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GASB invites views on pension accounting.

The Governmental Accounting Standards Board (GASB), as a matter of policy, periodically reviews its authoritative guidance to determine whether it continues to meet the needs of users of state and local government financial statements. Pursuant to that policy, the GASB recently issued an Invitation to Comment (ITC) on Pension Accounting and Financial Reporting that invites the opinions of interested parties on certain key aspects of the current authoritative guidance found in GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers. Both of those pronouncements were issued in late 1994 and have now been in effect for more than a decade.


How an employer incurs an obligation to employees for pension benefits is one thing; how that same employer finances pension benefits can be quite another. For financing purposes, public-sector employers have tended to favor actuarial funding methods that produce annual contribution amounts that can be expected to remain relatively constant over time as a percentage of payroll. The ITC invites respondents to express an opinion on the need for pension information that reflects one or the other of these perspectives, or both. Current GASB standards essentially focus on funding, within predetermined parameters. Private-sector pension guidance, on the other hand, focuses more on the employer's incurrence of an obligation to employees.


Not every obligation is necessarily a liability for accounting and financial reporting purposes. Today, for example, a state or local government employer does not display a liability on the face of the financial statements for the employer's unfunded accrued obligation to employees for benefits already earned. Conversely, employers are required to report a liability for the cumulative effect of any failure on their part to fully fund their annual required contributions to finance future benefit payments (consistent with a funding focus). An alternative would be for employers to report the entire unfunded accrued benefit obligation as a liability on the face of the financial statements, as in the private sector. The ITC invites respondents to take a position on which approach provides a better measure of the liability, based on the authoritative definition of that term provided in GASB Concepts Statement No. 4, Elements of Financial Statements (which was only released in 2007).


Under the accrual basis of accounting, the effect of transactions and events is normally recognized in the financial statements when they occur. However, in the case of pension accounting, the recognition of the effect of certain events and transaction may occur only gradually (i.e., amortization). For example, if the formula used to calculate benefit payments were to change in favor of future retirees (e.g., from 3 percent of salary x number of years worked to 4 percent of salary x number of years worked), the additional cost could be amortized as expense over a period of up to 30 years, rather than recognized immediately as an expense of the period in which the change occurred. The ITC invites respondents to comment on whether they believe such deferral and amortization is appropriate in light of the principle of interperiod equity (i.e., "financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided:' according to GASB Concepts Statement No. 1, Objectives of Financial Reporting, paragraph 61).


A pension formula typically applies not to today's salary levels but to future salary levels upon the completion of service. Those future salary levels will typically reflect intervening events (e.g., cost-of-living adjustments and projected salary increases). Current GASB standards include such factors in the calculation of the employer's unfunded accrued benefit obligation for benefits already earned. The ITC invites respondents to consider whether the inclusion of such factors is appropriate.

Furthermore, under current GASB standards, the calculation of the employer's unfunded accrued benefit obligation is reduced by anticipated earnings on amounts placed in trust. Currently, the appropriate discount rate used for this purpose is the pension plan's estimated long-term investment yield. The ITC solicits the views of respondents on other possible discount rates (e.g., risk-free rate of return, employer's borrowing rate, average return on high-quality municipal bonds).


As noted earlier, in current pension accounting, the effect of certain events and transactions may sometimes be deferred and amortized over future periods. Should the GASB decide to continue this practice, the ITC invites respondents to address a number of related issues:

* Which specific actuarial cost allocation methods should be permitted for purposes of accounting and financial reporting? GASB standards currently allow six methods, reflecting a variety of funding approaches, whereas private-sector standards mandate the use of a single approach that is closely related to the employer's unfunded accrued benefit obligation.

* What should the maximum amortization period be? Current GASB standards allow up to 30 years, whereas private-sector standards mandate a much shorter period.

* Should different maximum amortization periods be set for different items? Currently, 30-year amortization is an option for any item that qualifies for amortization.

* If different maximum amortization periods should be set for different items, what should those periods be?

What should the maximum amortization period be for a retroactive benefit enhancement? For an actuarial gain or loss?

* Which amortization methods should be permitted? Currently, amortization may be calculated as a level percentage of payroll or as a level dollar amount. Likewise, amortization may occur over either a fixed period (closed amortization) or a rolling period (open amortization).

* How should plan assets be valued for purposes of calculating an employer's unfunded accrued benefit obligation? Under current standards, averaged market-related values are used to minimize the effects of market volatility


To this point, the discussion has focused on pension benefits offered through a plan where a given employer retains all of the risk for its specific employees (i.e., single-employer plans and agent multiple-employer plans). Some employers, however, participate in cost-sharing multiple employer plans, where employees from various employers are combined into a single pool. Under current standards, employers account for their participation in the pool much as they would account for insurance. That is, it is presumed that an employer has no real responsibility or risk beyond making contractually required payments (i.e., if there is a future funding problem, it will be the plan's problem, not the employer's). The ITC invites respondents to indicate whether they find the current treatment satisfactory, believe additional information is needed, or believe that employers who participate in cost-sharing plans should use the same accounting and financial reporting as those who sponsor single-employer plans or participate in agent multiple-employer plans.


Currently, neither employers nor pension plans are required to present changes in the unfunded accrued benefit obligation. The ITC asks respondents whether they believe such changes should be reported, and if so, how (i.e., by the employer, the plan, or both? In the financial statements, in the notes to the financial statements, or as required supplementary information?).


Under current standards, pension plans do not report a liability for either the unfunded accrued benefit obligation or cumulative underfunding by employers. Instead, they report a liability only for benefits currently due and payable. The ITC solicits respondents' views on which is the better measure of the plan's liability


The complete ITC is available for free download at That site also offers a "plain language supplement" The GASB has set a comment deadline of July 31, 2009.

STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.
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Title Annotation:The Accounting Angle; Governmental Accounting Standards Board
Author:Gauthier, Stephen J.
Publication:Government Finance Review
Geographic Code:1USA
Date:Jun 1, 2009
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