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California County Pension Debt


End of Government Pension Financial Reporting "Fraud"

Major Changes Imposed by GASB68

When & Where Main Impacts in Financial Reports

End of Pension Accounting "Fraud"

Choices -

Major Reform - GASB 68

Bill Gates-"It's Fraud!" Was He Right?

When Pension Expense Happens

GASB's Basic Principle Retirement Benefits

Fatal Flaw GASB's Old Rules

Major Changes Government Financial Statements

Three Ongoing Impacts Balance Sheets

Pension Expenses

Footnotes - Required Supplemental Information

GASB68 Prior Year Adjustment Important!


These are the six major changes being imposed by GASB68 on state and local government financial statements (there are complications about all of these - but these simple statements capture the main points):

Major Change Imposed by GASB68 Previous Rule Where in Audited Statements First Year Only Ongoing
Report pension expenses as they create unfunded pension debt Report pension expenses that created unfunded pension debt as that debt was paid Statement of Activities (Income Statement)
List Net Pension Liability as a bona fide Debt Not listed in financial statements - only disclosed in Required Supplemental Information Statement of Net Position (Balance Sheet)
Report certain "Deferred Outflows & Inflows of Pension Resources" Not addressed in previous rules Statement of Net Position (Balance Sheet) Two Options
Deduct previously unreported pension expenses that created Net Pension Liability from Net Assets (Net Worth) Was not reported yet under previous rules - would have been reported in the future as the debt was paid Statement of Net Position (Balance Sheet)
Write off worthless Net Pension Assets created if Pension Obligation Bonds were sold Governments that sold Pension Bonds showed a "pre-paid" pension expense - Net Pension Asset - for amount above the annual Annual Required Contribution Statement of Net Position (Balance Sheet)
Significant new required disclosures Most previous disclosures to still be required - GASB68 requires several new disclosures Footnotes & Required Supplemental Information Two Options

What Sections of Government Financial Statements Are Affected?

State and local government annual financial reports are usually large, complex, and organized into separate sections. (see Note 1) It's easy to get lost. The new pension financial reporting rules imposed by GASB68 (the new government pension financial reporting rules) will impact specific parts of these reports but most of the material in these annual reports won't change. So - it's important to know where to look.

There are two different types of Basic Financial Statements The first is much more important in terms of seeing the impact of GASB68 on government finances.

  • Government-Wide Financial Statements: These present comprehensive and consolidated financial information about all a government's activities other than fiduciary activities. Those familiar with private sector for-profit financial statements find these more "understandable" than the next group of reports. This is where GASB 68 will impact government financial statements. There are two reports that will be impacted:
    • Statement of Net Position: Like a Private Sector Balance Sheet showing Assets, Liabilities, and Net Assets (basically - does the government have more assets than debts - or the opposite). There will be two significant identifiable impacts of GASB68 - explained on the next page.
    • Statement of Activities: This is "sort of" like a Private Sector Income Statement but the structure is a bit different. GASB68 will have a profound impact on this statement - BUT the impact will not be reported separately. As a practical matter pension expenses usually will be reported as much but they won't appear as a separate "line item" in this report. I'll explain this after the next page.
  • Fund Financial Statements: These occupy many more pages and go into much greater detail. Those familiar with private sector for-profit statements often find several aspects of Fund Financial Statements seriously deficient in terms of gaining a broad understanding of a government's finances - but that's not what these statements are designed to do. They provide information necessary to evaluate budgetary and legal compliance regarding restricted sources of funds, legally mandated activities, and so on. These statements may be impacted by GASB 68 but the Government-Wide statements are far better for most people at conveying the impact of unfunded pension debt and the expenses that created it.
  • Notes to the Financial Statements: These provide detailed information about various aspects of the two sets of financial statements. Many specific notes are required - others are optional. Some of the Notes related to pension finances will contain important information related to GASB 68.

These Basic Financial Statements appear between two sets of Required Supplementary Information (RSI):

  • Management's Discussion and Analysis (MD&A): This preceeds the Basic Financial Statements and presents the government's management context and analysis of major financial issues and information in the rest of the annual report. I suspect most managements will "opine" in various ways about the impacts of GASB68.
  • Remaining Required Supplemental Information: These are required data and analysis including important disclosures about pension finances. Some of the most valuable information required by GASB68 will appear in this section.

What's the Time-Line for Implementation?

GASB68 required all state and local governments to implement GASB68 no later than in their fiscal year that began after June 15, 2014. All California counties have fiscal years that begin Juny 1 - so they had to conform to the new rules in their fiscal years that began July 1, 2014 and ended June 30, 2015. More specifically they had to make their audited financial statements as of June 30, 2015 conform to GASB68. The timeline below shows these July through June fiscal years.

Implementation Timeline for GASB68

The audited statements as of the end of the fiscal year ended June 30, 2014 were the last that didn't have to use the new rules. But those as of a year later - June 2015 - were required to do so.

Transition to GASB68

GASB often provides governments a "transition period" of a few years to fully implement new sets of standards especially for something as significant and complicated as GASB68. There were three types of "transition" elements allowed in GASB68.

GASB published GASB68 in June 2012. Government retirement systems had two years before they had to comply with GASB67 - the new rules for local and state government Pension Funds. The governments had to comply one year later - three years after GASB68 was adopted and published.

GASB68 also allows governments two options for each of two other elements of GASB68 when the new rules are implemented. I'll introduce these "transition" options here - but I'll discuss them AFTER I lay out the main ongoing changes required by these new rules in the next 3 pages.

Prior Period Adjustment

This is the "circle-1" in the timeline above. GASB68 requires governments to make a "Prior Period" Adjustment in their first "GASB68" audit. "Prior Period (or Prior Year) Adjustments" change values that were reported in earlier years either because new information indicates the previously reported number was significantly incorrect, or in this case to conform to new accounting rules. I describe this adjustment on the next page.

The "GASB68 Adjustment" changed the value reported as the Net Assets as of June 30 2014 of the 21 counties that a part of the focus of Your . Generally the adjusted number shows what would have been reported as Net Assets had GASB68 been in effect in all previous years. Technically this adjustment was to the BEGINNING Net Assets of the fiscal year in which GASB68 was implemented, not to the value of Net Assets previously reported as of June 2014. This prevents the huge changes forced by GASB68 from appearing to happen only in the current year.

Ten-Year Schedules

This is the "circle-2". Governments must now include a number of new disclosures in the footnotes and what's called "Required Supplementary Information". Some are tables - or schedules in GASB terms - that show ten years of changes in various values. GASB68 says if it isn't "practical" to develop that information during the first year of implementation then a government can just add a year to the table every year until after 10 years there will be 10 years of data in those tables. Therefore many (I wouldn't be surprised if most) governments won't fully implement GASB68 until 10 years from now.

On the next page I'll describe the Prior Period Adjustment GASB68 requires to adjust the beginning Net Assets (Net Worth) of governments in their first GASB68-compliant audited financial statements.

Then we'll look at the changes GASB68 is making to Balance Sheets (Statement of Net Position), Income Statements (Statement of Activities), and some of the more important disclosures required in footnotes and Supplementary Reguired Information.

Finally - although I believe GASB68 is a huge leap forward in forcing governments to tell the financial truth about their pension finances, I do have some problems. I'll describe some of the more important of those on the last page of this section.


Note - this description of the major parts of government annual financial statements is paraphrased from An Analyst's Guide to Government Financial Statements - First Edition, Dean Michael Mead, Governmental Accounting Standards Board, 2001. A recently released second edition is described at GASB's website by clicking here.
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