Key Factors to Consider When Implementing GASB Statement No. 68

In June 2012, the Governmental Accounting Standards Board (GASB) issued two new statements impacting how state and local governments report their participation in pension plans. Statement Number 68, Accounting and Financial Reporting for Pension Plans (an amendment of GASB Statement Number 27), establishes new financial reporting requirements for most governments that provide their employees with pension benefits.

GASB Statement 68 will take effect beginning with the June 30, 2015 financial statements. Here are key factors employers should consider as they start implementing Statement Number 68:

Significant changes to discount rate calculation

The discount rate calculator used historically, which discounted the future obligation to pay benefits, was the pension plan’s long-term investment rate of return. The new changes to the discount rate calculator will require the calculation of projected cash inflows and outflows and resulting net position. For cash inflows, the employer and employee contributions related to current employees―active and inactive―will be based on the employer’s pension funding policy or the employer’s previous five years of contributions compared to required contributions. Cash outflows will apply to existing retirees and future retirees currently active or inactive. A positive net position will enable the use of the investment rate of return as the discount rate, while a negative net position will result in the use of a single rate that blends the investment rate of return with the effective interest rate on an AA-rated 20-year tax exempt general obligation bond.

For multiple employer plans, the discount rate calculation will generally be performed automatically by the plan actuary, but pay close attention to the schedule to make sure it’s projecting correctly. Single-employer plans need to work closely with their actuary to incorporate the discount rate calculation and create the schedule. A pension funding policy should have been adopted two years ago to factor in the changes to the discount rate, and if one has not been adopted it’s important, as your employer contributions for the next 70 years or more are going to be projected out based on your funding policy. If you are going to have any significant changes to your funding policy you’ll need to provide detail in your report.

Adjustment to annual required contribution

The annual required contribution (ARC) is used to determine ARC-related pension expense under prior GASB statement 27. Now under GASB statement 68, the objective is to provide guidance that replaces the ARC with an “Actuarially Determined Contribution” (ADC) based on the employers specific funding policy, funding method and assumptions.  This should give governments more flexibility as funding remains a management decision.

Unrestricted deficits in financial statements

For the first time, employers will report their balanced share of the overall unfunded net pension liability in their entity-wide financial statements. This liability is expected to be substantial and possibly cause the unrestricted net position to report a large deficit. With GASB Statement 68 reporting previously unreported net pension liabilities, these changes will not likely affect actual bond ratings of member employers, as the ratings analysis have previously considered pension funding as part of the analysis.

Pension plan employers are encouraged to communicate with their actuaries to coordinate all requirements to support the implementation.