Upcoming Changes to Pension Reporting Under GASB 67 & 68 and the Impact to Municipalities Participating in PERA Retirement Plans • Patricia (Patty) French, Board Chair, PERA • Wayne Propst, Executive Director, PERA
Agenda • GASB 67 • What governments does it apply to? • Plan specifics • What changes are brought about by the new pronouncement? • New disclosures • Census data testing • GASB 68 • What governments does it apply to? • Participation, type of plans • What changes are brought about by the new pronouncement? • Financial Statement impact • Schedule of Employer allocations
GASB 67 – What governments does it apply to? • June 2012 • The Governmental Accounting Standards Board (GASB) approved Statement No. 67, Financial Reporting for Pension Plans • Applies to plans that administer pension benefits, such as the Public Employees Retirement Association (PERA) of New Mexico • Public Employees Retirement Fund is a cost-sharing, multiple employer defined benefit pension plan. This fund has six divisions of members, including State General, State Police/Adult Correction Officers, Municipal General, Municipal Police/Detention Officers, Municipal Fire, and State Legislative Divisions, and offers 24 different types of coverage within the PERA plan. • GASB 67 establishes financial reporting standards for state and local governmental pension plans, defined benefit pension plans that are administered as trusts in which; • a. Contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable. • b. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms. • c. Pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members.
GASB’s Change to Pension Accounting • The adoption of GASB 67 and 68 bring new terms to the financial statements: • Total Pension Liability (TPL) • Definition: The portion of the actuarial present value of projected benefit payments that is attributed to past periods of member service • Pension Plan’s Fiduciary Net Position or the Plan’s Net Position • Definition: The pension plan’s net assets at fair value • Net Pension Liability or NPL • TPL – Pension Plan’s Fiduciary Net Position = NPL
GASB’s Change to Pension Accounting • GASB changes under statements 67 and 68 are intended to promote consistency and transparency of employer reporting. • Approach based on GASB’s decision that reporting the Net Pension Liability (NPL) on the face of a government’s financial statements allows users of the financial statements to better assess: • The long-term benefit obligations of a governmental entity; • The general long-term financial health of a governmental entity; • How well a governmental entity has supported and maintained the pension promises made to their employees.
GASB’s Change to Pension Accounting • GASB 67 Financial Reporting for Pension Plans • Applies to PERA and will be implemented in FY 2014 • Net Pension Liability (NPL) will be disclosed in PERA’s 2014 financial report • Cost-sharing multi-employer plan is one in which the participating government employers pool their assets and their obligations to provide defined benefit pensions (plan assets can be used to pay the pensions of the retirees of any participating employer) • Example: Approximately $14.4 billion in assets in PERA fund used to pay for City of Las Cruces retiree, San Juan County retiree and State of New Mexico Correctional Officer retiree • Cost-sharing employers will share the NPL, on a proportional basis • Changes will be noted in the notes to the financial statements and required supplementary information (RSI)
GASB 67 • Total Pension Liability (TPL) • Three essential steps for measure • Project total future pension benefit payments for current and former employees • Based on terms of the plan • Actuary assumptions, such as how long the employees are expected to work for participating government, what salaries are expected to be, period of collection of benefits after retirement • Discount the projected benefit payments to the their value at the time of the measurement (present value) • Attribute the present value of projected benefit payments to the periods when they were or will be earned – past and future. • Net Pension Liability or NPL • To the extent that the cumulative long-term obligation to provide pension benefits of the participating governments in a cost-sharing plan (TPL) is larger than the value of the assets available in the pension plan’s trust to pay pension benefits.
GASB 67 • Example of required GASB 67 note disclosure: • Calculation of the Net Pension Liability (NPL) Fiscal Year Ending June 30, 2014 Total Pension Liability $16,700,000,000 Fiduciary Net Position - $12,000,000,000 Net Pension Liability $ 4,700,000,000 Ratio of Fiduciary Net Position to Total Pension Liability 71.85% • This example is similar to what will be required to be disclosed in PERA’s notes to the financial statements in FY 2014 under GASB 67. The note will also include details of the actuarial assumptions used in the calculation.
GASB 67 • Example of required GASB 67 note disclosure: • Actuarial Assumptions related to the calculation of the NPL • The TPL was determined by an actuarial valuation as of June 30, 2014, using the following assumptions, applied to all prior periods included in the measurement: Inflation 3.5 percent Salary Increases 4.5 percent, average, including inflation Investment rate of return 7.75 percent, net of pension plan investment expense, including inflation
GASB 67 • Example of required GASB 67 note disclosure: • Discount rate used to measure TPL, sensitivity • Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cash flows used to determine the discount rate assumed that future contributions will be made in accordance with statutory rates. On this basis, the pension plan’s fiduciary net position together with the expected future contributions are sufficient to provide all projected future benefit payments of current plan members as determined in accordance with GASB Statement No. 67. • The table below depicts the required disclosure of sensitivity to changes in the discount rate. 1% Current 1% Decrease Discount Increase (6.75%) Rate (7.75%) (8.75%) Net Pension Liability 5,700,000,000 4,700,000,000 3,700,000,000
GASB 67 • Example of required GASB 67 RSI: • Schedule of Changes in the Net Pension Liability • ($ In thousands) 2014 2015 2016 2017 2018 Total pension liability Service Cost 400,000 Interest 1,300,000 Benefit changes 0 Difference between expected and actual experience 0 Changes of assumptions (90,000) Benefit payments (900,000) Refunds of contributions (48,000) Net change in total pension liability 660,000 Total pension liability - beginning 17,000,000 Total pension liability - ending (a) 17,700,000 Plan net position Contributions - employer 300,000 Contributions - member 245,000 Net investment income 2,200,000 Benefit payments (900,000) Administrative expense (10,000) Refunds of contributions (47,000) Other 17,000 Net change in plan net position 1,720,000 Plan net position - beginning 12,700,000 Plan net position - ending (b) 14,400,000 Net pension liability - ending (a) - (b) 3,300,000
GASB 67 • Example of required GASB 67 RSI: • Schedule of the Net Pension Liability • ($ In thousands) 2014 2015 2016 2017 2018 Total pension liability 17,700,000 Plan net position 14,400,000 Net pension liability 3,300,000 Ratio of plan net position to total pension liability 81.31% Covered-employee payroll 2,100,000 Net pension liability as a percentage of covered-employee payroll 156.29%
GASB 67 • Example of required GASB 67 RSI: • Schedule of Employer Contributions • ($ In thousands) 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Contractually Required Contributions $300,000 $285,860 $274,906 $283,377 $291,683 $311,082 $292,569 $269,571 $249,740 $234,232 Actual employer contributions 300,000 285,860 274,906 283,377 291,683 311,082 292,569 269,571 249,740 234,232 Annual contribution deficiency (excess) 0 0 0 0 0 0 0 0 0 0 Covered-employee payroll 2,100,000 2,049,783 1,994,280 1,935,014 1,993,517 2,081,259 1,965,064 1,908,520 1,774,918 1,607,839 Actual contributions as a percentage of covered-employee payroll 14.00% 13.93% 13.78% 14.64% 14.63% 14.95% 14.89% 14.12% 14.07% 14.57%
GASB 68 • June 2012 • GASB also approved Statement No. 68, Accounting and Financial Reporting for Pensions • Applies to governments that provide pension benefits to their employees • Examples: The City of Santa Fe and Santa Fe County that participate in PERA
GASB 68 Summary of Employer Reporting Employers will report the following elements: Pension Deferred Net Pension Outflows and Pension Liability Inflows of Expense (NPL) Resources
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