During 2015, municipalities providing pension benefits will likely experience significant changes in net position, or net assets, due to the addition of the Net Pension Liability to their financial statements as required by Governmental Accounting Standards Board Statement 68, Accounting and Financial Reporting for Pensions.
What is GASB Statement 68?
Statement 68 addresses accounting and financial reporting for retirement (or pension) benefits for employees of state and local governments through a defined benefit pension plan, such as the state's retirement system (now part of the Public Employee Benefit Authority). GASB 68 specifically addresses the Net Pension Liability. This is the amount a local government participating in a retirement system would be responsible for paying for all retirement benefits earned by active and retired employees should all of the benefits become immediately due and payable.
How is the Net Pension Liability allocated to municipalities participating in the state's retirement system?
The Net Pension Liability will be allocated based on each participating local government's proportionate share of the entire system's liability. Annually, PEBA will provide each member city with its individual Net Pension Liability.
Will GASB 68 impact the actuarial contributions paid to PEBA for retirement benefits?
No, GASB requires the Net Pension Liability be recorded for accounting purposes, not budgeting purposes. For local governments in the state's retirement system, PEBA will continue to determine each participating entity's annual contribution amount.
Is the Net Pension Liability due immediately?
No, the liability represents each participating entity's proportionate share of the Net Pension Liability of the whole retirement system should all benefits become immediately due and payable. It does not represent a liability that is immediately due and payable to PEBA. Most importantly, this does not mean that the retirement system plan or the local governments recording their share of the Net Pension Liability are insolvent.
Should the Net Pension Liability be included in the city's annual budget?
No, the expense and liability amounts recorded in the local government's financial statements should not be used for budgeting purposes. This is because they will likely be more volatile due to changes in the actuarial calculations. Municipalities should continue to use the statutorily determined contribution amounts set by PEBA for budgeting purposes.
What steps has the state taken to reduce the Net Pension Liability?
PEBA has taken steps in the past few years to reduce the Net Pension Liability by increasing the contribution requirements of participants in the program, eliminating the TERI program at the direction of the General Assembly and increasing vesting requirements, to name a few.
For additional information, plan to attend the GASB 68 session on February 4 during the Hometown Legislative Action Day.