please summarize the following article

In March 2016, America's Governmental Accounting Standards Board (GASB) issued Government Accounting Standard (GAS) No. 82, entitled Pension IssuesAn Amendment of GASB Statements no. 67, No. 68, and No. 73 (GASB 2016).That publication, which amended three other standards issued since 2013, was just one step in a long history of trying to account for government pensions. The issuance of nine separate GASB pension standards since 2011 has added much transparency to accounting for state and local government pensions, and has made financial statement users aware of the problems that many pension funds face. This paper examines the origins and development of state and local government pension accounting in the United States over the past 70 years with special emphasis on the pronouncements of the Financial Accounting Standards Board (FASB) and the GASB. Before the FASB and GASB, pension accounting pronouncements emanated from the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB), although these pronouncements were generic, for all pension plansnot just those of governmental entities. Accounting in this governmental area over the years has drawn criticism that state and local governments have underfunded their pension plans, failing to show adequate pension liabilities on their financial statements (Foltin, Flesher, Previts, and Stone 2017). Some might observe that the past four decades of accounting standards for such pensions brought limited change or evolution, at least until 2016. Despite an abundance of activity by standard setters, most recently by the GASB and earlier by the FASB, the required accounting treatments have often been opaque and contaminated by political issues and attitudes. The various changes in accounting over the years have consistently been accompanied by criticisms that state and local governments have underfunded their pension plans and failed to show adequate pension liabilities on their financial statements (Foltin et al. 2017). In essence, some would argue that the past four decades of changing standards for government pensions has been more of a non-event, as opposed to an evolution. At least until 2016, users of state and local government pension fund financial statements have, arguably, been little benefited by the changes in standards.

The lack of quality in pension accounting standards has not been for the lack of trying. Accounting for pensions and other related postemployment benefits has been a busy area for both the FASB and the GASB throughout their respective histories. At least 15 FASB Statements have dealt with pensions and other postemployment employee benefits over the period from the issuance of the first formal statement on the subject in 1980 and the most recent in 2006.1 Thus, almost 10 percent of the FASB's efforts throughout its first 35 years focused on pensions and other benefits for retirees. Most of these standards applied as equally to municipalities as to private enterprises. The GASB has been even more engaged with 25 percent of its pronouncements (21 out of first 84) directly dealing with pension-related and postemployment benefit matters.

The remaining sections of this paper examine the development of governmental pension accounting over the past 70 years with emphasis on the pronouncements of the FASB and the GASB. Views of FASB and GASB board members are discussed with respect to why they did, or did not, vote for issuance of each standard.

II. PRE-FASB ERA

Before there was a FASB, the Committee on Accounting Procedure (CAP) issued two pronouncements on pension accounting, and the Accounting Principles Board (APB) issued an additional one. Even before the CAP and the APB, there were articles on accounting for pensions, although these were more conceptual and not authoritative. As a point of reference, Stone (1984) established that the first private sector pension plan was initiated in 1875 by the American Express Company. By 1940, 4.1 million private sector workers (15 percent of the workforce) were covered by pension plans (Employee Research Benefit Institute [ERBI] 2017). Municipal governments offered pension plans even before most private enterprises did. New York City had a plan for police officers in 1857. By 1878, the New York plan provided lifetime pensions for police officers at age 55 with at least 21 years of service (National Public Pension Coalition [NPPC] 2017). Teachers were also included in many cities' plans. In 1911, Massachusetts became the first state to offer a pension plan to its general state employees. By 1916, there were at least 159 American cities with a pension plan for at least some city workersnormally policemen and firemen (Clark,Craig, and Wilson 2003, 167).

Stone (1984) noted that early theory involved a controversy between whether a pension was an expense borne by the worker, or by the employer. In the private sector, the ''deferred wage theory'' reflected ideas from economists such as Adam Smith and David Ricardo, who argued that employees were willing to accept lower wages if they expected to receive a pension. Thus, the employee bore the entire cost of the plan, even if he or she was not aware of it. The alternative theory asserted that the employer bore the cost in that a gift to a retiring employee provided protection against the employee discontent that would result from discharging long-serving, loyal employees.

Therefore, the accounting for a pension plan would be dependent upon whether employees had given up a portion of their salary, or whether the plan was a gift given by employers when the person retired, which meant the pension cost was a cost brought about by the employer's enlightened self-interest. Early articles in the Journal of Accountancy provided varying arguments as to how the aforementioned theories affected the accounting for pension liabilities on the financial statements (for example, see Rand 1911; Kimball 1929; Whitmore 1929a, 1929b). Some of these articles even questioned whether a liability for pensions even needed to be recorded, as did Hatfield (1916, 194) in his textbook, which concluded that a pension should be recorded as a reserve instead of a liability. In other words, a pension was a distribution of profits rather than a cost of production. This was typical until the advent of the U.S. income tax; because pension payments were deductible for tax purposes, there was more incentive for companies to record the payments as expenses. Here the government would share in the cost and there was more incentive for companies to record the payments as expenses. Because most entities that provided pensions funded them on a pay-as-you-go basis, it was only intuitive that such payments be deducted when paid, and not accrued over the working life of the employees (Kreiser 1976, 80).

In 1939, the SEC issued Accounting Series Release Number 4 (SEC 1939), which was the first indication that the regulatory body would give influence to the profession. That SEC (1939) release stated that the Commission would accept ''substantial authoritative support'' from the profession. This prompted the forerunner of the AICPA, the American Institute of Accountants, to create the Committee on Accounting Procedure (CAP) that same year; the CAP remained in place until 1959. Further bolstering the credibility of the CAP was the early membership of two former SEC chief accountants on the standard setting committee.

