GFOA takes position on proposed pension changes.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Government Finance Officers Association

In mid-June 2010, the Governmental Accounting Standards Board (GASB) issued its Preliminary Views (PV) on Pension Accounting and Financial Reporting by Employers. In the PV, the GASB proposes to substantially modify how state and local governments account for the cost of providing defined benefit pensions to their employees (see "Proposed Changes in Employer Accounting for Pensions," Government Finance Review, August 2010). The GFOA's Committee on Accounting, Auditing, and Financial Reporting and its Committee on Retirement and Benefits Administration developed a joint response to the PV that representatives of the two committees will present at a public hearing scheduled for October 27, 2010, in New York.

This article will examine the principal issues raised by the PV, the GASB's proposed position, and the GFOA's response.

EMPLOYERS IN SOLE AND AGENT PLANS

Most of the issues raised in the PV involve employers that participate in sole-employer and agent multiple-employer defined benefit pension plans.

The Employer's Obligation for Benefits. When an employer promises pension benefits to employees, is the employer responsible for the difference between the cost of promised benefits and the resources accumulated to pay those benefits?

GASB: For accounting and financial reporting purposes, an employer is primarily responsible for the portion of the obligation in excess of the plan net assets available for benefits.

GFOA: If pension plan beneficiaries have legal recourse to their former employer for benefit payments not made by the pension plan, then the employer remains primarily responsible for the portion of the pension obligation in excess of the plan's net assets available for benefits.

The Employer's Liability for Benefits. If an employer that offers pension benefits to employees is responsible for the difference between the cost of promised benefits and the resources accumulated to pay those benefits, should the employer report the difference as a liability?

GASB: The unfunded portion of a sole or agent employer's pension obligation to its employees meets the definition of a liability (net pension liability) and the net pension liability is measurable with sufficient reliability to be recognized in the employer's basic financial statements.

GFOA: The unfunded portion of a sole or agent employer's pension obligation to its employees meets the definition of a liability (i.e., "liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid," GASB Concepts Statement No. 4, Elements of Financial Statements, paragraph 17). However, the liability is not measurable with sufficient reliability to be recognized in the employer's basic financial statements.

The board proposes to tie the measurement of the unfunded obligation to the valuation of plan net assets at a single point in time (plan reporting date). Since most plan assets are valued as a function of their market price, the amount of the unfunded obligation is likely to be highly volatile because of passing market fluctuations that are essentially meaningless from the...