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TRANSCRIPT
11/8/13
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Minnesota Association of School Business Officials (MASBO)
Employer Pension Reporting Under GASB 68
November 15, 2013
Presented by: Dave DeJonge, Assistant Executive Director, PERA
John Wicklund, Assistant Executive Director, TRA
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GASB 67-68 accounting changes
§ Governmental Accounting Standards Board (GASB) will dramatically alter accounting rules for pension funds and their sponsoring employers (school districts, cities, counties, state) starting in FY 2015.
§ GASB changes will:
o Make pension costs more prominent on employers’ financial statements – each entity’s share of the PERA and TRA unfunded liability must be shown on face of government-wide financial statements.
o Make pension costs appear larger and volatile – giving the incorrect impression that employers are shouldering an immense debt that they must pay off immediately, when pension funding actually works much like a home mortgage.
Big question: Who owns and records the public pension fund liability? Or in better times, its surplus assets?
Underlying principles
§ Pensions are part of the employee/employer compact.
o Pension plans are part of total compensation. o Employer incurs a pension obligation as a result of
“employment exchange.” o Cost/expense should be recognized in period that services
are provided. § Plan responsible for paying benefits if plan has sufficient assets.
§ Employer responsible if plan does not have sufficient assets.
§ Difference between total pension liability and plan net position is the liability on financial statements of the government.
§ Pension Expense developed on accounting basis, not contribution basis.
o Totally different from current GASB standards. o Disconnect between accounting numbers, funding numbers. o Will require significant rethinking and retraining.
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‘We are in this together’
§ PERA and TRA membership data – annual actuarial valuations required under statute.
§ PERA General and TRA are cost-sharing, multiple-employer plans.
§ PERA and TRA will regularly report actuarial valuation results and disclosures for employers’ financial statements.
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§ Replaces current Statement of Plan Net Assets with Statement of Fiduciary Net Position (GASB 63).
§ Replaces current Statement of Changes in Plan Net Assets with Statement of Changes in Fiduciary Net Position.
§ Revisions to Notes to the Financial Statements.
§ Required Supplementary Information (RSI): Ten-year Funding Trends.
§ Required Supplementary Information (RSI) Schedule of the Net Pension Liability.
Conclusion: Little impact on employer units.
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GASB Statement 67 (Effective for FY 2014 PERA and TRA CAFRs released Dec. 1, 2014)
GASB Statement 68: Impact on employer units (FY2015)
§ Government-wide financial statements, not fund-level statements.
§ PERA/TRA conduct actuarial valuation reports at the close of every fiscal year. Audited results available every December.
§ PERA/TRA calculate proportionate share assigned to each employer unit (based on employer contributions).
§ PERA/TRA transmits assets, liabilities, disclosure data, Required Supplementary Information to each employer.
§ Large unfunded actuarial liabilities exist ($4 billion to $6 billion each), likely higher based on revised methodologies.
Result: § Many employers will experience sticker shock at their share
of the net pension liability, higher than net assets reported. (Remember: Liabilities paid over decades.)
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§ All plans required to use Entry Age Normal cost method to develop the Total Pension Liability. Not an issue in Minnesota.
§ Annual changes in Net Pension Liability will generally be reported as pension expense as they occur. o Normal Costs o Changes due to plan amendments for any members. o Change in actuarial assumptions for inactives. o Experience gain/loss for inactives. o Exceptions (deferred inflows/deferred outflows):
• Experience gain/loss and assumption changes for actives amortized over average work lives of all active and retired members. (Estimated eight years.)
• Difference between assumed and actual investment return on market value is recognized over a five year period.
§ Will create volatility in pension expense. § Pension expense reported not directly related to actual pension
contributions sent to PERA or TRA. 7
GASB Statement 68: Impact on employer units (FY 2015)
GASB 25-27 GASB 67-68 IMPLICATIONS
For pension systems, pension expense reported by employer equals statutory contribution rate.
Pension expense is change in net pension liability each year.
Pension Expense will be volatile. Cannot be calculated by the employer.
Pension systems’ unfunded liability does not impact individual employer financial statements.
