Project Pages

ARC Adjustment—Project Plan

Project Description: This project will consider providing guidance that would allow the annual required contribution (ARC) adjustment to be based on actual amounts associated with the amortization of past contribution deficiencies and excesses included in the ARC in cases in which those amounts are known by the actuary. The project is expected to result in a Technical Bulletin.

Background: The ARC adjustment is used to determine ARC-related pension or other postemployment benefit (OPEB) expense under the requirements of GASB Statements No. 27, Accounting for Pensions by State and Local Governmental Employers, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. In circumstances in which an employer has past under- or overcontributions to a pension or OPEB plan in relation to the ARC, Statements 27 and 45 require the use of two adjustments to the ARC in the calculation of an amount for ARC-related pension or OPEB expense-an interest adjustment and an ARC adjustment. The combination of those two adjustments is intended to eliminate from the expense calculation the portion of the ARC that represents amortization of past under- and overcontributions (which is a component of the total unfunded actuarial accrued liability (UAAL) that already has been recognized as expense in prior periods). The Statements explain this intent but also state that the amount of interest (and principal, if any) already included in the ARC for amortization of past contribution deficiencies or excess contributions of the employer is not precisely determinable.

The Statements provide a required methodology to reasonably approximate the necessary adjustment based on the net pension obligation. The adjustment approach requires the use of the same amortization method, actuarial assumptions, and amortization period that were used in determining the ARC for that year. In cases in which more than one period is used in determining the ARC, the Statements require that the period used to determine the adjustment to the ARC should be the period used to amortize net actuarial experience gains and losses.

In cases in which (1) contribution deficiencies and excesses are amortized using the same method, assumptions, and period as those used for other changes in the UAAL (if a single period is used to determine the ARC) or (2) contribution deficiencies and excesses are amortized using the same method, assumptions, and period as those used for net actuarial experience gains and losses, the required ARC adjustment methodology appears to accomplish the stated intent—producing a reasonable estimate of the amount included in the ARC for amortization of past contribution deficiencies and excesses. However, if contribution deficiencies and excesses are separately tracked and amortized (individually or in total) in a different manner—for example, using a different period than that used for net actuarial experience gains and losses—then the estimation method will over- or understate annual pension or OPEB cost (the expense amount recognized) compared to what would be recognized as expense if the actual amount the actuary has included for amortization of past under- and overcontributions was used to adjust the ARC.

Depending on the amortization method, assumptions, and period used by the actuary to determine the component(s) of the ARC associated with past under- and overcontributions, the required estimation approach has the potential, over time, to deviate from the "true" adjusted ARC and to under- or overstate the pension or OPEB liability that is recognized in accrual-basis financial statements compared to that which would be reported using the "true" adjusted ARC.

Accounting and Financial Reporting Issues: The staff does not believe that there are any major research issues that will need to be addressed to complete the project. The staff will discuss the issue with members of the actuarial community and other knowledgeable constituents prior to drafting a proposed Technical Bulletin.

Current Developments: A project prospectus was presented to the Board for consideration to be added to the active agenda at the April 2008 meeting.

Work Plan:

ARC Adjustment—Recent Developments

Minutes of Meeting, May 5, 2008 Teleconference

The Board discussed a draft of a proposed Technical Bulletin, Measuring Annual Pension Cost or Annual Other Postemployment Benefit Cost in Circumstances in Which the Amount of the Annual Required Contribution (ARC) Attributable to Past Contribution Deficiencies or Excess Contributions Is Known. The discussion centered around two topics—the staff’s proposal that the Technical Bulletin permit but not require use of actual amounts when they are known and the proposed effective date.

The Board tentatively agreed that because of the limitations with regard to use of a Technical Bulletin, the proposal to allow rather than require use of actual amounts should be retained; however, the members requested that the language of the proposed Technical Bulletin be revised to encourage use of actual amounts when they are known.

With regard to the proposed effective date, the Board tentatively agreed that the proposed Technical Bulletin should be effective for financial statements for periods ending after December 15, 2008. The Board also tentatively agreed that earlier application should be permitted.

In addition, individual Board members suggested editorial changes to the draft.

ARC Adjustment—Relevant Links