The first CAP pronouncement on pensions came in 1948, in the form of Accounting Research Bulletin (ARB) No. 36, Accounting for Annuity Costs Based on Past Services (CAP 1948). As the title implies, that ARB dealt only with past service costs. The debate was over whether past service costs should be charged to retained earnings or as a current expense. The committee unanimously agreed in a three-page pronouncement that past service costs should be charged as an expense against current earnings. ''The rationale for this approach was that companies adopt pension plans to achieve present and future benefits, therefore all pension costs should be allocated to present and future periods'' (Kreiser 1976, 60). Next came ARB No. 47 (Accounting for Costs of Pension Plans) in 1956. The six-page ARB No. 47 (CAP 1956), which dealt with accounting by employers, discussed the question of whether pension costs should be accrued, or recorded on a pay-as-you-go basis after the employee retired. Although the committee felt that accrual was the proper answer, it was unwilling to make such a requirement and instead pronounced the following:

The committee believes that opinion as to the accounting for pension costs has not yet crystallized sufficiently to make it possible at this time to assure agreement on any one method, and that differences in accounting for pension costs are likely to continue for a time. Accordingly, for the present, the committee believes that, as a minimum, the accounts and financial statements should reflect accruals which equal the present worth, actuarially calculated, of pension commitments to employees to the extent that pension rights have vested in the employees, reduced, in the case of the balance sheet, by any accumulated trusteed funds or annuity contracts purchased. (CAP 1956, 17)

That pronouncement lasted a decade until the Accounting Principles Board issued Opinion No. 8 on pensions in 1966 (APB1966).

The CAP came under criticism in the late 1950s for not reducing alternative accounting principles, a factor that prompted the AICPA to create the Accounting Principles Board. Opinion No. 8 (Accounting for the Cost of Pension Plans, APB 1966) required companies to report unfunded pension liabilities on the balance sheet, but the standard was not particularly burdensome. The requirements of that Opinion continued in effect for 14 years. These early pronouncements were basic and straightforward; Opinion No. 8 (APB 1966) required that ''if the company has a legal obligation for pension cost in excess of amounts paid or accrued, the excess should be shown in the balance sheet as both a liability and a deferred charge.''

To summarize the pre-FASB era, pensions varied by organization, and therefore accounting for pensions also varied. During the first half of the 20th century, pension plans were not particularly widespread, and the costs thereof were typically not large in terms of an organization's overall operating costs. But, as the number of covered employees multiplied, plan assets increased along with liabilities, and the pension benefit grew in importance to retirees. That growth continued exponentially over the next five decades, particularly with respect to state and local governments. Given that state and local government pensions predated private pensions, the public sector has been slow to adopt accounting standards that provide transparency of pension liabilities.

III. FASB'S EARLY ROLE

In 1971, with the APB not meeting the needs of the profession, the AICPA commissioned two study groups that led to the creation of the Financial Accounting Standards Board (FASB). Unlike its predecessors, the FASB was created with a full-time staff and better funding. In addition, the SEC formally endorsed the FASB in Accounting Series Release Number 150 (SEC 1973). These factors gave the FASB the ability and power to address more issues and complex matters like pension reporting. Therefore, when the FASB eventually promulgated pension accounting standards, those standards carried a great deal of weight and made impact. Although the decrease in defined benefit pension plansis directly correlated with FASB standards, other socio-economic factors were also impactful. Some of those include retirees living longer, greater number of retirees versus those working, and the creation of an alternative option in 1978the 401(k) plan.

The FASB's first involvement with pension accounting came in the form of Statement of Financial Accounting Standards (SFAS) No. 35, Accounting and Reporting by Defined Benefit Pension Plans (FASB 1980a) issued in March 1980. SFAS No. 35 defined the accounting principles for defined benefit plans. Two months later, in May, SFAS No. 36 was issued with the title of Disclosure of Pension InformationAn Amendment of APB Opinion No. 8 (FASB 1980b). Some might question why, given the multitude of pronouncements on pension accounting, there was a 14-year gap between Opinion No. 8 and Statements No. 35 and 36. That was a period of good market returns and growth in wages; thus, there was no burning platform upon which to campaign for changes in pension accounting standards. The two projects in 1980 differed in that Statement No. 35 dealt with the financial statements of pension plans, while Statement No. 36 was concerned with disclosures of pension plans in the financial statements of employers. That twofold development of standards has continued throughout the life of both the FASB and the GASB. SFAS No. 35 barely passed, as three board members voted against its issuance. John March, Robert Morgan, and Ralph Walters dissented because, in their opinion, the standard established an unattainable objective for a plan's financial statements, prescribed detailed reporting beyond the reasonable usefulness of plan participants, and improperly identified actuarial statements as financial statements rather than as supplementary information outside the financial statements. The three dissenters shared an overriding concern that, taken as a whole, these provisions invited comparisons of items that did not possess enough common properties to be comparable (FASB 1980a, 16-17).

March, Morgan, and Walters felt that the primary objective of a pension plan's financial statements should be to provide financial information about resources and financial activities that was useful in assessing the stewardship of the plan's administrators. A supplemental objective was to provide information about plan benefits and the accumulation of resources to pay those benefits. March, Morgan, and Walters further believed that the active cooperation between the board and the actuarial profession in this project was a significant milestone toward more consistent reporting of actuarial data. However, the three dissenters felt the board had dealt with choices of details in actuarial determinations that should have been left to the actuarial profession, as long as their guidelines produced information germane to the objectives of financial reporting. The three dissenters were also not convinced that plan participants needed the disclosures prescribed by this statement, particularly as to actuarial methods, changes, and assumptions. The annual reports filed with the Department of Labor, which were available to participants on request, should have provided sufficient benefit information for plans with fewer than 100 participants. This last aspect of the dissentthe lack of need for disclosureswas not fully supported by Walters, who had written a memo to the other two dissenters saying that it was too subjective to constitute a crisp dissent. He thought the other points had a sharper impact and could be diluted by dissenting on matters not substantiated (Walters 1980a).

IV. DISSATISFACTION BY GOVERNMENTAL ENTITIES

SFAS No. 35 was subsequently amended with the issuance in April 1982, of SFAS No. 59, Deferral of the Effective Date of Certain Accounting Requirements for Pension Plans of State and Local Governmental UnitsAn Amendment of FASB Statement No. 35 (FASB 1982). The FASB had received a request in December 1981 from the National Council on Governmental Accounting (NCGA) to suspend Statement No. 35 because its requirementsprimarily the requirement to show pension assets at fair valuesdiffered from the requirements that had been promulgated by NCGA. Prior to the establishment of the FASB, the NCGA, a group organized within the Municipal Finance Officers Association, had established standards for governmental entities. NCGA representatives asked for a deferral of the applicability of SFAS No. 35 for a specific period by changing the effective date. This was at the time that a special committee had recommended that a separate Governmental Accounting Standards Board (GASB) be established. Therefore, the board concluded that an 18-month deferral of the effective date would eliminate potential conflict between the NCGA and FASB standards while discussions about the appropriate standard-setting structure were in progress.

