GASB proposes changes to calculation, financial reporting of pensions

By Marisa Wong

Madison, Wis., July 8 - The Governmental Accounting Standards Board issued two exposure drafts proposing improvements to financial reporting of pensions by state and local governments - Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans - according to a news release.

The documents amend existing standards to improve how the costs and obligations associated with the pensions that governments provide to their employees are calculated and reported.

The first exposure draft about pensions relates to reporting by government employers. The second exposure draft about pension plans addresses the reporting by the plans that administer benefits.

"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," said GASB chairman Robert H. Attmore in the release.

"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.

"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," Attmore added.

The pensions draft proposes that governments be required to report a net pension liability that is the difference between the total pension liability and net assets set aside in a qualified trust to pay benefits to current employees, retirees and their beneficiaries. According to the release, the draft also proposes significant changes to how a government would calculate its total pension liability and pension expense, including:

• Recognition of more components of pension expense than is currently required, such as the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years;

• 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;

• A single actuarial cost allocation method rather than choosing 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 plan as a whole; and

• Requiring governments to present more extensive note disclosures and required supplementary information.

The board said that the pension draft also addresses situations in which another entity contributes to a government's pension plan on behalf of the employer, as well as accounting and financial reporting for employers that provide pensions through defined contribution plans.

The pension plan draft, which addresses financial reporting for plans administered through qualified trusts, outlines the basic framework for the separately issued financial reports of defined benefit pension plans. According to the GASB, it also details proposed note disclosure requirements for defined contribution pension plans.

The exposure drafts are available at www.gasb.org. The deadline for submitting written comments is Sept. 30. The board will host public hearings on Oct. 3, Oct. 13 and Oct. 20 and user discussion forums on Oct. 4, Oct. 14 and Oct. 21.

The GASB is the independent, nonprofit organization that works to establish and improve financial accounting and reporting standards for state and local governments.

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