Pension Trends & Understanding Changes to GASB 68 Presented by Betsy Waldofsky, Finance Director & Leon Hank, Chief Finance Officer
About MERS • MERS is a nonprofit organization, 38,000 + independent from the State, that N umber of MERS participants retired from or working for provides retirement plans for county governments or road municipal employees commissions • We listen and work in partnership with our members to deliver a 90% + superior value that meets their Percentage of MERS 26,000+ retirees that remain in the state needs • We provide one-stop access to shared professional retirement 23,000 + services Number of MERS participants retired from or working for city governments • MERS administers over 2,000 plans represented by 800 Michigan municipal employers $18,000 + and more than 100,000 Average annual pension participants payment
Trends in Retirement Baby Boomers Longer Lives Preparing for Retirement • The first Baby Boomer • Average lifespan is reached age 65 78.7 years old • Auto Enrollment for January 1, 2011 • Normal retirement age Defined Contribution • 77.3 Million Baby can change in the Plans Boomers in the US future • Employers and other • Currently makes up nonprofits are 25% of the entire US promoting financial population literacy programs • MERS is working to help prepare municipal workers for retirement 3
Trends in Plans Hybrid Plan Defined Benefit Defined Contribution • Combination of • Portfolio structure both Defined • Act 314 updates, • Investment Menu Benefit Plan and focusing on • Focus on fee Defined strengthening transparency Contribution Plan governance of • Can reduce plans liability for • Focus on municipalities Unfunded moving forward Accrued Liability 4
Pension Trends – Plan Design Changes Strategy Description Municipal Adoptions Impact 2013, 2010 2011 2012 as of Q3 Cost Sharing for Employees contribute to • Reduces the employer cost, but 245 Existing help fund the overall cost of does not affect total cost, or the 176 149 109 Employees the plan plan’s unfunded liability New hires receive a lower • Existing employees are not affected Lower Benefit for New Hires tier of Defined Benefit 65 61 40 provisions • Reduces the liability for new hires 3 Benefits are offered • Leaves earned benefits unchanged Bridged Benefits for in parts to existing Existing employees • Reduces the liability for new hires Employees and existing employees 17 14 Multiplier is then lowered on 11 a going-forward basis 2 New hires receive a • Existing employees are not affected Hybrid for New Hires Hybrid Plan 61 • Reduces the liability for new hires 25 14 3 Defined New hires receive a • Existing employees are not affected Contribution for Defined Contribution Plan New Hires • Eliminates the liability for new hires 23 19 18 4
MERS Defined Benefit Plan • Our Defined Benefit Plan is a multiple-employer plan meaning that assets are pooled for investment purposes but separate trusts are maintained for each individual employer – Each municipality is responsible for their own plan liabilities; we do not borrow from one municipality’s account to pay for another – This is in contrast to a single-employer plan run by a municipality or a cost-sharing multiple-employer plan run by the State • MERS does not have a “funded status” (each municipality has its own funded level) – 67% of all MERS’ 711 defined benefit and hybrid municipalities are funded over 70% – 108 municipalities are more than 100% funded 6
Distribution of Funded Percentage 178 136 125 108 68 58 38 Under 50% 50 ‐ 59% 60 ‐ 69% 70 ‐ 79% 80 ‐ 89% 90 ‐ 99% Over 100%
What is Unfunded Liability? • Unfunded liability is simply the difference between a pension or OPEB plan’s estimated benefits and assets that have been set aside to pay for them – The dollar value of the benefits is actuarially determined each year – Assets are held in a trust and are professionally managed
Why Do Unfunded Liabilities Occur? • Benefit improvements adopted • When municipalities don’t make et the minimal required contributions as determined by the actuary • Experience of the plan (investment experience and demographic experience) – This is the difference between what actually happens in the plan compared to the actuarial assumptions
