New financial reporting standards for pensions of U.S. state and local governments are among the most significant rules GASB has ever approved.
The standards will place unfunded pension liabilities on the balance sheets of state and local governments that provide defined benefit pensions and call for immediate recognition of more pension expense than previously has been required.
Governments and the pension plans that serve them are learning how to implement these standards. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, is effective for governments for fiscal years beginning after June 15, 2014. Statement No. 67, Financial Reporting for Pension Plans, which addresses reporting by pension plans that administer benefits for governments, takes effect for financial statements for periods beginning after June 15, 2013.
“Administrators of pension plans are already in the midst of implementation, and state and local governments are preparing for implementation next summer,” GASB Chairman David Vaudt said in a webcast.
The webcast was provided by GASB as part of a toolkit designed to assist in implementation. The AICPA State and Local Government Expert Panel also is developing guidance related to the pension standards to aid in implementation and development of best practices.
In the GASB webcast, Vaudt said that plan administrators and governments need to focus on five key areas for successful implementation:
1. Pension funding policy. The direct link between measurement for funding purposes and measurement for pension expense purposes has been removed in the new standards. Governments using actuarially based funding will need to decide how this will affect their funding policy, Vaudt said.
2. Selection of assumptions. The standard requires government employers and the pension plans that serve them to use the same set of assumptions in the information they disclose. This means governments and plans will have to work together to select their assumptions, according to Vaudt.
3. Timing of measurements. Plans will be required to report information about the net pension liabilities of the governments they serve, which must be measured at the end of the plan’s fiscal year. It’s possible that governments will not have the same fiscal year as the plan, so they will have some flexibility in the measurement date of the net pension liability reported on their financial statements, Vaudt said.
4. Frequency of timing of actuarial valuations. Actuarial valuations must be prepared at least every two years under the new standard. The date for the valuation for a plan can be no more than 24 months prior to the plan’s fiscal year end. The date for governments may be no more than 30 months prior to the government’s fiscal year end. “When the plan and the government employer year ends are different, attention to the timing of the actuarial valuation will be critical to meeting the needs of both the plan and the government,” Vaudt said.
5. Employer reporting information. Governments and multi-employer plans will have to report certain information that is derived from information reported by plans. This will require cooperation to determine who will be responsible for the cost of developing this information and whose auditor will provide assurance on that information, Vaudt said.
“While there are certainly other considerations to be mindful [of] in the implementation process, [these issues] should be at the top of the list for pension plan administrators and state and local governments,” Vaudt said.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.