Employer responsible for pension system unfunded liability and must show proportionate share on balance sheet.
Employers go from no liability on their books to potentially large liability. Impact on bond ratings unclear.
Long-term rate of return used to discount future benefits, which determines liabilities.
Discount rate is long term rate of return while assets exist and municipal bond rate after that.
Potential for higher liabilities if assets are projected to be depleted in the future.
Actuarial cost method used by plan for funding calculations is used for ARC calculations.
All plans must use Entry Age Normal actuarial cost method.
No real impact for pension systems; Entry Age Normal already used for valuation.
Accounting numbers linked to funding numbers. De facto standard for contributions.
Decoupling of accounting and funding numbers.
Two sets of numbers confusing. Boards or legislature have to set funding policy. More variance without benchmark.
Unfunded liability can be amortized over maximum 30 years regardless of source of UAL (plan amendment, assumption change, gain/loss).
Shorter amortization. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average working lifetime.
Higher pension expense and more volatility.
Permits asset smoothing method (5 years for MSRS/PERA/TRA).
Difference between assumed and actual investment return spread over 5 years.
Creates more volatility.
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How GASB 68 affects employers
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How GASB affects employers
§ GASB changes will force employers to show their portion of the pension system’s unfunded liability on financial statements. Using school districts as an example:
NOTE: Allocation method of unfunded liability is estimated.
Large school district
Medium school district
Small school district
Old GASB TRA annual contributions PERA annual contributions (Annual expense)
$8.9 million
$3.0 million ------------------ $11.9 million
$2.9 million
$1.2 million ----------------- $4.1 million
$475,673
$152,332 ----------------
$628,005
New GASB Employer portion of TRA unfunded liability Employer portion of PERA unfunded liability Balance sheet liability TOTAL
$226.6 million
$37.8 million -------------------- $264.4 million
$74.9 million
$15.1 million ------------------ $90.0 million
$12.0 million
$1.9 million ----------------
$13.9 million
School district’s net assets $166.5 million $60.0 million $14.2 million
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§ External auditor: Office of the Legislative Auditor
§ Auditing of plan financial statements
§ Auditing of the allocation method of the net pension liability (NPL)
§ Auditing of “Schedule of Plan Amounts” to determine employer’s deferred outflows, deferred inflows and pension expense.
Role of PERA/TRA external auditor
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§ Implementation and ongoing costs undetermined but will include: o Additional external actuary fees
o Additional external audit fees
o Additional staffing cost to comply
o Unknown impact upon employer units
Implementation costs
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§ Three ways to measure pension fund status: o Books – (GASB 67-68) for CAFR publication.
o Budget – Minnesota likely to continue current actuarial reporting to assist funding decisions (GASB 25).
o Bonds – Moody’s: 5.5 percent investment assumption, 17-year amortization period. Standard & Poor’s and Fitch developing their own assumptions.
Paperwork and report ‘tsunami’
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The annual P2F2 conference was held Oct. 26-30, 2013.
§ Walk-through of GASB implementation presented by public pension systems in Ohio and Michigan.
§ State of Kentucky implementing GASB 67 for fiscal year ended June 30, 2013.
§ GASB 68 Implementation Guide scheduled for release in January 2014.
Public Pension Financial Forum (P2F2)
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GASB 67-68 Measurement Period
Actuarial valuation
measurement date
Release of 7/1/14
actuarial valuation results
School districts use
7/1/14 actuarial valuation results
School district CAFRs w/GASB 68 published
Retirement systems transmit results to school districts
June 2013 June 30, 2014 Dec. 1, 2014 June 30, 2015 Late 2015
§ Key point: There will be a one-year lag in school district reporting of GASB 68 results. Example: School districts, in their FY 2015 reporting, will use FY 2014 actuarial valuation results from PERA and TRA.
GASB 67-68 timeline: Measurement dates for school districts
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GASB Statement No. 68 (Paragraphs 48-51)
Statement of net position for FY ended June 30, 2015: Cost-sharing employers
Change from old GASB
Total Assets $x,xxx,xxx Liabilities
Accounts payable $xx,xxx Salaries payable $xx,xxx Net pension liability $x,xxx,xxx (New)
Total Liabilities $x,xxx,xxx
Net Position Possibly negative
§ Remember: Pension liability is paid over decades of time and could be very volatile based on conditions of the pension fund at the state level.
