GASB Statement No. 68: Accounting for Government Pensions

GASB Statement No. 68 requires state and local governments to report the full net pension liability for their defined benefit pension plans directly on the balance sheet, rather than disclosing only annual contribution figures in the footnotes. The standard took effect for fiscal years beginning after June 15, 2014, and it applies to every governmental employer that provides defined benefit pensions through a qualifying trust.¹ It also prescribes how to measure that liability, how to calculate annual pension expense, and what has to be disclosed in the notes and required supplementary information.

Which Governments and Plans Are Covered

GASB 68 applies to state and local governmental employers that provide defined benefit pensions through a trust meeting three conditions: contributions and investment earnings are irrevocable, plan assets are dedicated solely to paying member pensions, and those assets are legally protected from creditors of the employer and the plan administrator.¹ States, counties, cities, public school districts, and public universities all fall in scope if they report under the GASB framework.

How you report depends on which plan structure you participate in:

Single-employer plans. One employer, one dedicated plan and trust. The employer reports its full net pension liability and all related deferred flows.
Agent multiple-employer plans. Multiple employers pool assets for investment, but each has a separate account with its own actuarial valuation. Each employer reports its own specific liability.¹
Cost-sharing multiple-employer plans. All participating employers share one pooled obligation, and any plan assets can be used to pay benefits for any participating employer’s members. Each employer reports a proportionate share of the collective liability.¹

Cost-sharing plans are the most common structure for statewide retirement systems, and the reporting mechanics for participating employers differ enough to warrant their own section below.

What GASB 68 Does Not Cover

GASB 68 governs financial reporting by the employer. Financial reporting by the pension plan itself is governed by GASB Statement No. 67, which was issued alongside GASB 68 and uses the same measurement framework.² GASB 68 also does not tell a government how much to contribute. It separates accounting measurement from funding: pension expense on the income statement and the actuarially determined contribution disclosed in supplementary schedules are calculated differently and serve different purposes, and they will rarely match.¹

Calculating the Net Pension Liability

The net pension liability is the central number. It equals the total pension liability minus the pension plan’s fiduciary net position.¹ In plain terms, take the present value of all future benefits employees have already earned through service, then subtract the current fair value of plan assets. The gap is what goes on the balance sheet.

The total pension liability is the harder half. It represents the present value of all projected benefit payments attributed to past service: benefits owed to current retirees, benefits earned by former employees not yet retired, and the earned portion of benefits for active employees. Three things drive that number: the required cost method, the discount rate, and the plan’s actuarial assumptions.

Entry Age Normal Cost Method

GASB 68 requires the entry age normal method and permits no alternatives.¹ This method calculates a level percentage of each employee’s pay that, if contributed from hire date to retirement, would theoretically fund that employee’s full benefit. The calculation runs individually for each employee, from the period benefits first begin accruing through the expected retirement date. Mandating one method was a deliberate choice: before GASB 68, employers could choose among several acceptable methods, so identical cities could report dramatically different liabilities.

The Discount Rate

No single assumption affects the reported liability more. A higher rate shrinks the present value of future payments; a lower rate inflates it. GASB 68 requires a single discount rate that may blend two components: the long-term expected rate of return on plan investments and a tax-exempt, high-quality municipal bond rate.¹

The mechanics work year by year. The plan projects its future benefit payments and its future asset balances. For each year in which projected assets are sufficient to cover benefit payments, those payments are discounted using the expected investment return. For any year in which assets are projected to be exhausted, the remaining payments are discounted using the municipal bond rate. The result is a single blended rate.

Well-funded plans typically never reach a projected depletion point, so their discount rate equals the full expected investment return, often in the 6.5% to 7.5% range. The municipal bond rate is considerably lower, often between 3.0% and 4.5%. When a plan is severely underfunded and assets are projected to run out before all benefits are paid, the blended rate drops sharply and the reported liability rises. The design penalizes underfunding, growing the balance-sheet liability faster as a plan’s financial health deteriorates.

Other Assumptions the Actuary Selects

Beyond the discount rate, the total pension liability depends on economic and demographic assumptions the plan’s actuary selects. Economic assumptions include the inflation rate, which serves as the baseline for projecting benefits and salary growth, and salary increase assumptions that layer merit and promotion increases on top of inflation. Demographic assumptions include mortality tables, which determine how long retirees are expected to collect benefits, and assumptions about turnover and retirement timing.