Another similar amendment on deferring the effective date came in November 1983, in the form of SFAS No. 75 (FASB 1983b), except this one was an indefinite deferral and applied only to pension plans of state and local governmental units. Recognizing that the GASB was near to becoming a reality, the board deferred its rules for governmental pension plans ''pending further action by the board'' (FASB 1983b). What the board was essentially doing was deferring to the yet-to-be formed GASB. Both Statements No. 59 and No. 75 were approved unanimously by the board. Some have postulated that these deferrals were evidence that the GASB was formed to allow state and local governments to avoid the pension requirements that had been promulgated by the FASB (Patton and Freeman 2009, 22). By deferring the effective date of the standard by 18 months for the GASB to study the issue, the FASB effectively deferred the requirements for 30 years.

Another amendment to SFAS No. 35 (FASB 1980a) came in August 1992, with the approval of SFAS No. 110 (FASB 1992a). This latter statement required a defined benefit pension plan to report at fair value any investment contracts issued by either an insurance enterprise or other entity. Only contracts that incorporated mortality or morbidity risk could be reported at contract value. The previous guidelines permitted companies to report contracts at the same value that they were reported at to federal agencies for ERISA (Employee Retirement Income Security Act of 1974) purposes. However, ERISA requirements do not extend to governmental pension plans. The FASB's Emerging Issues Task Force (EITF) had previously discussed this issue, but could not reach a consensus; therefore, it was recommended that the board address the issue. SFAS No. 110 (FASB 1992a) passed by a unanimous vote.

V. A COMPREHENSIVE APPROACH TO PENSION ACCOUNTING, FORMIDABLE CHANGE

Two important pension standards were issued in December 1985, in the form of SFAS No. 87 (FASB 1985a) and SFAS No. 88 (FASB 1985b). After 11 years of study and discussion, the FASB finally issued SFAS No. 87 at the end of 1985 by a vote of four to three. This approval was prefaced by three discussion memoranda, six exposure drafts, four public hearings, and six previous standards. The business roundtable, led by Roger Smith of General Motors Company, played an active role in the hearings. Smith was opposed to nearly everything that appeared in the original discussion memorandum and argued that it was not a neutral document (as discussion memorandums were supposed to be). Smith also argued that the board should not be making such revolutionary changes when its own conceptual framework was still incomplete (Liebtag 1984, 56). The position of Arthur Young & Company with respect to other postemployment benefits (OPEB), which was addressed in the same discussion memorandum, was that the board should ''move slowly, keeping in mind that, because those benefits usually are not funded, the balance sheet impact'' would be significant (Liebtag 1984, 56). At the end, the industry's major request was for a series of smoothing rules that would result in less impact on earnings. Critics contended that management wanted to continue its ability to manage earnings and to avoid earnings volatility. Early in the deliberations, virtually all respondents to the discussion memorandum were opposed to the contents of SFAS No. 87 (FASB 1985a). An April 1984 article in The Wall Street Journal stated that the board's proposal to place unfunded pension liabilities on the books was opposed by ''seven of the Big Eight accounting firms and practically every major U.S. corporation'' (Berton 1984, 1). Arthur Andersen was the only Big 8 firm supportive of the board's position. It was noted that corporate debt-to-equity ratios would be severely damaged.

Although long and complex at 112 pages, the basic gist of SFAS No. 87 (FASB 1985a) was to make companies report the cost of an employee's pension over that employee's expected service life. Most board members felt that the pension information would be more useful if the methods used for allocating the cost were reduced. The board could not identify any reasons for different employers to use different accounting methods or for a single employer to use different methods for different plans. Thus, a single method of measurement was prescribed. FASB members felt that an employer with an unfunded pension obligation had a liability; an employer with an overfunded pension plan therefore had an asset. The best information available about that liability or asset was the fair value of assets and a measure of the present value of any liabilities. However, the FASB members concluded that recognition of those amounts for financial statement purposes would be too great a change from previous practice. Thus, an allowance was permitted for delayed recognition, over five years, which in turn resulted in the exclusion of the most current and relevant information from the face of the balance sheet. Nevertheless, such information was to be included in the notes to the financial statements. This latter provision was added to the statement to give preparers an opportunity to mitigate any major volatility in earnings caused by changes in the marketplace. As FASB member Arthur Wyatt pointed out when he criticized this giving in to preparers, ''People tend to like things in smooth curves rather than the ups and downs'' (Norris 1987, 44). Essentially, the complications of the statement were due to the provisions that were inserted to make it less distasteful to management. The complexities had no basis in accounting; they were simply approaches designed to reduce the earnings volatility that the preparer community did not want to contend with. When asked whether an investor could understand the realities, Wyatt stated:

An astute investor probably can. Because the disclosures that are required do involve the fair value of the assets and they do involve, in the footnotes, a disclosure of the real pension obligation. Why one should have to wade through those footnotes to find out numbers that could just as easily have been put into the body of the financial statements is a puzzle to me. (Norris 1987, 44)

Three board members, Victor Brown, Robert Sprouse, and Arthur Wyatt dissented. Brown objected to the minimum liability provisions and was unwilling to support the pension cost determination. In his view, evidence was insufficient to support an argument that a benefit/years-of-service method should be the sole required method or that recognition of liabilities and assets beyond unfunded accrued or prepaid pension costs should be required. He felt that no particular method was superior. He would not specify a single actuarial method to be used. Rather, he wanted to establish an objective that pension cost be charged over the service lives of the work force (SFAS No. 87, FASB 1985a, 25-26). In other words, Brown supported a principles-based standard as opposed to a rules-based standard. What this means is that Brown was in support of a guidance statement where the preparers of financial statements had some discretion in determining proper inputs and reporting that would be most useful to the users of those statements. This is in contrast to the prescriptive bright-line approach to which Brown was in opposition. He believed that stating the accounting objective rather than specifying a computational method was preferable. Comparability would be improved if methods used had a common objective. He felt that detailed methods produced a complex accounting standard. Brown wanted to leave implementation to those who had the ability to understand each pension plan. Brown's views were later used by supporters of SFAS No. 132 (FASB 1998) and 132-R (FASB 2003), who argued that the SFAS No. 87 (FASB 1985a) requirements were too confusing to be of any benefit to financial statement users (Anand 2002).

