The Governmental Accounting Standards Board is proposing one of the most substantial overhauls of pension reporting since the existing standards were implemented in 1994. Among the new rules are adjustments to the methods which governments use to report pension costs, obligations, and unfunded liabilities.

The changes are described in the overview of a Plain Language Supplement to the Exposure Draft. It states that, “The GASB is proposing significant improvements to its standards for accounting and reporting on the pensions that governments provide.”

The proposed changes, presented in two drafts, would separately relate to two aspects of pension reporting: pensions provided through a qualified trust and pension plans that administer the benefits.

Pensions are a form of compensation.”

“Like salaries, the costs and obligations associated with pensions should be recorded as they are earned, rather than when contributions are made… or when benefit payments are made to retirees.”

Currently, governmental reporting standards do not require that future pension liabilities be included or disclosed on a municipal or governmental balance sheet. Instead, those details can be (and often are) included in the notes of the financial statements. However, under the new rules, that would change.

“A government that provides pension benefits to its employees is responsible for the net obligation and would report it as a liability in its financial statements. This liability would be called a net pension liability.”

This disclosure of the “net pension liability” would result in a more transparent view of how the unfunded liabilities of pension programs can affect municipal finance.

“A significant improvement to the comparability of pension information.”

When boiled down, pension liabilities are a function of costs versus assets. If a fund has too little assets and too high of obligations, it will have a greater liability than a fund with a vast portfolio and few obligations. However, the strength of expected returns on investment plays a monumental role in calculating the funding status of a pension. In recent years, numerous pension funds have come under fire for basing their funding plans upon unrealistic expected returns.

Under the proposal, all assumptions of returns and costs “would be consistent with the American Academy of Actuaries’ Actuarial Standards of Practice.”

Under this new rule, ad hoc Cost of Living Adjustments and other postemployment benefit changes would be included in benefit projections. The implication is that the amount of projected payments would increase, when compared to current standards.

“The GASB believes this would be a more accurate reflection of the total obligation.”

“Most governments would recognize pension expenses sooner than they do at present.”

While numerous variables factor into the actual expense of pension plans, not all are required to be measured equally or on an equal time frame. For example, the GASB lists eight different variables that are used to calculate expenses. However, only three are immediately calculated into the balance sheet, the other five can be introduced over a period of as much as 30 years.

Because of the disparity in timeframes, the GASB found that governments might not recognize the actual expense, leaving pension funds open to promising more than they can afford to spend.

The proposed new rules would accelerate the reporting timeframe for all liabilities. For instance, tenure, interest, and accounts receivable or payable are immediately reported in pension funding equations. Under the new rules, changes in the terms of the pension benefits and projected investment earnings would also be reflected in the balance sheets without delay.

Other expenses could be deferred by five years, but the 30-year window would be immediately eliminated. Most substantially, the differences between assumed and actual earnings from pension investments would be incorporated into the expense calculations over five years.

“Report a net pension liability based on its proportion of the collective net pension liability.”

In the event a government is part of a cost-sharing, multiple-employer pension plan, then each government must report a liability in its own financial statements that is equivalent to its share of the collective pension fund liability.

CalPERS has a cost-sharing, multiple-employer pension plan which it uses for any participating agency or municipality with less than 100 participants in its pension plans.


According to the report issued by the GASB, they need feedback from interested and invested organizations. As part of their summary, which can be found here, they pose a series of questions related to each of their reforms. They hope the answers will be shared, either by email, traditional mail, or as part of a nationwide listening tour, which comes to San Francisco on October 14.

For more information on this report, or to view the full exposure drafts, you can go to this GASB website.

The GASB also held a webinar at the beginning of August discussing the Exposure drafts. That presentation has been archived by GASB and can be accessed through this website.