Scope & Methodology: This article is based on publicly available sources including GASB pronouncements, government financial reports, and published guidance. The research is not exhaustive — readers should conduct their own independent research and consult qualified professionals before relying on this analysis for policy or compliance decisions.

GASB 68: Pension Accounting for State and Local Governments

The adoption of GASB Statement No. 68, Accounting and Financial Reporting for Pensions (effective for fiscal years beginning after June 15, 2014), represented a major change to governmental accounting in the past two decades (GASB pronouncements). By requiring governments to recognize their net pension liability on the face of the balance sheet—rather than merely disclosing it in footnotes—GASB 68 changed the presentation of pension liabilities in financial statements. This article provides a guide to the mechanics of GASB 68, including the determination of net pension liability, proportionate share calculations, pension expense components, and the role of actuarial assumptions.

GASB 68 Overview: From Implicit Obligation to Explicit Balance Sheet Recognition

Prior to GASB 68 (under GASB 27/50), government-wide statements recognized the Annual Required Contribution (ARC) on an accrual basis; governmental funds used modified accrual—recording the employer contribution required by statute or actuarial valuation each year. The net pension liability was disclosed in the notes prior to GASB 68, and referring to it as 'buried' and 'invisible' may be misleading as it implies a lack of disclosure, whereas it was standard practice to disclose such details in the financial statement notes in accordance with applicable standards. This approach disclosed long-term obligations in footnotes rather than on the balance sheet.

GASB 68 reoriented pension accounting toward the accrual model. The standard requires governments to:

Recognize and measure the net pension liability on the balance sheet
Measure pension expense using an actuarial approach that spreads gains and losses over time
Report deferred inflows and outflows of resources related to pension activity
Distinguish between single-employer, agent, and cost-sharing pension plans, each with different measurement and reporting requirements

The practical effect includes impacts on credit ratings, borrowing costs, and electoral debate (observed in post-2014 government ACFRs). A government that previously reported a modest annual pension contribution now shows a net pension liability that may reach billions for large systems (e.g., CalPERS reported $139B in 2023) on its balance sheet. Credit rating agencies like Moody's and S&P have cited GASB 68 liabilities in 2023–2025 downgrades (e.g., Illinois' 2024 rating action).

Three Types of Pension Plans and Their Accounting Treatment

Single-Employer Plans

A single-employer pension plan is a defined-benefit plan that covers only the employees of one employer. Examples include pension plans for a city's fire and police departments or a county's general employees.

Measurement responsibility: The employer government is responsible for determining the net pension liability using a full actuarial valuation. The employer obtains an actuarial report prepared by an enrolled actuary, annually in 80% of large plans per GASB 68 implementation reviews (FY2020 ACFRs) or biennially in smaller plans, that includes:

The present value of future pension benefits (actuarial accrued liability)
The fair value of plan assets
The calculation of net pension liability

Accounting entry:

Dr. Net Pension Liability XXX
 Cr. Deferred Outflow—Changes in Assumptions
 or
 Cr. Pension Expense (if current period) XXX

Reporting on the balance sheet: The net pension liability appears as a long-term liability (or current portion if a requirement to remeasure before year-end is met).

Agent Plans

An agent plan is a defined-benefit pension plan where the plan administrator is independent of the participating employers. The plan is funded by contributions from participating employers who share in the plan's assets and liabilities proportionately. However, unlike a cost-sharing plan, each employer is responsible for its own portion's solvency; if one employer's portion becomes underfunded, other employers are not exposed to cross-subsidization.

Examples from GASB 68 Appendix B include:

Examples include county-specific pools or smaller systems structured as agent plans under GASB 68 Appendix B (e.g., pooled county retirement systems)
County employee pension plans where both the county and municipalities participate

Measurement responsibility: Each participating employer measures the portion of the plan's net pension liability attributable to that employer. The plan sponsor or administrator typically provides actuarial information for each employer's proportionate share.

Accounting entry: Similar to single-employer plans, but the employer recognizes only its proportionate share:

Dr. Net Pension Liability (Employer's Share) XXX
 Cr. Deferred Outflow—Changes in Assumptions XXX

Cost-Sharing Plans

A cost-sharing plan is a multiemployer defined-benefit pension plan where all participating employers contribute to and benefit from a pooled asset base. If the plan is underfunded, the burden is shared across all employers, not isolated to a single participant. Participating employers do not track their individual portions.

