The Governmental Accounting Standards Board (GASB) approved new rules that will require employers to include their proportionate share of STRS Ohio’s net pension liability and annual expense in their financial statements. GASB Statement 68, Accounting and Financial Reporting for Pensions, replaces GASB Statement 27 and is effective beginning with the fiscal year ending June 30, 2015.
STRS Ohio is a cost-sharing multiple-employer plan. All STRS Ohio employers who prepare published financial statements on an accrual basis using generally accepted accounting principles (GAAP) are required to adhere to the standards of GASB 68.
Media inquiries should be directed to Nick Treneff, director of Communication Services, at 614‑227‑2825.
Overview of New GASB Standards
The Governmental Accounting Standards Board (GASB) issued two new financial reporting standards in 2012. The new standards (GASB 67 and 68) change the way governmental pension plans and their participating employers account for and report pension liabilities and expenses in their financial statements. GASB 68 requirements apply to various types of governmental pension plans, including cost-sharing multiple-employer plans like STRS Ohio.
The objectives and intent of the new standards are to:
- Improve accounting and financial reporting by state and local governments for pensions.
- Enhance the transparency of pension-related information in financial reports of governmental employers.
- Increase consistency and improve accountability.
- Standardize actuarial valuation practices.
GASB 67 — Impacts STRS Ohio
GASB 67 amends previous standards to improve the reporting by state and local governmental pension plans, such as STRS Ohio. These changes will apply to STRS Ohio’s Comprehensive Annual Financial Report beginning with the fiscal year ending June 30, 2014.
GASB 68 — Impacts Employers
GASB 68 establishes accounting and financial reporting requirements related to pensions for governmental employers whose employees are provided with pensions from pension plans covered by GASB 67 (such as STRS Ohio, a cost-sharing multiple-employer plan). GASB 68 establishes standards for measuring and recognizing pension liabilities, deferred outflows of resources, deferred inflows of resources and expenses. These standards must be applied to employer financial reports in fiscal years beginning after June 15, 2014. For most STRS Ohio employers, this will be the year ending June 30, 2015, and later.
Contribution rates and funding requirements are not impacted by GASB 68. Based on state statute, STRS Ohio employers contribute to reduce the liability over a long period of time through a portion of the employer contributions. Due to pension reform changes, STRS Ohio expects the retirement plan’s funding to improve over time, which would lower the liability. The new GASB 68 standards apply to accounting and financial reporting in the employer’s financial statements and represent the employer’s share of STRS Ohio’s net pension liability and expense.
The State Teachers Retirement Board began planning to strengthen the financial condition of the system in 2009. The process concluded when the Ohio Legislature passed Substitute Senate Bill 342 in 2012. The Ohio 130th General Assembly passed House Concurrent Resolution No. 40 “to acknowledge the Governmental Accounting Standards Board Standards 67 and 68 and to pledge the General Assembly's continued support of Ohio's public employers and retirement systems in their mission to provide secure and sustainable retirement, disability and survivor benefits to Ohio's public employees.”
How GASB 68 Impacts Employers
Effective: Fiscal year ending June 30, 2015, and later
Primary impact: STRS Ohio employers must report their proportionate share of STRS Ohio’s net pension liability and annual expense in their financial statements.
Historically, GASB viewed an unfunded pension obligation as a future liability rather than as an existing one, allowing information about the total liability to be disclosed in required supplemental information. A shift to an accounting-based approach from a funding-based approach will now require employers to report their share of the unfunded liability of the entire pension plan on their balance sheets.
The employer’s proportionate share of the net pension liability, pension expense, deferred inflows and deferred outflows may represent a significant impact on employer financial statements. The new standards only impact financial reporting and do not impact the amount employers are required to fund under Ohio law. Employers will continue to pay contribution rates as defined in Ohio statute.
Due to pension reform changes, STRS Ohio expects the retirement system’s funding to improve over time, which would lower the net pension liability for employers. Employers are now paying the liability over a long period of time through a portion of the employer contributions.
