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GASB proposes to modify guidance on ARC adjustment for pensions and OPEB.

In mid-July, the Governmental Accounting Standards Board (GASB) invited comment on a draft technical bulletin, Determining the Annual Required Contribution Adjustment for Postemployment Benefits. The draft technical bulletin proposes to modify how an employer calculates pension expense or other postemployment benefit (OPEB) expense in situations where the employer has previously contributed less (or more) than the employer's annual required contribution (ARC). If approved, the changes proposed in the draft technical bulletin will first have to be implemented for the fiscal year ending December 31, 2009 (with earlier implementation encouraged).


For employers that participate in a single-employer or agent multiple-employer pension/OPEB plan, the ARC is the normal measure of pension/OPEB cost. Thus, an employer whose ARC for in the current period was $7,500 would normally report that same amount as pension/OPEB expense in the financial statements. If the employer were for some reason to contribute less (or more) than that amount (e.g., $2,500), the difference would be reported as a liability (asset):
                      CR        DR

  expense           $7,500

Cash                          $2,500

Net pension/OPEB
  obligation                  $5,000

(To report pension/OPEB expense
and related employer contribution)

In the case of a contribution deficiency, the actuary must increase the amount of the ARC in subsequent periods to recover the missing contribution (as well as related interest). Since the missing contribution (but not the related interest) would already have been recognized as expense when the deficiency occurred, it cannot be recognized as expense yet again, in some later period. Thus, once a funding deficiency has occurred, the ARC must be adjusted before it can serve as the measure of pension/OPEB expense. That is, there must be an ARC adjustment to remove any portion of the ARC that reflects the recovery of prior contribution deficiencies.

GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, presumed that it would be impractical for employers to obtain the actual amount of the actuarial adjustment. Therefore, those two standards provided a formula for estimating the amount of the actuarial adjustment. That formula involved the following steps:

* Estimate the total increase in the ARC (i.e., both the recovery of the missing contribution and related interest) by dividing the liability for underfunding by the actuary's amortization factor (which reflects both the period over which the recovery is being amortized and the discount rate assumption):

$5,000 liability/13.9 amortization factor = $359

* Estimate the portion of that increase that represents related interest by multiplying the liability for underfunding by the actuary's interest rate assumption:

$5,000 liability x 5.5 percent interest rate assumption = $275

* Estimate the amount by which the ARC needs to be reduced to arrive at pension/OPEB cost for the period (i.e., actuarial adjustment) by netting the two amounts just calculated:

$359 total adjustment - $275 related interest = $84 recovery of contribution deficiency

Pursuing this same example, if the ARC for the year following the deficiency was $7,859, pension/OPEB cost for financial reporting purposes would be only $7,775 (i.e., $7,859 ARC--$84 ARC adjustment = $7,775 pension/OPEB cost). If the employer funded the full amount of the ARC, the difference between that amount and pension/ OPEB cost of the period would reduce the reported liability, as follows:
                    CR       DR
OPEB expense      $7,775

Net pension/
OPEB obligation      $84

Cash                       $7,859

(To report pension/OPEB expense
and related employer contribution)


As already noted, GASB Statement No. 27 (pensions) and GASB Statement No. 45 (OPEB) both assumed it would not be practical for employers to obtain the actual amount of the actuarial adjustment. That assumption, however, is no longer necessarily true, especially in the case of employers that are just now beginning to report the cost of OPEB on an accrual basis. Technically speaking, GASB Statement No. 27 and GASB Statement No. 45 could be understood to require that employers use the estimation technique just described even if they had access to the actual amount of the ARC adjustment. The proposed technical bulletin would explicitly encourage the use of the actual amount, when available. The difference between the actual amount and the estimated amount could be significant if the actuary is treating contribution deficiencies and excess contributions differently from experience gains and losses.

Final guidance from the GASB is expected before the end of the year.

STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.
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Title Annotation:Annual Required Contribution; other postemployment benefit
Author:Gauthier, Stephen J.
Publication:Government Finance Review
Geographic Code:1USA
Date:Oct 1, 2008
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