What Does GASB Statement 68 Mean for New Hampshire Municipalities?

Barbara T. Reid

The Government Accounting Standards Board, known as the GASB, establishes accounting and financial reporting standards for governmental entities in the United States, including municipalities, counties, school districts, special purpose districts such as water and sewer districts, as well as state governments. The GASB recently issued Statement 67 dealing with financial reporting for pension plans, and Statement 68 dealing with pension accounting and financial reporting for employers that sponsor or contribute to a public pension plan. According to the GASB, “the new Statements should substantially improve the transparency, consistency, and comparability of the pension information reported by state and local governments and pension plans.”

There are three different types of pension plans: single-employer plans, agent multiple-employer plans, and cost-sharing multiple-employer plans. The most significant changes in the new accounting and financial reporting standards under Statement 68 will impact those governmental entities that participate in cost-sharing multiple-employer pension plans. This includes the 475 New Hampshire state and local government employers that participate in the New Hampshire Retirement System (NHRS).

Proportionate Share of the Net Pension Liability

Under current financial reporting requirements, practically no information about pension liabilities is reported in the employer’s financial statements. Disclosure about participation in the NHRS is limited to a footnote, which typically includes a description of the pension plan and benefits provided, employer and employee contribution rates, and contribution dollars paid to NHRS during the fiscal year. Generally, a liability would only be reported if the employer had not made the required contribution payments to NHRS by the end of the fiscal year.

Under the new reporting standard, each employer will report its proportionate share of the “net pension liability” in their accrual-based, government-wide financial statements. The net pension liability, a new measure, is the difference between the market value of pension fund assets and benefit obligations as of a specific date. As explained in the GASB’s fact sheet on cost-sharing plans, “Under Statement 68, the employer’s proportionate share of the cumulative net pension liability will appear plainly on the face of the financial statements for the first time, along with a cost-sharing employer’s other long-term liabilities.

Statement 68 states that once the net pension liability is determined for the pension system as a whole, then that amount may be allocated to the participating employers using a method that is consistent with how the plan determines the contributions from those participating employers. Preliminary discussions with the NHRS indicate that a likely allocation method would be based upon each employer’s contributions as a percentage of total employer contributions. NHRS would compute that apportionment annually for each of the 475 participating employers and provide those numbers for inclusion in the employer’s financial statements. For example, if an employer paid $3.6 million in pension contributions (excluding the portion of employer contributions for the medical subsidy) to the NHRS, that would represent approximately 1.415% of the total employer pension contributions of $254.5 million paid in 2012 ($3.6M / $254.5M). Therefore, this employer would be allocated 1.415% of the net pension liability.

Net Pension Liability

As previously noted, the net pension liability is the total pension liability less the fair market value of the assets available to pay benefits. Included in this computation are projected employer and employee contributions as well as the expectation that the assets will grow at the long-term assumed rate of return on plan investments, which for the NHRS is currently 7.75%, otherwise referred to as the discount rate. Under Statement 68 some pension plans may be required to assume a discount rate lower than their assumed rate of investment return, one that reflects, in part, the tax-exempt municipal bond rate. This would result in lower assumed investment earnings with a higher portion of the liabilities to be funded by employer contributions. Because of the New Hampshire constitutional requirement that pension contributions be based on sound actuarial valuations – and that those annual contributions be paid in full by employers – along with a statutorily closed amortization period (as opposed to a rolling amortization period) to pay off the unfunded liability, it is expected that the net pension liability for the NHRS will be determined using the assumed rate of return of 7.75% rather than a lower discount rate.

Nevertheless, the unfunded accrued pension liability of the NHRS is already significant, at $4.54 billion as of June 30, 2012. Valuing the assets at fair market value as required by Statement 67, rather than the current method of smoothing the investment gains and losses over a 5-year period, will make this number more volatile to market swings. If GASB 67 had been in place in 2012, the unfunded accrued liability would have been slightly higher, at approximately $4.612 billion. Using the previous example of an employer being allocated 1.415% of the total net pension liability would result in a pension liability of $65.3 million to be reported on this employer’s statement of net assets ($4.61B * .01415). In this real life example, this particular municipality currently has $63 million in outstanding bonded debt and total long-term liabilities of $108.7 million. Implementation of Statement 68 will add an additional amount almost equal to their existing bonded debt, increasing the total long-term liabilities on the statement of net assets to $174 million.