Economic Vitality Incentive Program (EVIP) EVIP (for eligible cities, villages or townships) and CIP (for eligible counties) are revenue sharing packages for municipalities. • Include three categories of eligibility, each with its own set of requirements and deadlines, and • Offering 1/3 of the total available incentive revenue EVIP Category 3 addresses unfunded accrued liabilities Requires local units of governments with unfunded accrued liabilities in pensions or other post employment benefits to submit a plan to lower liabilities
Unfunded Accrued Liability Resources Web Resources EVIP Template GASB 68 Resources • GFOA Resources • Webinars • Fact sheets • Glossary of Terms Strategic Partnerships • How to • Michigan Municipal League communicate • Department of Treasury changes with your • Michigan Local Government board Management Association 11
Understanding Changes to GASB
New Pension Reporting Standards The Governmental Accounting Standards Board (GASB) issued two new standards that will substantially change the accounting and financial reporting of public employee pensions Statement No. 67 - Statement No. 68 - Financial Reporting for Accounting and Financial Pension Plans Reporting for Pensions • Revises existing • Revises and establishes guidance for the new financial reporting financial reports of most requirements for most pension plans governments that provide their employees with pension benefits
Key Changes for 2015 • Net Pension Liability (NPL) • Net Pension Expense • Deferred Outflows and Inflows • Discount Rate
What is Net Pension Liability? Today: Total Actuarial Unfunded Pension Value of Accrued Liability Assets Liability Future: Total Market Net Pension Value of Pension Liability Assets Liability
Net Pension Expense • Today – Annual Required Contribution (ARC) and Pension Expense are the SAME • Future – Annual Required Contribution (ARC) and Pension Expense are DIFFERENT 16
Deferred Outflows and Inflows • Differences between projected and actual experience • Changes in assumptions • Difference between projected and actual earnings • Similar to depreciation, spread out over future years 17
Discount Rate • Today – Public pension plans use the rate of return they expect on their investments (8% typically) • Future – Severely underfunded plans that do not make contributions must use a lower rate for some of their obligations 18
What will municipalities actually see?
The Bottom Line • If pension is well-funded (95%), the liability is likely small • If plan is less well-funded (60%), the new liability could be the largest number on your balance sheet • These new rules may make local governments appear weaker
NPL Effects at 94% Funding Assets 2012 2012 with GASB Cash and Equivalents $ 1,320,000 $ 1,320,000 Receivables, net 10,114,000 10,114,000 Capital Assets 27,442,000 27,442,000 Total assets 38,876,000 38,876,000 Liabilities Accounts Payable/Accrued Liabilities 552,000 552,000 Long Term Debt 19,630,000 19,630,000 Net pension liability 1,178,000 Total liabilities 20,182,000 21,360,000 Net Position Invested in capital assets, net of debt 10,003,000 10,003,000 Unrestricted 8,691,000 7,513,000 Total Net Position $ 18,694,000 $ 17,516,000
NPL Effects at 79% Funding Assets 2012 2012 with GASB Cash and Equivalents $ 6,711,000 $ 6,711,000 Receivables, net 25,870,000 25,870,000 Capital Assets, net 18,240,000 18,240,000 Total assets 50,821,000 50,821,000 Liabilities Accounts Payable/Accrued Liabilities 8,433,000 8,433,000 Unearned revenue 6,171,000 6,171,000 Long Term Debt 12,342,000 12,342,000 Net pension liability 14,792,000 Total liabilities 26,946,000 41,738,000 Net Position Invested in capital assets, net of debt 5,690,000 5,690,000 Unrestricted 18,185,000 3,393,000 Total Net Position $ 23,875,000 $ 9,083,000
NPL Effects at 63% Funding Assets 2012 2012 with GASB Cash and Equivalents $ 9,900,200 $ 9,900,200 Receivables, net 24,300,000 24,300,000 Capital Assets, net 14,970,000 14,970,000 Total assets 49,170,200 49,170,200 Liabilities Accounts Payable/Accrued Liabilities 5,590,000 5,590,000 Unearned revenue 5,011,000 5,011,000 Long Term Debt 26,380,000 26,380,000 Net pension liability 35,444,000 Total liabilities 36,981,000 72,425,000 Net Position Invested in capital assets, net of debt 5,690,000 5,690,000 Unrestricted 6,499,200 -28,944,800 Total Net Position $ 12,189,200 $ (23,254,800)
GASB Next Steps Communications • Municipalities need to find out what this means for them • Help explain reporting changes to board/council, media, and citizens to help them understand • Talk about long-term changes • Use resources – MERS – GFOA 24
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