Session 604. GASB Statements 67 and 68 Update. Michelle Czerkawski GASB. Bill Hallmark Cheiron, Inc. March 25, 2014

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1 Session 604 GASB Statements 67 and 68 Update Jointly sponsored by the American Academy of Actuaries And the Conference of Consulting Actuaries In cooperation with the Society of Actuaries Michelle Czerkawski GASB Bill Hallmark Cheiron, Inc. March 25, 2014 All sessions of the sponsoring organizations will be conducted in compliance with Federal and State antitrust laws and any discussion of anticompetitive activities among participants is strictly prohibited. The views expressed here are those of the presenter(s), and not necessarily those of the Conference or the Academy. Nothing in this presentation is intended to be an interpretation of actuarial standards of practice by the sponsoring organizations. Copyright 2014 Conference of Consulting Actuaries All rights reserved by the Conference of Consulting Actuaries. Permission is granted to make limited copies of items for personal, internal, classroom or other instructional use, on the condition that the foregoing copyright notice is used to give reasonable notice of the Conference s copyright.

2 Agenda 2 Introduction Measurement Timing Discount Rate Net Pension Liability, Deferred Outflows and Inflows of Resources, and Pension Expense Cost-Sharing and Agent Multiple-Employer Plans Questions

3 Introduction 3 Effective Dates Statement 67: Fiscal years beginning after June 15, 2013 Statement 68: Fiscal years beginning after June 15, 2014 Beginning deferred outflows/inflows of resources balances all or nothing at initial implementation exception, contributions after measurement date RSI schedules prospective if information not initially available Implementation Guides Statement 67 Issued June 2013 Statement 68 Issued January 2014

4 Introduction 4 Financial reporting is based on: Individual entry age cost method Valuation of all benefits, including gain-sharing and substantively automatic ad hoc COLAs Discount rate Expected return to extent assets and contributions fund expected benefits Municipal bond rate to extent assets and contributions do not fund expected benefits Market value of assets Net pension liability reported on employer s balance sheet Pension expense might be volatile

5 Key Initial Determinations 5 Timing Reporting and Measurement dates Valuation date and calculation of the TPL Discount rate Do I need to perform a crossover test? Should I change my contribution policy? Municipal Bond Index Type of plan and reporting requirements Single, agent, or cost-sharing Nonemployer contributing entities/special funding situations Allocation of responsibility for disclosure items

6 Measurement Date Considerations 6 Measurement date Plan = plan FYE Employer = prior FYE or later Actuarial valuation date Plan = within 24 months of FYE Employer = within 30 months of FYE Updates permitted from valuation date to measurement date Plan/employer(s) required to use same assumptions for similar or related information

7 Measurement Timing Example 7 Prior FYE 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 12/31/12 12/31/13 12/31/14 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date

8 Measurement Timing Example 8 30 months + 1 day 24 months + 1 day Update 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 12/31/12 12/31/13 12/31/14 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date

9 Discount Rate Determination 9 Single discount rate Long-term expected rate of return on pension plan investments (net of investment expenses, but not administrative expenses), to the extent that plan assets are: Projected to be sufficient to pay projected benefits Expected to be invested using a strategy to achieve that return Yield or index rate for 20-year, tax-exempt general obligation municipal bond rate to extent that conditions for long-term expected rate of return are not met

10 Discount Rate Determination 10 If the answer to all of the following questions is Yes, the discount rate for GASB purposes should be the expected long-term return on assets, and you may not have to perform the full crossover test Are contribution amounts actuarially determined? Is the actuarial cost method a traditional individual method? Is the amortization period closed and of reasonable length? Are all benefits valued, including gain-sharing and substantively automatic COLAs? Is the asset smoothing method non-asymptotic? Does the auditor agree?

