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New accounting and financial reporting standards for US state and local government pension and benefits funds go into effect this month. Confusion is likely to emerge as taxpayers, plan participants, and even plan sponsors take a closer look at the new figures that more clearly identify funded or unfunded municipal pension liabilities.

The new rules separate pension accounting from pension funding by shifting the focus from the sponsor’s cost of funding benefits to the employer’s pension liability.

The General Accounting Standards Board (GASB) is the independent organization that sets the standards behind the changes, which include two sets of new rules issued on June 25, 2012. The highlights of the rule changes, such as the describes the GASB in part, they are described below. .

GASB Statement 67: Financial Information for Pension Plans

This Statement requires defined benefit pension plans to present two financial statements: 1) a statement of net fiduciary position; and 2) a statement of changes in the net fiduciary position.

The total pension liability, determined by actuarial valuations, must be realized at least every two years. The notes to the financial statements of defined benefit pension plans should also include more descriptive information.

Statement 67 is effective for plan fiscal years beginning after June 15, 2013. For plans with a fiscal year ending December 31, Statement 67 will apply to financial statements as of December 31, 2014 .

It replaces the requirements of Declarations No. 25, Financial Information for Defined Benefit Pension Plans and Disclosure of Notes for Defined Contribution Plans, and No. 50, Disclosure of Pension Plans, as it refers to pension plans that they are administered through trusts or equivalent agreements. Pension plans that are not administered through a trust remain subject to the previous rules of statements 25 and 50.

GASB Statement 68: Accounting and Financial Information for Pensions

This Statement establishes standards to measure and recognize liabilities, deferred outflows of resources and deferred inflows of resources and expenses / disbursements. GASB 68 defines how benefit expense calculations and payments should be calculated, including guidance on discount rates and the determination of net present value.

Statement 68 will apply to employers and “Non-Employer Contributing Entities” (“NCE”) for fiscal years beginning after June 15, 2014. For plans ending fiscal year December 31, Statement 67 will apply to the financial statements as of December 31, 2015.

Key changes to the new GASB pension rules

The main changes contained in GASB statements 67 and 68 include:

• The “total pension liability” (“TPL”) of the plan sponsor is similar to the “augmented actuarial liability” (“AAL”), but must:

o Use the normal cost method of entry age
o Use a combined discount rate based on the long-term rate of return and municipal bond rates
o Recognize ad hoc “cost of living adjustments” (“COLA”) if they are essentially automatic

• A number representing the plan sponsor’s “net pension liability” (“NPL”) will appear on the plan sponsor’s balance sheet. Municipalities that previously appeared to be in a strong financial position may find that the inclusion of significant unfunded pension liabilities on the balance sheet will disrupt taxpayers, investors, and plan participants.

• A “pension expense” (“PE”), which differs from the “actuarially determined contributions” (“ARC”) of the plan sponsor, will appear on the sponsor’s income statement.

• Historical requirements regarding financial information disclosures will be replaced with information based on the new measures.

• The discount rate used to calculate future obligations may change, depending on the funding levels of the plan.

• Allowable payback periods for investment gains or losses will be shortened. A process known as liability “smoothing” is being eliminated over time, which is likely to lead to higher volatility.

As readers can see, the rule changes are very technical. Plan sponsors and employers will help participants and taxpayers understand the full impact of individual plans.

Three types of municipal pension plans addressed

The accounting and financial reporting pension rules will vary depending on the type of sponsor of the municipal plan. The three types of plans subject to Declarations 67 and 68 include:

1. Single employer pension plans.

2. Pension plans with employment of multiple agents. In these plans, the assets of multiple pensions are pooled for investment purposes. Each employer plan retains individual responsibility for funding and benefit payments.

3. Multi-employer pension plans with shared costs. In these plans, both assets and payment mechanisms are pooled across multiple employers.

In summary

The GASB rule changes were issued after an extensive public comment period, including an Invitation to Comment in 2009, circulation of draft documents in 2010, multiple hearings, and a June 2011 draft for public discussion. Actuaries, investment professionals and sophisticated plan backers have debated the pros and cons of pension reform in financial reporting, the taxpayer continues to largely ignore unfunded pension liabilities.

According to the Pew Charitable Trusts, “The gap between the promises that states have made for public employee retirement benefits and the money they have set aside to pay these bills was at least $ 1.38 trillion in fiscal 2010. . ” As these changes appear in municipal financial statements over the next two to three years, watch out for even greater taxpayer concerns about municipal and pension deficits. Pension litigation is likely.

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