GASB 67 and 68 The New World of Public Pension Plan Accounting - - PowerPoint PPT Presentation

GASB 67 and 68 The New World of Public Pension Plan Accounting

Presented by Mark Olleman, FSA, EA, MAAA Daniel Wade, FSA, EA, MAAA

TERS Retirement Board Meeting October 10, 2013

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Agenda

• Timing
• Notable Issues for TERS
• Overview
• Terminology (old and new)

– Actuarially Determined Contribution – Single-employer vs. Cost-sharing vs. Agent

• Note Disclosures and Required Supplementary Information (RSI)
• New Calculation Requirements

– Discount Rate – Cost Method – Pension Expense

• Public Plan Reactions
• Appendix – Outline of Statements

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Timing of New Accounting Statements

October 2, 2013

• June, 2012 : GASB Statements No. 67 and 68 issued

– GASB No. 67 is for Plans (TERS)

• Effective for fiscal year ending December 31, 2014

– GASB No. 68 is for Employers (City of Tacoma)

• Effective for fiscal year ending December 31, 2015
• Net Pension Liability (NPL) is reported on the employer’s balance sheet

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Timing of New Accounting Statements (continued)

October 2, 2013

• June 27, 2013: GASB No. 67 Implementation Guide issued

– NPL reported for TERS at December 31, 2014

• Liabilities based on a valuation at that date or roll-forward

from a valuation date no more than 24 months before plan’s FYE

• Will TERS roll-forward from December 31, 2013 liabilities?

– NPL reconciled back to beginning of year at December 31, 2013

• January 2014: GASB 68 Implementation guide due to be issued

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Notable Issues for TERS

October 2, 2013

• On Employer Balance Sheet:

– Net Pension Obligation (NPO) replaced by Net Pension Liability (NPL) – In the past, if a plan sponsor contributed the Annual Required Contribution (ARC) they would not have a positive NPO. – Now, the NPL is equal to the Unfunded Actuarial Accrued Liability (UAAL) using Market Assets. – The NPL will be very volatile from year to year.

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Notable Issues for TERS (continued)

October 2, 2013

• Is TERS a single employer, cost sharing, or agent plan?

– This will impact some of the disclosures.

• How will we calculate the “Actuarially Determined

Contribution” (ADC)?

• Will a simplified sufficiency test be used for the discount rate?
• Will TERS use liabilities based on current census data or a

roll-forward of the liabilities calculated using last years census data?

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October 2, 2013

Background

What is GASB?

• Governmental Accounting Standards Board

– Founded in 1984 – Shares offices in Norwalk, CT and 75% of its name with FASB

• Very little else in common

– Establishes standards for accounting and financial reporting for state and local governments

• Does NOT address how governments approach pension plan funding

– Has no binding authority

• Governments usually must comply to receive clean, or nonqualified,
• pinions from auditors

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Overview of the New Accounting Statements

• GASB 67&68 are a complete revision of GASB 25 & 27
• GASB 25 & 27 married funding and accounting

– Generally one set of numbers – The GASB 27 expense (Annual Required Contribution

“ARC”) was often the same as the funding contribution

– ARC consists of Normal Cost plus amortization of UAAL – Contributing ARC allowed sponsors to avoid balance sheet

liability – Tacoma actually has an asset (negative Net Pension Obligation: NPO)

– GASB never had authority or desire to dictate funding

policy, but often became a de facto funding standard.

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Overview of the Statements

• With 67 / 68, financial reporting and funding

policies are now “divorced”

• GASB has made clear they do not intend to

provide the basis for funding policies

• The new financial reporting standards will:

– Bring NPL onto the employer’s balance sheet

• NPL replaces NPO (Net Pension Obligation)
• NPL = Actuarial Accrued Liability minus Market Assets
• NPL = roughly $100M for Tacoma for last 2 valuations

– Make Balance Sheet Liability and Expense volatile! – Significantly expand financial disclosures

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New Terminology

• Total Pension Liability (TPL)

– Actuarial Accrued Liability calculated in accordance with statements (Entry Age Actuarial Cost Method, “blended” discount rate)

• Fiduciary Net Position (FNP)

– Market value of plan assets

• Net Pension Liability (NPL)

