Current Standards

Currently, plans may apply any of three different standards for the financial statements: NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, NCGA Statement 6, Pension Accounting and Financial Reporting: Public Employee Retirement Systems and State and Local Governmental Employers, or FASB Statement No. 35, Accounting and Reporting by Defined Benefit Plans. Some employers apply NCGA Statement 6 and others apply APB Opinion No. 8, Accounting for the Cost of Pension Plans. All plans and employers should include note disclosures and required supplementary information (RSI) as required by GASB Statement No. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers.

Pension Plan ED

The GASB proposal would require all defined benefit plans to present two financial statements and two schedules of RSI:

* Statement of net assets available for benefits;

* Statement of changes in net assets available for benefits;

* Schedule of funding progress; and

* Schedule of employer contributions.

The financial statements would provide current information about the stewardship of the assets held in trust for plan members. The required schedules would report the plan's funding progress from a long-term perspective and the extent to which employers are making required contributions.

Financial Statements. The statement of net assets would report the composition and fair value of plan investments, benefits and refunds payable at the reporting date, and net assets available for benefits. (Assets used in plan operations would be reported at depreciated cost.) The statement would not report the plan's funded status. The actuarial accrued liability for benefits not yet due and payable would be reported in the schedule of funding progress, together with the actuarial value of assets (generally, market value smoothed over, for example, three to five years).

The statement of changes in net assets would report the principal changes by major category. Additions would include contributions and investment income, including the net change in the fair value of investments. Investment-related costs (for example, investment management and custodial fees) would be reported as reductions of investment income to help users assess investment performance. Deductions would include benefits, refunds, and administrative expenses.

Asset Valuation. Reporting investment at fair value would be a significant change for many plans, although an increasing number of plans have adopted fair value in recent years. The GASB believes reporting fair value is useful and consistent with the stewardship focus adopted for the financial statements. In the Boards's view, "Stewardship comprises not only the safekeeping of assets but also the effective use of assets to generate additional resources. Investment performance is an essential element of stewardship responsibility." The GASB concluded that reporting changes in fair value is important for assessments of investment performance, which should include the results of holding as well as selling investments. The Board considered but decided not to accept amortized cost for fixed-income securities, even if a plan intends to hold them to maturity, because amortized cost does not provide information about the effects on Investment performance of the decision to hold.

The GASB emphasizes, however, that fair value generally would not be appropriate for reporting a plan's funded status. Because governmental plans are long-term, going-concerns, the GASB believes that information is more useful when it is measured from a long-term perspective, and assessed using the results of several valuations. From that perspective, a smoothed market value that reduces short-term volatility is preferred. The conclusion that different asset values are needed for different purposes contributed to the decision to require plans to report funded status in a multi-year schedule of funding progress and not in the financial statements.

Notes and Required Supplementary Information. Plans would present a brief plan description, summary of significant accounting policies, and information about contributions, legally required plan reserves, and investment concentrations. These disclosures are similar to current requirements (Statement No. 5), but the number and technical detail of disclosures have been reduced. A further reduction is proposed for a pension trust fund when a separate plan report is publicly available, includes all required disclosures, and is referenced In the employer's report. Some proposed changes to Statement No. 5 are in response to requests to reduce the volume and complexity of pension disclosures, especially In employers' financial reports.

The schedules of funding progress and employer contributions would be presented as RSI, immediately after the notes to the plan's financial statements. Both schedules would include information for at least six years. However, three valuations or plan years would be acceptable for pension trust funds when the plan issues a separate report that includes six-year schedules and is referenced in the employer's report. The schedules would be followed by disclosures about the actuarial methods and assumptions used and significant changes in benefit provisions, methods, or assumptions that may affect users' ability to identify trends.

The schedule of funding progress would include the valuation date, actuarial value of assets, actuarial accrued liability, unfunded actuarial accrued liability or funding excess, funded ratio, covered payroll, and unfunded actuarial accrued liability or funding excess as a percentage of covered payroll. The information items are similar to those included in the Statement No. 5 "analysis of funding progress." However, GASB is proposing that all actuarial determined information should be based on the funding methodology, provided it meets certain accounting "parameters." The current requirement to report funded status based on the Statement No. 5 standardized measure of the pension benefit obligation and the asset value reported in the financial statement would be discontinued. After considerable deliberation (including a review of constituents' experiences with the standardized measure since Statement No. 5 became effective in 1987), the GASB concluded that pension information based on the funding methodology is more useful and is preferred by a majority of users. The Board considered requiring disclosure of the Statement No. 5 measure in addition to the plan's actuarial accrued liability, but concluded that two measures would be more confusing than useful to most users.

Because the ongoing ability and willingness of employers to contribute to pension plans has a significant impact on funding progress, GASB believes the schedule of employer contributions will be a useful supplement to the schedule of funding progress. The schedule would report the annual required contributions of the employer(s) (ARC) and the percentage of that amount recognized by the plan as contributed. The ARC would be measured in accordance with the parameters. The ARC also would be the basis for measuring the pension expenditures/expense of employers participating in single-employer or agent multiple-employer plans (sole and agent employers).

