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Explore the significant revisions in accounting and financial reporting standards for pensions under Statements 67 and 68, their implications for analysis, and the big changes in liability recognition, discounting, cost allocation, expenses, and disclosure.
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Inside theNew GASB Pensions Standards Municipal Analysts Group of New York February 15, 2013 Thad Calabrese, Assistant Professor, NYU Dean Michael Mead, Research Manager, GASB The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The New Pensions Standards • What: existing accounting and financial reporting standards have been significantly revised by Statements 67 (plans) and 68 (employers) • Why: review of effectiveness of current standards found significant room for improvement • When: fiscal years ending June 30, 2014 and later for plans; fiscal years ending June 30, 2015 and later for employers The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The Big Changes: The Liability • Portion of the total pension liability not covered by plan assets will be recognized as a liability—the net pension liability (NPL) • Employers in cost-sharing multiple-employer plans will report their proportionate share of the NPL for the participating employers as a whole • Asset smoothing is eliminated from the measurement of the liability • NPL = total pension liability minus the value of plan net position as of the date of the statements • Special funding situations The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The Big Changes: Discounting • Discounting using the long-term expected rate of return (LTEROR) will be limited to the extent that assets are expected to be available to cover future benefit payments • As long as projected plan net position is greater than projected benefit payments, use LTEROR • Otherwise, use a municipal bond rate (20-year, tax exempt, AA or higher or equivalent rating) • “Crossover point” – generally, the first year in which projected benefit payments exceed projected plan net position The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The Big Changes • One required approach to cost allocation—entry age, as a level percentage of payroll—rather than 12 options • Amortization is eliminated for most changes in the net pension liability and greatly shortened for others The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The Big Changes: Expenses The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
The Big Changes: Disclosure • More robust note disclosures, particularly with respect to discount rate • Much more extensive required supplementary information (RSI) schedules The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
RSI: Changes in NPL Note: Only 5 years are presented here; 10 years of information will be required The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
RSI: NPL Components and Ratios Can be combined with schedule of changes in the net pension liability Note: Only 5 years are presented here; 10 years of information will be required The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
RSI: Contributions Note: Only 5 years are presented here; 10 years of information would be required The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Implications for Analysis • A large (and likely larger than now) liability will be added without any offsetting assets, which will reduce unrestricted net position • Expenses likely to be larger and recognized much more quickly • Pro: Liability measurements should be more comparable across governments The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Implications for Analysis • Pro: More consistency with regard to which governments should present which notes and RSI • Pro: A lot more disclosure about how the liability is measured and why it changes • Pro: Greatly expanded disclosures about the discount rate, including a sensitivity analysis • Con: Possible disruption in data series • Con: Possible confusion with funding information The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Implications for Big Changes As discussed, the new GASB pension standards affect a lot of reporting used by analysts. Areas affected include: • The liability • The expense • Cost methods allowed • Discount rate • Asset valuation • Disclosures and supplemental information The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Big Change 1: Liability • Attempt to standardize pension liability: back to the future? (shades of 1987 PBO) • NPL reported on balance sheet of government-wide basic financial statements – enhances transparency, a key goal of financial reporting • Cost-sharing employers will report proportionate share of plan’s NPL – important improvement • Because assets are recorded at fair market value, NPL more volatile – reflects the actual nature of the financial markets The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Big Change 2: Expense • Based on Entry Age cost method only – more conservative than PUC (records larger pension obligation and requires larger contribution) • Eliminates amortization for items that arguably shouldn’t be amortized (changes in benefits, interest on pension liability, etc.) – more honestly reports the expense • One criticism: expense not reflective of funding; however, actuaries and accountants are trying to do two separate things The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Big Change 3: Discount Rate • Recognition that investment returns can’t fund liabilities if investment isn’t made • Many have suggested that the calculation is very complicated – includes assumptions about future sponsor contributions • Leaves open the critique from financial economists that liability values should be independent of assets The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Big Change 4: ARC • In the past, ARC was used to assess a government’s commitment to sound pension funding • Governments will now report their “actuarially determined contribution” (ADC) if it calculates one. • If a government doesn’t calculate ADC, they will report their “statutorily or contractually established” contribution – which are likely more static than ADC/ARC • Potential loss of information from these governments that reported ARC in the past because of disclosure requirements, but will not calculate ADC without requirement The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
Big Change 5: Disclosures and RSI • Inclusion of sensitivity analyses a great improvement – will allow analysts to compare with greater ease • 10-year schedule of actuarial/statutory/contractual contributions will aid in data building by analysts • 10-year schedule of NPL/share of NPL also will aid in analyzing how a government is managing its obligations The views expressed in this presentation are those of the presenters. Official positions of the GASB are established only after extensive due process and deliberation.
