New reporting requirements for state and local governments offering defined benefit pension plans significantly increase the extent to which government employers, pension plans, and the related auditors must coordinate their efforts. In some cases, governments that have never recorded a pension liability will now measure and report a liability based on the excess of the actuarial present value of projected pension benefits over the net resources available to pay those benefits. The changes affect both governments that sponsor their own pension plans and those governments that participate in such plans.
In response to the new reporting standards, the AICPA Auditing Standards Board approved pension-related audit interpretations, and the AICPA State and Local Government Expert Panel (SLGEP) issued three white papers to address reporting and auditing issues for governmental entities related to public-sector pensions. The interpretations and white papers are available on the AICPA website at tinyurl.com/lv6szzg.
The SLGEP examined issues related to implementing GASB Statements No. 67, Financial Reporting for Pension Plans, and No. 68, Accounting and Financial Reporting for Pensions, and developed suggestions for management, actuaries, and auditors. This article describes the issues facing preparers and auditors related to the reporting of pension liabilities by state and local governments and summarizes the SLGEP's recommendations. Government officials, pension plan managers, financial statement preparers, auditors (plan and employer), and actuaries need to work together to meet the information requirements of these new reporting standards. These parties should be planning now to assure that processes are in place to efficiently meet the disclosure and audit requirements.
GASB STATEMENTS NO. 67 AND NO. 68
Statement No. 67 went into effect for periods beginning after June 15,2013, and establishes reporting for government-administered pension plans. Statement No. 68 is effective for periods beginning after June 15, 2014, and establishes employer reporting. The key difference from earlier standards is that financial statement recognition is now divorced from pension funding.
Statement No. 68 requires governments to report the total pension liability, as well as the fair value of plan assets available to pay pension benefits. The difference between a participating government's total pension liability and the fiduciary net position of the plan is the net pension liability (NPL) and is reported on the statement of net position of the governmentwide and proprietary fund statements.
The problem facing auditors and financial statement preparers for state and local governments that provide their employees with defined benefit plans is to obtain sufficient appropriate evidence to attest to the fairness of the reported NPL, pension expense, and pension-related deferred inflows of resources or deferred outflows of resources. The SLGEP's white papers provide recommendations specific to the various types of pension plans.
As the name implies, single-employer pension plans provide pension benefits to the employees of one government. The auditor's responsibilities in single-employer plans are to (1) obtain an understanding of the process and controls used to assure the completeness and accuracy of census data provided to the actuary following the guidance provided in AU Section 336, Using the Work of a Specialist; (2) test the underlying records for a sample of plan participants as evidence that the census data reported to the actuary are correct; (3) evaluate the actuary's competence and actuarial valuation report; and (4) examine the government's pension accrual and related disclosures with respect to plan (Statement No. 67) and employer (Statement No. 68) reporting standards. Given the complexity of the actuarial valuation and the materiality of the pension amounts, auditors may consider using their own specialist. Additionally, it is important to determine that the actuary uses the data correctly.
COST-SHARING MULTIPLE-EMPLOYER PLANS
Many states have created multiple-employer retirement systems for both state employees and employees of local governments within the state. One type of multiple-employer plan is a cost-sharing plan, in which the participating governments pool their resources, risks, and obligations. A key feature of cost-sharing plans is that a single actuarial valuation report is performed for all plan members and is used to determine the contribution rate for participating employers. Close cooperation between the retirement system and the participating governments, as well as between those entities and their auditors, is essential to effectively meet the information needs of all parties. Because cost-sharing plans make a single actuarial valuation and participating employers share proportionally in the liability, the retirement system (rather than the participating governments) is in the best position to calculate the system's NPL. Further, the plan sets contribution levels for participating governments. These measures are based on local government census data provided to the plan and used by the plan's actuary. To effectively manage the pension...