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

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 2

Timing of New Accounting Statements  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 3 October 2, 2013

Timing of New Accounting Statements (continued)  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 4 October 2, 2013

Notable Issues for TERS  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. 5 October 2, 2013

Notable Issues for TERS (continued)  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? 6 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, opinions from auditors 7 October 2, 2013

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. 8

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 9

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) 10

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 11

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 12

Is TERS a Single-Employer, Cost-Sharing, or 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 of any employer  The City and auditor need to agree which TERS is 13

Is TERS a Single-Employer, Cost-Sharing, or Agent Plan? (continued) 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.” 14

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 15

Illustrations – Note Disclosures for GASB 68 Changes in the NPL Increase (Decrease) Total Pension Plan Fiduciary Net Pension Liability Net Position Liability (a) (b) (a) – (b) $2,853,455 $2,052,589 $800,866 Balances at 6/30/X8 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) 135,406 184,519 (49,113) Net changes $2,988,861 $2,237,108 $751,753 Balances at 6/30/X9 16

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: Deferred Outflows Deferred Inflows of Resources of 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 - $230,254 $53,995 Total Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Year ended June 30 : Payable to the Pension Plan 20Y0 $57,966 At June 30, 20X9, the County reported a 20Y1 86,466 payable of $6,988 for the outstanding 20Y2 43,069 amount of contributions to the pension 20Y3 (1,778) 20Y4 1,465 plan required for the year ended June 30, Thereafter (10,929) 20X9. 17

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 of ADC) – In general, 10-year schedules not required to be built retroactively 18

Required Supplementary Information 10-Year Schedules (continued)  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) 19