The true cost of public employee pensions will become clearer under changes approved June 25 by the accounting standards-setter for state and local governments ? the Governmental Accounting Standards Board (GASB).
The GASB has approved two new standards that mark a major departure in the way pension costs are accounted for and described in financial statements today.
The major difference is that liabilities will be reported on the balance sheet for the first time. The net pension liability is the difference between the total pension liability (the present value of projected benefit payments to employees based on their past service) and the assets (mostly investments reported at fair value) set aside to pay current employees, retirees, and beneficiaries. Currently, governments must only report as a liability the difference between the contributions they are required to make to a pension plan in a given year versus what is actually funded.
Many states and municipal governments have not fully funded their pensions. In fact, the gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills was at least $1.38 trillion in fiscal year 2010, according to the Pew Center on the States.
Some observers believe the changes will help users of financial statements more clearly see the consequences of future proposed benefit increases.
Note Disclosures and Supplementary Information
Governments must also “comprehensively and comparably” measure the annual costs of pension benefits under the new standards.
The new statements are:
Statement No. 67, Financial Reporting for Pension Plans, which changes the existing guidance for the financial reports of most pension plans. The standard is effective for periods beginning after June 15, 2013.
Statement No. 68, Accounting and Financial Reporting for Pensions, establishes new financial reporting requirements for most governments that provide their employees with pension benefits. Provisions are effective for fiscal years beginning after June 15, 2014.
Early implementation is encouraged for both statements.
The American Institute of CPAs (AICPA) came out in favor of the new rules. AICPA President and CEO Barry C. Melancon said in a statement, “The new GASB standards will benefit users of these financial statements as well as taxpayers, since state and local governments for the first time will have to report unfunded pension liabilities on their balance sheets providing a clearer view of pension obligations.”
Statements 67 and 68 can be downloaded from the GASB website early August. Bound copies of the statements and a plain-language description of the new requirements also will be available.