WASHINGTON — The Governmental Accounting Standards Board has issued a fact sheet of frequently-asked questions to help resolve confusion over their new public pension accounting and reporting standards.
The three-page educational paper, issued Tuesday, includes seven questions and answers that GASB said should clarify “common misconceptions about the new pension statements.”
The two new standards approved in August are: Statement No. 67, Financial Reporting for Pension Plans, which applies to financial reporting by most pension plans and Statement No. 68, Accounting and Financial Reporting for Pensions, which applies to financial reporting by most governments that provide their employees with pension benefits.
GASB standards are not mandatory, but state and local governments must follow them to receive a clean audit opinion.
One question addresses whether the new GASB statements do not tell governments how they should fund their pensions. GASB said that after reexamining the prior standards for pensions, they concluded that approaches to funding are not “necessarily the best approach to accounting for, and reporting, pension benefits.”
The new statements mark a definitive separation of accounting and financial reporting from funding, the letter said.
State and local groups have argued that the new GASB pension changes will be costly and add strain on public sector finance departments. They have asked if they will have to pay more each year for pensions under the new standards.
The FAQ sheet addressed this issue by saying how much governments actually contribute each year to a pension plan is a policy issue.
“Governments will likely report pension expense more quickly than under the prior standards; however how or whether this information is used in assessing the amounts that governments will contribute to their pension plans is a public policy decision made by the government officials,” GASB said in the document.
Another concern was about the selection of an appropriate interest rate for discounting projected future benefit payments.
GASB said governments will not have to use a municipal bond rate for discounting as punishment for not fully funding their pension plans.
However, the less well-funded a pension plan, the more likely it will reach a crossover point and therefore have to discount some projected benefit payments using a municipal bond index rate, GASB said in the document.
GASB also released a two-page background paper on the new pension standards that a spokesperson described as a “quick reference” for state and local government officials.
The reference sheet answered five basic questions including why the GASB issued the new accounting and financial rules and what type of pensions are affected.
GASB said that it periodically reviews existing standards to “determine whether they are effective in supporting accountability and providing decision-useful information for financial statement users.”
The new accounting standards were not crafted in response to the economic downturn, the document said. GASB began research to review the pension standards in 2006.
GASB said the new accounting statements apply to pensions administered through trusts that meet three different criteria including: contributions from employers are irrevocable; assets in the trust are dedicated to providing pension benefits to the plan members; and assets in the trust are protected from the creditors of the employers, the plan administrator and the plan members.
The vast majority of pensions are administered through trusts meeting these requirements, GASB said in the letter.
GASB spokesperson John Pappas said that the organization doesn’t necessarily publish fact sheets for all new GASB standards. Most prior standards have one fact sheet but the new pension standards will have eight in total. Six more fact sheets are forthcoming, he said.
“Since these specific standards are complex and affect many different types of governments in different ways, the GASB wanted to ensure that each government that provides defined contribution pensions have information on their specific requirements,” he said.