Archive for June, 2013

BEA to Move to Accrual Accounting for Defined Benefit Pension Plans

• Employers provide employees with retirement benefits largely through two mechanisms: defined contribution plans like 401(k)s or defined benefit pension
plans. Under defined benefit plans, employees accrue benefits based on factors such as the employee’s length of service and salary history.
• Employers provide these promised benefits to employees through a pension fund. Employers, and in some cases employees, make cash contributions to the
fund. In addition, the fund holds financial assets, earns income and capital gains on those assets, and pays out benefits to retirees and beneficiaries.
• As part of its 14th comprehensive revision of the national income and product accounts that will be released beginning on July 31, BEA will switch from a cash accounting method to an accrual accounting method to measure the transactions of defined benefit pension plans.

Why is BEA making this change?
• Accrual accounting better reflects the retirement benefits an employee earns while working and improves BEA’s measures of compensation by more closely aligning the accrual of retirement benefits with the employee’s work. Accrual accounting also is consistent with business accounting standards.
• With the current cash accounting approach, sporadic cash contributions made by employers to the pension funds result in volatility in BEA’s measure of
compensation that does not accurately reflect the relatively smooth manner in which benefits are earned by the employee.
• In some cases, the pension plans may be underfunded, meaning that the plans do not have sufficient financial assets to cover pension promises. Employers are generally liable for payment of those promised benefits. If an employer does not make a cash contribution directly to the plan, the employer is effectively
borrowing from the pension plan. BEA will recognize an imputed interest expense associated with underfunding.

How will this change affect BEA’s accounts?
• Compensation will reflect the value of the pension promises made by the employer, rather than the employer’s cash contributions to the pension fund. The switch to accrual accounting will dampen some of the volatility seen in the compensation measures.
• Business and government interest expenses will include imputed interest associated with pension plans’ unfunded liabilities, which will also be reflected in
personal interest income.
• Personal and government saving will be impacted by the changes to compensation and interest payments. In general, because most plans are underfunded, these changes will boost personal saving and lower government saving.
• Corporate profits will reflect the accrual-based estimates of compensation and the interest costs associated with unfunded liabilities.

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BEA Introduces New Measures of the Regional Economy

Today, the U.S. Bureau of Economic Analysis released experimental real, or inflation-adjusted, estimates of personal income for states and metropolitan areas. The inflation adjustments are based in part on regional price parities (RPPs), which provide a measure of differences in price levels across each state and region relative to the national price level for each of the years 2007–2011. When RPPs are applied in conjunction with BEA’s national Personal Consumption Expenditures (PCE) price index, which measures price changes over time, personal income comparisons can be made across regions and time periods. These prototype statistics are being released for evaluation and comment by data users.

PI_1_0612Growth in real state personal income from 2010 to 2011 ranged from 1.3 percent in Mississippi to 10.4 percent in South Dakota. These growth rates reflect the year-over-year change in the state’s nominal personal income, the change in the national PCE price index, and the change in the regional price parity for that state. After South Dakota, the states with the largest growth rates of real personal income are North Dakota (9.5 percent), Iowa (6.1 percent), Nebraska (6.0 percent), and Texas (4.3 percent). The states with smallest growth rates after Mississippi are Maine (1.4 percent), Rhode Island (1.5 percent), Vermont (1.6 percent), and New Mexico (1.6 percent). Four states—Arizona, Indiana, North Carolina, and Oregon—had growth rates equal to the national average of 2.7 percent.

PI_2_0612Growth in real metropolitan area personal income from 2010 to 2011 ranged from a decline of 0.7 percent in Rochester, MN, to an increase of 11.9 percent in Odessa, TX. After Odessa, TX, the metropolitan areas with largest growth rates of real personal income were Midland, TX (10.7 percent), Hanford-Corcoran, CA (6.7 percent), San Jose-Sunnyvale-Santa Clara, CA (6.4 percent), and Madera-Chowchilla, CA (6.2 percent). In addition to Rochester, MN, four metropolitan areas had declining or flat growth rates. These are Ocean City, NJ (–0.3 percent), Anniston-Oxford, AL (–0.2 percent), Gadsden, AL (–0.2 percent), and Cape Girardeau-Jackson, MO-IL (0.0 percent).

To learn more, read the full report.