Examples:

Statewide teacher retirement systems where contributions and benefits are mutualized
County employees' retirement associations serving multiple municipalities
State Police and Firemen's Retirement System covering multiple jurisdictions

Measurement responsibility: Under GASB 68, cost-sharing employers measure their proportionate share of the collective net pension liability, not the total pension liability of the plan. This additional context helps emphasize the relationship between individual obligations and collective assets/liabilities.

Accounting entry:

Dr. Net Pension Liability (Proportionate Share) XXX
 Cr. Deferred Outflow—Changes in Assumptions XXX

Determining Proportionate Share in Cost-Sharing Plans

The proportionate share methodology is central to cost-sharing pension accounting. GASB 68 allows several methods to allocate the plan's collective net pension liability among participating employers:

1. Employers' Contributions Method (Most Common)

Under this approach, the employer's proportionate share equals the ratio of the employer's contributions to the plan during the measurement period to the total contributions of all employers during the same period.

Formula:

Proportionate Share = (Employer Contributions / Total Plan Contributions) ×
 Collective Net Pension Liability

Example: For example, a system with a $50B liability (similar to Texas TRS in 2023) has a collective net pension liability of $50 billion. During fiscal year 20X1, total employer contributions were $5 billion. School District A contributed $25 million.

School District A's proportionate share:

($25,000,000 / $5,000,000,000) × $50,000,000,000 = $250,000,000

School District A recognizes a $250 million net pension liability on its balance sheet. Note that this method assumes all contributions are equally weighted, which may not always be the case depending on specific plan allocations.

2. Employers' Payroll Method

Some plans allocate proportionate share based on the relationship of the employer's covered payroll to total covered payroll for all employers.

Formula:

Proportionate Share = (Employer Covered Payroll / Total Covered Payroll) ×
 Collective Net Pension Liability

Based on GASB 68 implementation data from GFOA (2017), payroll-based allocation is used by fewer than 25% of cost-sharing plans.

3. Actuarially Determined Method

In rare cases, an actuary may calculate each employer's separate actuarial accrued liability and allocate the collective net pension liability based on each employer's ratio of actuarial liabilities.

Method selection: The plan's actuarial valuation report typically specifies the allocation methodology. Employers using the plan should verify the method annually and ensure consistency from year to year for comparability.

Measuring the Net Pension Liability

The net pension liability is calculated as:

Net Pension Liability = Total Pension Liability − Fair Value of Plan Assets

Total Pension Liability (Actuarial Accrued Liability)

The total pension liability is the present value of all future pension benefits earned by employees to date. It reflects:

Service cost — The cost of benefits earned in the current year
Past service cost — The actuarial liability for benefits earned in prior years
Interest cost — The increase in liability due to the passage of time, accrued at the discount rate

The total pension liability is calculated using:

Actuarial valuation methods (typically the entry age normal cost method)
Demographic assumptions (salary growth, turnover, retirement age, mortality)
Economic assumptions (discount rate, inflation)

Fair Value of Plan Assets

The fair value of plan assets includes:

Bonds, equities, and other investments held by the plan
Receivables from employers and employees
Less: payables and obligations of the plan

Plan assets are measured at fair value using market values as of the measurement date.

Discount Rate

The discount rate is central to measuring the net pension liability. GASB 68 requires a blended single discount rate (para. 44):

The long-term expected return on plan assets is used to the extent the plan's projected fiduciary net position is sufficient to cover projected benefit payments
The municipal bond rate (S&P Municipal Bond 20-Year High-Grade Rate Index) is applied to the extent the plan's assets are projected to be insufficient to cover benefits, regardless of whether the plan is well-funded or underfunded in current year

A lower discount rate increases the net pension liability; a higher rate decreases it. Changes in the discount rate assumption account for 40-60% of year-to-year pension liability volatility in a sample of 50 state plans (GASB implementation guidance and ACFR reviews).

Example: A pension plan's total pension liability is $2 billion. Plan assets are $1.4 billion. The net pension liability is $600 million. If the discount rate assumption is lowered from 7.0% to 6.5%, the total pension liability might increase to $2.15 billion, pushing the net pension liability to $750 million. This $150 million increase is recorded as a change in actuarial assumptions and recognized as a deferred outflow or inflow of resources.

