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Business and Policy Areas
Business and Policy Areas

GASB Close to Pension Reporting Changes

July 29, 2011

The Governmental Accounting Standards Board (GASB) has issued a long awaited Exposure Draft that will mandate new measurement and reporting requirements for governmental employers that provide defined benefit pension plans to their employees. The proposal is the third document available for public comment over a period exceeding two years and is the result of years of research, constituent feedback, and deliberations by the Board. An additional Exposure Draft proposes new requirements for plan administrators.

Pension benefits are part of a compensation exchange between an employer and employee. Employees of governmental entities often receive two types of compensation in return for their labor—current compensation and deferred compensation in the form of post-employment benefits such as pensions. Because the promise of a pension after employment is considered an exchange for current work performed, the government has a current obligation.

Financial Reporting

The employer proposal will impact public colleges and universities that directly provide defined benefit pension plans for their employees. The Pension Exposure Draft proposes that governments be required to report in their statement of financial position a net pension liability, which is the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries. At present, the difference between a government’s total pension obligation and assets available for benefits—often called the unfunded liability—is disclosed in notes, but does not appear on the face of the financial statements.

Although public institutions that participate in their state’s pension plan will not have to measure and report the changes proposed in the Exposure Draft, many fear that larger state pension expenses and liabilities will reduce appropriations to public institutions.

Measurement of the Pension Liability

The Exposure Draft also proposes significant changes to how a government would calculate its total pension liability and pension expense. Calculating the total pension liability involves three essential steps: (1) projecting future benefits payments for current and former employees or their beneficiaries; (2) discounting the projected future benefit payments to their present value; and (3) allocating the present value to past and future years during which the employees have worked or are expected to work.

  1. Projecting future benefits: The proposal would carry forward the general current practice of incorporating expectations of future employment-related events (like salary increases and years of continuing employment until retirement) into projections of pension benefit payments. Pension plan provisions for automatic cost-of-living adjustments (COLAs), generally included as part of an employment agreement, statute, or ordinance, would continue to be included in projections as well. Ad hoc COLAs, which are made at the discretion of the government, would only be included if they occur with such regularity that they are substantively automatic.
  2. Discounting future benefit payments: The proposal requires that, as long as plan net assets are projected to be available to make the projected benefit payments, governments discount projected benefit payments using the long-term expected rate of return. However, at the point at which plan net assets are not projected to be sufficient, governments would discount using a tax-exempt, high-quality 30-year municipal bond index rate. Because the recommended municipal bond index rates tend to be lower than long-term expected rates of return, governments that have inadequate net plan assets will recognize a larger net pension liability.
  3. Allocating the present value: Once the projected benefit payments have been discounted to their present value, they are allocated over a period related to the working years when the employees earn benefits. Under the proposal, governments would use the entry age normal actuarial cost method to allocate present value, and would do so as a level percentage of payroll. Under this method, projected benefits are discounted to their present value when employees first begin to earn benefits and attributed to employees’ expected periods of employment until they leave.

Measurement of the Pension Expense

Pension expense is determined using a combination of immediate recognition of items that affect the pension liability and over-time recognition of either deferred inflows or outflows of resources that do not immediately affect the pension liability.

Examples of items that immediately impact the net pension liability are:

  • Benefits that are earned each year
  • Interest on the total pension liability at the beginning of the year
  • Changes in the terms of the benefits to be provided to retirees
  • Projected earnings on plan investments
  • Changes in the value of plan assets other than investments

Examples of deferred pension outflows of resources or deferred pension inflows of resources that are introduced into the expense calculation gradually over the remaining years of employment of active employees are:

  • The effect of differences between economic and demographic assumptions and actual experience, as it relates to current employees
  • The effect of using new economic and demographic assumptions, as it relates to current employees.

Finally, the effect of differences between the expected return on plan investments and actual experience would be recognized as deferred outflows of resources or deferred inflows of resources and are recognized as pension expense over five years.

NACUBO encourages public institutions that directly provide pension benefits to their employees to closely read the Exposure Draft, provide comments directly to GASB or NACUBO, and consider contacting GASB to participate in a field test of the proposed standard.

The Exposure Drafts, including instructions on how to submit written comments, are available for download from GASB. The deadline for submitting written comments is September 30, 2011. In addition, the GASB has released a comprehensive plain-language supplement to assist non-accountant users of financial statements in commenting on the Pension Exposure Draft.


Sue Menditto
Director, Accounting Policy