California Society of
Municipal Finance
Officers
Pension Accounting and
Financial Reporting:
A Work in Progress
The views expressed in this presentation are those of Mr. Bean. Official positions of the GASB are
determined only after extensive due process and deliberation.
What Was the Starting Point?

Current standards were issued in 1994
 Statement
No. 25, Financial Reporting for
Defined Benefit Pension Plans and Note
Disclosures for Defined Contribution Plans
 Statement No. 27, Accounting for Pensions by
State and Local Governmental Employers


GASB’s strategic plan calls for the periodic
reexamination of major standards
Focus of this session is on employer
reporting
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Where Have We Been?

GASB staff research



Invitation to Comment



Neutral document
Issued in March 2009
Preliminary Views



Conducted during 2006-2008
Recommended that the Board should place all pension
accounting and financial reporting issues on the table
Board document
Issued June 2010
Exposure Drafts


Employers and Plan
Issued June 2011
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Fundamental Approach
Balance between a point-in-time measure
of the employer’s obligation to employees
and the measures over time of the cost to
taxpayers of providing governmental
services
 Viewed in the context of an ongoing,
career-long employment relationship
 Accounting-based versus funding-based
proposals

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Measurement
Measurement Approach Illustrated
1) Project Benefits
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2) Discount
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Present Value
3) Attribution
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Actuarial Assumptions

Selection of all actuarial assumptions
should be made in accordance with
Actuarial Standards of Practice (unless
specific guidance is provided by the
GASB).
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Projection of Future Benefit
Payments
The effects of the following projected future changes should be
included in the projection of benefits for the purpose of
measurement of the pension liability:


Automatic cost-of-living adjustments (COLAs)
Projected future ad hoc COLAs, referring in this context to COLAs that
are dependent upon a decision to grant by a responsible authority,
when those adjustments are substantially the same as automatic
COLAs
–
–
–
The historical pattern of granting the changes
The consistency in the amounts of the changes or in the amounts of the
changes relative to, for example, a defined cost-of-living or inflation index
Whether there is evidence to conclude that changes might not continue to
be granted in the future despite what might otherwise be a pattern that
would indicate such changes are substantively automatic.

Projected future salary increases in circumstances in which the pension
benefit formula is based on future compensation levels

Projected future service credits, both in determining an employee’s probable
eligibility for benefits and in the projection of benefits in circumstances in
which the pension benefit formula is based on years of service.
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Discount Rate
Should be a single rate that reflects:
–
The long-term expected rate of return on plan
investments to the extent that current and expected
future plan net assets available for pension benefits
are projected to be sufficient to make benefit
payments
– A high-quality municipal bond index rate beyond the
point at which plan net assets available for pension
benefits are projected to be fully depleted

If employer contributions to the plan are expected to be held
for a short time such that there would be little or no
opportunity to invest the assets (for example, if contributions
are made on a pay-as-you-go basis), projected benefit
payments that are expected to be paid by those contributions
should be discounted at the high-quality municipal bond
index rate
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Crossover Point

The projection of future employer
contributions for purposes of determining a
discount rate should not include
contributions intended to fund the service
costs of future employees or the
contributions of future employees.
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Projection of Contributions

In circumstances in which either (1) contributions are subject to
statutory or contractual requirements or (2) a formal, written policy
related to employer contributions exists, professional judgment
should be applied to project future employer contributions


Application of such judgment should consider the employer’s most
recent five-year contribution history as a key indicator of future
contributions and should reflect all other known events and conditions
In the event that no statutory or legal contribution requirement or
formal, written contribution policy exists, projected contributions
should be limited to an average of contributions over the most recent
five-year period, potentially modified based upon the consideration
of subsequent events

The basis for the average (for example, percentage of pay contributed,
or percentage of actuarially determined contributions) will be a matter of
professional judgment
Attribution Method

Single allocation method
 Based

on entry age normal principles
The definition will exclude the use of approaches in which
measurements of service costs are not individually based.
 Level
percentage of payroll
 Over periods beginning in first period in which the
employee’s services lead to benefits under the plan
(without regard to conditional service-related
provisions such as vesting) and ending in last period
of the employee’s service
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Measurement of Plan Assets

Plan net assets held in trust for pension
benefits component of the employer’s net
pension liability should be measured in the
same way that it is measured in the
statement of plan net assets, including
measurement of investments at fair value.
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Recognition
To Be Deliberated at March
Meeting
Statement of Net Position
Entire net pension liability reported
 Deferred inflows or deferred outflows may
be reported based on expense recognition

Expense Recognition


Service cost attributed to the current period
should be included in current-period pension
expense
Interest on the total pension liability should be
included in current-period pension expense
 Interest
should be calculated using the discount
rate used in calculating the beginning total
pension liability

Changes in benefit terms on the total pension
liability should be included in pension
expense in the period of the change
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Expense Recognition

Differences between expected and actual experience with regard to
economic or demographic factors (differences between expected
and actual experience) and the effects of changes of assumptions
about future economic or demographic factors (changes of
assumptions) should be recognized as follows:

Inactive (including retired) employees—effects should be included in pension
expense in the period of the change
 Active employees—effects should be recognized using a systematic and rational
method over a closed period that is representative of employees’ expected
remaining service lives as of the beginning of the period in which the change
occurred.