GASB 68 does not set these assumptions. The standard requires plans to select assumptions that reflect their covered population and to disclose them prominently. Experience studies, typically performed every five to ten years, support or revise those selections. When any assumption changes, the resulting shift in the total pension liability flows into the financial statements over time through the deferred flows mechanism below.

Measurement Date and Valuation Timing

GASB 68 draws a distinction between the measurement date, when the net pension liability is calculated, and the reporting date, when the employer’s financial statements are issued. The measurement date must be no earlier than the end of the employer’s prior fiscal year.¹ For a government with a June 30 fiscal year, the measurement date can be June 30 of the current year or June 30 of the prior year. Many employers pick the prior year because the plan’s actuarial valuation takes time to produce. When the measurement date falls before the reporting date, the employer separately accounts for contributions, benefit payments, and investment activity in the interim.

Actuarial valuations of the total pension liability must be performed at least every two years, though annual valuations are encouraged. If no valuation exists as of the measurement date, the employer uses update procedures to roll forward the most recent one, provided that valuation was performed no more than 30 months and one day before the employer’s most recent fiscal year-end.³ If significant changes occur between the valuation date and the measurement date, professional judgment determines whether a fresh valuation is needed rather than a mechanical roll-forward.

Pension Expense and Deferred Flows

Annual pension expense is not simply the year-over-year change in the net pension liability. GASB 68 builds pension expense from distinct components. Service cost (the present value of benefits newly earned during the year), interest on the total pension liability, projected earnings on plan investments, and the effect of any benefit term changes hit expense immediately.¹

Two other categories are spread over future years:

Experience differences and assumption changes. When actual experience diverges from assumptions (retirees living longer than expected, for instance) or when a plan changes its assumptions, the resulting shift in the total pension liability is amortized over the average expected remaining service lives of all employees in the plan, active and inactive.¹
Investment gains and losses. The difference between projected and actual investment returns is amortized over a fixed five-year period.¹

The five-year window for investment variances is deliberately shorter than the service-life window for demographic changes. Investment returns swing widely year to year but normalize faster than long-term demographic trends. Spreading a bad market year over five years keeps a single downturn from distorting operating results.

Deferred Outflows and Deferred Inflows on the Balance Sheet

The unrecognized portions of these changes sit on the balance sheet as deferred outflows of resources or deferred inflows of resources. Deferred outflows represent future costs waiting to be recognized. Deferred inflows represent future reductions to pension expense. They function similarly to prepaid expenses and unearned revenue, though GASB places them in their own categories rather than lumping them with assets and liabilities.

One deferred outflow deserves specific attention: employer contributions made after the measurement date but before the reporting date. Because the net pension liability was calculated as of the measurement date, those contributions haven’t been factored in yet. They are reported as a deferred outflow and reduce pension expense in the following period.¹ On the balance sheet, deferred outflows appear after assets but before liabilities; deferred inflows appear after liabilities but before net position. The net pension liability itself is a long-term liability and is often the single largest obligation on a governmental balance sheet.

Reporting for Cost-Sharing Employers

Cost-sharing multiple-employer plans cover a large share of public employees nationally, particularly through statewide retirement systems. The reporting mechanics for participating employers differ from single-employer and agent plans because no employer owns a discrete slice of the obligation. Each employer reports its proportionate share of the collective net pension liability.¹

GASB 68 encourages basing that proportion on each employer’s projected long-term contribution effort compared to the total projected contributions of all employers. In practice, many plans use actual contributions paid as the allocation basis. An employer contributing 2% of the system’s total contributions reports 2% of the system-wide net pension liability, along with 2% of the collective deferred outflows and inflows.

When an employer’s proportion changes from one year to the next, the effect must be recognized in pension expense over the average remaining service lives of all plan members. The same treatment applies when an employer’s actual contributions during the measurement period differ from its proportionate share of total contributions.¹ These additional deferred items are unique to cost-sharing employers and can make their pension disclosures considerably more complex than those of single-employer plans.

Required Disclosures and Supplementary Information

GASB 68 requires extensive information beyond the basic statements, split between notes and required supplementary information (RSI).

