Fact Sheet on the GASB’s New Pension Standards: Special Funding Situations
What new requirements regarding accounting and financial reporting for pension benefits will governments that provide pension benefits to their employees be implementing?
The Governmental Accounting Standards Board (GASB) approved Statement No. 68, Accounting and Financial Reporting for Pensions, in June 2012. Statement 68 significantly changes how governments measure and report the long-term obligations and annual costs associated with the pension benefits they provide to their employees. The Statement is available free of charge at www.gasb.org. A separate fact sheet describes the GASB’s new pension standards and why they were issued.
What is a special funding situation?
In many cases, a government employer is solely responsible for the obligation related to the pension benefits it provides to its employees. However, in some instances, another entity (often another government) may be responsible for a part or all of a government’s pension obligation. For example, a state government may be legally responsible for making half of the required contributions to retirement plan for teachers on behalf of local school districts.
A special funding situation exists if an entity—a “nonemployer contributing entity”—is legally responsible for making contributions directly to a pension plan on behalf of a government and one or both of the following is true:
The amount the nonemployer contributing entity is required to contribute is not based on events or circumstances unrelated to pensions (such as contributing a percentage of a specific revenue source)
The nonemployer contributing entity is the only entity legally required to contribute to the plan.
In a special funding situation, the nonemployer contributing entity has essentially assumed a portion (or all) of a government’s pension obligation. Statement 68 explains how governments benefiting from a special funding situation should adjust the amounts they report in their financial statements. Statement 68 also explains how a nonemployer contributing entity that is a government should report its share of other governments’ pensions.
How should an employer that benefits from a special funding situation measure and report its net pension liability, pension expense, and pension-related deferred inflows of resources and deferred outflows of resources?
All employers, regardless of whether they benefit from a special funding situation, will measure their net pension liability, pension expense, and pension-related deferred inflows of resources and deferred outflows of resources the same way. (The measurement requirements are described more fully in separate fact sheets on accounting and financial reporting for governments that provide pension benefits.) All employers will, at a minimum, disclose the full amounts in the notes to their financial statements. All employers also will recognize their full pension expense, regardless of whether they benefit from a special funding situation.
The amounts recognized as the net pension liability and as pension-related deferrals in the employer’s financial statements, however, will be net of the portion assumed by the nonemployer contributing entity. Consider, for example, a state that is legally responsible for half of the pensions of teachers in local school districts. The school districts will:
Recognize in the financial statements their full pension expense
Recognize in the financial statements half of their net pension liability and pension-related deferrals
Disclose in the notes the full amount of their net pension liability prior to assumption by the nonemployer contributing entity.
How should a governmental nonemployer contributing entity report its obligation for the defined benefit pensions of other entities?
A governmental nonemployer contributing entity will recognize its proportionate share of the other entities’ net pension liability, pension expense, and pension-related deferred inflows of resources and deferred outflows of resources. The state government in the preceding example will:
Recognize in the financial statements its proportionate share of the local school districts’ net pension liability and pension-related deferrals, separately from the amounts for its own employees
Recognize in the financial statements its proportionate share of the other employer’s pension expense but labeled similarly to its other aid to school districts, rather than as pension expense.
Why does an employer benefiting from a special funding situation report the full amount of its pension expense rather than an amount net of the nonemployer contributing entity’s portion?
Even though another entity is paying for a portion of the pension benefits of its employees, the cost of those benefits is nonetheless the employer’s cost of providing services. This is similar to how an employer would account for state aid for a particular program: The employer does not report an expense amount net of the state aid for that program; rather, it reports the full expense and revenue in the amount of the state aid. Likewise, an employer benefiting from a special funding situation reports its full pension expense and revenue equal to the amount of expense reported by the nonemployer contributing entity.
How does a special funding situation affect the notes to the financial statements and required supplementary information of employers with defined benefit pensions?
The general note disclosures and required supplementary information of an employer are described in the separate fact sheets for governments that provide pension benefits. The notes to the financial statements of an employer benefiting from a special funding situation will include:
The employer’s percentage of the net pension liability, how the percentage was determined, and the change in percentage since the prior year
The employer’s and nonemployer contributing entity’s respective shares of the net pension liability
Differences between the employer’s actual contributions and its calculated share of the contributions made by all employers and nonemployer contributing entities, as part of the disclosure of pension-related deferrals.
For single and agent employers, the required supplementary information schedule presenting ratios related to the net pension liability will continue to show the shares of the full total pension liability, plan net position, and net pension liability that are associated with the employer—the employer’s shares plus those shares that are reported by a nonemployer contributing entity. In addition, it will separately show the nonemployer contributing entity’s share of the net pension liability. The employer will compute the ratio of net pension liability divided by covered employee payroll using its share of the net pension liability—in other words, employer’s share of the net pension liability divided by covered employee payroll. This approach also applies to note disclosures.
What information will a governmental nonemployer contributing entity report in its notes and required supplementary information about defined benefit pensions?
The reporting requirements differ depending on whether a governmental nonemployer contributing entity recognizes a substantial portion of another entity’s net pension liability or a less-than-substantial portion.
A governmental nonemployer contributing entity that recognizes a substantial portion of another entity’s net pension liability will present notes to its financial statements similar to those of an employer, such as plan and benefit descriptions, assumptions and methods used to measure the pension liability, the effect on the net pension liability of using a discount rate one percentage point higher and lower, changes in net pension liability, and the net amount of deferred inflows and outflows that will be introduced into pension expense in future years.
A governmental nonemployer contributing entity that recognizes a substantial portion of another entity’s net pension liability will present two required supplementary information schedules covering the past 10 years:
Its percentage of the net pension liability, its share (in dollars), and a ratio of the plan’s net position divided by the total pension liability.
If the nonemployer contributing entity’s contributions are statutorily or contractually required, then its required contributions, actual contributions, and the difference between the actual and statutorily or contractually required contributions.
A governmental nonemployer contributing entity that recognizes a less-than-substantial portion of another entity’s net pension liability will present a less extensive set of notes and required supplementary information. The notes will be primarily descriptions of the plan, how the nonemployer contributing entity’s contributions are determined, its amount and percentage of the net pension liability, and its expenses and deferrals related to special funding situations. The required supplementary information schedule will cover the past 10 years and present the nonemployer contributing entity’s share of the net pension liability and its actual contributions to the plan.
When will the special funding situation requirements be implemented under the new standards?
Employers and nonemployer contributing entities are required to put the new standards—including the sections related to special funding situations—into effect beginning in fiscal years ending June 30, 2015, and later. The GASB does, however, encourage employers to implement the new standards sooner.