Pension funding and the GASB's new pension accounting.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle

For those interested in the finances of a state or local government that offers defined pension benefits to its employees, the main question has typically been "is the government doing everything it should to pay for the cost of those benefits?" Until now, financial reports prepared in conformity with generally accepted accounting principles (GAAP) have attempted to answer that question by providing information on the actuarially determined amount an employer would need to contribute each year to reasonably fund the cost of benefits earned by employees (annual required contribution, or the ARC). This situation is about to change dramatically as the result of GASB Statement No. 68, Accounting and Financial Reporting for Pensions. Specifically, under the GASB'S new pension guidance, employers will no longer be required to calculate an ARC. This has raised serious concerns about how those interested in a government's finances can know whether a government is responsibly funding the cost of pension benefits in any given year.

At first, it might seem that all that would be necessary would be to continue to engage the services of a professional actuary to calculate an ARC for funding/budgetary purposes. However, the change in the GASB's pension standards means that the strict limitations (parameters) that the GASB imposed on the actuarial calculation of that amount will no longer be operative. Consequently, many believe there is a pressing need for widely recognized, standardized guidelines as to what constitutes a sound funding plan for employers that offer defined benefit pensions.

POLICY OBJECTIVES

To meet this need, the GFOA joined with other groups to develop a comprehensive set of guidelines for ensuring the sustainable funding of pension benefits. (For more information, see the "Federal Focus" article in this issue of Government Finance Review.) All involved agreed that a sustainable pension funding plan would need to: 1) establish general policy objectives and 2) set criteria for applying those objectives to the basic elements of a funding plan. The working group proceeded to identify the following five general policy objectives:

* Actuarially Determined Contributions. A pension funding plan should be based on an actuarially determined annual required contribution (ARC) that incorporates both the...