3 Accounting
3.4 Liabilities
3.4.13 Pension Liabilities
3.4.13.10 Introduction
Cash basis local governments are required to calculate their pension liabilities and assets. This section provides guidance for accounting and reporting these liabilities and assets.
Sections 3.4.13.20 through 3.4.13.50 focus on local governments participating in the State of Washington cost-sharing, multiple-employer pension plans administered by the Department of Retirement Systems (e.g. PERS 1, PERS 2/3, TRS 1, TRS 2/3, SERS 2/3, PSERS 2, LEOFF 1, LEOFF 2). Sections 3.4.13.60 and 3.4.13.70 focus on other types of pension plans.
Management’s responsibilities
This guidance is intended to assist local governments in the application of the pension reporting requirements. Local governments must apply their own professional judgment to determine if this guidance is appropriate for their facts and circumstances and must draw their own conclusions about the proper reporting. Government’s management is solely responsible for the content of the financial statements. Each local government is responsible for evaluating the information used to recognize and disclose pension amounts in its financial statements. Preparers must understand the underlying accounting and reporting concepts for pensions and retain adequate supporting documentation for all amounts reported.
Steps and procedures to calculate the proportionate share of collective pension amounts
3.4.13.20 Step 1 – Get your data
Much of the financial data necessary to report pension liabilities and assets will be obtained from the State Department of Retirement Systems (DRS) at www.drs.wa.gov.
Download the Participating Employer Financial Information (PEFI) report from the Employers section of the website. This report is published annually as of June 30.
This report includes the Employer Allocation Schedules and the Schedules of Collective Pension Amounts for each pension plan.
Employer Allocation Schedules: Each separate plan presents a schedule of employer allocations. The schedules are sorted by allocation percentage, largest to smallest, and you will need to search each schedule for your local government’s name. Note that the PERS 1 and TRS 1 schedules have separate sections for both the regular allocation and the Plan 1 UAAL allocation. You will need both allocation percentages. If you have more than one DRS ORG ID number, add the percentages together.
What is the Plan 1 UAAL?
Under RCW 41.45.060, part of the contributions for PERS 2/3, SERS 2/3, PSERS 2, and TRS 2/3 fund the UAAL’s for PERS 1 and TRS 1.
Employers have a responsibility to exercise due care in financial reporting and to verify and recalculate amounts specific to them. Use the DRS Employer Reporting Application (ERA) contribution reconciliation, or some other reliable method, to verify the reasonableness of contributions used in the calculation of your proportionate share.
Schedule of Collective Pension Amounts: The PEFI also includes the schedules of collective pension amounts for each plan. Employers will use the collective pension amounts and apply their proportionate share (discussed above) to determine their own share of pension liabilities (or assets). The use of this schedule is discussed further below.
3.4.13.30 Step 2 – Calculate your numbers
The Schedules of Collective Pension Amounts for each plan are published near the back of the DRS report.
For each plan in which you participate, multiply the amounts in these schedules by your unique allocation percentage to calculate your entity’s share of each plan’s pension liability (or asset).
See Cash Pension Worksheet (found on the BARS Reporting Templates page) for calculations. The calculated numbers will represent your government’s pension liability and pension assets at year-end. Only the total pension liability amount is reported on the government’s Schedule of Liabilities (Schedule 09). Pension assets are only reported in the Notes to the Financial Statements. Do not net pension liabilities with pension assets.
3.4.13.40 LEOFF – Special funding situation
LEOFF Plans 1 and 2 include a special funding situation in which the State has a legal obligation to make contributions directly to the Plans.
LEOFF Plan 1 is fully funded and there have been no contributions since 2000 and the State continues to make the contributions on behalf of the individual employers to the LEOFF Plan 2.
3.4.13.50 Reporting
Pension liabilities are reported on Schedule 09 under I.D. No. 264.30 – Pension Liabilities. Pension assets are reported only in the notes. For note disclosures see Note X - Pension Plans.
3.4.13.60 Local government pension plans – defined benefit vs. defined contribution plans
Defined benefit pensions are those for which the income or other benefits that the employee will receive at or after separation from employment are defined by the benefit terms. The pensions may be stated as:
- A specified dollar amount
- An amount that is calculated based on one or more factors such as age, years of service, and compensation.