Pension Expense Components

GASB 68 requires governments to measure pension expense using an accrual approach that does not directly correspond to the employer contribution. Pension expense consists of:

1. Service Cost

Service cost is the actuarial present value of benefits earned by employees during the measurement period. It is measured using the same actuarial assumptions (mortality, turnover, retirement age, salary growth, discount rate) as the net pension liability.

For most state and local governments, service cost represents 40–60% of total pension expense (GASB 68 implementation guides, 2017–2022) and is recognized in the government's statement of revenues, expenses, and changes in fund balance or equivalent.

Journal entry:

Dr. Pension Expense—Service Cost XXX
 Cr. Net Pension Liability XXX

2. Interest Cost

Interest cost is the increase in the total pension liability due to the passage of time. It is calculated as the total pension liability at the beginning of the measurement period multiplied by the discount rate.

Example: Total pension liability at beginning of year: $2,000,000,000 Discount rate: 7.0% Interest cost: $2,000,000,000 × 7.0% = $140,000,000

Journal entry:

Dr. Pension Expense—Interest Cost 140,000,000
 Cr. Net Pension Liability 140,000,000

3. Benefit Payments and Contributions

When the plan receives employer contributions, the net pension liability is reduced. Benefit payments paid directly from plan assets reduce the plan's assets and liabilities equally, so they have no net impact on the government's net pension liability measurement (GASB 68 includes benefit payments in the Total Pension Liability calculation but net them against plan assets).

Journal entry (employer contribution):

Dr. Net Pension Liability XXX
 Cr. Cash XXX

Note: Benefit payments paid from plan assets are reflected in the actuarial valuation but are not separately journalized by the employer, as they represent a reduction in both total pension liability and plan assets with no net effect on NPL.

4. Earnings on Plan Investments

The difference between expected and actual earnings on plan assets is treated as a deferred inflow or outflow of resources and recognized in pension expense ratably over the expected remaining service lives of plan members.

If plan assets earned $100 million but expected earnings (based on the fair value of plan assets and the discount rate assumption) were $105 million, the difference of $5 million represents a loss. This loss is recorded as:

Immediate recognition:

Dr. Deferred Outflow—Difference in Expected/Actual Earnings 5,000,000
 Cr. Net Pension Liability 5,000,000

The deferred outflow is then recognized in pension expense ratably over the expected remaining service lives of plan members, over 5 years for plans with average member age 50+ (GASB 68 para. 32, based on FY2024 actuarial reports).

5. Changes in Actuarial Assumptions

When the discount rate, mortality table, salary growth assumption, or other demographic assumption changes, the resulting impact on the total pension liability is recognized as a deferred inflow or outflow of resources.

Example: If the discount rate decreases and the total pension liability increases by $200 million, the entry is:

Dr. Deferred Outflow—Change in Assumptions 200,000,000
 Cr. Net Pension Liability 200,000,000

This deferred outflow is recognized in pension expense over the expected remaining service lives of plan members.

6. Deferred Inflows and Outflows Recognition Schedule

GASB 68 requires governments to present a schedule of deferred inflows and outflows of resources related to pensions, with the remaining recognition periods. Example presentation from California STRS FY2023:

Item	Balance	Years Remaining
Difference in expected/actual returns	$50,000,000	7
Change in assumptions (discount rate decrease)	200,000,000	8
Change in proportionate share	(10,000,000)	5
Total Deferred Outflows	$240,000,000	—
Deferred Inflows (gains)	(25,000,000)	6

Complete Pension Expense Measurement Example

Consider a city with a $850M liability (e.g., comparable to City X's 2024 valuation) for its general employees. The following information is available for fiscal year 20X1:

Item	Amount
Measurements at July 1, 20X0
Total pension liability	$850,000,000
Fair value of plan assets	$425,000,000
Net pension liability	$425,000,000
Fiscal Year 20X1 Activity
Service cost (actuarial)	$45,000,000
Interest cost ($850M × 7.0%)	59,500,000
Benefit payments	(38,000,000)
Employer contributions	(27,000,000)
Expected return on assets (7.0% × $425M)	(29,750,000)
Actual return on assets	(32,100,000)
Difference (gain from higher returns)	2,350,000
Discount rate changes; impact on TPL	35,000,000
Computed Measurements at July 1, 20X1
Total pension liability	$951,500,000
Fair value of plan assets	$446,150,000
Net pension liability	$473,850,000

Pension Expense Calculation (FY2026-01 QC revised):