Example Municipality

Impact of Statement 68

Initial questions regarding the effects of Statement 68 focused on three main issues: the impact on pension costs and ultimately on property tax rates, the impact on credit ratings and the related costs of borrowing, and the ability to audit what in some cases may be one of the largest numbers on a municipality’s balance sheet.

Pension Costs and Property Tax Rates. Answering the question whether governments will have to pay more each year for pensions because of Statement 68, the GASB notes that Statements 67 and 68 relate only to accounting and financial reporting, meaning how pension costs are measured and how pension obligations are reported in financial statements, not how a pension system is funded. The GASB further states that the funding of public pension systems is a policy issue. In New Hampshire the funding of the NHRS is governed by constitutional and statutory provisions, and administrative procedures. Therefore, what the new Statements do is separate pension accounting and financial reporting from pension funding, which will result in one set of numbers for the “books” and another set of numbers for the “budget”.

From a property tax rate perspective, the addition of a significant long-term liability on the statement of net assets will have no effect on the fund balance used to set property tax rates. This is because of the fact that the pension liability will be presented in the government-wide financial statement, not the fund financial statement which is used for tax rate setting purposes. While some pension costs under the new Statements will need to be expensed sooner (such as the financial impact of benefit changes), the apportionment of the net pension liability discussed above will have no impact on a municipality’s general fund, and therefore no impact on the property tax rate.

Bond Rating. For those municipalities that seek independent credit analysis for bond rating purposes, their participation in the NHRS, as well as the financial status of the NHRS, have been well known to the rating agencies. The statutory requirement for mandatory participation in the NHRS for full-time teachers, police and firefighters, contribution rates, funding status, financial trends, and retirement reform measures are already considered in rating criteria. A recent Moody’s Investment Service release regarding public pension data stated, “we have always incorporated pensions into our credit analysis where we have been aware of significant unfunded liabilities.” Therefore, it is expected that the implementation of Statement 68 should not have an immediate impact on municipal credit ratings.

However, Moody’s has also indicated their intent to make further “adjustments” to the pension data as reported under Statement 68, stating “… we believe the adjustments we are adopting provide us with improved pension measures that will be important and consistent inputs to our government credit analysis. Our adjustments are not intended as a guide, standard or requirement for state or local governments to report or fund their obligations.” Hence there will be yet another set of pension numbers for “bond” purposes. For more information about Moody’s adjustments, go to http://gfoa.org/downloads/MoodysAdjustmentsApril2013.pdf.

Also see the Books-Bonds-Budget chart on page 14 for a summary of these three sets of pension numbers.

Audit Issues. When a municipality contracts with an independent certified public accountant to audit the financial statements, they are asking the auditor to express an opinion as to the fair presentation of those financial statements. Auditors have extensive professional standards regarding the scope of the audit, and the procedures, representations, presentation, documentation, materiality levels, and other requirements associated with expressing their opinion on those financial statements. As expected, there is considerable concern on the part of local government auditors across the country as to how to meet those professional standards and audit requirements in order to justify their opinion on the fair presentation of financial statements that will now include a significant liability never reported before. While there are auditing standards on when and how to rely on work performed by another auditor (such as the NHRS auditors), those standards may not be applicable or practical in the case of apportioning the net pension liability to members of a cost-sharing multiple-employer pension plan. A national task force of the American Institute of Certified Public Accountants is addressing this concern, and will hopefully issue guidance that provides local government auditors with the assurances they need to express their opinions without significant audit cost increases to municipalities.

Implementation of Statements 67 and 68

The NHRS is in the process of implementing Statement 67 and will issue their June 30, 2014 financial statements in accordance with that pronouncement. Local governments must issue their June 30, 2015 or December 31, 2015 financial statements in accordance with Statement 68. While that may seem like a long time away, there are a lot of questions and details that need to be addressed before then. Statement 68 is a significant change in accounting and reporting on a very complex and confusing subject and the GASB has yet to issue their implementation guide for this statement. However, to assist with the transition, NHMA has convened a pilot group of municipal and school finance officials to work through this process with the NHRS in the hopes of streamlining the implementation for all NHRS employers. A session on these new pension reporting requirements will be presented at the NHMA annual conference in November. Additionally, the NHRS has created a “GASB Reporting Resource Page for Employers” on their website at http://www.nhrs.org/Employers/GASBReportingChanges.aspx which includes links to numerous GASB publications on this topic. Municipal officials are encouraged to review this information and to talk with their auditors about Statement 68 well before implementation time.

Barbara Reid is Government Finance Advisor for the New Hampshire Municipal Association. She may be contacted at 800-852.2358 ext. 3308 or at breid@nhmunicipal.org.