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Weekly UpdatesState and local government employers that offer pension or other postemployment benefits (OPEB) to their employees can turn to two pronouncements of the Governmental Accounting Standards Board for authoritative guidance--GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Unfortunately, there have been some practical disagreements concerning the proper application of certain provisions of these two standards to employers participating in cost-sharing plans. In December 2004, the GASB issued a special technical bulletin to resolve these differences.
GASB TB 2004-2, Recognition of Pension and Other Postemployment Benefit Expenditures/Expense and Liabilities by Cost-Sharing Employers, will take effect for employers participating in cost-sharing pension plans starting as of periods ending after December 15, 2004 (earlier application encouraged). In the case of OPEB, the new guidance will need to be implemented at the same time an employer first implements GASB Statement No. 45.
The questions and answers that follow provide background and an overview of the new guidance.
What is a "cost-sharing plan" and how does it differ from a single-employer or agent multiple-employer plan? In a cost-sharing pension or OPEB plan, employers pool their costs and risks, much as they would in an insurance pool. Specifically, employees of a number of different employers are all placed together in a common pool for rate-setting purposes, so that the rate charged to a given participating employer reflects the experience of the pool rather than the experience of that particular employer's employees. That is to say, there is a single actuarial valuation for the pool rather than separate actuarial valuations for each participating employer (as would be the case for an agent multiple-employer plan).
How are employers who participate in cost-sharing plans supposed to recognize related expense/expenditures? Both GASB Statement No. 27 and GASB Statement No. 45 call for employers in cost-sharing pools to recognize expense/expenditure based upon contractually required contributions. Characteristically, such contributions can be directly associated with a specific period of time, such as a month, quarter, or year.
Are contributions by employers participating in cost-sharing plans always scheduled to take place in the period with which they are associated? No. An employer might be required, for example, to make quarterly contributions within 45 days--or some other interval--of the close of each quarter. As a result, the contribution for the last quarter of the calendar year, which begins October 1 and ends December 31, might not be due until February 15 of the following year.
If a contractually required contribution associated with one period is scheduled for payment in the next, when should expense/expenditures be recognized? Some have argued that recognition should be based upon the payment schedule, at least in the case of governmental funds with their unique modified accrual basis of accounting. Others have argued that the timing of payments is irrelevant and that expense/ expenditure should always be recognized in the associated period. Thus the need for additional guidance from the GASB.
What position does the GASB take in the technical bulletin regarding the timing of expense/expenditure recognition? The technical bulletin takes the position that under both the accrual and modified accrual basis of accounting, an expense or expenditure should be recognized during the associated period, even if payment is not due until the subsequent period. Thus, using the example of a government with a calendar fiscal year and contributions scheduled for 45 days after the close of each quarter, the following journal entry would be necessary in a governmental fund as of December 31:
Expenditures--pensions $30,000
Accrued pension expense $30,000 (To recognize pension cost for the fourth quarter)
Similarly, the February 15 payment would need to be treated as a reduction of the fund liability recognized as of December 31, rather than as an expenditure, as follows:
Accrued pension expense $30,000
Cash $30,000
(To recognize payment of fourth quarter pension contribution)
The overall effect of this guidance on expense/expenditure recognition for a full year's contributions to a cost-sharing pension or OPEB plan is illustrated in Exhibit 1.
What are the practical ramifications of this new guidance? Before the issuance of the technical bulletin, some had argued that governmental funds need not recognize an expenditure for employer contributions to cost-sharing plans until a scheduled payment was due. In that case, it was possible for a cost-sharing plan to offer onetime "relief" to participating employers facing budgetary difficulties by simply changing the payment schedule to move one or more payments from late in the current fiscal year to early in the subsequent fiscal year. The new guidance has eliminated this possibility clearly dissociating expenditure recognition from the payment schedule.
Should this same general approach be applied to payments made in connection with annual required contributions to single employer and agent multiple employer pension and OPEB plans? No. The scope of the technical bulletin is strictly limited to employers participating in cost-sharing plans.
STEPHEN J. GAUTHIER is director of GFOA's Technical Services Center in Chicago and author of Governmental Accounting. Auditing, and Financial Reporting.
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