GASB 67 and 68 The New World of Public Pension Plan Accounting

Transcription

1 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

2 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

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 Is TERS a Single-Employer, Cost-Sharing, or Agent Plan? (continued) GASB 67 Implementation Guide Q&A 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

15 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

16 Illustrations Note Disclosures for GASB 68 Changes in the NPL 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 75,864 75,864 Interest 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) Net changes 135, ,519 (49,113) Balances at 6/30/X9 $2,988,861 $2,237,108 $751,753 16

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

18 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

19 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

20 Illustrations RSI for Both GASB 67 and 68 Schedule of Changes in NPL and Related Ratios (4 years shown) 20X9 20X8 20X7 20X6 Total Pension Liability Service cost $75,864 $74,276 $71,157 $69,344 Interest 216, , , ,694 Changes in benefit terms Differences between expected and actual experience (37,539) (15,211) (3,562) 38,438 Changes in assumptions ,011 - Benefit payments, including refunds of member contributions (119,434) (112,603) (104,403) (95,376) Net change in total pension liability 135, , , ,100 Total pension liability beginning 2,853,455 2,701,955 2,488,907 2,301,807 Total pension liability ending (a) $2,988,861 $2,853,455 $2,701,955 $2,488,907 Plan fiduciary net position Contributions employer $79,713 $86,607 $89,828 $91,963 Contributions member 31,451 30,550 29,137 28,547 Net investment income 196,154 (44,099) (16,138) 298,260 Benefit payments, including refunds of member contributions (119,434) (112,603) (104,403) (95,376) Administrative expense (3,373) (3,287) (2,774) (2,582) Other 8 (83) 173 (175) Net change in plan fiduciary net position 184,519 (42,915) (4,177) 320,637 Plan fiduciary net position beginning 2,052,589 2,095,504 2,099,681 1,779,044 Plan fiduciary net position ending (b) $2,237,108 $2,052,589 $2,095,504 $2,099,681 County s net pension liability ending (a) (b) $751,753 $800,866 $606,451 $389,226 Plan fiduciary net position as a percentage of the total pension liability 74.85% 71.93% 77.56% 84.36% Covered-employee payroll $449,293 $436,424 $416,243 $407,812 County s net pension liability as a percentage of covered-employee payroll % % % 95.44% 20

21 Illustrations RSI for Both GASB 67 and 68 Schedule of Contributions (4 years shown) 20X9 20X8 20X7 20X6 Actuarially determined contribution $79,713 $86,607 $89,828 $91,963 Contributions in relation to the actuarially determined contribution 79,713 86,607 89,828 91,963 Contribution deficiency (excess) $ - $ - $ - $ - Covered-employee payroll $449,293 $436,424 $416,243 $407,812 Contributions as a percentage of covered-employee payroll 17.74% 19.84% 21.58% 22.55% 21

22 New Calculation Requirements Discount Rate One of the most notable aspects of the new standards is the concept of the discount rate to be used For plans with assets projected to be sufficient to meet benefit payments if all assumptions are met: there is no impact, use long-term expected rate of return on assets (LT-ROR) TERS will likely be in this category For other plans, a blended rate equivalent to combination of: LT-ROR until assets insufficient to meet benefit payments 20-year tax-exempt municipal bond yield or index rate Applied after projected crossover point where plan assets don t cover benefit payments 22

23 New Calculation Requirements Discount Rate (continued) For TERS there is a question of how to test sufficiency. GASB 67 Implementation Guide Q&A 88 says any alternative approach to the cash flows described in GASB 67 that is sufficiently reliable may be used subject to professional judgment. TERS could potentially use a simplified sufficiency test For plans with inadequate funding policy, the discount rate under the new standard is likely to be much lower and will significantly increase plan s measured liabilities. Recent estimate of muni bond rates in 5.0% range May draw significant attention to actuary s projection of cash flows and crossover point where plan assets don t cover benefit payments 23

24 New Calculation Requirements Actuarial Cost Method Statements require traditional Entry Age cost method. Level percentage of pay Attribution period from start of service accrual to exit No change for TERS since this method is already used. 24

