The Governmental Accounting Standards Board (GASB) issued new public pension accounting rules in 2012. These new requirements, known as GASB 68, will take effect at the end of this year for local and state governments.
Minnesota Cities recently talked with Jim Riebe, principal accounting officer with the Public Employees Retirement Association (PERA), to find out more about these new requirements and their effect on cities.
Minnesota Cities: The GASB is not an agency with regulatory authority over cities. Do cities have to follow their suggested practices?
Jim Riebe: The GASB is the authoritative standard-setting body for governmental accounting principles. Cities need to comply with the GASB requirements in order to prepare financial statements in accordance with government accounting principles. If cities do not comply with the new pension accounting requirements, they will likely receive qualified audit opinions on their financial statements.
MC: The GASB has a new requirement, commonly referred to as GASB 68, which has to do with financial reporting of pensions. Can you explain briefly what this requires and when the requirements take effect?
JR: GASB 68 is effective for cities for the fiscal year ending Dec. 31, 2015. This will require cities to report their proportionate share of PERA’s plan net pension liability, deferred inflows of resources and deferred outflows of resources, and pension expense in their government-wide financial statements. Pension expense will now be based on the GASB 68 actuarial valuation and will no longer be based on the contributions employers pay into the plan. Cities will also be required to include significantly more pension footnote disclosures and two 10-year required supplementary information pension schedules in their financial reports.
MC: Why is the GASB changing financial reporting standards to require cities to include the pension liability in their financial statements?
JR: The GASB decided that governments preparing financial statements using the accrual basis of accounting need to account for pension liabilities the same way they account for any other liabilities; that is, when the goods or services are received, not when they are paid for. The GASB believes the new requirements provide more transparency about government commitments to provide pension benefits to their employees, and that they allow for more comparability among governments because, under the new requirements, governments now have fewer choices about how pension liabilities are calculated for financial reporting.
MC: How does GASB 68 measure the pension liability?
JR: PERA’s actuary determines the total liability for financial reporting by calculating the present value of projected future pension benefit payments based on multiple assumptions, including investment earnings, payroll growth, inflation, and other assumptions. The net pension liability is the difference between the total pension liability and the plan fiduciary net position at market value.
MC: Do cities of all sizes have to report under GASB 68? What about joint powers entities—do they have to report as well?
JR: Only cities that prepare financial statements in accordance with generally accepted accounting principles must comply with GASB 68. Cities that prepare cash-basis financial statements do not need to comply. Joint powers entities may or may not have to comply with GASB 68. If the joint powers entity employs its own staff (or if its board elects coverage in PERA) and prepares accrual basis financial statements in accordance with government accounting standards, then it would need to report its proportionate share of the net pension liability and other pension amounts. If, on the other hand, the participating members of the joint powers entity employ the staff, the joint powers entity would not have to comply with GASB 68, but each participating entity would.
MC: How does GASB 68 impact fire relief associations?
JR: Municipalities that sponsor fire relief associations (not independent nonprofit associations) may need to include pension information about the fire relief association in their financial statements if the amounts are material. Generally, cities with affiliated fire relief associations will have one more footnote disclosure, a Schedule of Changes in Net Pension Liability, and one more required supplementary information schedule, a Ten-Year Schedule of Changes in Net Pension Liability. Cities will need to include an additional Ten-Year Schedule of Contributions only if they make statutorily required contributions to the fire relief association.
MC: Will the changes required under GASB 68 affect the amount of employer or employee contributions that are required to be sent to PERA?
JR: No. The new accounting requirements will not affect employer or employee contributions. The Legislature will continue to determine contribution rates based on the historical funding actuarial valuation, which will continue to be completed each year.
MC: What if a city is very small and has few PERA-covered employees—could a single retirement or one new hire have a major impact on this liability?
JR: Let’s take a specific example from our GASB 68 actuarial valuation as of June 30, 2014. If a city contributed $26,000 to the plan, its proportionate share of the net pension liability was 0.0069 percent, or about $324,000. If the city’s contributions increased by $6,000 to $32,000 because it hired a new employee, its proportionate share of the liability would be 0.0085 percent, or about $399,000. If one of the city’s employees retired, and the city’s contributions decreased to $20,000, the proportionate share would be 0.0053 percent with a corresponding liability of $249,000. So in this example, a single new hire or single retirement for a small city could impact the city’s liability by about $75,000.
MC: The League has heard that cities sometimes receive letters from auditors collecting data for PERA. Why would an auditor be collecting this data, and what statutory authority can cities rely on in order to release private data to contractors?
JR: PERA hired an accounting firm to audit the GASB 68 schedules and underlying information, which includes census data on plan members. The audit standards require the plan’s auditor to select a sample of employers and test payroll and personnel records of a sample of employees. The audit tests of the city employee records include plan eligibility, salary, birth date, and gender; some of the supporting records may also include Social Security number. The objective of the audit testing is to provide assurance about the accuracy of the census data PERA’s actuary uses to calculate the plan’s projected pension liability.
Some of the employee census data our auditors request is classified as not public data under the Minnesota Government Data Practices Act. The responsibility of cities to provide our auditors with the requested census data is addressed in Minnesota Statutes 2015, section 353.27, subdivision 4, part (d), which states: “The employer shall furnish data, forms, and reports as may be required by the executive director for the proper administration of the retirement system.”
MC: How will this reporting affect a city’s financial statements and how can cities explain this new requirement to residents?
JR: The most significant impact of the new pension requirements is that city’s net position on the government-wide financial statements will be lower than in the past because of the inclusion of the city’s proportionate share of the net pension liability.
PERA has put together a plain-language guide to understanding the new pension accounting and financial reporting requirements. Although the guide is intended for public officials, it could help city residents also understand the new requirements. The brochure is available online at http://bit. ly/1ED5gB4.
MC: What is PERA doing to assist cities with this reporting requirement?
JR: PERA has developed a GASB Public Pension Accounting Standards web page at http://bit.ly/1wTO3zG. The web page contains:
PERA also produced a 90-minute webinar, which the League of Minnesota Cities co-hosted, titled “GASB 68: Employers’ Road Map to Successful Implementation.” It is available for viewing on the PERA website at the above link and on the League website at www.lmc.org/gasb68webinar. The webinar presented a case study using the Minnetonka School District to show employers how to incorporate the pension information into their financial statements. PERA has also developed a similar case study using the City of Brooklyn Center, which is available on our website.
City employers can also contact PERA by email at firstname.lastname@example.org to request help with any GASB 68 implementation questions.
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