GASB Statements and Impact on Public Higher Education Institutions
New Jersey should recognize, in statute, its obligation to fund pension benefits and other postemployment benefits (OPEB) for employees at the public colleges and universities – and accept financial liability for providing those benefits. Recent amendments to the standards of the Governmental Accounting Standards Board (GASB) create confusion over whether the liability for these benefits rests with the institutions of higher education or the state.
- Definition: Established in 1984, the Governmental Accounting Standards Board
(GASB) is the independent, private-sector
organization based in Norwalk, Connecticut, that establishes accounting and
financial reporting standards for U.S. state and local governments that follow
Generally Accepted Accounting Principles.
- Mission: The GASB standards are recognized as
authoritative by state and local governments, state Boards of Accountancy, and
the American Institute of CPAs (AICPA).
GASB develops and issues accounting standards through a transparent and
inclusive process intended to promote financial reporting that provides useful
information to taxpayers, public officials, investors, and others who use
Statements: GASB issues statements
that are numbered and have applicability to state colleges and universities,
which are instrumentalities of state government.
Statement No. 68 “Accounting and Financial Reporting for Pensions” became effective for fiscal years beginning after June 15, 2014 and requires public higher education employers with special funding situations to report their proportionate share of net pension liability and related expense in their financial statements.
Statement No. 75 “Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions” is effective for fiscal years beginning after June 15, 2017 and requires public higher education employers to report a liability and related expense in their financial statements for other postemployment benefits (OPEB) if a special funding situation exists. The technical application of “special funding situation” may be different for GASB Statement No. 75 than it is for GASB Statement No. 68.
- GASB Statement No. 68 “Accounting and Financial Reporting for Pensions” became effective for fiscal years beginning after June 15, 2014 and requires public higher education employers with special funding situations to report their proportionate share of net pension liability and related expense in their financial statements.
The Concern: Liability and Credit Worthiness
- Pension liability and pension expense are determined annually for the total State Pension Fund based on actuarially-determined factors and prescribed formulas. GASB No. 68 requires the schools to report their proportionate share of the pension liability and pension expense.
actual funding of the State Pension Fund is determined each year by the State
Legislature, and the funding is paid by the state (including funding for the
schools’ future pension liabilities).
The payment of retiree pension benefits is made from the State Pension
Fund as retirees become eligible.
- The technical interpretation of GASB No. 68 resulted in schools having to report their proportionate share of liability and expense, even though the state indicated that there is no intention to transfer to the schools the responsibility for funding of the State Pension Fund or the payment of retiree pension benefits. The schools are concerned that this could change.
- The state’s OPEB plan, which pays for retiree health care, is administered and paid for entirely by the state. The schools do not maintain plan or participant data. Health benefits and rates are negotiated by the state without involvement by the schools.
- Statement No. 75 requires employers to report their proportionate share of future expected plan payments (liability) and current year expense on the face of the financial statements for the state’s OPEB plan that they provide, if a special funding situation exists. It is the opinion of NJASCU, however, that since the state by statute is required to fund retiree health benefits, the schools will not need to record the liability, and there will/should be an allocation of revenue to match the calculated expense. We have no official guidance on this yet.
- As of December 31, 2018, the state’s OPEB plan is still under audit and a final determination by the state’s auditors of “special funding situation” has not been made.
- Institutions are component units of the state and once consolidated, the liability remains reflected on the state’s financials. The implementation of GASB No. 68 had no effect on the state’s reported numbers, however, the unfunded liability and pension expense allocated by the state to the institutions was significant. The impact of GASB No. 75 could potentially be even more material.
- The unfunded liability negatively affects all institutions (e.g., downward pressure on credit rating, financial statements because of the need to record expense, reduces total net position, possibly need to record as liability, etc.).
- Stakeholders (students, parents, taxpayers, etc.) would have difficulty interpreting institution’s financials reflecting negative net assets.
- It will be important to know how the credit-rating agencies intend to factor GASB No. 75 into the credit ratings of New Jersey’s senior public colleges and universities.
- The delay in finalizing applicability of GASB No. 75 for the schools already has impaired the school’s ability to meet debt compliance deadlines.
The NJASCU Statement: The state colleges and universities contend that they should not be forced to report the liability for OPEB, because the State of New Jersey, not the state colleges and universities, is statutorily required to pay for the health benefits of retired employees. The state colleges and universities also would like to revisit GASB No. 68 to ensure that fiscal liability for pensions remains with the state.
February 7, 2019