Sprouse believed that, although this statement provided improvements in accounting for pensions, those improvements were more than offset by new types of deficiencies. In Sprouse's view, an employer could not have a liability for pension benefits related to future salary increases. He argued that the decision to grant increases in wages and salaries was a future event that would have related consequences, including increases in pension costs, as well as the wages and salaries themselves. Accounting should recognize all of those consequences at the time the event occurs. Anticipating the effects of those potential events would be no more appropriate than anticipating the future higher wages in accounting for the current period (SFAS No. 87, FASB 1985a, 26-27).

Wyatt believed the projected benefit obligation should be the pension liability reported in the financial statements. He felt that neither the unfunded accrued cost nor the accumulated benefit obligation was a measure of a company's pension liability. In a late 1987 interview (Norris 1987), Wyatt stated that SFAS No. 87 represented an improvement over APB Opinion No. 8, but the board had an opportunity to go further to achieve a fair presentation of pension accounting (SFAS No. 87, FASB 1985a, 27). However, the level of improvement was modest when compared to that which could have been achieved. Thus, in Wyatt's view, the statement's deficiencies represented more of an opportunity cost than an actual problem (Norris 1987, 44).

SFAS No. 88 (FASB 1985b) was issued in December 1985, at the same time as SFAS No. 87 (FASB 1985a). It prescribed the amount to be recognized in earnings when a pension obligation was settled or a plan was curtailed. Settlement was defined as an action that relieves an employer of responsibility for a liability and eliminates risks related to that liability and the assets used to pay the settlement. A curtailment is defined as a reduction in, or an elimination of, defined benefit accruals for present employees' future services. SFAS No. 88 (FASB 1985b) superseded SFAS No. 74, Accounting for Special Termination Benefits Paid to Employees (FASB 1983a). Prior to this statement, an employer that entered into an asset reversion transaction involving the termination of one plan and establishment of a successor-defined benefit plan was precluded from immediately recognizing any gain. SFAS No. 88 (FASB 1985b) specified how that employer should determine the gain to be recognized. Board members David Mosso and Arthur Wyatt dissented. Mosso dissented because, by recognizing curtailment losses and deferring curtailment gains,3 SFAS No. 88 (FASB 1985b) perpetuated conservatism. He pointed out that SFAC No. 2 unequivocally rejected conservatism: therefore, a Concepts Statement, the primary purpose of which is to provide guidance to the board in setting standards, is ignored because it conflicts with preexisting standards (FASB 1985b, 10).

Wyatt could not support this statement because he felt that its provisions were inconsistent with the policy of delayed recognition of gains and losses adopted in SFAS No. 87 (FASB 1985a). He argued that useful information is not provided by following delayed recognition in some circumstances and not following it in others. Wyatt also disagreed with the conclusion that the purchase of participating annuity contracts should be deemed to be a settlement that creates gain or loss recognition. Participating annuity contracts are a type of investment of pension assetsfor example, an alternative to an investment in equity securities. Decisions to change investment vehicles, for example, from equity securities to bonds, are not a sufficient basis to recognize gains and losses under the delayed recognition philosophy adopted in SFAS No. 87 (FASB 1985a). Wyatt felt that the change in investment vehicle to participating annuity contracts likewise should not be viewed as sufficient to report a gain or loss. Wyatt noted that the provisions in SFAS No. 88 created the volatility in earnings that the delayed recognition of Statement No. 87 was intended to mitigate, and that delayed recognition of gains and losses should be continued until both a settlement and a plan curtailment occurs (FASB 1985b, 10-11).

The impact of these statements, particularly the reporting of the pension liability, can be argued to have longstanding impact on the types of pension plans employers offer their employees. Putting large liabilities on the books provides incentive to move toward defined contribution plans. Not long after the issuance, David M. Walker (1988, 12), then Assistant Secretary of Labor (and later Comptroller General of the United States), stated: Desire to limit financial obligations may cause sponsors to consider alternative plan designs. Specifically, an increasing number of sponsors may consider the use of defined benefit plans as a base benefit plan that, coupled with other defined contribution type arrangements, would provide an overall targeted level of retirement income.

VI. FASB REFINES THE FOUNDATION OF PENSION REPORTING

A less contentious pronouncement, although one that was later superseded, came in February 1998 with the unanimous passage of SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits: An Amendment of FASB Statements No. 87, 88, and 106 (FASB 1998). The statement required employers to provide a reconciliation of how pension benefits and expense were calculated. The reconciliations were not required for nonpublic companies. There was no controversy among board members surrounding SFAS No. 132. The statement was subsequently revised in 2003 (SFAS No. 132-R, FASB 2003) to require disclosure of the accumulated benefit obligation and the benefits to be paid in each of the next five years. A later amendment was issued with the December 2008 issuance of FASB Staff Position 132(R)-1, which required more disclosures regarding types of plan assets and the risks therewith associated. Entities should also report the impact of the economy and financial markets on the value of pension assets and whether fair value measurements are based on unobservable inputs. Both Statements No. 132 and No. 132-R were unanimously approved by the boards. In February 1999, SFAS No. 135 (Rescission of FASB Statement No. 75 and Technical Corrections, FASB 1999) passed unanimously, concluding a long abstention by the FASB in the state and local government pension area. By rescinding SFAS No. 75, which indefinitely deferred adoption of FASB guidance in the public sector, the FASB was signaling once and for all that the GASB had sole jurisdiction over all state and local government pension matters. Although SFAS No. 135 was uncontroversial with respect to its requirements, there was some question as to whether the FASB should have input on the matter. It was finally decided that the FASB should issue the statement, because it was no longer needed since the GASB had issued its own standard on the subject. The GASB agreed. The statement included a good summary of pension pronouncements. This was the first statement to include a brief summary at the beginning of the published statement, a change that had been suggested by board member Gerhard Mueller (Flesher 2010, 161). Unrelated to the public sector, the last numbered FASB statement dealing with pensions was SFAS No. 158 (FASB 2006). Approved unanimously, it required disclosure of pension plan deficits and surpluses on the face of the balance sheet, and thus amended Statements No. 87, No. 88, No. 106, and No. 132-R. Deliberations on this statement were undertaken in a move toward international convergence of standards. This standard came about because users of financial statements often said that the information needed to be on the face of the financial statements; footnotes that may have provided the same information were viewed as difficult to decipher and abetted smoothing approaches that were allowed in former standards (Kranacher 2007).