11 Discount Rate Determination Basic Steps 11 Project benefit payments for all current active and inactive members Include projected automatic COLAs, substantively automatic benefit changes, projected salary increases and projected service Project assets of the plan Include projected benefit payments determined above and projected administrative expenses Include all projected contributions based on plan s contribution policy intended to finance the benefits of current plan members (i.e., exclude total normal cost for future plan members)

12 Discount Rate Determination Basic Steps (continued) 12 Discount projected benefit payments: Using long-term rate of return for projected benefit payments prior to the crossover date (i.e., the date assets are projected to reach $0) Using municipal bond rate after the crossover date Note that the crossover date is not the date the plan is expected to run out of money. It is just the date assets reach $0 in this test Solve for single equivalent discount rate that produces the same present value as applying the two rates above

13 Discount Rate Determination 13 Plans that may have a crossover date Sponsors don t make required contribution Statutory contribution rates Rolling amortization methods Plans that don t value gain-sharing or other substantively automatic benefit changes Asymptotic asset smoothing (very minor impact, if any)

14 Discount Rate Determination 14 What is the actual contribution policy? Statutory rates are straightforward Retirement board sets rate which is actually contributed by the sponsors Use retirement board s contribution policy If it isn t clear, may want to make it clear Legislature determines contribution amount which sometimes equals actuary s or retirement board s recommendation and sometimes does not Consider history Use professional judgment

15 Discount Rate Determination 15 Discount rates for funding purposes are generally based on the long-term expected return on assets ASOP 27 now requires the actuary to disclose any margin for adverse deviation used in developing the discount rate If you employ a margin for adverse deviation for funding purposes, for GASB purposes should you use the longterm expected return unadjusted for the margin?

16 Discount Rate Disclosures 16 Discount rate and change in rate since prior measurement Projected cash flow assumptions, including contributions from employers, nonemployer contributing entities, and members Long-term expected rate of return and a description of how it was determined Municipal bond rate (if used) and source for rate Periods of projected benefit payments to which longterm return is applied and periods to which municipal bond rate is applied

17 Discount Rate Disclosures 17 Asset Class Target Allocation Arithmetic Long-Term Real Rate of Return Domestic Equity 46% 5.4% International Equity 21% 5.5% Fixed Income 26% 1.3% Real Estate 6% 4.5% Cash 1% 0.0% Assumed asset allocation, the long-term expected real rate of return for each major asset class, and whether the rates are arithmetic or geometric

18 Discount Rate Disclosures 18 Discount Rate Net Pension Liability 1% Decrease (6.75%) Current Discount Rate (7.75%) 1% Increase (8.75%) $1,050,638 $751,753 $393,091 Measures of the NPL calculated using a discount rate 100 basis points higher and 100 basis points lower than the discount rate

19 Note Disclosure Illustration Changes in NPL by Source 19 Total Pension Liability (a) Increase (Decrease) Plan Fiduciary Net Position (b) Net Pension Liability (a) (b) Balances at 6/30/X8 $ 2,853,455 $ 2,052,589 $ 800,866 Changes for the year: Service cost Interest Differences between expected and actual experience Contributions employer Contributions employee Net investment income Benefit payments, including refunds of employee contributions Administrative expense Other changes 73,034 73, , ,345 (37,539) (37,539) 79,713 (79,713) 31,451 (31,451) 196,154 (196,154) (119,434) (119,434) (3,373) 3,373 8 (8) Net changes 135, ,519 (49,113) Balances at 6/30/X9 $ 2,988,861 $ 2,237,108 $ 751,753

20 Recognition of Changes in NPL 20 Recognize most changes as expense in full in reporting period of change Exceptions: Differences between expected and actual experience (TPL) Changes of assumptions (TPL) Difference between projected and actual earnings on pension plan investments Employer contributions

21 Recognition of Changes in TPL 21 Expense recognized over average of expected remaining service lives of all employees (active and inactive) Systematic and rational method Portion not recognized in expense = deferred outflow of resources/deferred inflow of resources related to pensions Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Differences between Expected and Actual Experience Year Differences between Expected and Actual Experience Recogition Period (Years) 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20X0 $ 35, $ 1,292 20X1 30, ,733 $ 1,117 20X2 13, ,622 1,622 $ X3 34, ,137 4,137 4,137 $ 1,239 20X4 (28,228) 8.2 (3,442) (3,442) (3,442) (3,442) $ (692) 20X5 19, ,430 2,430 2,430 2,430 2,430 $ X6 38, ,688 4,688 4,688 4,688 4,688 4,688 $ X7 (3,562) 8.0 (445) (445) (445) (445) (445) (445) (447) 20X8 (15,211) 8.0 (1,901) (1,901) (1,901) (1,901) (1,901) (1,901) (1,901) $ (1,904) 20X9 (37,539) 7.9 (4,752) (4,752) (4,752) (4,752) (4,752) (4,752) (4,752) $ (4,275) Net increase (decrease) in pension expense $ 12,114 $ 3,454 $ 1,203 $ (2,183) $ (672) $ (1,923) $ (6,166) $ (6,656) $ (4,275)

