substantial additional disclosures are required. These include a description of the plan, assumptions used to calculate pension liability, method for calculating contributions, changes in net pension liabilities over the past 10 years and a sensitivity analysis on how discount rate changes affect liabilities.
Statement No. 67 is effective for periods beginning after June 15, 2013 and Statement No. 68 is effective for fiscal years beginning after June 15, 2014. Copies of the statements will be available on the GASB website in August 2012.