– TPL minus FNP; aka the Unfunded Actuarial Accrued Liability

• Deferred inflows and outflows of resources

– Accounts holding unrecognized changes in NPL – Essentially unrecognized gains (deferred inflows) and losses (deferred outflows)

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Actuarially Determined Contribution (ADC)

• More New Terminology
• Contribution target determined in accordance with Actuarial

Standards of Practice (ASOPs)

– Note that ASOPs do not define such a thing

• If calculated for a plan, reported in Required Supplementary

Information and compared to the actual employer contribution

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Actuarially Determined Contribution (continued)

• TERS will need to decide whether to:
• 1. Set ADC = Employer contribution as long as amortization ≤ 30

years

• Consistent with GASB No. 27 and TERS current practice
• Might use a period shorter than 30 years
• 2. Calculate an ADC that is different than the employer contribution
• 3. Disclose in the financial statements that no ADC was calculated
• Further guidance may help decide

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Is TERS a Single-Employer, Cost-Sharing,

• r Agent Plan?
• Old Terminology (still used)
• Single-employer pension plan

– Plan provides benefits to employees of only one employer

• Multiple-employer pension plan

– Agent pension plan

• Assets pooled for investment, but separate accounts tracked and each

employer’s share of assets can only pay benefits for its employees

– Cost-sharing pension plan

• Obligations are pooled and plan assets can pay benefits of employees
• f any employer
• The City and auditor need to agree which TERS is

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GASB 67 Implementation Guide Q&A 12-16 may help:

• Q&A 12:

– If all plan assets are legally available to pay the benefits of any plan members, then the plan is not an agent multiple-employer plan. – Agent multiple-employer plans have a legal segregation of assets for purposes of providing benefits.

• Q&A 14 “A primary government and all its component units

should be considered to be one employer for purposes of classifying a defined benefit plan as a single employer or a multiple employer.”

Is TERS a Single-Employer, Cost-Sharing,

• r Agent Plan? (continued)

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Significant Note Disclosures

• Assumptions/inputs to determining Total Pension Liability (TPL)

– Describe how the long-term expected rate of return was determined

• NPL sensitivity to changes in the discount rate:

– NPL calculated with discount rate +/- 1%

• Changes in the NPL
• Balances of deferred outflows/inflows and scheduled recognition

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Illustrations – Note Disclosures for GASB 68

Changes in the NPL

Increase (Decrease) Total Pension Liability (a) Plan Fiduciary Net Position (b) Net Pension Liability (a) – (b) Balances at 6/30/X8 $2,853,455 $2,052,589 $800,866 Changes for the year: Service cost 75,864 75,864 Interest 216,515 216,515 Differences between expected and actual experience (37,539) (37,539) Contributions – employer 79,713 (79,713) Contributions – employee 31,451 (31,451) Net investment income 196,154 (196,154) Benefit payments, including refunds of employee contributions (119,434) (119,434)

• Administrative expense

(3,373) 3,373 Other changes 8 (8) Net changes 135,406 184,519 (49,113) Balances at 6/30/X9 $2,988,861 $2,237,108 $751,753

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Illustrations – Note Disclosures for GASB 68

Pension Expense and Deferred Outflow/Inflow of Resources

For the year ended June 30, 20X9, the County recognized pension expense of $158,356. At June 30, 20X9, the County reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Payable to the Pension Plan At June 30, 20X9, the County reported a payable of $6,988 for the outstanding amount of contributions to the pension plan required for the year ended June 30, 20X9.

Deferred Outflows

• f Resources

Deferred Inflows

• f Resources

Differences between expected and actual experience $33,329 $53,995 Changes in assumptions 62,949

• Net difference between projected and actual earnings on

pension plan investments 133,976

• Total

$230,254 $53,995

Year ended June 30: 20Y0 $57,966 20Y1 86,466 20Y2 43,069 20Y3 (1,778) 20Y4 1,465 Thereafter (10,929)

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Required Supplementary Information 10-Year Schedules

• Standards require 10-year schedules in Required

Supplementary Information

– Exact requirements and location differ some depending on plan/employer situation (cost-sharing vs. single/agent; existence

• f ADC)

– In general, 10-year schedules not required to be built retroactively

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• In general, requirements include 10-year schedules of:

– Changes in NPL (or proportionate share) – Fiduciary Net Position, Total Pension Liability, funded status and NPL as percentage of payroll – ADC (if applicable) and comparison to actual contributions and payroll – Statutory/contractual contributions (if applicable) and comparison to actual contributions and payroll – Money-weighted return (plan’s RSI)

Required Supplementary Information 10-Year Schedules (continued)

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Illustrations – RSI for Both GASB 67 and 68

Schedule of Changes in NPL and Related Ratios (4 years shown)

20X9 20X8 20X7 20X6 Total Pension Liability Service cost $75,864 $74,276 $71,157 $69,344 Interest 216,515 205,038 188,845 174,694 Changes in benefit terms

• Differences between expected and actual experience

(37,539) (15,211) (3,562) 38,438

Changes in assumptions

• 61,011
• Benefit payments, including refunds of member contributions

(119,434) (112,603) (104,403) (95,376) Net change in total pension liability 135,406 151,500 213,048 187,100 Total pension liability – beginning 2,853,455 2,701,955 2,488,907 2,301,807 Total pension liability – ending (a) $2,988,861 $2,853,455 $2,701,955 $2,488,907 Plan fiduciary net position Contributions – employer $79,713 $86,607 $89,828 $91,963 Contributions – member 31,451 30,550 29,137 28,547 Net investment income 196,154 (44,099) (16,138) 298,260 Benefit payments, including refunds of member contributions (119,434) (112,603) (104,403) (95,376) Administrative expense (3,373) (3,287) (2,774) (2,582) Other 8 (83) 173 (175) Net change in plan fiduciary net position 184,519 (42,915) (4,177) 320,637 Plan fiduciary net position – beginning 2,052,589 2,095,504 2,099,681 1,779,044 Plan fiduciary net position – ending (b) $2,237,108 $2,052,589 $2,095,504 $2,099,681 County’s net pension liability – ending (a) – (b) $751,753 $800,866 $606,451 $389,226 Plan fiduciary net position as a percentage of the total pension liability 74.85% 71.93% 77.56% 84.36% Covered-employee payroll $449,293 $436,424 $416,243 $407,812 County’s net pension liability as a percentage of covered-employee payroll 167.32% 183.51% 145.70% 95.44%

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Illustrations – RSI for Both GASB 67 and 68

Schedule of Contributions (4 years shown)

20X9 20X8 20X7 20X6 Actuarially determined contribution $79,713 $86,607 $89,828 $91,963 Contributions in relation to the actuarially determined contribution 79,713 86,607 89,828 91,963 Contribution deficiency (excess) $ - $ - $ - $ - Covered-employee payroll $449,293 $436,424 $416,243 $407,812 Contributions as a percentage of covered-employee payroll 17.74% 19.84% 21.58% 22.55%

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New Calculation Requirements – Discount Rate

• One of the most notable aspects of the new standards is the

concept of the discount rate to be used

• For plans with assets projected to be sufficient to meet benefit

payments if all assumptions are met:

– there is no impact, use long-term expected rate of return on assets (LT-ROR) – TERS will likely be in this category

• For other plans, a “blended” rate equivalent to combination of:

– LT-ROR until assets insufficient to meet benefit payments – 20-year tax-exempt municipal bond yield or index rate

• Applied after projected “crossover” point where plan assets don’t cover

benefit payments

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• For TERS there is a question of how to test sufficiency. GASB 67

Implementation Guide Q&A 88 says any alternative approach to the cash flows described in GASB 67 that is sufficiently reliable may be used subject to professional judgment.

– TERS could potentially use a simplified sufficiency test

• For plans with inadequate funding policy, the discount rate under

the new standard is likely to be much lower and will significantly increase plan’s measured liabilities.

– Recent estimate of muni bond rates in 5.0% range – May draw significant attention to actuary’s projection of cash flows and crossover point where plan assets don’t cover benefit payments

New Calculation Requirements – Discount Rate (continued)

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New Calculation Requirements – Actuarial Cost Method

• Statements require traditional Entry Age cost method.

– Level percentage of pay – Attribution period from start of service accrual to exit

• No change for TERS since this method is already used.