Length of the period should be an average expected remaining service life of the active
employees with which the change is associated, with weighting to approximate the
aggregate result that would be obtained if such changes in each active employee’s total
pension liability were recognized separately over that employee’s expected remaining
service life.
Expense Recognition


Projected earnings on plan investments should
be included in pension expense in the period in
which the earnings are projected to occur.
Differences between projected and actual
earnings on plan investments should be
recognized using a systematic and rational
method over a closed five-year period,
beginning in the period in which the difference
occurred.
Expense Recognition

Differences between expected and actual experience with regard to
economic or demographic factors or changes of assumptions about
the expected future behavior of economic and demographic factors
should be recognized as expense over a period representative of
employees’ expected remaining service lives, with the following
requirements:


To the extent that changes relate to past service of inactive, including
retired, employees, the effects of such changes should be recognized
as pension expense immediately in the period of change
To the extent that such changes relate to past periods of service of
active employees, the effects should be recognized using a
systematic and rational method over a closed period

The period should be an average expected remaining service life of the
employees with which the change is associated, with weighting to
approximate the result that would be obtained of such changes were
recognized over each active employee’s service life
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Disclosures
To Be Deliberated At April
Meeting
Disclosures
•
•
•
General information
Assumptions used in measurement
Details about changes in the net pension
liability, pension expense, and deferred
outflows of resources
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General Information



Name of the plan through which benefits are
provided
Identification of the public employee retirement
system or other entity that administers the plan
Identification of the plan as:
 Single-employer
 Agent multiple-employer
 Cost-sharing multiple-employer

A brief description of the benefit provisions,
including
 Types of benefits,
 Key elements of the benefit formula(s), and
 Authority under which benefit provisions are
established or may be amended
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General Information

The number of employees covered by the plan,
separately identifying numbers of the following:
 Retired
employees and their beneficiaries currently
receiving benefits
 Inactive employees entitled to but not yet receiving
benefits
 Active employees

Whether the pension plan issues a stand-alone
financial report, or is included in the report of a
public employee retirement system or another
entity, and, if so, how to obtain the report
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Assumptions Used In
Measurement

Assumptions in respect of:
 Salary,
 Inflation
 Postemployment
 Discount rate


benefit increases
Different rates, if contemplated for different
periods
Date(s) of experience studies and tables on which
significant assumptions are based
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Discount Rate Assumptions
Assumptions made about contributions of
the employer and of employees and about
other projected cash flows into and out of
the plan
 Expected rate of return

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Discount Rate—Expected Rate
of Return
Expected rate of return on plan
investments
 Description of how the expected rate of
return on plan investments was
determined, including

 Assumed
asset allocation of the portfolio
 Best estimate of the long-term expected real
rate of return for each major asset class
Discount Rate—Municipal Bond
Rate

If the discount rate incorporates a
municipal bond index rate
 Tax-exempt
municipal bond index rate
 Index selected (20-year maturity)
 Reasons for selection of that index
 Periods of projected benefit payments to
which the expected rate of return and the
municipal bond index rate were applied to
determine the discount rate
Discount Rate—Sensitivity
Analysis

The effects on the current-period net
pension liability of a 1-percentage-point
increase and a 1-percentage-point
decrease in the discount rate
Changes in Net Pension
Liability

For the current period, a schedule of changes in the net pension liability that
separately discloses (a) the beginning and ending balances of the total
pension liability, plan net assets held in trust for pension benefits, and the
net pension liability and (b) the effects of the following on those items during
the period:












Service cost
Interest
Benefit changes related to past services
Experience losses (gains)
Changes in assumptions
Contributions—employer (direct)
Contributions—employer (other entities on behalf of the employer)
Contributions—employees
Net investment income
Refunds of contributions
Benefits paid
Other changes, separately identified if individually significant

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Changes in Net Pension
Liability




Brief description of changes of assumptions that affect
measurement of the total pension liability
Brief description of changes of plan terms that affect the
amount of benefits associated with employee services in past
periods
Basis for determination of actual employer contributions to the
plan (the employer’s contribution policy), including
identification of the authority under which employer
contribution requirements are established or may be
amended. If employer contributions to the plan include more
than one contributor, disclosure of contributions by the
employer from its own sources and contributions made on
behalf of the employer by another entity
Basis for determination of employee contributions to the plan,
including identification of the authority under which employee
contribution requirements are established or may be modified
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Pension Expense

Separate identification of the following components:

Service cost
 Interest on beginning total pension liability
 Current-period benefit changes
 Current-period experience losses (gains)
 Current-period changes in assumptions
 Employee contributions
 Expected earnings on plan investments
 Differences between actual and expected investment returns not
qualified for deferral
 Amortization of beginning deferred pension inflows
 Amortization of beginning deferred pension outflows
 Other, with separate display by type of changes if significant

The amortization period or periods for different types of changes in
the net pension liability that occurred in the current period
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Deferred Inflows and
Deferred Outflows

Separate reconciliations of beginning and ending
balances of (a) deferred pension outflows and (b)
deferred pension inflows, each with separate
identification of the following categories of changes:





Current-period benefit changes
Current-period experience gains (losses)
Current-period changes of assumptions
Earnings on plan investments above (below) expectation
Amortization of beginning deferred pension inflows
(outflows)
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Required
Supplementary
Information
To Be Deliberated At April
Meeting
Required Supplementary
Information

10-year schedules for all governments,
regardless of type of plan (plus notes):
 Changes

in the net pension liability by source
Collective level for cost-sharing employers
 Components
of the net pension liability and
ratios: plan net position ÷ total pension liability;
net pension liability ÷ covered-employee payroll

Collective and individual level for cost-sharing
 Contribution
information, if a government has an
actuarially determined contribution: actuarially
calculated contribution – actual contributions;
contributions ÷ payroll
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Illustration: Changes in NPL
Note: Only 5 years are presented here;
10 years of information would be required
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Illustration: NPL
Components/Ratios
Note: Only 5 years are presented here;
10 years of information would be required
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Illustration: Contribution-related
Information
Note: Only 5 years are presented here;
10 years of information would be required
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Questions?
Web site—www.gasb.org
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