VII. ACCOUNTING FOR OTHER POST-EMPLOYMENT BENEFITS (OPEB)

The FASB first addressed the issue of postretirement benefits other than pensions in November 1984 with the issuance of SFAS No. 81, Disclosure of Postretirement Health Care and Life Insurance Benefits (FASB 1984). The required disclosures about an employer's accounting for postretirement health care and life insurance benefits included (1) a description of the employee groups covered and the benefits offered, (2) a description of the employer's accounting and funding policies for those benefits, and (3) the cost of those benefits recognized in the current period. In addition to pensions, the board had added a project on Other Postemployment Benefits (OPEB) to its technical agenda in February 1984. The issue had been discussed earlier, but it had been combined with the project on employers' accounting for pension plans and was addressed as a part of the discussion memorandum on the combined topics. Accounting for OPEB was made a separate agenda item because the board wanted to ensure clear identification and consideration of the issues involved in the non-pension aspects. SFAS No. 81 (FASB

1984) was issued because the board felt that the complexity of the OPEB project was so vast that it was unlikely that a final statement covering measurement and recognition would be issued anytime soon. The topic of disclosure was a major concern of board members because of existing differences in accounting for postretirement health care and life insurance benefits, the high cost of those benefits, and the lack of disclosures in financial statements about those items. Therefore, the board decided that, as an interim measure, several disclosures should be required pending completion of the larger OPEB project. The board issued the standard based on existing data without holding a public hearing.

The next undertaking regarding OPEB, SFAS No. 106 (FASB 1990), issued in December 1990, proved to be one of the most controversial standards ever issued by the FASB. SFAS No. 106 has also been called the best standard ever issued by the FASB (Zeff 2005). Although SFAS No. 106 (FASB 1990) was designed to apply to all types of postretirement benefits, the focus was primarily on health care benefits and required current expensing and booking of a long-term liability for the future

health care benefits. Prior to this standard, most companies had accounted for postretirement health care benefits provided to employees on a pay-as-you-go, or cash basis. Therefore, SFAS No. 106 (FASB 1990) meant a significant difference in practice, because the standard required employers to accrue expenses during the years that an employee rendered service to the company. The accrued liability and expense were to be recorded based on the estimated cost of providing the future benefits to

the employee and perhaps the employee's spouse and dependents. This had significant negative impact on the financial statements causing employers to push back on the FASB. Despite the criticism, the board remained resolute; its conclusions in Statement No. 106 were based on the view that a defined OPEB plan set forth the terms of an exchange between the employer and the employee. In exchange for the current services provided by the employee, the employer promised to provide health and other welfare benefits after the employee retired. Therefore, because they are contractually based, OPEB were not gratuities but were a part of an employee's compensation for services rendered during his working years. Because payment is deferred until after the employee retires, the benefits are a type of deferred compensation similar to a pension. The company's obligation for that compensation is incurred as employees render the services necessary to earn their postretirement benefits. Therefore, an estimate of future OPEB should be expensed each period, with a corresponding liability recorded. The ability to measure the obligation for postretirement health care benefits was the subject of much controversy. However, board members felt that measurement of the obligation and accrual of the cost based on estimates was superior to not recording anything. A failure to accrue a liability results, of course, in an overstatement of owners' equity and impairs the integrity of the employer's financial statements.

The major objection to SFAS No. 106 (FASB 1990) was the impact that it would have in the transition period. No standard was more bitterly opposed by industry in general, because it would mean substantial liabilities would have to be reported. As an example, when the standard was ultimately approved, General Motors Company was forced to book a liability that reduced shareholders' equity by 77 percent. This write-down arose because GM's management in the past had negotiated for wages savings of a few cents an hour with a promise that the company would provide retirement benefits to its employees over the years of their retirement. Because those future liabilities were never recorded, management had never bothered measuring the costs of the promised benefits. Eventually, companies conceded that the standard was a beneficial one because it made them realize the level of their liabilities and the impact that their past decisions had on future earnings. Once companies began having

to measure the benefits that they had promised retirees, there was a change in the decision-making process and a major impact on corporate behavior. It gave rise to the maxim ''You manage what you measure'' (Zeff 2005). The idea of managing what you measure was not an altogether unexpected result; one of the comment letters, from American Standard Inc. of September 6, 1989, argued for disclosure of OPEB in order to force management to intensify its efforts on an important element of cost (Hill, Shelton, and Stevens 2002, 88). Former Chairman Dennis Beresford has said that he thinks one of the reasons for the success of SFAS No. 106 (FASB 1990) was the development of an outstanding communications plan; constituents knew what the board was proposing and could see the results of research supporting the standard. Although the standard gave a sudden negative jolt to many companies' financial statements, few could argue that it was not the right thing to do.

SFAS No. 106 (FASB 1990) was one of the longest standards ever issued at 518 paragraphs over 186 pages. It included a 12-page glossary. The standard received unanimous approval from the board. Board member Robert Swieringa stated that SFAS No. 106 was ''the most significant accomplishment during my time on the Board'' (Swieringa 1996, 6). Again, under the theme of ''you manage what you measure,'' this statement can be argued to have had significant impact on the reduction of retiree health care costs and benefits. An Employee Benefit Research Institute Brief (No. 236) states:

SFAS 106 dramatically impacts a company's calculation of its profits and losses and thereby creates a strong incentive for financial managers to limit expenses. As a result of FAS 106, and the increasing cost of providing retiree health benefits in general, many employers began a major overhaul of their retiree health benefit programs. (Fronstin 2001) Data show a dramatic drop in the percentage of firms offering retiree health benefits to active workers surrounding the timing of SFAS No. 106. The percentage dropped from 66 percent in 1988 to 36 percent in 1993, and leveled out to about 25 percent by 2010 (McArdle, Neuman, and Huang 2014). OPEB were addressed again by the board in 1992 with SFAS No. 112, Employers' Accounting for Postemployment Benefits (FASB 1992b). This statement was similar to SFAS No. 106 (FASB 1990), but dealt with salary continuation plans, severance pay, and disability-related payments.