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New Calculation Requirements – Pension Expense

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• Under GASB 68, Employers recognize the change in their NPL

in current period, except for limited deferrals: Expense = Service cost + Interest on Total Pension Liability + Plan changes (recognized immediately) + Changes in Fiduciary Net Position from other than investments (e.g., administrative expenses)

• Projected earnings on plan investments

+/- Recognition of portion of deferred inflows/outflows

New Calculation Requirements – Pension Expense (continued)

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Deferred recognition items:

• Recognized over closed period = expected remaining service

(actives and inactives – zeroes or ones for inactives). This will be short for TERS (mature plan)

– Economic/Demographic gains or losses – Changes in assumptions or input – If deemed cost-sharing: change in proportionate share or difference between ER contributions and share of total contributions

• Recognized over closed five-year period.

– Difference between projected and actual investment earnings

• Both approaches require “systematic and rational methods”.

– Straight-line or level percent of payroll both acceptable

New Calculation Requirements – Pension Expense (continued)

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Public Plan Reactions

• A few that we have seen include:

– Concern over potential for larger and more volatile financial statement entries. – Concern over keeping “two sets of books” (i.e., accounting vs. funding). – Questions regarding impact on timing and cost on accounting and audit tasks:

• “Who pays?” question. Should the plan trust pay costs of developing

additional information needed for employer financial reporting?

• Others?

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Appendix

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Outline of the Statements

Requirements – GASB 67

• Financial Statements

– Statement of Fiduciary Net Position – Statement of Changes in Fiduciary Net Position

• Notes to Financial Statements

– All Plans:

• Plan description
• Plan investments

– Includes reporting money-weighted rate of return

• Receivables (if applicable)
• Allocated insurance contracts (if applicable)
• Reserves (if applicable)

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Outline of the Statements

Requirements – GASB 67 (continued)

• Notes to Financial Statements (continued)

– Single-ER and Cost-Sharing Plans:

• Exhibit showing Total Pension Liability (TPL), Fiduciary Net Position

(FNP), Net Pension Liability (NPL), and FNP as percentage of TPL (i.e., funded status)

• Assumptions and inputs to measuring TPL

– Discount rate determination detail and sensitivity to +/- 1% change

• Date of actuarial valuation and mention of roll-forward (if applicable)

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Outline of the Statements

Requirements – GASB 67 (continued)

• Required Supplementary Information (Single-ER and

Cost-Sharing Plans)

– 10-year schedule of changes in NPL – 10-year schedule of TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll – 10-year schedule of Actuarially Determined Contribution (ADC) (if applicable), including comparison to actual contributions – 10-year schedule of money-weighted rate of return

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Outline of the Statements

Requirements – GASB 67 (continued)

• Notes to the Required Schedules

– Significant methods and assumptions used in calculating ADC (if applicable) – Information on any factors affecting trends in items reported in Required Supplementary Information

• For example, changes in benefits or assumptions

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Outline of the Statements

Requirements – GASB 68

• Financial Statements – Balance sheet

– Cost-sharing employer

• Recognize proportionate share of collective Net Pension Liability
• Financial Statements – Income statement

– Cost-Sharing employer

• Recognize proportion of collective plan expense and deferred
• utflows/inflows
• Recognize over average expected remaining service for:

– Change in proportionate share – Difference between employer’s contributions and proportionate share of all contributions

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Outline of the Statements

Requirements – GASB 68 (continued)

• Notes to Financial Statements

– Aggregate total NPL for all plans of employer – Plan description – Information about NPL

• Assumptions/inputs, including discount rate and sensitivity

– Plan’s Fiduciary Net Position – Changes in NPL – Balances of deferred outflows/inflows and scheduled recognition – ER’s proportionate share of NPL (cost-sharing ER only)

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Outline of the Statements

Requirements – GASB 68 (continued)

• Required Supplementary Information (Single/Agent employers)

– 10-year schedule of changes in NPL – 10-year schedule of TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll – 10-year schedule of ADC (if applicable), including comparison to actual contributions – If no ADC and contributions statutory/contractual, 10-year schedule

• f such amounts compared to actual contributions

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Outline of the Statements

Requirements – GASB 68 (continued)

• Required Supplementary Information (Cost-sharing employers)

– 10-year schedule of proportionate TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll – If contributions statutory/contractual, 10-year schedule of such amounts compared to actual contributions