In GASB exposure drafts, school districts must account for teacher pension liabilities
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Published: 22-Jul-2011

Analysis of the new “exposure drafts” from the Government Accounting Standards Board (GASB) yields the conclusion that public school districts  – employers of the vast majority of the education workforce in Oklahoma -- will need to account, list and disclose transparently their share of pension obligations within the Oklahoma Teacher Retirement System (OTRS). 

If they ever go into effect, revised standards would lead to important changes in financial reporting of pensions by state and local governments. The revisions would, if ultimately passed through GASB this fall, make much clearer the costs and obligations of pensions provided to public employees.

Public comments on the two exposure drafts will be taken by the GASB through September 30. That deadline is followed by public hearings October 3, 13 and 20, and “user discussion forums” on October 4, 14 and 21. 

Exposure Draft #27 is focused on “Accounting and Financial Reporting for Pensions, an amendment of GASB Statement No. 27.”

The plan introduction includes (page v) the following description of the kind of plans covered: 

“This proposed Statement and the related proposed Statement would establish a definition of pension plan that reflects the primary activities of a fund that is used to provide pensions — the accumulation and management of assets dedicated for pensions and the payment of pensions to plan members as the benefits come due. A trust, or equivalent arrangement, that is used to administer a pension plan and that has the following characteristics is referred to as a qualified trust:

“1.         Employer contributions to the plan, including contributions made on behalf of the employer(s) by a nonemployer contributing entity, and earnings on those contributions are irrevocable.

“2.         Plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms.

“3.         Plan assets are legally protected from the creditors of the employer(s), nonemployer contributing entities, and the plan administrator. If the plan is a defined benefit plan, plan assets also are legally protected from creditors of the plan members.”

In the view of GASB officials, “this proposed Statement would improve the decision-usefulness of information in employer financial reports and enhance its value for assessing accountability and interperiod equity” through explicit recognition, by government employers, of “entire net pension liability” and “a more comprehensive measure of pension expense.”

The details and extent of government pension liabilities would lead to “new note disclosures and required supplementary information.” This will include:

“•         More robust disclosures of assumptions would allow better informed assessments of the reasonableness of pension measurements.

“•         Explanations of how and why the net pension liability changed from year to year would improve transparency.

“•         The summary net pension liability information, including ratios, would offer an up-to-date indication of the extent to which the total pension liability is covered by resources held by the plan.
 “•         The employer contribution schedule would provide measures to evaluate decisions related to the assessment of contribution rates in comparison to actuarially determined rates, when such rates are determined. It also would provide information about whether employers are keeping pace with actuarially calculated pension contributions.”

Throughout the document, references are made to stricter “discount rate” accounting. This could avoid, in CapitolBeatOK’s analysis, overly optimistic assumptions about rates-of-return in pension fund investment portfolios.

“Consistency and transparency” would be improved, in assumptions held in the GASB draft, by incorporating “into benefit projections of ad hoc COLAs and other ad hoc postemployment benefit changes that are considered substantively the same as automatic COLAs and other automatic postemployment benefit changes.”

Exposure Draft #25 is focused on “Financial Reporting for Pension Plans an amendment of GASB Statement No. 25.”

In introductory words (pages ix-x), exposure draft 25 describes “How the Changes in This Proposed Statement Would Improve Financial Reporting.”

The authors concluded, “The requirements of this proposed Statement would improve financial reporting primarily through enhanced note disclosures and schedules of required supplementary information. The new information would enhance the decision-usefulness of information in plan financial reports and its value for assessing accountability by providing information about measures of the net pension liabilities of employer(s), including information that explains how and why the net pension liability changed from year to year, which would improve the transparency of reporting. 

“The net pension liability information, including ratios, would offer an up-to-date indication of the extent to which the total pension liability of the employer(s) is covered by resources held by the plan. The employer contribution schedule would provide measures to evaluate decisions related to the assessment of contribution rates in comparison to actuarially determined rates, when such rates are determined. 

“It also would provide information about whether participating employers are keeping pace with actuarially calculated pension contributions. In addition, new information about rates of return on plan investments would inform financial report users about the effects of market conditions on the plan’s assets over time and would provide information for users to assess the relative success of the plan’s investment strategy and the relative contribution that investment earnings provide to plan net position.”

Public school districts appear to fall into the category of “cost-sharing employers” or “employers” as those terms as used in the GASB drafts. 

The General Accounting Standards Board is an arm of The Financial Accounting Foundation. 

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