Magazine article Government Finance Review

The GFOA Weighs in on Pensions

Magazine article Government Finance Review

The GFOA Weighs in on Pensions

Article excerpt

At the end of March, the Governmental Accounting Standards Board (GASB) issued an Invitation to Comment (ITC) document on Pension Accounting and Financial Reporting. The ITC invited interested parties to comment on certain crucial aspects of accounting and financial reporting for pensions. On August 26, 2009, representatives of the Government Finance Officers Association (GFOA) testified at a public hearing on the ITC held by the GASB at its offices in Norwalk, Connecticut. That testimony was developed by two of the GFOA's standing committees (the Committee on Accounting, Auditing, and Financial Reporting, and the Committee on Retirement Benefits and Administration) and was delivered jointly by representatives of both committees. This article will examine the details of that testimony.


How an employer incurs an obligation to employees for pension benefits is one thing; how that same employer finances pension benefits can be quite another. Current GASB standards focus on whether an employer is meeting its actuarially determined funding requirements (financing focus). Private-sector pension guidance, on the other hand, focuses on the employer's obligation to its employees for benefits as of the reporting date (obligation focus). The GFOA has taken the following position:

      The ultimate cost of pension
   benefits is reduced by earnings on
   related investments. The rate of
   return on investments is much
   more predictable, of course, over
   the long term than over the short
   term. Consequently, a measure of
   pension cost that focuses on a single
   point in time (employer's obligation
   for benefits earned as of the
   reporting date) will likely be significantly
   more volatile than one that
   takes a longer-term perspective
   (obligation reflective of employer
   funding requirements).

      There is no reason to believe
   that a given private-sector enterprise
   will still be in business next
   year, let alone 30 or 40 years from
   now. Consequently, a serious case
   can be made for adopting a point-in-time/termination
   focus for private-sector
   employers, despite the
   inherent volatility of such a measure.
   State and local governments,
   on the other hand, are perpetual
   entities for all practical purposes.
   That being the case, taking a point-in-time/termination
   perspective for
   the measurement of a long-term
   obligation that is highly susceptible
   to market fluctuations only serves
   to inject a needless element of
   volatility that significantly detracts
   from the usefulness of the information
   to decision makers and could
   easily lead to decisions that are
   detrimental to the best interests of
   all concerned (benefit increases in
   the wake of transient market gains).

      Furthermore, the key issue for
   decision makers in the public sector
   regarding pension benefits is the
   sustainability of employer funding.
   A funding-focused approach provides
   information directly relevant
   to the assessment of sustainability;
   whereas an obligation-focused
   approach confuses the issue by
   highlighting temporary fluctuations
   that have little import on long-term
   funding requirements.

      Accordingly, the GFOA strongly
   supports maintaining the current
   focus on employer funding requirements
   in accounting and financial
   reporting for pension benefits.


Not every obligation constitutes a liability for accounting and Financial reporting purposes. Today, for example, a state or local government employer does not display a liability on the face of the financial statements for the employer's unfunded accrued obligation to employees for benefits already earned. Conversely, employers are required to report a liability for the cumulative effect of any failure on their part to fully fund their annual required contributions to finance future benefit payments (consistent with a financing focus). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.