Proposed changes in employer accounting for pensions: the GASB proposes to substantially modify how state and local governments account for the costs of providing pension benefits to their employees.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Governmental Accounting Standards Board

In mid-June, 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 pension benefits to their employees. The PV focuses exclusively on defined benefit pension plans.

BACKGROUND

The current authoritative public-sector guidance on employer accounting for pensions dates from late 1994 (GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers). As a matter of policy, the GASB periodically reviews individual standards to satisfy itself that those standards continue to meet the information needs of financial statement users. Pursuant to that policy, the board issued an invitation to comment on Pension Accounting and financial Reporting in Match 2009 (see "GASB Invites Views on Pension Accounting," Government Finance Review, June 2009). The PV offers the board's tentative conclusions following its examination of responses to the invitation to comment document.

The board has set a September 17, 2010, deadline for those wishing to respond to the PV. Public hearings will follow in Dallas, Texas (October 13, 2010), San Francisco, California (October 14, 2010), and New York, New York (October 27, 2010). Following the public hearings, the next step will be for the board to develop an exposure draft, now scheduled for release in the second quarter of 2011, with a final standard anticipated the following year.

This article examines some of the key issues raised in the PV concerning how state anal local government employers account for the cost of pension benefits. In each case, the article first reviews current practice and then describes changes proposed in the PV.

AN EMPLOYER'S OBLIGATION FOR PENSION BENEFITS

(Employers participating in single-employer and agent multiple-employer plans)

Current practice: Current practice seems to presume that employers effectively transfer their obligation to pay pension benefits to the pension plan and that the employer's obligation for pensions is essentially limited to making required contributions to the plan on a timely basis.

Proposed change: The GASB reasons that if a pension plan were unable to pay benefits to retirees, participating employers would have to step in and make the payments themselves. Consequently, the PV concludes that employers remain primarily responsible for...