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Balance Sheet: Deferred Resources

The Billion-Dollar Decrease

The University’s pension liability decreased from $2.2 billion in Fiscal Year 2018 to $1.2 billion in Fiscal Year 2019. Normally, a decrease such as this would mean that cash was disbursed to pay off the liability. However, this is not the case.

So what happened?

Understanding deferred outflows and inflows

Like assets and liabilities, deferred outflows and inflows of resources impact the balance sheet. However, deferred outflows should not be confused with assets and deferred inflows should not be confused with liabilities.

Assets provide some degree of real benefit to the University, for example, as cash or investments used to pay expenses or generate income, or as buildings and equipment used in day-to-day operations.

Liabilities represent a real claim on the University’s resources, for example, debt used to finance construction, or accounts payable related to goods purchased but not yet paid for.

Deferred outflows, on the other hand, provide no real benefit and deferred inflows create no real claim. Rather, they are an accounting tool used in the income statement to spread the impact of certain balance sheet changes over a number of fiscal years as opposed to reporting that impact in a single fiscal year.

Deferred outflows of resources impact the balance sheet in the same manner as assets – they increase the University’s net position. As a deferred outflow decreases over a number of years, it results in a decrease in net position. Deferred inflows of resources impact the balance sheet in the same manner as liabilities – they decrease net position.  

What actually happened was that the funding of the state’s retirement plan changed significantly due to a new law. Accounting rules dictate that the impact of a change in pension liability be spread across multiple years using the deferred outflow/inflow tool. Under these circumstances, the billion-dollar decrease in the Fiscal Year 2019 financial statements shows up on the Balance Sheet as a decrease in the pension liability and an increase in deferred inflows and the Income Statement as a decrease in expense. As the impact is spread over a number of years, expense will continue to be reduced until the deferred outflow is zero.