VIII. ACCOUNTING FOR COMPENSATED ABSENCES AND TERMINATION BENEFITS

Another type of employee benefit, that of compensated absences (i.e., vacations), was addressed in SFAS No. 43 (FASB 1980c), issued in November 1980. The board took on the project because of a fear that a large unrecorded liability existed at many companies. SFAS No. 43 required an employer to accrue a liability to cover employees' rights to receive compensation for future absences, if it was probable that the employee would eventually collect on the promised benefit. For instance, a liability should be recorded for vacation-pay benefits that employees have earned, but have not yet used. The statement does not necessarily require the accruing of a liability for future sick pay compensation, holidays, and similar compensated absences until employees actually use the promised benefit. Holidays, for example, typically do not accrue or vest with employees; the employee has to be working at the date of the holiday to collect on the holiday benefit. An exposure draft of a proposed statement, Accounting for Compensated Absences, was issued on December 17, 1979. The board received 217 comment letters.

Many of the respondents questioned the need for the standard; they pointed out that the results would not be cost beneficial. The probable result was expected to be an initial recording of a large liability and a decrease in retained earnings, but with no major changes in the level of that liability in future years. In other words, the income statements of future periods would not be impacted. The board decided that it could reach an informed decision on the basis of existing data without holding a public

hearing. SFAS No. 43 (FASB 1980c) was not approved unanimously. Two board members, Donald Kirk and Robert Sprouse, dissented due to the belief that the condition relating to ''rights that vest or accumulate'' introduced unnecessary considerations in determining whether a liability had been incurred. If a benefit has a vesting provision, the employee need not be absent to be

compensated; therefore, services already rendered is necessarily the past event that creates the obligation. The crucial question is whether the employer's liability is the result of employees rendering past service or being absent. Compensation for a holiday is the result of being absent, not because of years of service. Compensation for absences not contingent on holiday events, for example vacations, was due to rendering service. Specifically, the two dissenters felt that the employer had a recordable liability for vacation pay, but not a recordable liability for sick pay, because if sick pay was not paid when there was no sickness, then there would be no liability. The employer does not owe anything until the illness occurs, and therefore an expense and liability should not be accrued. Kirk and Sprouse also objected to the fact that identical situations might produce cases that were accounted for differently. For example, sick pay that vests should be recorded as a liability, but a liability for non-vesting sick pay was not required, but was permitted (SFAS No. 43, FASB 1980c, 6). Another board member, Ralph Walters, came close to dissenting, but ultimately decided to approve the standard, although he thought it was not needed. He explained his thinking in a memo to other board members as follows:

Though I am not convinced that a statement on this subject is necessary, and believe that virtually all companies accrue for vacation pay (which may be the only significant item in the basket), I will not dissent. I do feel that both the FASB and the auditing profession should be ashamed of themselves if this pronouncement is, in fact, necessary. (Walters 1979) Walters (1980b) had earlier told his colleagues that he would ''expect to dissent to this statement,'' because he did not feel that sick pay should be accrued, regardless of the vesting terms, because, ''If you must get sick to enjoy it, it ain't vested.'' He also argued that any attempt to apply probabilities to genuine sickness does not meet any of the tests of decision usefulness and would rarely cross the materiality threshold. The issue of termination benefits offered to employees was the subject of SFAS No. 74 (FASB 1983a), which was issued in August 1983. Conceptually, the accounting treatment that the board decided upon was somewhat controversial. Statement No. 74 is applicable when an employer offers special termination benefits to its employees to encourage them to take early retirement, or otherwise quit their jobs. SFAS No. 74 (FASB 1983a) required employers to record the estimated amount of termination benefits as a liability and an expense of the period in which the employees accept the offer. The amount to be reported should include any lump-sum payments and the present value of any expected future payments. Thus, this was an early example of the use of present values in calculating the fair value of a liability. If they are measurable, certain changes in the

estimated costs of other employee benefits, such as pensions, are also to be included in measuring the termination expense. Because of the controversy on the subject, and the fact that there had been many recent cases of employers making termination offers, the AICPA's Accounting Standards Executive Committee (AcSEC) had encouraged the FASB to address the issue because there was a diversity of views in practice. Some theoreticians argued that the cost of termination benefits should be treated as expenses in future periods. After all, the cost was being incurred to relieve future periods of costs; this meant that any payments made (or liabilities recorded) should be accompanied by a debit to an intangible asset account. Others suggested that the cost of those benefits should be immediately expensed, because the cost was the result of a current decision. Still others

viewed the benefits as merely additional pension benefits, rather than special termination benefits (in which case, no new standard was needed because the issue could be accounted for as a revision of a pension plan). That diversity of views was confirmed by the large number of comments160 lettersreceived in response to the Exposure Draft, Accounting for Special Termination Benefits Paid to Employees, issued on December 28, 1982. Statement No. 74 (FASB 1983a) was approved by a vote of six to one, with John March dissenting. March dissented due to his belief that the requirement making employee acceptance of the offer of benefits as a condition necessary to record a liability was an unwanted bar to recognition and could cause failure to report a loss that was known to have occurred. The normal definition of a liability does not require acceptance by the creditor when the effect of probable acceptance can be reasonably estimated. March felt that users' reasonable expectations are that known losses have been reflected in financial statements and that objective should take precedence over the emphasis on legal obligation couched in the requirement of needing prior acceptance (SFAS No. 74, FASB 1983a, 5-6).

IX. THE FORMATION OF THE GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB)

A brief historical perspective of municipal accounting tracing back to colonial times can be found in a 2012 Abacus article (Roybark, Coffman, and Previts 2012a, 3-10). The GASB was inaugurated in 1984, but concern with who should be involved in standard setting for governmental entities goes back to at least 1978 when a concept statement on nonbusiness organizations was being considered. Previously, a voluntary organization called the National Council on Governmental Accounting (NCGA) promulgated such standards,4 but the FASB's actions caused worry that the NCGA task was about to be taken over. The GASB's roots date back to at least a 1978 U.S. Senate bill introduced by Senator Harrison Williams proposing legislation to require cities and states that wanted to sell public securities to register with the SEC. Local government officials were understandably opposed to the idea, because of the costs it would impose on them, so the original proposal was replaced in 1979 by a bill (''State and Local Government Accounting and Financial Reporting Standards Act') to establish a federally funded governmental accounting standards board to be led by the chairman of the SEC, the comptroller general, and the