25 New Calculation Requirements Pension Expense 25

26 New Calculation Requirements Pension Expense (continued) Under GASB 68, Employers recognize the change in their NPL in current period, except for limited deferrals: Expense = Service cost + Interest on Total Pension Liability + Plan changes (recognized immediately) + Changes in Fiduciary Net Position from other than investments (e.g., administrative expenses) - Projected earnings on plan investments +/- Recognition of portion of deferred inflows/outflows 26

27 New Calculation Requirements Pension Expense (continued) Deferred recognition items: Recognized over closed period = expected remaining service (actives and inactives zeroes or ones for inactives). This will be short for TERS (mature plan) Economic/Demographic gains or losses Changes in assumptions or input If deemed cost-sharing: change in proportionate share or difference between ER contributions and share of total contributions Recognized over closed five-year period. Difference between projected and actual investment earnings Both approaches require systematic and rational methods. Straight-line or level percent of payroll both acceptable 27

28 Public Plan Reactions A few that we have seen include: Concern over potential for larger and more volatile financial statement entries. Concern over keeping two sets of books (i.e., accounting vs. funding). Questions regarding impact on timing and cost on accounting and audit tasks: Who pays? question. Should the plan trust pay costs of developing additional information needed for employer financial reporting? Others? 28

29 29 Appendix

30 Outline of the Statements Requirements GASB 67 Financial Statements Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Notes to Financial Statements All Plans: Plan description Plan investments Includes reporting money-weighted rate of return Receivables (if applicable) Allocated insurance contracts (if applicable) Reserves (if applicable) 30

31 Outline of the Statements Requirements GASB 67 (continued) Notes to Financial Statements (continued) Single-ER and Cost-Sharing Plans: Exhibit showing Total Pension Liability (TPL), Fiduciary Net Position (FNP), Net Pension Liability (NPL), and FNP as percentage of TPL (i.e., funded status) Assumptions and inputs to measuring TPL Discount rate determination detail and sensitivity to +/- 1% change Date of actuarial valuation and mention of roll-forward (if applicable) 31

32 Outline of the Statements Requirements GASB 67 (continued) Required Supplementary Information (Single-ER and Cost-Sharing Plans) 10-year schedule of changes in NPL 10-year schedule of TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll 10-year schedule of Actuarially Determined Contribution (ADC) (if applicable), including comparison to actual contributions 10-year schedule of money-weighted rate of return 32

33 Outline of the Statements Requirements GASB 67 (continued) Notes to the Required Schedules Significant methods and assumptions used in calculating ADC (if applicable) Information on any factors affecting trends in items reported in Required Supplementary Information For example, changes in benefits or assumptions 33

34 Outline of the Statements Requirements GASB 68 Financial Statements Balance sheet Cost-sharing employer Recognize proportionate share of collective Net Pension Liability Financial Statements Income statement Cost-Sharing employer Recognize proportion of collective plan expense and deferred outflows/inflows Recognize over average expected remaining service for: Change in proportionate share Difference between employer s contributions and proportionate share of all contributions 34

35 Outline of the Statements Requirements GASB 68 (continued) Notes to Financial Statements Aggregate total NPL for all plans of employer Plan description Information about NPL Assumptions/inputs, including discount rate and sensitivity Plan s Fiduciary Net Position Changes in NPL Balances of deferred outflows/inflows and scheduled recognition ER s proportionate share of NPL (cost-sharing ER only) 35

36 Outline of the Statements Requirements GASB 68 (continued) Required Supplementary Information (Single/Agent employers) 10-year schedule of changes in NPL 10-year schedule of TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll 10-year schedule of ADC (if applicable), including comparison to actual contributions If no ADC and contributions statutory/contractual, 10-year schedule of such amounts compared to actual contributions 36

37 Outline of the Statements Requirements GASB 68 (continued) Required Supplementary Information (Cost-sharing employers) 10-year schedule of proportionate TPL, FNP, NPL, funded status, covered payroll, and NPL as % of payroll If contributions statutory/contractual, 10-year schedule of such amounts compared to actual contributions 37