Parameters. The parameters are included in both EDs. Plans and sole or agent employers would be required to apply the same parameters, when a choice is available, and to apply the plan's funding methodology, when it meets the parameters. The principal requirements are as follows:

* An actuarial valuation should be performed at least every two years.

* One of six recognized actuarial cost methods should be used.

* Actuarial assumptions should be selected and assets should be valued in accordance with the standards of the Actuarial Standards Board of the American Academy Actuaries. Assumptions should be selected individually, and asset values generally should be market-related.

* The interest rate should be based on an estimated long-term yield on plan assets.

* All economic assumptions should include the same inflation assumption.

* The ARC should include normal cost and a provision for amortization of the unfunded actuarial accrued liability of funding excess.

* The amortization period should not exceed 30 years. (Up to 40 years would be acceptable for the first 10 years after the effective date.)

* A 10-year minimum amortization period would apply for decreases in the total unfunded actuarial accrued liability due to changing the actuarial cost method or asset valuation method.

* The amortization method should be level dollar or level percentage of projected payroll.

* Amortization of differences between the ARC and the employer's contributions generally should begin at the next valuation.

Although some current practices would be precluded, several recognized funding methodologies would meet the parameters and most entities should be able to maintain the traditional relationship between accounting and funding measures. The GASB believes that relationship is useful, and its importance was emphasized by a large majority of the respondents to the Board's 1988 Preliminary Views and 1990 ED on pension accounting for employers.

Employer ED

Sole and Agent Employers. Sole and agent employers would be required to measure and disclose an amount for annual pension cost based on the parameters, regardless of the amount contributed and recognized in the financial statements. Employers also would disclose a net pension obligation (NPO) of the cumulative difference between annual pension cost and contributions. An NPO generally would have a positive balance (liability for unpaid pension cost). However, a negative balance may occur if, for example, the employer's contributions are determined by statute and exceed pension cost.

For employers that do not have an NPO, annual pension cost would be equal to the ARC based on the parameters. When an employer has an NPO, annual pension cost would include three components: 1) the ARC, 2) interest on the NPO, and 3) an adjustment to the ARC to offset the effect on the ARC of actuarial amortization of the under-funding of prior-year ARCs. The adjustment is necessary because the unpaid amount was included in pension cost and the NPO in the year the under-funding occurred. The employer would return to measuring annual pension cost equal to the ARC when amortization of the unpaid amount is complete or earlier if the NPO is paid in full.

Recognition Requirements. The amount of annual pension cost recognized in the financial statements would depend on whether the employer applied accrual or modified accrual accounting. When the accrual basis is used, any NPO would be recognized as a liability or asset of the fund in which pension expense is recognized. Under modified accrual, pension expenditures may be less or more than annual pension cost. A positive NPO balance would be reported in the general long-term debt account group; a negative balance would not be reported in the financial statements but would be disclosed. Employers would not recognize the plan's unfunded actuarial accrued liability or funding excess in the financial statements. Funded status would be reported as RSI.

Cost-Sharing Employers. Employers participating in cost-sharing, multiple-employer plans would recognize their contractually required contributions as pension expenditures/expense and a liability for unpaid contributions. In a cost-sharing plan, risks, cost, and assets are pooled, a single valuation is performed for the plan as a whole, and the same contribution rates apply for all employers. Generally, a cost- sharing employer's obligation is limited to payment of the required contributions. The GASB concluded that a requirement to measure annual pension cost and recognize liabilities for unpaid cost would not provide useful information to users of the financial statements of individual employers. However, cost-sharing plans would report the total ARC for all employers in the schedule of employer contributions, to provide information about the total cost of cost-sharing obligations.

Notes and Required Supplementary Information. All employers--sole, agent, and cost-sharing--would disclose a brief plan description; information about how to obtain the plan's report, and the funding policy, including the employer and employee contribution rates. In addition, cost-sharing employers would disclose their required contributions and the percentage contributed for the past three years. Sole and agent employers would disclose pension cost, its components, and the NPO balance for the current year; the actuarial methods and assumptions used in determining the ARC; three-year trend information about pension cost, the percentage of pension cost contributed, and NPO balances; and a schedule of funding progress coveting three valuations for their individual plans.

Readers will recognize that many of the provisions of the plan and employer EDs are the same or closely related. The GASB believes consistent measurement of pension information by plans and employers, together with the proposed simplification of note disclosures, should increase the understandability and usefulness of plan and employer reports. To help readers understand the various proposals and how they are related, each ED includes cross-references to the other EDs and comprehensive illustrations, some of which are coordinated (the employers in the employer ED illustrations are contributing to the plans illustrated in the plan ED).

The GASB has scheduled public hearings on all three EDs for June 8 in Minneapolis and July 13 in Norwalk. The deadline for written comments is June 30.

Note: Expressions of individual views by the GASB members and staff are encouraged. The views expressed here are those of the authors. Official positions of the GASB are determined only after extensive due process and deliberation.