GASB & LOSAP – PART 2 OF 4

There are currently two GASB pronouncements that have a significant bearing on the reporting of LOSAP on the municipal sponsors financial statements. In this second part of our look at GASB and LOSAP, we’ll highlight GASB Statement 73.

Notes about GASB Statement 73:
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• GASB 73 is effective for fiscal years beginning after June 15, 2016.
  
• The statement only applies to GAAP financial statements; the OSC has not implemented GASB 73 for the AUD.
  
• It requires a local government to disclose on its financial statement footnotes certain liability information about the LOSAP (i.e., a value of the benefits that have been earned).
  
• For Defined Contribution (DC) plans, the reporting is fairly straightforward and assistance is not needed from an actuary.
  
• For Defined Benefit (DB) plans, an actuary must calculate the total pension liability and the pension expense using methods and assumptions prescribed in the Statement. Specifically, the entry age normal cost method is required, and the discount rate is tied to rates for 20-year, tax-exempt general obligation municipal bonds with ratings of AA/Aa or higher.
  
• This method and discount rate are vastly different from the method and discount rate used for calculating the contributions to the trust. Since most LOSAP trust asset allocations incorporate some equities, the discount rates used for funding will be higher than the rate required for the GASB 73 calculations. The entry age normal cost method is best utilized in traditional pension plans whereby a participant retires at a specified retirement date. Since LOSAP instead has an entitlement date, and participants can continue to accrue benefits after that date, using the entry age normal method requires some actuarial license. Naturally, different actuaries are likely to approach how to apply this method to a LOSAP differently.
  
• From our viewpoint, GASB 73 is simply an exercise for the purpose of standardized reporting of LOSAPs on financial statements. At this time, we aren’t aware of any significant impact this reporting has on the local government, other than additional fees to the actuary to calculate the liabilities.

Next we will highlight GASB Statement 84.