proposed gasb 45 changes

Proposed GASB 45 Changes

What’s all the fuss about?

MASBO Fall Conference

Mark Schulte, FSA, EA, MAAA

November 14, 2014

What we’re going to cover today

1 Introduction and GASB 45 review

2 Why are things changing?

3 What’s being proposed?

4 What can I do to prepare?

5 Recap / questions

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Financial reporting of pensions and other post-employment benefits (OPEB) have changed substantially in the past decade

Have had to comply with GASB 45 since at least 2008 Have a liability “on the books” (balance sheet Net OPEB Obligation)

Record annual accounting expense (based on the ARC)

GASB 67/68 substantially change how pensions are reported

May 28, 2014: GASB approves exposure draft which revamps OPEB accounting rules similar to pensions

1. Introduction and GASB 45 review

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1. Introduction and GASB 45 review

Basic Principle: Post-retirement benefits are a form of

compensation, and those promises should be recognized

on financial statements in the period when they are earned.

Includes: Retiree medical, vision, dental, life insurance

Previously accounted for on a cash basis; now have to account

for on an accrual basis … but very slowly

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Financial reporting example – UNFUNDED PLAN: Actuarial Accrued Liability (AAL) = $ 10M

Trust assets = $ 0

Normal cost = $ 0.5M

Annual payments = $ 0.4M

1. Introduction and GASB 45 review

Annual Expense Balance sheet liability reconciliation

Normal Cost $ 0.5 Net OPEB Obligation - BOY $ 0.0

Amortization of unfunded AAL 0.6 Annual OPEB Cost 1.1

Total ARC $ 1.1 Benefit payments or trust

contributions

(0.4)

Net change in NOO 0.7

Net OPEB Obligation - EOY

$ 0.7

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Financial reporting example – FUNDED PLAN: Actuarial Accrued Liability (AAL) = $ 10M

Trust assets = $ 8M

Normal cost = $ 0.5M

Annual payments = $ 0.4M

1. Introduction and GASB 45 review

Annual Expense Balance sheet liability reconciliation

Normal Cost $ 0.5 Net OPEB Obligation - BOY $ 0.0

Amortization of unfunded AAL 0.6 Annual OPEB Cost 1.1

Total ARC $ 1.1 Benefit payments or trust

contributions

(8.0)

Net change in NOO (6.9)

Net OPEB Obligation - EOY

$ (6.9)

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Financial reporting example – FRONT-LOADED PLAN: Actuarial Accrued Liability (AAL) = $ 10M

Trust assets = $ 0

Normal cost = $ 0.1M

Annual payments = $ 1.0M

1. Introduction and GASB 45 review

Annual Expense Balance sheet liability reconciliation

Normal Cost $ 0.1 Net OPEB Obligation - BOY $ 0.0

Amortization of unfunded AAL 0.6 Annual OPEB Cost 0.7

Total ARC $ 0.7 Benefit payments or trust

contributions

(1.0)

Net change in NOO (0.3)

Net OPEB Obligation - EOY

$ (0.3)

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2. Why are things changing?

“School districts struggle to pay retirees' health benefits”

“Retiree Health Care: The Brick That Broke Municipalities’ Backs”

“The Retiree Medical Benefit Crisis”

“The next retirement time bomb” “Taxpayers on the hook for billions in hidden government-worker healthcare costs”

“Taming the OPEB Beast”

“Slaying the OPEB Dragon”

“District is stretching out OPEB burden”

OPEB!

OPEB in the Media

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2. Why are things changing?

Criticisms of GASB 45 accounting

Amortization options are too generous – up to 30 years open

basis

Net OPEB Obligation is an inaccurate measure of employer’s

liability

Too much variation in liability calculation methods

Discount rate determination not appropriate

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3. What’s being proposed?

New terminology

GASB 45 OPEB Exposure Draft

Actuarial Accrued Liability (AAL) Total OPEB Liability

Plan assets Fiduciary Net Position

UAAL Net OPEB Liability

Annual Required Contribution (ARC) Actuarially Determined Contribution (ADC)

N/A Deferred inflows/outflows of resources

Annual OPEB Cost; Net OPEB Oblig. N/A

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3. What’s being proposed?

Move unfunded liability to the balance sheet Actuarial Accrued Liability (AAL) = $ 10M

Trust assets = $ 0

Normal cost = $ 0.5M

Annual payments = $ 0.4M

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3. What’s being proposed?

OPEB expense will become more complex

Change in Net OPEB Liability (balance sheet) recognized quickly

Immediate recognition

Service cost

Interest on liability

Expected asset return

Plan changes

Deferred recognition (deferred inflows/outflows of resources)

Assumption changes

Demographic and (some) economic experience

Asset returns

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3. What’s being proposed?

More measurements/information to disclose

Enhanced disclosure of historical contributions and funded status

Explain basis for selecting assumptions [ASOPs and GASB]

Disclosure of Net OPEB Liability’s sensitivity to changes in: Medical trend +/- 1%

Discount rate +/- 1%

Combinations thereof (9 total)

Biennial actuarial valuations required for all plans (even if <200 members)

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3. What’s being proposed?

Discount rate changes

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3. What’s being proposed?

Actuarially Determined Contribution (ADC)

Most MN Districts either unfunded or prefunded substantial portion of

UAAL

Proposed 10-year disclosure of actual contribution compared to ADC

Unclear what to disclose if don’t have a funding policy, but it’s not $0

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3. What’s being proposed?

Impact on small plans

3-year actuarial reporting option eliminated if < 200 members

Must have new report at least every two years

AMM is preserved! A bit more complex than the current GASB 45 service allocation model

Apply Entry Age Normal method in a spreadsheet

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3. What’s being proposed?

Other technical adjustments

Actuarial costs must now be calculated as a percent of pay Many plans use a service allocation method now

Unclear what the effect on the accrued liability will be

Odd to allocate non-pay related benefits ... based on pay

Keeping track of deferred inflows/outflows of resources for many years

Document basis for selecting assumptions

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3. What’s being proposed?

Timing Issues

Lots of dates to keep track of: Valuation Date: when liabilities are calculated (census date)

Measurement Date: when liabilities and assets are measured for financial reporting

Reporting Date: Fiscal year-end

“Full” actuarial valuation of liabilities (at least) every two years

Assets must be re-measured every year

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Valuation Date Reporting Date Measurement Date

“Roll” liabilities

Measure assets Calculate liabilities Net amount

reported at FYE

4. What can I do to prepare?

Exposure draft

(May 2014)

Comments due

(August 2014)

Final rules

(June 2015)

Effective for FY

beginning after

12/15/2016

Implementation timeline

Lots of time to prepare, but it will be here fast!

Now is the time to create a plan and set expectations

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4. What can I do to prepare?

There have been several technical objections to

parts of the new rules – but nothing substantial

Estimate impact to your balance sheet

For funded plans: reconsider investments and

discount rate analysis

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5. Recap / questions

Questions?

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Contact Information

Mark Schulte, FSA, EA, MAAA

marks@vaniwaarden.com

612.596.5971

Van Iwaarden Associates

10 South Fifth Street, Suite 840

Minneapolis, MN 55402-1010

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