secretary of the treasury. At the same time, the Financial Accounting Foundation (FAF), the parent of the FASB, began discussing the issue of standards for governmental entities and not-for-profit agencies. The SEC was not supportive of the 1979 Senate bill, due supposedly to the lack of any enforcement mechanism, and the comptroller general, Elmer Staats, stated his support for a private-sector standard-setting body. The AICPA viewed the situation with alarm, with the fear being that the establishment of a government agency to create accounting standards for local governments could lead to a government

takeover of all accounting standard setting. Thus, the AICPA appealed to the FAF to establish a study group to develop a proposal to solve the problem of governmental accounting standard setting. FAF president Alva Way scheduled a meeting on July 17, 1979 to include representatives from the FAF, the FASB, the GAO, the AICPA, and various organizations with governmental accounting interests. The FASB and FAF were willing to take over the task of setting governmental accounting standards, but the governmental representatives at the meeting were unwilling to accept the FASB as their standard setter. They were willing to accept a similar sister board under the jurisdiction of the FAF. The separate standards board was proposed to the entire FAF, and on March 13, 1980, the trustees rejected the proposal (Olson 1982, 82-83). There was strong belief among trustees that the FASB should be the single standard setter for all types of organizations; a separate governmental standard setter

was not needed. This belief may have been true, but the trustees' reading of the political situation was nave; government officials were not willing to accept a business-oriented organization to set their standards, primarily because the government agencies would have less control over a business-oriented group. A committee composed of governmental accounting leaders was formed to study the issue; Robert Mautz, a noted professor at the University of Michigan, chaired the committee. By the end of 1980, the committee had concluded that an independent five-member board and a new foundation (an organizational arrangement eerily identical to that of the FASB and FAF) should be formed to promulgate governmental accounting reporting standards. In May 1981, the Mautz Committee held a

public hearing on the plans for the new board; the 25 commentators at that meeting traversed the gamut from extreme opposition to full support, with a healthy number in the middle asking for more study. Some argued that differences in reporting between governmental entities and other nonbusiness organizations were so minor that a separate board was not needed. Government accountants, however, argued that their representation was needed on any organization establishing financial reporting standards for governmental units. Additional meetings were scheduled in late May and June (Mautz 1981, 3). The meeting in Detroit was a heated one. FAF Chairman Russell Palmer realized that the government representatives would never agree to the FASB setting their standards. Palmer subsequently convinced the FAF ''the government people were never going to give up, and it was time to take the best deal he could get by creating GASB under FAF'' (Van Daniker 2009, 4). Following the June meeting, the FAF trustees sent a letter to Chairman Mautz offering to reverse their March 13 position and offered to establish the proposed GASB. The conditions of the FAF offer included the modeling of the proposed board after the FASB and for it to be under FAF oversight. In return, the FAF would add three governmental representatives to the board of trustees and would allow the National Council on Governmental Accounting veto power over appointment of the initial GASB chairman, vice-chairman, and members (Mautz 1981, 3). At an October 13, 1981 meeting, the Mautz Committee recommended that the GASB be established under the auspices of the FAF. A committee led by FAF Chairman Russell E. Palmer was authorized to organize the new GASB. That committee, which included comptroller general Charles A. Bowsher and AICPA president Philip B. Chenok, spent 1982 getting organized and working out jurisdictional turf issues with the FASB. During 1983, new governmental trustees were appointed to the FAF, funding was sought, potential GASB members were evaluated,

and the FAF revised its bylaws and certificate of incorporation to reflect the addition of the GASB. Despite this moving ahead, some governmental accounting groups, including the Municipal Finance Officers Association, were reluctant to go along with the plan (Steele 1983, 16). Four of the five members of the GASB were announced in May 1984. The chair, James Antonio, was the only full-time

appointment. Effective July 1, 1984, the GASB took over the responsibility of standard setting for the nearly 100,000 state and local governmental units in the United States. The number of board members would be increased to seven in November 1996 (Roybark et. al. 2012a, 13). The GASB's first official statement was issued in September 1984.

The creation of the GASB was viewed by the FAF trustees as a major accomplishment, but they themselves were nave in believing that all of the problems had been solved:

Don Kirk and his fellow FASB members, however, predicted serious problems for both private and public sector entities arising from the almost casual allocation of jurisdictional responsibilities between the two Boards. The agreement ignored the fact that some types of reporting entities, such as colleges, universities, and health care facilities, not only were prevalent in both the private and governmental sectors but also, to an increasing degree, drew on some of the same sources for financing. Therefore, their financial reporting practices should be comparable.

However, the trustees agreed to organize the GASB with a mere ''understanding'' that the new Board would establish standards ''for activities and transactions of state and local governmental entities,'' and the FASB would continue to do the same for all other entities. (Van Riper 1994, 91) During the subsequent transition, in 1986 and again in 1988, the GASB advised the constituent governments within its domain that they did not have to follow FASB pronouncements in areas where the GASB was planning to issue a pronouncement, but had not yet done so. The 1986 issue was pensions, while the 1988 problem was with respect to recording depreciation.

X. EARLY GASB PENSION PRONOUNCEMENTS

Given that the FASB devoted approximately 10 percent of its pronouncements to pension-related standards, it would seem unlikely that there would be anything left for the GASB to do on the topic, but such was not the case. Pension issues were on the first technical agenda of the GASB in 1984 and have remained an area of emphasis ever since. Through the end of 2017, nearly 25 percent of the GASB's pronouncements have dealt with pension-related matters. Of the GASB's first 87 pronouncements, 17 of them included the word ''pension'' in the title. Plus, GASB (2009) Statement No. 57 dealt with other

postemployment benefits (as had several earlier pronouncements), but the word ''pension'' was not in the title. In addition, Statement No. 84 (Fiduciary Activities, GASB 2017) dealt with a variety of issues that the board had observed while discussing previous pension pronouncements. Overall, that is nearly 25 percent of GASB pronouncements that have dealt primarily with pensions and OPEB. In addition, the GASB has issued 14 technical bulletins over its first 33 years of operations, and four of those have dealt with pensions and OPEBover a 28 percent rate. Indeed, pension accounting has been a focus of the GASB since the standard setter's founding in 1984. Nevertheless, in terms of content and direction, the GASB appeared to lag its private sector counterpart; it has taken over two decades for the GASB to catch up to FASB pension requirements. The GASB began its activity with respect to pensions with the issuance of Government Accounting Standard (GAS) No. 4 in September 1986. That statement (Applicability of FASB Statement No. 87, ''Employers' Accounting for Pensions,'' to State and Local Governmental Employers, GASB 1986a) stipulated that state and local government employers should not follow the then recently issued FASB pronouncement. The summary proclaimed that ''The GASB is making progress on that subject and expects to issue one or more pronouncements on it in the near future'' (GASB 1986a, i). GAS No. 4 was approved unanimously by the five members of the GASB. There were only 19 comment letters received on the GAS No. 4 exposure draftfar fewer