22 Recognition of Investment Gains/Losses 22 Expense recognized over 5 years - Systematic and rational method Portion not recognized in expense = deferred outflow of resources/deferred inflow of resources related to pensions Report net deferred outflow of resources/deferred inflow of resources from this source Year Differences between Projected and Actual Earnings on Pension Plan Investments Increase (Decrease) in Pension Expense Arising from the Recognition of Differences between Projected and Actual Earnings on Pension Plan Investments Recogition Period (Years) 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20X4 (29,336) 5 $ (5,868) 20X5 (43,058) 5 (8,612) $ (8,610) 20X6 (159,517) 5 (31,903) (31,903) $ (31,905) 20X7 179, ,865 35,865 35,865 $ 35,867 20X8 206, ,309 41,309 41,309 41,309 $ 41,310 20X9 (37,529) 5 (7,506) (7,506) (7,506) (7,506) $ (7,505) Net increase (decrease) in pension expense $ 30,791 $ 29,155 $ 37,763 $ 69,670 $ 33,804 $ (7,505)

23 Recognition of Employer Contributions 23 During the measurement period Directly reduce NPL (no expense impact) Subsequent to measurement date Deferred outflow of resources related to pensions Directly reduce NPL in next reporting period (no expense impact)

24 Schedule of Deferred Items 24 Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual experience Changes of assumptions Net difference between projected and actual earnings on pension plan investments Total $ 33,327 $ 53,999 62, ,732 - $ 230,012 $ 53,999 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: 20Y0 $ 57,872 20Y1 86,393 20Y2 43,018 20Y3 (1,802) 20Y4 1,463 Thereafter (10,931)

25 Calculation of Pension Expense Two Approaches 25 Sum of components of recognized changes in NPL Description Amount Change in balance sheet items excluding changes due to employer contributions Service cost $ 73,034 Employee contributions (31,451) Pension plan administrative expense 3,373 Interest on the total pension liability 219,345 Projected earnings on pension plan investments (158,625) Description Amount Differences between expected and actual experience 3,454 Changes of assumptions 20,101 Differences between projected and actual earnings on plan investments 29,155 Other changes in fiduciary net position (8) Total pension expense $ 158,378 Change in Net Pension Liability $ (49,113) Change in deferred outflows 100,779 Change in deferred inflows 26,999 Employer contributions 79,713 Total pension expense $ 158,378

26 Cost-Sharing Employers 26 Recognize proportionate shares of collective NPL, pension expense, deferred outflows of resources/ deferred inflows of resources Proportion (%) Relationship of the employer to the total of all contributing entities Use of relative long-term projected contribution effort encouraged Two additional deferred items Change in proportion Difference between employer contributions and proportionate share of collective contributions

27 Nonemployer Contributing Entities 27 Legal requirement to contribute directly to the pension plan Special funding situations Contribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contribute Similar to cost-sharing accounting Nonemployer expense classified in same manner as similar grants to other entities Employer recognizes additional expense and revenue = nonemployer contributing entity s proportionate share of collective expense (portion related to the employer) Not special funding Employer Follows applicable requirements for single, agent, or cost-sharing employer Recognizes revenue equal to change in NPL from contributions from nonemployer contributing entities Nonemployer entity classifies expense for contributions in same manner as similar grants to other entities

28 Information for Cost-Sharing Employers 28 Plan actuaries will be providing information to the Plan for its financial reporting under GASB 67 Plan actuaries will also likely be asked to provide additional information to cost-sharing employers Collective information Net pension liability Deferred outflows and inflows by category Pension expense Average expected remaining service life Each employer s proportionate share Potential interaction with employer s auditor

29 Information for Agent Employers 29 Plan actuary will likely have to provide each employer a fair amount of information specific for that employer Discount rate is determined separately for each employer Employers will need: Net pension liability Deferred outflows and inflows by category Pension expense Average expected remaining service life Actuarial certification letter Not clear how employer amounts will be audited (Plan auditor vs. each employer auditor)

30 Questions 30