- All plans that do not meet the criteria to be a defined contribution plan are treated as a defined benefit plan
Examples of local government defined benefit plans include pre-LEOFF police and firefighter plans that were established under the following RCWs:
- Chapter 41.16 RCW – Firefighters’ Relief and Pensions – 1947 ACT
- Chapter 41.18 RCW – Firefighters’ Relief and Pensions – 1955 ACT
- Chapter 41.20 RCW – Police Relief and Pensions in First Class Cities
Defined contribution plans are those that:
- provide an individual account for each employee;
- define the contributions that an employer is required to make (or the credits that it is required to provide) to an active employee’s account for periods in which that employee renders service;
- provide that the pensions an employee will receive will depend only on the contributions (or credits) to the employee’s account, actual earnings on investments of those contributions (or credits), and the effects of forfeitures of contributions (or credits) made for other employees, as well as pension plan administrative costs, that are allocated to the employee’s account.
Defined contribution plans do not require an actuarial valuation and do not require a liability to be reported on the Schedule of Liabilities.
If a government contributes to a defined contribution plan, including pension plans administered by non-government entities (such as union sponsored plans), the governments must include the plan in their note disclosures, see Note X, Pension Plans.
If a government does not contribute to the pension plan (only employees make contributions) governments are not required to include the plan in their pension note disclosures.
3.4.13.70 Qualifying Trust vs. non-qualifying trust
Depending upon how individual local governments have established their pension plans (including pre-LEOFF I police and firefighter plans), they may or may not meet the criteria of a trust described below. Local governments that have these plans should carefully review all legislation establishing and modifying the plans and consult with their legal counsel regarding the status of the plans.
- Contributions from employers to the pension plan and earnings on those contributions are irrevocable. Irrevocability is understood to mean that an employer no longer has ownership or control of the assets, except for any reversionary right once all benefits have been paid. Assets may flow from an employer to the plan, but not from the plan to an employer unless and until all obligations to pay benefits in accordance with the plan terms have been satisfied by payment or by defeasance with no remaining risk regarding the amounts to be paid or the value of plan assets. Refunds of the non-vested portion of employer contributions that are forfeited by plan members are consistent with this criterion.
- Pension plan assets are dedicated to providing pensions to plan members in accordance with benefit terms. The use of pension plan assets to pay plan administrative costs or to refund plan member contributions is consistent with this criterion. The commingling of pension and OPEB assets in the same trust is not consistent with this criterion.
- Pension plan assets are legally protected from the creditors of employers, the plan administrator and plan members.
Pay-as-you-go funding is not a qualifying trust.
Plans that meet the trust criteria should report a net pension liability on the Schedule of Liabilities. If the plan has a net pension asset, that will not be reported on the Schedule of Liabilities and will only be disclosed in the Notes to the Financial Statements. These governments should have an actuarial valuation to determine the net pension liability (asset) amount. If the plan is administered through a qualifying trust, then the government is holding monies on behalf of someone else. Therefore, the government should report a fiduciary pension trust fund (reported on the C5 Statement).
Plans that do not meet the trust criteria should report a total pension liability on the Schedule of Liabilities. These governments should have an actuarial valuation to determine the total pension liability amount. These plans cannot be reported as a pension trust fiduciary fund. Instead, it should be reported as a managerial fund that is rolled into the general fund for financial statement reporting.
Both trusted and non-trusted defined benefit plans should be disclosed in the notes, see Note X, Pension Plans.
3.4.13.71 Accounting for tax revenue for pensions and fiduciary trust funds
Some governments receive taxes to help fund pension costs, such as the Fire Insurance Premium Tax (BARS 336.06.91) or an ad valorem property tax for pensions. These taxes are levied by the government, not the pension plans. Since these are revenues of the government, they must be reported as a revenue in the governmental funds. To move these monies to the fiduciary trust fund, they would then report an expenditure in the governmental fund and then report an addition in the fiduciary trust fund.
For example, a government receipts $50,000 in Fire Insurance Premium Tax that will ultimately be used in their fiduciary trust fund to pay pension benefits. They would make the following journal entries:
Initial receipt of tax money
|
General Fund – Cash |
$50,000 |
|
|
General Fund – Fire Insurance Premium Tax (BARS 336.06.91) |
|
$50,000 |
Move tax money out of General Fund
|
General Fund – Expenditure (BARS 517.20.20) |
$50,000 |
|
|
General Fund – Cash |
|
$50,000 |
Move tax money into Fiduciary Trust Fund
|
Fiduciary Trust Fund – Cash |
$50,000 |
|
|
Fiduciary Trust Fund – Additions (BARS 389.40) |
|
$50,000 |