than had been received on other exposure drafts. The board members assumed that the low response rate was due to general agreement with the board's conclusions (GASB 1986a, 6). The GASB initially tried to address the issue of the inapplicability of FASB Statement No. 87 with the issuance of a technical bulletin. However, the exposure draft of the technical bulletin generated comments that, although in agreement with the bulletin, were critical that a technical bulletin was not a strong enough

statement. A handful of commenters felt that an official statement was needednot just a technical bulletin. State and local government pension accounting had been in a state of flux since 1980 when the FASB issued Statement No. 35. Shortly thereafter, in 1981, the National Council on Governmental Accounting (NCGA), a pseudo-standard setter that had preceded the establishment of the GASB, issued an interpretation saying that governments did not have to follow FAS No. 35. In 1983, the FASB convinced the NCGA to repeal its interpretation, but the FASB would indefinitely delay the applicability of Statement No. 35 to state and local government pensions (GASB 1986a, 5). Also, in 1983, the NCGA issued Interpretation No. 6 suggesting guidance for pension accounting, but there was no effective date on the interpretation. Nevertheless, that document provided guidance for pension accounting once the GASB adopted its first official Statement, No. 1, which was entitled Authoritative Status of NCGA Pronouncements and AICPA Industry Audit Guide. GAS No. 1 stipulated that NCGA interpretations could provide interim guidance until the FASB issued a statement on a subject. In fact, there is some indication that this issue of pensions may have played a part in the establishment of the GASB as a separate entity from the FASB. State and local governments did not want to follow the provisions of FASB Statement No. 87 (FASB 1985a), so they were supportive of the establishment of the separate entity to issue pronouncements for governmental bodies (Patton and Freeman 2009, 22). GASB Statement No. 4 (GASB 1986a) was essentially a placeholder to clarify the situation until the GASB issued its own guidelines regarding pension accounting. Those guidelines came with the issuance of Statement No. 5 in November 1986. That pronouncement (Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers, GASB 1986b) established standards for disclosure of defined benefit pension plans, which were the norm for municipal pension systems at that time. Statement No. 12 (GASB 1990) followed in June 1990 to provide disclosure guidance for OPEB plans.

The next pension pronouncements took the form of GASB Statements No. 25 (Financial Reporting for Defined Benefit Pension Plans and Note Disclosures, GASB 1994a) and No. 27 (Accounting for Pensions by State and Local Government Employers, GASB 1994c). In addition, the intervening Statement No. 26 (GASB 1994b) dealt with OPEB. GAS No. 25 was issued in November 1994. It created a financial reporting framework for defined benefit pension plans and disclosure requirements for defined contribution plans. Funds were to categorize financial information into two categories; the first was information about current plan assets and financial activities. The second category included information related to the long-term perspective of the plan and included a six-year historical trend of such information as a schedule of funding progress and a schedule of employer contributions. GAS No. 27, also issued in November 1994, was aimed at employers, as opposed to the funds themselves, which were the

target of GAS No. 25. GAS No. 27 established standards for measurement, recognition, and disclosure of pension expenditures and the related liabilities and assets. Employers were to use either the accrual or modified accrual basis of accounting (i.e., not the cash basis). Employers that participated in cost-sharing, multiple-employer, and defined benefit plans were required to recognize pension expense equal to the employer's contractually required contributions and a liability was to be recorded for any unpaid contributions. Both Statements No. 25 and No. 27 were later amended by Statements No. 50 and No. 67. Despite the private sector world adjusting to FAS No. 106 and the accruing of the expense and recording of the liability, the GASB did not address this fundamental issue. After over a decade hiatus from the issuance of new pension standards, the GASB came out in May 2007, with Statement No. 50 (Pension DisclosuresAn Amendment of GASB Statements No. 25 and No. 27, GASB 2007), which amended GAS No. 25 and No. 27 to enhance the information disclosed in the notes to the financial statements, particularly with regard to the actuarial cost methods used and to the means of valuing investments, if the fair value is not based on quoted market prices. Statement No. 50 more closely aligned the reporting requirements for pensions with those for other postemployment benefits (OPEB). In doing so, information disclosed in notes to financial statements or presented as required supplementary information by pension plans and by employers that provide pension benefits was enhanced. Again, the board voted unanimously to approve the pronouncement. Also, again, the GASB was silent about the recording of the liability in the body of the financial statements.

XI. RECENT GASB STATEMENTS MAKE DRAMATIC IMPACT

GASB Statements No. 67 (Financial Reporting for Pension Plans, GASB 2012a) and No. 68 (Accounting and Financial Reporting for Pension Plans, GASB 2012b) were issued in June 2012. These two standards were amendments of Statements No. 25 and No. 27. The simultaneous issuance of these two standards has been called the most significant changes since the GASB's formation in 1984 (B. Apostolou, N. Apostolou, and Dorminey 2013, 28). The primary difference between the two standards was that No. 67 applied to state and local pension plans that had been established as trusts or similar arrangements, while No. 68 applied to governments that contributed to larger pension plans, such as state-wide or locale-wide multi-employer programs. These standards were intended to allow financial statement users to determine whether governments were setting aside sufficient assets to cover their pension commitments. The main result was that pension expense and liabilities recognized by government entities would increase and would reveal the degree to which underfunding existed. Even in multi-employer programs, each entity must report its proportionate share of the collective liability of the plan.

These two statements were the result of several years of study by the GASB, with the project having been initiated in 2006. The GASB members learned that the then-existing rules were widely criticized for understating the pension liability on the face of the balance sheet, although the unfunded liability was supposed to be reported in the footnotes to the financial statements. GAS No. 67 (GASB 2012a) required defined benefit plans to provide two financial statements: a statement of fiduciary net position, and a statement of changes in fiduciary net position. Under Standards No. 67 and No. 68