Why GASB 68 is a Financial Priority for Governmental Hospitals

A major change to pension plan reporting takes place in fiscal year 2015 that could become a significant headache for governmental hospitals if they don’t get started now preparing for it. The ramifications of GASB 68 are substantial enough without the stress of waiting too long to prepare. Here’s why: 

1) It’s a long lead time to gather information 

Getting information from your actuary could take longer than you might think. One of our clients was told there was an 8 to 9 month waiting period to complete the necessary calculations. If you have not already done so, begin talking to your auditors, lenders, and actuaries to ensure you have all the resources in place to issue your financial statements on time and accurately.

As of fiscal year 2015, you will have to record the net pension liability on your financial statements – an estimate of what you owe to the plan for participant retirement benefits. The gross pension liability minus the Fair Market Value (FMV) of assets you have in the plan is your net pension liability. In the past, the only liability was for annual required contributions. But the new funding formula requires that the entire net pension liability must be presented.

What is the net effect of these changes? It will vary from institution to institution, however some initial estimates indicate that the new pension liability could be 10 or more times higher than under the previous formula. 

2) You need time to inform lenders and others of the substantial changes to your formal financial picture 

Once you know the new numbers that take into consideration the GASB 68 measurement rules, it could drastically impact your debt covenants. A potentially big liability will be recorded on your balance sheet. Most lenders are aware that this is coming and that it could be a substantial change, however they need to know the facts to evaluate how it might impact your compliance with your existing loan agreements. 

If you have debt covenants with debt to equity clauses, the net position shown under previous calculations could be greatly reduced or become a deficit. So between now and the effective date, you need to work with your lenders to evaluate the impact on debt covenants.

Other interested parties 

Regulators, bond rating agencies, and county and city administrators will need plenty of advance warning of how GASB 68 changes your financial picture. Your board of directors needs to be informed of these changes too, so that they can plan ahead for potential impacts. 

Taking action 

One of the key steps in getting the process started is to choose your actuarial valuation and measurement dates. The actuary valuation date has to be within 30 months plus a day of the hospital’s year end. Most hospitals have reporting requirements to issue their audited financial statements within 90 to 120 days of their fiscal year end. If you set the measurement and actuarial valuation dates as of the end of fiscal year 2015, it doesn’t give you enough time to calculate that number and get it audited. 

Our recommendation is that the measurement date should be set as of the end of the prior fiscal year and this will be your first actuarial valuation date. This gives you breathing room instead of waiting for the end of the fiscal year. It also provides the added benefit of only having to perform a full valuation every other year, while still adhering to the requirement that the measurement date must be no earlier than the end of the hospital’s prior fiscal year. 

Getting a handle on GASB 68 should be a top priority for hospital CFOs and administrators. Delaying the inevitable will only exacerbate the challenges of meeting these new requirements and reporting the results to principal parties of interest. 

Do you need help preparing for GASB 68? Contact us here to begin a conversation on how our HORNE health care practice can provide strategic guidance and services to meet these new standards.