The pension standards required by Governmental Accounting Standards Board Statement Number 68 (GASB 68) affect different cities in different ways. It has no impact on financial reporting for cities not required to be audited. However, to impacted cities the changes may seem complex.
GASB Statement 68
Accounting and financial reporting standards for pensions prescribed by GASB 68 have now been implemented by state and local governments. Generally there are two sets of pension numbers – those related to accounting and those related to funding. The numbers are intended to tell the story of pension-related activities from two different perspectives. The accounting numbers convey the amount of deferred compensation (pension benefits) which will be paid to employees after retirement. The amounts reported as liabilities represent the benefits employees have earned and, therefore, the government has a present obligation to pay in the future. The total pension liability represents the government’s promise of (deferred) benefits for work already performed. When the total pension liability exceeds the pension plan’s net position available for paying benefits, there is a net pension liability.
The accounting numbers also more closely link the pension expense reported with the periods in which pension benefits are actually earned – as employees work for the government. The accounting numbers are supported by notes to financial statements and 10-year schedules of trend information known as required supplementary information (RSI).
The funding numbers address how governments approach pension plan funding – a government’s policy or statute regarding how much money the government will contribute to the pension plan each year. The actuarial valuation performed for funding purposes determines the amount of annual contributions to the pension plan needed to fund future benefit payments. The statutorily required employer contributions and the amount of employer contributions recognized by the pension plan in relation to those contributions are included in the financial report as RSI, which allows the government to demonstrate its degree of compliance with its funding policy or statute.
Cost-Sharing Multiple-Employer Pension Plans
In cost-sharing multiple-employer pension plans, such as the Iowa Public Employees’ Retirement System (IPERS) and the Municipal Fire and Police Retirement System of Iowa (MFPRSI), the contributions of multiple governments and their employees are combined. The pension benefits of the retirees of all participating governments are paid out of this common pool of assets.
Historically, the statutory contribution rate for the IPERS Regular membership group was set by state statute. Effective with the 2011 valuation, IPERS has been delegated the authority to set the required contribution rate for the Regular membership group based on the Actuarial Contribution Rate developed in the annual actuarial valuation, subject to a change of no more than 1 percent per year. The required contribution rate for the Protection Occupation membership group continues to be based on the Actuarial Contribution Rate developed in the annual actuarial valuation. For MFPRSI employer contribution rates are based on an actuarially determined normal contribution rate and set by state statute.
GASB 68 now requires participating governments in cost-sharing multiple-employer pension plans to report their proportionate share of the net pension liability in their financial statements.
For cities reporting in accordance with generally accepted accounting principles (GAAP), the financial statements will include a net pension liability as well as pension related deferred outflows of resources and deferred inflows of resources. In the past the city’s share of IPERS and MFPRSI contributions paid were reported as pension expense. Pension expense will now be more reflective of the pension benefits employees earned during the year. Pension note disclosures and schedules of RSI are also required.
Cities which are audited and report on the cash basis of accounting will report the city’s share of net pension liability, pension related deferred outflows of resources, deferred inflows of resources and their proportionate share of collective pension expense in the notes to financial statements. Schedules of RSI are also required.
Implementation resources are available on the Auditor of State’s Web site. GASB 68 resources include the IPERS reports which display each entity’s proportionate share of the various collective pension amounts, sample GASB 68 calculator spreadsheets, sample reports and implementation materials for cities.