Compliance with GASB 68 will require additional effort on the part of STRS Ohio and each of its nearly 1,200 employers. It will also require coordination with the external auditors of STRS Ohio and the employers. STRS Ohio is committed to assisting all of our employers in understanding and implementing these standards, as well as communicating the information necessary for employer financial reporting.
- What is GASB?
GASB is the Governmental Accounting Standards Board. It is responsible for setting standards that establish generally accepted accounting principles (GAAP) for governmental financial statements. All STRS Ohio employers publishing financial statements on a GAAP basis will be required to adhere to the standards of GASB 68.
- What are the objectives of the new accounting standards in GASB 68?
The objective of GASB 68 is to improve the accounting and reporting by governmental employers who offer pension benefits to their employees. The new standards are intended to improve transparency and accountability and to standardize actuarial practices in reporting pension obligations.
- Who does GASB 68 impact and when?
GASB 68 applies to governmental employers who participate in a pension plan covered by the provisions of GASB 67 (such as STRS Ohio) and who prepare published financial statements on an accrual basis using generally accepted accounting principles (GAAP). GASB 68 will apply to most STRS Ohio employers beginning with the fiscal year ending June 30, 2015.
- Will the new standards change how employers fund the STRS Ohio pension plan?
No. These standards only impact the accounting and financial reporting of pension obligations for governmental employers. Contribution rates and funding requirements are not impacted by GASB 68. Employers will continue to pay the contribution rates as defined in Ohio statute.
- How is STRS Ohio’s net pension liability determined?
STRS Ohio will calculate the net pension liability based on an actuarial valuation as of the end of each fiscal year (June 30). An actuarial valuation of future benefits payable to current active and inactive employees for past periods of service will be discounted using a blended discount rate. The difference between the actuarial valuation of future benefits and STRS Ohio’s fiduciary net position (net assets) will be the net pension liability.
- Actuarial present value of projected benefit payments
- Projected benefit payments discounted to reflect the expected effects of the time value (present value) of money and the probabilities of payment.
- Cost-sharing multiple-employer defined benefit plan
- A multiple-employer defined benefit pension plan in which the pension obligations to the employees of more than one employer are pooled and pension plan assets are used to pay the benefits of the employees of any employer that provides pensions through the pension plan.
- Discount rate
- The blended rate at which the present value of projected future benefits is calculated. The system’s long-term expected rate of return on investments is used to the extent the plan’s fiduciary net position is projected to be sufficient to finance projected benefit payments. At the point it does not cover the payment of projected benefits, the system must use a rate approximating the yield of a 20-year AA tax-exempt general obligation bond.
- Employer proportional share
- The allocation of pension amounts (net pension liability and the components of deferred outflows, deferred inflows and pension expense) based on the proportion of each employer’s actual employer contributions to the total contributions of all employers. A Schedule of Employer Allocations will be prepared by STRS Ohio each year. The percentage or proportional share will be applied to the pension amounts and presented by STRS Ohio in the Schedule of Pension Amounts by Employer as of and for each fiscal year.
- Measurement date
- The plan valuation date selected by the employer to report their share of the pension liability in their financial statements. The annual measurement date for STRS Ohio employers is June 30 of the prior or current fiscal year.
- Money weighted rate of return
- A method of calculating period-by-period returns on pension plan investments that adjusts for the changing amounts actually invested.
- Net pension liability
- The difference between the plan assets and the total obligations to plan participants as of the specific measurement date.
- Other post-employment benefits (OPEB)
- All post-employment benefits other than retirement income (such as death benefits and disability benefits) that are provided separately from a pension plan, as well as post-employment health care benefits regardless of the manner in which they are provided.
- Projected benefit payments
- All benefits estimated to be payable through the pension plan to current active and inactive plan members as a result of their past service and their expected future service.
Detailed information about GASB 68 can be found on the GASB website at: www.gasb.org