Staying Out of the Red: The Real Bottom Line on GASB 68

Monday, June 9, 2014

– By Auditor of State Dave Yost

A hot topic of discussion amongst taxpayers and public employers alike is how to properly manage our public employee pension systems and make sure that pension obligations are met. In June 2012, the Government Accounting Standards Board (GASB) issued Statement 68 requiring governments that provide defined benefit pensions to recognize their long-term obligation for pension benefits as a liability on their financial statements.  

In Ohio, public employees sell their labor to a public employer in exchange for wages and a benefits package, which includes a promise of a future pension.  Traditionally, public employees saw this promise of a future pension as tradeoff for their historically lower wages than those employed in the private sector.  GASB states that pension obligations are part of the “employment exchange,” and should be reported by the government as a liability since they received the benefit of the exchange.

How does this affect Ohio’s governments?

Ohio is one of six states that treat pensions as a simple property right, and an act of the Ohio General Assembly caps the amount a public employer must contribute to its pension obligation.  If the pension liabilities of the state’s five systems continue to be unfunded, the impact could be shouldered by a combination of the local government, individual employees, reforms from current contributors, or capital shifts from non-mandated benefits (such as health insurance).

The concern in Ohio is that the GASB 68 requirement for local governments to report this liability could dramatically distort the financial condition of a local government.  However, failing to comply with GASB 68 standards would result in modified audit opinions and mean that Ohio fails to follow national accounting standards.  

It is important to keep in mind that this new standard creates an accounting liability rather than a legal liability.  In Ohio, there are no legal means to enforce the unfunded liability of the pension system as against the public employer.

How can governments comply?

Upon receiving this new standard and recognizing the challenges that GASB 68 poses, my office got down to work to figure out how Ohio’s local governments can accurately report their financial positions while also following accounting standards.  The Auditor of State’s office is currently drafting guidance for our clients to create the smoothest possible transition when GASB 68 becomes effective for fiscal years beginning after June 15, 2014.

The proposed guidance suggests reporting the proportionate share of the unfunded pension liability as a separate line item on the entity’s Statement of Net Position, with the detail of multiple pension systems’ participation in the footnotes, as necessary.  Governments should also include language in their Management Discussion & Analysis (MD&A) that explains Ohio’s legal environment and the limitations on enforcement of the unfunded pension liability as against the local government.  

Sample notes of the Net Pension Liability are being developed by our office, and these samples will continue to develop as we learn more through the recently published implementation guide.  We will issue a bulletin in the near future that includes sample financial statement and footnote disclosures.

How will GASB 68 affect governments’ financial health status?

I have received numerous concerns from local governments as to how this will impact an entity’s financial health indicators as a measure of fiscal distress and their bond ratings.  To answer that question up front, the Auditor of State’s office will not be using this liability in the calculation for determination of fiscal caution, watch or emergency for any local government.  In addition, I have met with representatives from Fitch Ratings and Moody’s.  Both have indicated that the implementation of GASB 68 will not affect their ratings.  Each use methods of analysis that are separate from the accounting of the liability GASB 68 requires.

The Auditor of State’s office will continue to work with Ohio’s local governments and pension systems to provide assistance where necessary.  Should you have any questions regarding the implementation of the new GASB 68 standard, please contact my office at 800-282-0370.

GASB 68 Presentation