GASB 68, or Government Accounting Standards Board (GASB) Statement 68, updates the accounting rules for the “Accounting and Financial Reporting for Pensions” – updated GASB 27
While GASB 27 has existed since 1997, GASB has recently decided to update the accounting and financial reporting for pension plans to improve such financial reporting and improve transparency of financial statements.
The key issues related to GASB 68 and it’s counterpart, GASB 67 “Financial Reporting for Pension Plans”, are that it focuses on “net position” and changes the discount rate used in the calculation of plan liabilities to reflect the funding & investment policy of the plan sponsor.
Am I subject to GASB 68?
All government entities that offer defined benefit pension plans and follow GASB guidance must comply with GASB 68 if they are to issue GAAP accounting statements. These municipal entities include municipalities, public schools, water districts, public utilities, and other entities that follow other Governmental Accounting Standards Board statements.
What types of benefits are included under GASB 68?
The benefits included under GASB 68 are those provided through pension plans with the following characteristics:
- Contributions from employers and nonemployer contributing entities and earnings on such contributions are irrevocable
- Pension plan assets are dedicated to providing benefits to plan members in accordance with terms of a plan document or statute
- Pension plan assets are legally protected from creditors of employers, nonemployer contributing entities and the plan administrator. If a defined benefit pension plan, plan assets are also legally protected from creditors of the plan members.
Does GASB 68 also cover Defined Contribution Plans?
Yes, GASB 68 also applies to Defined Contribution plans although the reporting requirements are not extensive.
How do GASB 67 & GASB 68 change my choice of discount rate?
Under GASB 67, plan liabilities are valued using the underlying investment policy & funding policy of the Plan. In years where the projected fiduciary net position of the plan is sufficient to meet benefit obligations, those payments will be discounted at a long-term rate of return based on the investment policy. Benefit payments not covered by the fiduciary net position shall be discounted using a 20-year tax free municipal bond index. Then, a “single equivalent” discount rate shall be calculated that would create the same liability as the sum of this dual discount rate approach.
What is the Fiduciary Net Position (“FNP”)?
The Fiduciary Net Position represents the market value of plan assets. The calculation of the “projected fiduciary net position” will only include current participants at the time of the valuation.
What is the Total Pension Liability (“TPL”)?
The Total Pension Liability is the actuarial accrued liability calculated using the Entry Age Normal cost method and the “single equivalent” discount rate.
What is Net Pension Liability (“NPL”)?
The Net Pension Liability represents the unfunded actuarial accrued liability or the Total Pension Liability less the Fiduciary Net Position.
How is Pension Expense calculated under GASB 68?
Under GASB 68, the pension expense for a single employer plan will recognize changes to the Total Pension Liability (“TPL”). Certain changes to the TPL will not be recognized immediately, but rather will be recognized via “Deferred Inflows” & “Deferred Outflows”. These deferred expense items include variation in actual & expected rates of return, plan demographic experience and changes in plan assumptions. The components of the Pension Expense are:
- Service Cost
- Increased Interest on TPL
- Increased Benefit Changes (current period)
- Increased Administrative Expenses
- Decreased Contributions from Members
- Decrease in Expected Investment Earnings
- Increased Deferred Outflow Recognition
- Decreased Deferred Inflow Recognition
With the recognition of deferred inflows & outflows, pension expense is likely to be volatile from year-to-year.
What’s included in the Required Supplementary Information (“RSI”)?
GASB 68 requires single & agent employers to present the following information in their RSI for the 10 most recent fiscal years:
- Sources of Changes in the Net Pension Liability
- Components of the Net Pension Liability and related ratios (includes fiduciary net position as % of total pension liability and net pension liability as % of covered payroll)
What is a single vs. an agent employer?
A single employer plan covers the employees of a single employer. An agent plan would allow multiple employers to participate. The assets of each employer are legally segregated and can’t be used to pay the benefits of other participating employers.
When is this effective?
GASB 67 is effective for plan fiscal years beginning after June 15, 2013 and GASB 68 is effective for employer fiscal years beginning after June 15, 2014.
What do I need to do now?
GASB 67 & 68 creates the need for many new notes to financial statements and required supplementary information. Now is a good time to begin working with your actuary & auditor to create those new exhibits and format the notes to the financial statements.
Odyssey was founded in 1998 by Parker Elmore to bring the skills and tools used by larger employers to the small and middle market. Our consultants have extensive experience in public & private pension systems and work with hundreds of cities, towns, schools, housing authorities and more of varying sizes. Odyssey’s GASB 68 team comprises health and pension actuaries and consultants who have a thorough understanding of the complex issues relating to GASB 68 and how they impact you and your organization.