Accounting and Financial Reporting for Pensions
Effective: Fiscal years beginning after June 15, 2014 (FY2015)
GASB 68 fundamentally changed pension accounting for state and local governments by requiring the recognition of net pension liability on the face of the financial statements. For governments participating in cost-sharing multiple-employer plans, this often resulted in the recognition of billions of dollars in previously off-balance-sheet obligations.
Key Provisions
- Net pension liability recognized on statement of net position
- Proportionate share allocation for cost-sharing plans
- Pension expense based on actuarial components (not contributions)
- Deferred inflows/outflows for actuarial changes and investment differences
- Blended discount rate methodology
- Note disclosures including sensitivity analysis
- RSI schedules for 10-year trend data
- Entry age normal cost method required
Net Pension Liability
The net pension liability (NPL) is the difference between the total pension liability (the actuarial present value of projected benefit payments attributed to past periods of employee service) and the pension plan's fiduciary net position (plan assets). This liability is recognized on the government-wide statement of net position. For cost-sharing plans, each participating employer recognizes its proportionate share of the collective NPL.
Pension Expense
Pension expense under GASB 68 differs significantly from the previous contribution-based approach. The expense includes service cost, interest on the total pension liability, projected earnings on plan investments (net of actual earnings, which are deferred), changes in benefit terms, and amortization of deferred inflows and outflows. This creates more volatility than the previous standards, particularly in years with significant investment gains or losses.
Deferred Inflows and Outflows
Certain items are recognized as deferred outflows of resources or deferred inflows of resources rather than immediately in pension expense. These include differences between expected and actual experience, changes in actuarial assumptions, net difference between projected and actual earnings on plan investments, and changes in proportionate share (for cost-sharing plans). These deferrals are amortized over the average expected remaining service life of plan members.
Plan Types
GASB 68 addresses three categories of pension plans: single-employer plans (one government, one plan), agent multiple-employer plans (pooled investments but individual employer accounts), and cost-sharing multiple-employer plans (fully pooled). The cost-sharing model is most common for state-administered plans (CalPERS, TRS, etc.) and requires proportionate share allocation across all participating employers.
Discount Rate
The discount rate is a blended rate reflecting (1) the long-term expected rate of return on plan investments for the portion of projected benefit payments covered by plan assets, and (2) a high-quality municipal bond rate for any payments projected to be made from employer resources after plan assets are depleted. This "crossover" methodology can significantly increase the total pension liability if plans are projected to run out of assets.