Numbered Letter 2024-01

Effective Date: March 21, 2024

Summary

This letter provides accounting guidance for recording and reporting state pension grants received by local units of governments for underfunded pensions under Public Act 166 of 2022.

Accounting for State Pension Grants - Public Act 166 of 2022

Public Act 166 of 2022, Section 979a, allows for local units of government to apply for a grant to provide funding directly to their underfunded defined benefit pension plan. Since this is an appropriation by the state and the local unit must apply for the grant, there is not a legal requirement to provide funding. In cases where there is no legal requirement to make payments, a special funding situation under Governmental Accounting Standards Board (GASB) Statement 68 does not exist. The following information provides the accounting treatment for the grant payment. This grant cannot be used in place of the local unit’s constitutional obligation to make the required Actuarial Determined Contribution (ADC) payments to the pension plan.

Employer reporting of the State Pension Grant

Even though, in almost all cases, the grant proceeds went directly to the pension system, the employer should still recognize the grant award in their financial statements. However, the timing of the revenue recognition is dependent on both the measurement focus and basis of accounting of the related fund/statement and the measurement date of the Net Pension Liability (NPL) as adopted by the employer.

Modified Accrual Funds

The employer for whose benefit the grant was allocated should report revenues and expenditures equal to the payment received by the pension plan in the fund financial statements. The revenue and expenditures should be recognized in the year the payment from Michigan Department of Treasury was paid to the pension plan.

569-Other State Grants should be used as the revenue account for this transaction. It is recommended to spread these expenditures across activities in relation to the benefiting department(s) or funds. The following provides an example entry for a transaction when a local unit decides to spread these expenditures across separate activities within the General Fund.

Road Commissions – Modified Accrual Funds

Road commissions should credit Other State Grants account number 569 and debit Non-Road Related Projects account number 521 for the revenues and expenditures associated with this payment. It was determined that it would be inappropriate to charge against account 513 since this account flows into road projects that would be capitalized at the year-end closing.

Government-wide Statements and Other Full Accrual Funds

The government-wide statements and other full accrual funds should recognize revenue from the state pension grant only in the year that the grant impacts the change in the NPL. This is a significant exception to the way most grants are recorded and is different than the revenue recognition concepts in the modified accrual statements. The reason for this is due to the guidance in GASB Statement 73, para. 122, which amends GASB Statement 68, which states: “In financial statements prepared using the economic resources measurement focus and accrual basis of accounting, employers should recognize revenue for the support of a nonemployer contributing entity that is not in a special funding situation in the reporting period in which the contribution of the nonemployer contributing entity is reported as a change in the net pension liability or collective net pension liability, as applicable.”

For entities that have adopted a lag in the measurement of the NPL, this may result in recognition of revenue on the modified accrual statements in a year earlier than the revenue is recognized in the full accrual statements. A deferral should not be recorded within the government-wide statements and other full accrual funds if the measurement period precedes the fiscal year of the local unit. The GASB has excluded contributions after the measurement period from nonemployer entities that are not in special funding situations from deferral.

For example, if you are an employer with a 9/30/2023 year end that has adopted a one-year lag in the measurement date of the NPL (e.g., the measurement date of the NPL is 9/30/2022), even though the grant contributed to the plan in August 2023, the full accrual statements would NOT recognize the revenue until 9/30/2024 fiscal year. On the contrary, the modified accrual statements would show the revenue during the 9/30/2023 fiscal year.

Pension Plan Reporting of The Grant

The pension plan that received the payment because of the grant funding should record the contribution as a contribution from a nonemployer contributing entity. The contribution should be recognized as revenue when received.

Note Disclosure and Required Supplementary Information Reporting – Employer and Pension Plans Other Than Agent Plans

In the year in which the NPL is reduced by the support provided by the state (the nonemployer contributing entity, in this case), the footnotes should include disclosure of the amount of revenue recognized for that support in accordance with GASB Codification P20.145(j).

For purposes of the Required Supplementary Information (RSI) schedules, since the ADC was calculated for the employer (not contemplating any amounts from nonemployer contribution entities), for both plan and employer reporting, the contribution to the plan because of the grant would not be included in the Schedule of Contributions as a contribution in relation to the ADC of the employer.

Budgeting

Revenues and expenditures associated with these payments and recorded in a governmental fund should be budgeted for accordingly.

If you have any questions, please call 517-335-7469 or write our office: Michigan Department of Treasury, LAFD, P.O. Box 30728, Lansing, Michigan 48909-8228 or email our office at TreasLocalGov@michigan.gov.