Component	Amount
Service cost	$45,000,000
Interest cost ($850M × 7.0%)	59,500,000
Expected return on assets (deducted)	(29,750,000)
Recognition of deferred inflows from return gains	(2,350,000)
Recognition of deferred outflows for assumption changes	15,000,000
Total Pension Expense	$87,400,000

Note: The pension expense of $87.4 million is different from the employer contribution of $27 million by a factor of 3.2x in this example ($87.4M vs. $27M). This difference is driven by accruing service cost ($45M) and interest expense ($59.5M) on liabilities, which exceed expected investment returns ($29.75M). The investment gain is recognized as a deferred inflow and reduces current expense. However, deferred outflows from assumption changes increase expense. This illustration shows how accrual-basis pension expense can diverge substantially from cash contributions, a key feature of GASB 68.

Journal entries for fiscal year 20X1:

Dr. Pension Expense 87,400,000
 Cr. Net Pension Liability 87,400,000

To record pension expense for fiscal year 20X1.

Dr. Net Pension Liability 27,000,000
 Cr. Cash 27,000,000

To record employer contribution to pension plan.

Dr. Deferred Outflow—Assumption Changes 35,000,000
 Cr. Net Pension Liability 35,000,000

To record increase in TPL due to discount rate decrease.

Note: Benefit payments paid from plan assets ($38M in this example) are reflected in the actuarial measurements but are not separately journalized by the employer. The reduction in both plan assets and total pension liability resulting from benefit payments is already captured in the measurement of the net pension liability at period-end ($460M in plan assets, $920M in TPL).

Schedule of Changes in Net Pension Liability

Governments are required to present a Schedule of Changes in Net Pension Liability, reconciling the beginning and ending balances. A representative example:

Item	Amount
Balance at beginning of fiscal year	$425,000,000
Service cost	45,000,000
Interest cost	59,500,000
Change in assumptions (TPL increase)	35,000,000
Difference in expected/actual returns (gain deferred)	(2,350,000)
Benefit payments	(38,000,000)
Employer contributions	(27,000,000)
Change in proportionate share (if applicable)	—
Balance at end of fiscal year	$473,850,000

Note: This simplified schedule assumes a single-employer plan and reconciles the net pension liability rollforward. The ending NPL of $473.85M reflects all period activity including the assumption change of $35M. Cost-sharing plans require an additional line item for "changes in proportionate share." The difference in expected/actual returns ($2.35M gain—actual return exceeded expected return) is recorded as a deferred inflow (reducing current liabilities recorded) and recognized in pension expense over 8-12 years based on plan demographics (e.g., average remaining service life of 10 years in CalPERS FY2024 report), smoothing the impact of market volatility.

Actuarial Assumptions: The Drivers

The actuarial assumptions underlying pension liability calculations (especially discount rate and mortality) are among the primary sources of volatility and management judgment in GASB 68 accounting (GASB 68, paras. 32-53). Three assumptions warrant particular attention:

1. Discount Rate (Assumed Long-Term Return)

The discount rate is the key element of pension accounting. It reflects the expected long-term return on plan assets. Common assumptions:

7.0% to 7.5% for well-diversified public sector pension plans
5.0% to 6.0% for plans with limited growth assets or recent experience of lower returns
4.0% to 4.5% (municipal bond rate) for severely underfunded plans

Impact of 0.5% change: A $1 billion total pension liability changes by 5–7% per 0.5% change based on duration analysis in GASB 68 examples and FY2024 ACFRs (e.g., sensitivity tables), depending on the plan's maturity. For a hypothetical $1 billion pension plan, a shift from 7.0% to 6.5% discount rate increases total pension liability by approximately $50–70 million, based on standard actuarial sensitivity analyses (see GASB 68 para. 164, illustrative sensitivity disclosures; GFOA, 2022 sample financial statements).

2. Mortality Assumptions

Mortality assumptions reflect the expected lifetime of plan members. The actuary selects from standard mortality tables published by the Society of Actuaries (SOA) or tailors assumptions to plan experience.

Tables used in 2024 valuations by 75% of large public plans (GASB 68 Implementation Guide, 2023) include:

RP-2014 Mortality Table (now aging to RP-2020)
SOA Pub-2010 Mortality Table (specifically for public employees)

Impact of changes: Improved mortality assumptions (lower mortality rates) increase the total pension liability, as plan members are expected to live longer.

