Starting with the fiscal year that ended June 30, 2015, state and local governments began to report a net pension liability (NPO) on their government-wide statement of net position, in conformity with GASB Statement No. 68, Accounting and Financial Reporting for Pensions. This new pension liability represents the difference between the value in today's dollars (present value) of benefits already earned by employees (total pension liability) and resources accumulated and held in trust to pay those benefits (fiduciary net position). The amount of the NPO can be substantial, and in some cases may even dwarf an employer's other liabilities.
Because government employers previously have not reported an NPO, some financial statement users who are encountering it for the first time may be unsure how to assess its significance. This article offers three points of reference for making that assessment: 1) funding policy; 2) funding progress; and 3) funded contributions.
Funding Policy. There is no need for the parents of a kindergartener to panic just because they have not yet accumulated in their child's college fund all of the money that will be needed to pay for the child's college education. After all, the parents still have 12 years to accumulate the total resources that will be needed. What is important is that: 1) the parents have a solid plan for accumulating the necessary resources;
2) the plan they have put together is feasible, given the parents' financial circumstances; and 3) the parents faithfully follow that plan by faithfully making their contributions to the college fund in full. So too, there is no reason to fear serious financial difficulties simply because a government employer has not yet accumulated the total resources that will be needed to pay benefits when current employees retire if: 1) the employer has a plan to make contributions based on an actuarial valuation that uses reasonable assumptions; 2) it is feasible for the employer government to keep making those contributions, given its economic circumstances; and 3) the employer government does, in fact, faithfully pay the full amount of its actuarially determined contribution (ADC) to the pension plan each year. To use another analogy from personal finance, the important thing is not so much the size of the mortgage on the house, as the size of the monthly mortgage payments and the homeowner's ability to make those payments given the homeowner's income.