New GASB accounting rules to affect schools
Published: May 1, 2014
Until now, how government employers funded pensions matched how they reported them in financial statements. However, new Governmental Accounting Standards Board (GASB) requirements will change this relationship and the effect of this shift has caused a lot of concern in the financial reporting world, including public schools.
GASB now requires public pension plan employers, including school districts and county offices of education, to report pension plan unfunded liabilities as their own liabilities on their financial statements. This requirement is due by the 2014-15 fiscal year.
GASB is an independent, not-for-profit organization formed in 1984 that establishes financial accounting and reporting standards for state and local governments. In June of 2013, GASB finalized two new accounting standards: Statement 67, Financial Reporting for Pension Plans, which was effective for CalSTRS and CalPERS in 2013-14 and Statement 68, Accounting and Reporting for Pensions, which becomes effective for plan employers, including school districts and county offices of education, in 2014-15.
The greatest controversy is related to the inclusion of Net Pension Liability (NPL), and the use of a blended discount rate to calculate the NPL when pension funds are projected to run out of assets.
Unlike other local government agencies, schools do not negotiate pension benefits with their employees. Pension benefits for school employees, both certificated and classified, are decided by the Legislature and governor. Which entity owns the unfunded liabilities of the California State Teachers Retirement System (CalSTRS) and the school portion of the California Public Employees Retirement System (CalPERS) is where GASB may have gotten it wrong as they treated schools in California like other local governments.
But there is a difference. When cities and counties negotiate pension benefits, those entities most often contract with CalPERS to administer those benefits. In those instances, the city or county is on the hook for what they negotiated with their employees.
With school employers, the state determines retirement benefits and then sets rates for employers and employees to contribute to the systems. The liability for school employers shows up monthly, almost like a payroll tax. The amounts are part of the employer’s monthly obligation and annual budget.
GASB’s blended discount rate
Discount rates are what pension funds use to account for future obligations for current benefits in today’s dollars. CalSTRS and CalPERS use an estimated rate of return that is higher than what is called for by new GASB rules. As such, the unfunded liabilities of the two systems could be twice as high as originally thought. But whether the unfunded liability for CalSTRS is $70 billion or $165 billion, or the school portion of CalPERS is $15 billion or $30 billion, it is each school employer’s “share” of that liability that must now be reported on the balance sheets of school districts and county offices of education. Calculating that share for each employer involves a complex formula that has to be run for each employee, current and retired, for each employer. The calculation will amount to a new reportable liability in the tens of millions of dollars for a small-to-medium-sized school district.
The impact that a new liability will have on issuing debt is still not fully understood.
GASB requirement different than rate increases
As school boards see these amounts added to their balance sheets, the other pension issue looming involves budgeting for future rate increases. Both CalSTRS and CalPERS have indicated that even with recent returns on their investments outpacing projections, the systems cannot simply invest their way out of the unfunded liability crisis; rates will increase. And rates for school employers will go up substantially and could even double over the next decade.
Important issues to discuss and understand
As governing boards move into the 2014-15 fiscal year and look into the future to contemplate growth under the Local Control Funding Formula, school facilities bond needs, or even issuance of short term debt to finance cash flow needs, it is critical to discuss with staff and others the impact that the new reporting requirement and rate increases will have.