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Business and Policy Areas
Business and Policy Areas

GASB Pension Allocation Requirements Affect Public Institutions

October 18, 2012

The GASB's new guidance in Statement No. 68, "Accounting and Financial Reporting for Pensions," takes effect in FY15 and will impact all public higher education institutions with employees in defined benefit pension plans. The new standard replaces the requirements of Statement No. 27, "Accounting for Pensions by State and Local governmental Employers," and the requirement of Statement No. 50, "Pension Disclosures."

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. Consequently, Statement No. 68 attempts to align the recognition of pension expense with the period in which the related benefits are earned.

The measurement process incorporated into Statement No. 68 involves three essential steps:

  1. Project future benefit payments for current and former employees and their beneficiaries.
  2. Discount those payments to their present value.
  3. Allocate the present value over past, present, and future periods of employee service.

The standard classifies employers in one of the following three categories and impacts how pension expense, liabilities, and deferred outflows or inflows of resources are measured, displayed, and disclosed in the external audited financial statements.

  1. Cost-sharing employers are those whose employees are provided with defined benefit pensions through cost-sharing multiple-employer pension plans. In these plans the participating employers pool, or share, their obligations to provide pensions to their employees, and plan assets can be used to pay the pensions of any participating employer's employees.
  2. Single employers are those whose employees are provided with defined benefit pensions through single-employer pension plans. The pension benefits in single employer plans are provided to the employees of only one employer.
  3. Agent employers are those whose employees are provided with defined benefit pensions through agent multiple-employer plans. In such plans the assets are pooled for investment purposes but are legally segregated to pay the pensions of each employer's employees.

Whether a public institution is part of a state's single employer plan, cost-sharing multiple employer plan, agent-multiple employer plan, or has its own single employer plan, Statement No. 68 requires some type of recognition. For example:

  • In some states, public institutions are component units of the state but the employees working at the public institution are considered employees of the state. The state has a single-employer defined-benefit pension plan that its employees working at public institutions are part of. Statement No. 68 requires that each state government—in its stand-alone financial statements—account for and report its participation in the single-employer plan as if it were a cost sharing employer. This means that expenses, deferrals, and liabilities would be recognized using a proportionate allocation methodology.
  • In some states public institutions are part of a cost-sharing multiple-employer plan (or plans). In these states public institution employers would recognize a liability (and related expenses or deferrals) based upon the public institution employer's proportionate share of the collective net pension liability.
  • Some public institutions or systems offer their own defined-benefit pension plans to employees. These entities would directly calculate future benefit payments using a discount rate that is relevant to their circumstances, and allocate the present value of employee pension benefits over past, current, and future periods.

Statement No. 68 creates a variety of issues that public institutions must begin thinking about and communicating to trustees and other relevant stakeholders. Because every state is different, public institutions will need to begin understanding how measurement and allocations will work, and the impact on financial statements. Institutions will also need to explore the degree of control they have to alter the types of benefits offered to employees. Other considerations could include: increased audit time and cost; bond covenant compliance; rating adjustments; or impact on state appropriations. NACUBO will be offering a webcast that begins addressing these issues on November 13, 2012.


Sue Menditto
Director, Accounting Policy