On June 23, the Governmental Accounting Standards Board (GASB) issued Statement No. 97, Certain Component Unit Criteria and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.
The new guidance makes clear that defined contribution (DC) pension plans and other post-employment plans (OPEB) would not be included in fiduciary fund financial statements when in the absence of a governing board the primary government performs duties that a governing board typically would perform on behalf of the plan. The notion that such plans would be considered component units of the primary government by virtue of the government making certain types of decisions about the plan became controversial when GASB issued its fiduciary fund implementation guide last year.
NACUBO advocated for clearer guidance concerning DC plan decisions made by employers, and for a technical project to revisit component unit criteria. NACUBO’s position was that employer compensation decisions do not equate to governing decisions and therefore the de facto appointment of a voting majority of the plan’s governing board—a criterion for component unit identification and inclusion within a public institution’s financial statements. At the urging of NACUBO and other governmental stakeholders, a research effort was added to the GASB’s technical agenda and findings ultimately indicated that the costs outweighed the benefits of including DC plans and other similar employee benefit plans in fiduciary funds statements.
Statement 97 clarifies how the absence of a governing board should be considered in determining whether a primary government is financially accountable for purposes of evaluating potential component units. The statement also amends the financial burden criterion in paragraph 7 of Statement No. 84, Fiduciary Activities, and addresses pension plan criteria for Section 457 plans that trigger pension accounting and reporting requirements and lead to inclusion of such plans as fiduciary funds within governmental financial statements.
The appointment of a voting majority of an organization’s governing board is a financial accountability criterion in Statement No. 14, The Financial Reporting Entity, used to evaluate whether another organization is a component unit of the primary government for financial reporting. Statement 97 clarifies how the absence of a governing board should be considered in determining whether a primary government is financially accountable for purposes of evaluating potential component units. Statement 97 requires—exceptexcept for DC pension and OPEB plans and certain Section 457 plans—that in the absence of a governing board, if the primary government performs the duties that a governing board typically would perform, those actions would be treated the same as the appointment of a voting majority of a governing board.
Financial Burden Criterion
Employer contributions to DC pension and OPEB plans and certain Section 457 plans would not be considered a financial burden under paragraph 7 of Statement No. 84, Fiduciary Activities. However, financial burden criterion would apply to defined benefit pension and OPEB plans.
Section 457 Plans
When a Section 457 plan meets the definition of a pension plan, under authoritative GASB guidance, the plans must adhere to all accounting and reporting requirements for pensions under Statement No. 68, Accounting and Reporting for Pensions. That means asset valuation measured at the end of the plan’s reporting period and disclosure requirements would apply. Statement 84, as amended, also would apply.
Concerning DC pension and OPEB plans, guidance for assessing financial burden and financial accountability governance criteria, in the absence of a governing board, is effective immediately. Requirements for pension accounting and reporting for Section 457 plans and assessing financial accountability for component unit inclusion are effective in FY22.