State and Local Pension Accounting

Being a government employee comes with benefits that are far surpassed by the cons of being under constant regulatory and budget scrutiny. Advancement and pay increases are typically pre-defined and are turned into a waiting game rather than a goal to be reached to effort and skill. Speed and quality of resources can be delayed and impaired by budget shortfalls and cuts. What seems to make a government employee career worth-while is the pension policy which after a pre-defined period of service, provides remaining life income and benefits equal in value ranging from a percent based up to and including full final year total income. Employees contribute percentages of incomes to pension pools managed by outside organizations, which when combined with government contributions are designed to cover future benefit obligations using market growth rates and contributions. The 2008-2009 economic decline resulted in a near flat decade of asset growth, highlighted the serious under-funding through contributions and a unsustainable reliance on market growth to meet pension obligations.

According to a 2010 report by the Pew Center on the status of state pension obligations, the gap between pension assets and liabilities is in excess of one trillion and represents a massive long term liability and deficit that until recently where not reported on state and local balance sheets. Prior to June 15th, 2013 the Government Accounting Standards Board (GASB) did not require state and local governments to report their long time pension obligations on balance sheets, contrary to the Financial Accounting Standards Board (FASB) which requires pension obligations to be reported both short and long term liabilities. Similar to the private sector who are forced to expense pension accrual shortfalls, current due pension obligations that were short funded fall upon the state and local taxpayers who are forced to divert the tax funds from vital services and resources to non-productive pension obligations.

Due to pressure from politicians, bondholders, taxpayers, government workers and all those who had a vested interest in state and local governments, the GASB issued statements designed to better reflect existing benefit liabilities on GASB balance sheets. On June 25th, 2012 the GASB approved Statement No. 67, Financial Reporting for Pension Plans and Statement No. 68, Accounting and Financial Reporting for Pensions which are to be placed into effect on all Financial Statements for fiscal years starting on June 15th, 2013 require reporting entities to disclose their net pension liability which represents the difference between the total pension liabilities and the assets available for funding.

Outside the balance sheet, the GASB also requires to provide additional information on pensions through the Notes to Financial Statements. Required information is to include “the portion of the actuarial present value of projected benefit payments to be provided through the pension plan to current active and inactive plan members that is attributed to those members’ past periods of service (the total pension liability), the pension plan’s fiduciary net position, the net pension liability, and the pension plan’s fiduciary net position as a percentage of the total pension liability.” Furthermore reporting entities are reporting to list significant assumptions which include assumptions of estimated inflation, salary increases, benefit requirements, cost of living adjustments, discount rates and any other assumptions vital to formulating projected pension obligations.

With the recently enacted changes in GASB pension accounting, reporting entities will have to accumulate and report the most recent ten years of employer and non-employer obligations and include the sources of changes in the net pension liability and components of the liability and related ratios. All plan obligations that are determined through actuary estimates will be required to include the most recent ten years of “actuarially determined contribution, contributions to the pension plan and any significant methods and assumptions used in calculating the actuarially determined contributions.”

GASB Chairman Robert Attmore in a statement said “”The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations” and AICPA further commented through a statement released by AICPA President and CEO Barry Melancon stating “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 in their balance sheets, providing a clearer view of pension obligations.”

GASB Statement No. 67 and 68 have finally caught up and addressed the serious pension obligation shortfalls which for the first time are now reflective on governmental balance sheets. No longer are pension liabilities capable of being ignored and will allow all stakeholders with these governmental entities to create accountability and force legislators to work in a bipartisan manner to resolve the now very transparent pending pension implosion.

Works Cited

1. GASB. GASB vote places unfunded pension liabilities on government balance sheets. 15 June 2012. 17 July 2013.
2. GASB. Summary of Statement No. 67 Finacial Reporting for Pensions. 12 June 2013. 17 July 2013.