Notes to the Financial Statements

The notes must describe the pension plan, the types of benefits provided, and how contributions are determined. All significant actuarial assumptions used to calculate the total pension liability must be disclosed: the inflation rate, salary growth assumptions, mortality tables and dates of experience studies, and a full explanation of how the discount rate was determined, including inputs and the projection of asset sufficiency.¹ The date of the actuarial valuation and the measurement date must also be stated.

One of the more useful required items is the discount rate sensitivity analysis. The employer must present the net pension liability at three rates: the rate actually used, a rate one percentage point lower, and a rate one percentage point higher.⁴ The three-point view shows how exposed the reported liability is to a rate change. A plan whose liability jumps sharply at a one-point decrease carries more market risk than one where the change is modest.

The notes must also detail the amounts and sources of all deferred outflows and inflows, breaking them into categories such as experience differences, assumption changes, and investment variances, and stating the amortization period for each.

Required Supplementary Information

The RSI section provides historical trend data across the 10 most recent fiscal years.¹ For single and agent employers, the RSI shows the sources of changes in the net pension liability, the components of the liability and related ratios (such as funded percentage), and the net pension liability as a percentage of covered payroll.

If contributions are actuarially determined, a schedule of contributions compares what the actuary recommended to what the employer actually paid. For cost-sharing employers, the RSI includes 10-year schedules showing the proportionate share of the net pension liability and related ratios, along with contribution information where applicable.¹ The contribution schedule is where the separation between funding and accounting becomes visible: a government can comply with GASB 68 while consistently underfunding its actuarially determined contribution, and the schedule will reveal that pattern.

Transition Rules and Later Amendments

When governments first implemented GASB 68, many did not have all the historical deferred flow data the standard contemplates. GASB Statement No. 71 addressed this by requiring governments to recognize a beginning deferred outflow for any pension contributions made between the measurement date and the implementation date, even when other deferred amounts could not be practically determined.⁵ Without that fix, interim contributions would have disappeared from the balance sheet during transition. GASB Statement No. 82, issued later, made targeted amendments to GASB 67 and GASB 68, including clarifications to payroll-related measures used in RSI schedules and the presentation of covered payroll.

Auditing GASB 68 Numbers

Auditing pension figures under GASB 68 runs into a practical problem: most of the evidence lives at the pension plan, not at the employer. Employer finance staff typically do not calculate the total pension liability, select the discount rate, or maintain the census data that drives the valuation. They rely on an actuarial report from the plan’s actuary and, for cost-sharing arrangements, an allocation schedule from the plan administrator.

To bridge the evidence gap, many pension plans engage independent auditors to issue Service Organization Control (SOC 1 Type 2) reports. These attest to the design and operating effectiveness of the plan’s internal controls over census data, financial data, and the calculations that produce employer-specific allocations. The plan auditor tests whether the controls actually worked during the reporting period, giving the employer’s auditor a basis for relying on the plan’s numbers.

A SOC 1 report does not cover everything. It identifies user entity controls that must exist at the employer level, such as verifying that census data submitted to the plan is accurate and complete. The plan’s auditor does not test those employer-side controls. The employer’s own auditor is responsible for confirming they are in place and functioning. Finance teams that ignore the split responsibility often find themselves scrambling during audit season for evidence that submitted data was reviewed before it went to the plan.

What Changed on Government Balance Sheets

The most immediate effect of GASB 68 was a sharp reduction in unrestricted net position for many governments. Before the standard, pension obligations sat largely in the footnotes. Moving them onto the balance sheet turned modestly positive net positions into deeply negative ones for governments with large unfunded pension liabilities. A negative unrestricted net position does not mean the government is insolvent. It means available resources today would fall short of long-term obligations if those obligations came due at once. Since pension benefits are paid over decades, a negative position is a warning signal rather than an emergency.

For analysts and rating agencies, the standard produces far more comparable data. The funded ratio (fiduciary net position divided by total pension liability), the trend in net pension liability over time, and the gap between actuarially determined contributions and actual contributions all appear in standardized formats. Whether a government consistently underfunds its pension obligation, or relies on optimistic investment assumptions to hold down its reported liability, is now visible in the financial statements rather than buried in actuarial reports.