California Department of Education Tom Torlakson, State Superintendent of Public Instruction
July 2, 2015
Sent by electronic mail
Dear County and District Chief Business Officials and Charter School Administrators:
NEW FINANCIAL REPORTING REQUIREMENTS FOR PENSIONS
The two recent pension accounting standards issued by the Governmental Accounting Standards Board (GASB) make fundamental changes to how state and local governments account for their costs and obligations relating to employee pensions. This letter augments the considerable body of information about the new standards that is available from other sources, and discusses certain implications for California local educational agencies (LEAs).
The guidance in this letter supersedes the guidance in the 1996 Management Advisory 96-03 from the California Department of Education (CDE) relating to accounting for on- behalf pension payments made by the state.
SYNOPSIS OF NEW REQUIREMENTS
GASB Statement 68 (GASB 68), Accounting and Financial Reporting for Pensionsâ€”an amendment of GASB Statement No. 27, introduces new requirements for accrual-basis recognition by state and local governments of employer costs and obligations for pensions. Although GASB 68 relates to accrual-basis financial statements, for California LEAs there are implications for governmental fund statements as well.
GASB Statement 71 (GASB 71), Pension Transition for Contributions Made Subsequent to the Measurement Dateâ€”an amendment of GASB Statement No. 68, amends the transition provisions of GASB 68 to eliminate a potential misstatement in the year of implementation.
Under previous accounting standards, employers participating in a cost-sharing defined benefit pension planâ€”such as the CalSTRS and CalPERS plans in which California LEAs participateâ€”recognized annual pension expense only to the extent of their contractually required contributions to the plan. In their fund statements and their government-wide statements, LEAs recognized a pension liability only for the difference, if any, between contributions required and contributions made.
Under the new accounting standards, if the present value of benefits earned by all employees participating in the CalSTRS or CalPERS pension plan (the planâ€™s total pension liability) exceeds the resources accumulated by the pension plan to pay benefits (producing a net pension liability), LEAs must now report in their government-wide financial statements their proportionate share of the planâ€™s net pension liability. At present, both CalSTRS and CalPERS have a net pension liability.
LEAs must also report their proportionate share of accrual-basis pension expense, and their proportionate share of deferred items for unamortized changes in the planâ€™s total pension liability due to factors such as changes in actuarial assumptions or differences between actuarial assumptions and actual experience.
An LEAâ€™s proportionate share of the planâ€™s net pension liability, pension expense, and deferred items is based on the LEAâ€™s proportionate share of total employer contributions to the plan. The information LEAs need to determine their proportionate share of total employer contributions, and to determine the planâ€™s net pension liability, pension expense, and deferred items, are provided by CalSTRS and CalPERS.