Government Accounting: Pensions and Other Postemployment Benefits*

Employee pensions and other postemployment benefits (OPEB), such as healthcare, life insurance, disability, and long-term care benefits, are significant elements of cost for state and local governments. Moreover, a confluence of forces -- unfavorable demographics (e.g., an aging public workforce), stock market declines, and increases in pension benefits during the strong revenue growth years for many states in the 1990s -- has led to an alarmingly rapid deterioration in the financial stability of many public pension plans. Even though pension and OPEB benefits may not be paid until far in the future, generally accepted accounting principles (GAAP) require that benefit costs be actuarially measured and reported on a current basis in the financial statements of the benefit plans that administer the payments and the government employers that contribute to the plans. If GAAP are not followed, government officials and taxpayers can be misled about plan financial operations and make erroneous decisions about funding and benefit levels, and plan participants can be deprived of adequate information about their financial rights, protection, and coverage.

This analysis has been designed to help preparers and users of government financial reports obtain a better understanding of GAAP for employee pensions and OPEB. In describing how plan trustees and state and local government employers should measure and account for employee benefits, this analysis:

  • analyzes government accounting and financial reporting standards;
  • identifies, explains, and illustrates key actuarial concepts;
  • outlines requirements for financial statements; and
  • describes the information that should be disclosed in financial statement notes and supplements.

The GASB has two ongoing projects in this area. The first, addressing accounting and reporting for pensions, is nearing completion. A final standard is expected later in 2012. The OPEB project is expected to follow the same lines as the pension project. An Exposure Draft is expected by the 3rd Quarter 2013, with a final standard by the 2nd Quarter 2014. These two projects will have a significant impact for years to come.

Public employee retirement systems (PERS) and pension plans have been significant features of state and local governments for well over a century. . . . After retirement, many former public employees and their families are heavily dependent on pension plan benefits to meet their daily living expenses and provide financial security.

. . . In the aggregate, the contributions to the plans, the composition of plan assets, and the plans' financial status are significant enough to influence the nation's economy and capital markets, including the issuance and trading of government securities.

Some governments operate their pension plans on a pay-as-you-go basis, remitting benefits from current revenues. At the other extreme are governments whose retirement systems are fully funded and actuarially sound. Most governments, however, fall somewhere in between. . . .

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 *Written by Edward W. Stepnick, C.P.A., continuing professional education consultant on government accounting and auditing, Sarasota, FL. Revised by G. Robert Smith, Jr., Ph.D., C.P.A., C.G.F.M., Associate Professor of Accounting, Middle Tennessee State University, and Dwayne N. McSwain, Ph.D., C.P.A., Assistant Professor of Accounting, Appalachian State University.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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