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What you need to know about GASB 68

State and local governments are required to follow accounting practices set forth by the Governmental Accounting Standards Board. GASB is recognized by governments, the accounting industry and capital markets as the official source of Generally Accepted Accounting Principles for government entities.

Periodically, GASB issues new standards intended to make government financial reporting more accountable. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, goes into effect for fiscal years beginning after June 15, 2014. It governs the specifics of accounting for public pension plan obligations. Municipalities participating in the state's retirement plan will have to report their proportionate share of the state plan's overall net pension liability and pension expense in their annual audited financial statements.

Previously, pension expense was reported as the employer contributions paid during the year as required by state law. GASB 68 requires the government entity to recognize additional items as pension expense on the financial statements in order to record the change in the net pension liability from the previous reporting period.

The SC Public Employee Benefits Agency is working with state's retirement system members to make sure they are aware of the pension accounting rule changes. PEBA's staff is also working closely with an external actuary to ensure that PEBA has the information necessary to provide members with the appropriate pension plan data in response to GASB 68 requirements.

PEBA indicates that, regardless of the net pension liability reported on the employer's financial statements, the employer is responsible only for making the contributions required by state law during any given fiscal year.

In addition to reviewing pensions, GASB has also been reviewing accounting for other post-employment benefits (known as OPEB), such as retiree healthcare. GASB typically issues exposure drafts leading up to the final approval of new standards to give users the opportunity to comment on the effects of the proposed standards. In May, GASB approved two new exposure drafts related to the financial reporting for OPEB. The concepts in the exposure drafts for OPEB are similar to the GASB 68 standards for pensions.

The two OPEB exposure drafts require governmental entities to report on their financial statements an OPEB liability that previously was only disclosed in the footnotes. The promise to pay these benefits often represents a significant future obligation that will potentially have a major impact on governmental financial statements.

The employer-related exposure draft recommends the OPEB liability be reported one of two ways. The first applies to entities that provide an OPEB plan administered through a trust such as the Association-sponsored South Carolina Other Retirement Benefits Employer Trust. Trust members will report the liability net of their accumulated earnings within the trust.

The other way applies to entities that do not participate in such a trust. They would report the total OPEB liability on their financial statements. The drafts will also include new methods to calculate the liability and annual OPEB expense.

The required and proposed changes to pensions and OPEB accounting will result in increased volatility in municipal financial statements each year, stated Heather Ricard, the Association's director of risk management services and secretary/treasurer for SCORBET. The large net pension liability may even make a city or town appear insolvent; however, it is important to remember the liability is required for accounting purposes only, not for funding purposes.

For municipalities in the state's retirement system, the funding amounts will continue to be the required contributions as established by PEBA.

Municipal Association staff will continue to closely monitor the OPEB exposure drafts and will work to educate cities and towns on the changes approved when the final accounting statements are issued.