GASB 68: An Opportunity to Teach
GASB 68 sparked discussion, and confusion, about net unfunded pension liabilities. Public administrators cannot address concerns by merely adding notes to financial statements; they must craft compelling, visualization-rich, narratives that educate staff, press, and the public.
GASB 68 and your government-wide financial statements
The Statement of Net Position and the Statement of Activities are getting new entries. Controversial ones. GASB 68 advises municipalities to disclose both their share of net unfunded liabilities and the current period’s accrued pension expenses from cost-sharing plans. Cost-sharing pension plans pool assets and obligations between multiple employers, and can be used to pay the employees of any participating employer. In other words, participants add to, and take from, the same pot.
Prior to GASB 68, municipalities did not have to report their unfunded liabilities from cost-sharing plans on their financial statements. Of course, GASB 68 does not change the actual pension expense a municipality must pay; it affects only the pension liabilities and accrued expenses that are reported.
But reports shape perception. The Center for State and Local Government Excellence found that, out of a sample of 173 municipalities, 92 have cost-sharing pension plans. Within these 92 municipalities, “the unfunded liability as a percentage of revenue rises from 37% before GASB 68 to 70% after.”
The narrative gap
GASB wishes to promote discussion within the government and with the public on pensions by enhancing transparency. But it will not be enough for governments to attach notes to financial documents explaining that pension costs have not actually increased as a result of GASB 68; financial documents are lengthy, complex, and require training to fully grasp. Fortunately, government finance practitioners around the country recognize the need to provide context and narratives with visualizations to explain important financial information.
GASB 68: An opportunity to demystify pensions
There is no avoiding pension discussions that result from implementing GASB 68. But public administrators have a unique opportunity to increase pension literacy within the government, the press, and the media. Intuitive visualizations, accompanied by well-written notes, can go a long way.
Clarify how unfunded liabilities are calculated
Public administrators first need to explain how unfunded liabilities are determined, and their real impact on the entity. Specifically, finance experts must explain that the Unfunded Actuarial Accrued Liability (UAAL) is the difference between the assets’ market value, and the actuarial determined current liability at a certain point in time. If the market underperforms actuarial assumptions, then unfunded liabilities increase. Higher unfunded liabilities cause higher annual, liability-reduction payments. The total Actuarial Accrued Liability (AAL) is not like a car loan that can be paid off, and then forgotten. A government can eliminate its UAAL with a lump-sum payment, but the equity market could wipe the payment away tomorrow, bringing the UAAL right back.
Guide a difficult debate with better pension literacy
Even if they understand how liabilities are calculated, staff may be surprised at the true level of pension costs, and just as GASB intended, some municipalities will need to have difficult discussions. Intuitive visualizations, clear written explanations, and a common source of numbers will ensure contentious debates are grounded in the same, accurate facts.
The media will request narratives around new reported liability levels. Press will ask questions about massive reported increases in unfunded liabilities, and finance staff must explain GASB 68 and provide context, without assuming the press will read a financial document detailing accounting changes.
Citizens will demand answers. Will taxes increase to cover unfunded liabilities? Which pension groups have the highest pension costs? Why weren’t liabilities from cost-sharing plans reported earlier? Governments must prepare to explain complex financial information to a wide range of stakeholders. The public will benefit from crisp visualizations supported bynarrative-rich text.
Improved pension literacy. Better budgeting.
GASB 68 will aid public administrators as they budget. Financial statements will better reflect liabilities, and budgeting with clear insights into these liabilities and annual expenses will set municipalities on sustainable financial paths. The true story behind these insights will ensure all stakeholders in the budget process across departments grasp how unfunded liabilities impact financial planning. Planning with deeper insights leads to planning with better results.
Reporting changes from GASB 68 are inevitable. Contentious discussions from higher reported unfunded liabilities are inevitable. But confusion over numbers, the spreading of misunderstandings, and wild accusations are not preordained. Government leaders fully prepared to engage their staff, the media, and the public will spread the truth, and hopefully begin some fruitful discussions on a very important issue.
Category: Government Finance