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GASB Statement No. 68 (Paragraphs 52-73)
Statement of Changes in Net Position for FY ended June 30, 2015 Instruction expenses $x,xxx,xxx Support expenses $x,xxx,xxx Pension expenses $xx,xxx (Revised) Total expenses $x,xxx,xxx
Impact upon net position from pension expense
Positive or negative each year
§ Currently: The pension expense is contributions made. § GASB 68: Pension expense consists of multiple elements,
including pension investment returns, plan changes, contributions, assumption changes, etc.
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GASB Statement No. 68 (Paragraphs 74-80)
Notes to Financial Statements for FY ended June 30, 2015 § Pension assets, pension liabilities, deferred outflows of
resources, deferred inflows.
§ Public pension plan description
§ Assumptions (inflation, salaries, mortality tables, COLAs)
§ Discount rate (used by PERA and TRA) to measure liabilities
§ Public pension plan’s fiduciary net position
§ Sensitivity analysis on the impact on NPL of a one percentage increase and decrease in the discount rate.
§ Funding policy for determining contributions.
§ Other: Numerous (paragraph 80)
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GASB Statement No. 68 (Paragraph 81)
Required supplementary information (RSI) Ten-year trend schedules
§ School district’s proportionate share of net pension liability
o District-covered payroll
o Net pension liability as a percent of covered payroll
§ Schedule of school district contributions
o Statutory contributions
o Contributions as a percent of covered payroll
GASB grace: Only go back retroactively if data is present.
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GASB Statement No. 68 footnote disclosures
Disclosure Reference Source Requirement
Total of employer’s pension liabilities, pension assets, deferred outflows/inflows related to pensions, and pension expense for the period (if not identifiable in financials)
74 PERA/TRA New
Name of plan, ID of system that administers the plan, ID as agent or cost-sharing plan
76.a PERA/TRA or Employer
Existing
Description of benefit terms, including types of employees covered, types of benefits, pension formulas, COLAs, and authority under which benefit terms are established/amended.
76.b PERA/TRA or Employer
Existing
Description of contribution requirements, including how contributions are determined, how contribution rates are changed, actual contribution rates, and amount of contributions recognized by the pension plan for that period.
76.c PERA/TRA or Employer
Existing (with slight changes)
How to obtain PERA’s and TRA’s CAFR 76.d PERA/TRA or Employer
Existing
Significant assumptions/inputs used to measure the total pension liability, including: inflation, salary changes, COLA’s, mortality, and dates of experience studies on which assumptions are based.
77 PERA/TRA New
Discount rate applied when measuring TPL and change in the discount rate since the prior measurement date, if any.
78.a PERA/TRA (Actuary)
New
Assumptions made about projected cash flows when calculating the discount rate
78.b PERA/TRA (Actuary)
New
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GASB Statement No. 68 footnote disclosures
Long-term expected rate of return and how it was determined, including significant methods and assumptions used for that purpose.
78.c PERA/TRA (SBI) New
If the discount rate incorporates a municipal bond, the bond rate used and source of that rate.
78.d PERA/TRA (Actuary)
New
Periods of projected benefit payments to which long-term ROR is used and municipal bond rate is used when determining the discount rate
78.e PERA/TRA (Actuary)
New
Assumed asset allocation of portfolio, long-term expected real ROR for each asset class, and whether ROR is presented as arithmetic or geometric.
78.f PERA/TRA (SBI) New
Employer’s NPL calculated using discount rates that are 1% higher and lower than the actual discount rate used to calculate the TPL.
78.g PERA/TRA (Actuary)
New
Pension plan’s fiduciary net position has been determined on the same basis used by the pension plan, and a brief description of pension plan’s basis of accounting, including policies regarding benefit payments and the valuation of plan investments.