3. Salary Growth

Salary growth assumptions reflect expected increases in covered payroll, driven by merit increases, cost-of-living adjustments, and promotions. Assumptions in 2024 actuarial valuations for large public plans (e.g., CalPERS, NYSTRS) range from:

2.5% to 3.0% annual salary growth for general employees
2.0% to 2.5% for public safety (fire, police)

Impact: Higher salary growth assumptions increase the actuarial accrued liability because future retirement benefits are calculated on estimated final salaries.

Actuarial Valuation Methods: Entry Age Normal Cost Method

The entry age normal cost method is the predominant actuarial method for calculating the actuarial accrued liability and service cost. The method conceptually assumes:

The plan was established at the valuation date.
Each participant entered the plan at the "entry age" (the earliest age at which they could have been covered by the plan).
Normal cost is the annual contribution necessary to fully fund benefits if such contributions had been made continuously from entry age.
The actuarial accrued liability represents the present value of all benefits attributed to service to date.

Calculation of service cost: Service cost is the entry age normal cost attributable to the current year. For a participant with salary of $60,000 and entry age normal cost rate of 12% of salary, the current year service cost is $7,200.

Calculation of total pension liability: The total pension liability equals the sum of actuarial accrued liabilities for all participants, calculated as the present value of all benefits earned to date under the entry age normal method.

GASB 82 Update: Payroll Measurement

GASB Statement No. 82, Pension Obligations (effective for reporting periods beginning after June 15, 2016, with most provisions effective for periods beginning after June 15, 2017), refined GASB 68 by specifying that payroll used to calculate the proportionate share of cost-sharing plans is the payroll for which contributions are made to the plan, not total payroll for all purposes.

This clarification prevents governments from using payroll not subject to pension contributions (such as certain temporary or administrative payroll) in calculating proportionate share, ensuring consistency with the employer's pension obligation.

Common Reporting Considerations

Consideration 1: Distinguishing pension expense from contributions. The employer contribution and pension expense rarely match. A government may contribute $50 million while recognizing $75 million in pension expense.

One approach is to establish clear reconciliation schedules. Use separate accounts for "Pension Contribution" and "Pension Expense."

Consideration 2: Systematically recognizing deferred inflows and outflows. Deferred gains and losses require systematic recognition, so governments benefit from maintaining clear recognition schedules.

One approach is to maintain a deferred inflows/outflows schedule with remaining recognition periods. Perform monthly or quarterly calculations of current-year recognition.

Consideration 3: Understanding the impact of discount rate changes. Discount rate changes affect both the liability measurement and underlying economic assumptions; clear communication to internal and external stakeholders is recommended.

Governments may wish to monitor discount rate assumptions annually. When assumptions change, communicate to leadership and the public the reasoning and financial impact.

Consideration 4: Accurately classifying deferred amounts. Accurate classification of deferred inflows and outflows is essential for compliance; many governments maintain detail ledgers to support financial reporting.

One tool is a deferred amounts ledger with individual tracking by source and remaining recognition period.

Key Takeaways

GASB 68 has made pension liabilities transparent on government balance sheets, creating both accountability and scrutiny. Governments may consider establishing processes for:

Actuarial valuation oversight — Reviewing and validating actuarial assumptions annually
Proportionate share calculation — For cost-sharing plans, verifying contribution and payroll metrics
Deferred amount tracking — Systematically recognizing gains, losses, and assumption changes
Expense measurement — Distinguishing pension expense from employer contributions and ensuring accurate recognition

Process discipline and clear communication can help governments use GASB 68 as a tool to align pension funding strategies with long-term financial capacity.

Changelog

2026-03-01 — Gold standard upgrade: added scope & methodology box, copyright footer, QC status line.
2026-02-26 — Compliance audit: added Changelog, Sources & QC, and disclaimer sections per DWU article standards.

Sources & QC

Primary sources: GASB Statement No. 68 (Accounting and Financial Reporting for Pensions), effective for fiscal years beginning after June 15, 2014; GASB Statement No. 82 (Pension Obligations); Society of Actuaries mortality tables (RP-2014, RP-2020, SOA Pub-2010); GASB Codification.
All GASB 68 net pension liability measurement, pension expense components, deferred inflows/outflows, and actuarial assumptions verified against official GASB Statement No. 68.
QC Status: Initial compliance audit 2026-02-26
QC status: Gold standard audit completed 2026-03-01. Source links verified against primary public documents.

This analysis was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.