79 PERA /TRA New
Employer’s share of the NPL 80.a PERA/TRA (Actuary)
New
Employer’s percentage of NPL, the basis on which its proportion was determined, and change in its proportion since the prior measurement date
80.b PERA/TRA New
Disclosure Reference Source Requirement
GASB Statement No. 68 footnote disclosures
Disclosure Reference Source Requirement
Measurement date of NPL and date of actuarial valuation on which the TPL is based.
80.c PERA/TRA New
Assumption changes or other inputs that affected measurement of the TPL since the prior measurement date
80.d PERA/TRA New
Changes of benefit terms that affected measurement of the TPL since the prior measurement date
80.e PERA/TRA New
Nature of changes between measurement date of collective NPL and employer’s reporting date if they are expected to have a significant effect on the employer’s share of the NPL.
80.f PERA/TRA or Employer
New
Amount of pension expense recognized by the employer in the reporting period. 80.g PERA/TRA or Employer
New
Employer’s balances of deferred outflows/inflows related to pensions, classified in 5 categories: • Differences between expected and actual experience • Changes of assumptions/inputs • Difference between expected and actual earnings • Changes in employer’s proportion and differences between contributions
made and employer’s proportionate share of contributions • Employer’s contributions to the pension plan subsequent to the
measurement date
80.h PERA/TRA and Employer
New
Schedule showing net amount of balances of deferred outflows/inflows that will be recognized in the employer’s pension expense and recognized as a reduction in the collective net pension liability in the future.
80.i PERA/TRA and Employer
New
Amount of revenue recognized for the support provided by non-employer contributing entities, if any.
80.j Employer New
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GASB Statement No. 68: Deferred outflows + inflows
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GASB 68: Schedules of required supplementary information
DISTRICT’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan
Last 10 Fiscal Years* (Dollar amounts in thousands)
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6/30.
GASB 68: Schedule of district contributions
Teachers Pension Plan Last 10 Fiscal Years
(Dollar amounts in thousands)
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GASB 68: Summary
§ An employer in a cost-sharing, multiple-employer plan (local governments, school districts, etc.) will report a net pension liability in their own financial statements based on their proportionate share of collective unfunded liability for the entire plan. Currently, these employers have no such reporting requirements in statements, footnotes or schedules.
§ GASB is NOT requiring more rapid funding
of the UAL.
o GASB’s new shorter amortization periods apply only to pension expense, NOT funding.
o Legislature and retirement systems will need to have a stand-alone funding policy.
o PERA/TRA likely to have two valuation reports: One GASB 67-68 compliant; one funding standard report used to determine contribution rates.
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Key take-aways
§ Employers and the state are going to need to show much more information on their financial statements under GASB 67-68.
o Allocation issues – joint effort involving the pension systems and actuaries.
o Many questions are still open, pending implementation guide.
o Auditors and local government/school district finance personnel will have a lot of questions.
o Reporting is at the end of fiscal periods, so any variation in fiscal years will add complexity (hopefully not an issue).
§ The appearance of liabilities on school district financials might alarm local governments, the public, and the press.
§ The legislature must develop a formal funding policy or continue current funding reports under GASB 25-27.
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§ Communication initiatives (employers, external auditors, employer stakeholder groups, member/retiree groups)
§ Working with our actuaries on programming, data infrastructure.
§ Awaiting further guidance from GASB and AICPA
o Implementation Guide Statement 67: June 2013
o Implementation Guide Statement 68: January 2014
§ Legislative communication and funding policy (Legislative Commission on Pensions and Retirement)
§ Working with Office of Legislative Auditor (OLA) and Office of State Auditor (OSA) on audit responsibilities.
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What are PERA/TRA doing right now?
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§ Stay in tune with GASB 67-68 – spread this information back to your firms, school districts.
§ PERA and TRA would be happy to speak to employer groups about GASB. To schedule a presentation for your group, contact Susan Barbieri, Communications Officer for the retirement systems, at 651-205-4247 or [email protected].
§ The retirement systems can provide you with GASB explanatory fact sheets for use in your board packets and as handouts for members of the public and the press.
§ Visit the “employer” tab on PERA’s and TRA’s websites: www.mnpera.org www.minnesotatra.org/employerinfo/gasb
What can you do?