Proposed GASB 45 Changes

Transcription

1 Proposed GASB 45 Changes What s all the fuss about? MASBO Fall Conference Mark Schulte, FSA, EA, MAAA November 14, 2014 What we re going to cover today 1 Introduction and GASB 45 review 2 Why are things changing? 3 What s being proposed? 4 What can I do to prepare? 5 Recap / questions 1 Financial reporting of pensions and other post-employment benefits (OPEB) have changed substantially in the past decade Have had to comply with GASB 45 since at least 2008 Have a liability on the books (balance sheet Net OPEB Obligation) Record annual accounting expense (based on the ARC) GASB 67/68 substantially change how pensions are reported May 28, 2014: GASB approves exposure draft which revamp OPEB accounting rules similar to pensions 2 1

2 Basic Principle: Post-retirement benefits are a form of compensation, and those promises should be recognized on financial statements in the period when they are earned. Includes: Retiree medical, vision, dental, life insurance Previously accounted for on a cash basis; now have to account for on an accrual basis but very slowly 3 Financial reporting example UNFUNDED PLAN: Actuarial Accrued Liability (AAL) = $ 10M Trust assets = $ 0 Normal cost = $ 0.5M Annual payments = $ 0.4M Annual Expense Balance sheet liability reconciliation 4 Normal Cost $ 0.5 Net OPEB Obligation - BOY $ 0.0 Amortization of unfunded AAL 0.6 Annual OPEB Cost 1.1 Total ARC $ 1.1 Benefit payments or trust contributions (0.4) Net change in NOO 0.7 Net OPEB Obligation - EOY $ 0.7 Financial reporting example FUNDED PLAN: Actuarial Accrued Liability (AAL) = $ 10M Trust assets = $ 8M Normal cost = $ 0.5M Annual payments = $ 0.6M Annual Expense Balance sheet liability reconciliation 5 Normal Cost $ 0.5 Net OPEB Obligation - BOY $ 0.0 Amortization of unfunded AAL 0.1 Annual OPEB Cost 0.6 Total ARC $ 0.6 Benefit payments or trust contributions (8.0) Net change in NOO (7.4) Net OPEB Obligation - EOY $ (7.4) 2

3 Financial reporting example FRONT-LOADED PLAN: Actuarial Accrued Liability (AAL) = $ 10M Trust assets = $ 0 Normal cost = $ 0.1M Annual payments = $ 1.0M Annual Expense Balance sheet liability reconciliation 6 Normal Cost $ 0.1 Net OPEB Obligation - BOY $ 0.0 Amortization of unfunded AAL 0.5 Annual OPEB Cost 0.6 Total ARC $ 0.6 Benefit payments or trust contributions (1.0) Net change in NOO (0.4) Net OPEB Obligation - EOY $ (0.4) OPEB! 2. Why are things changing? 7 OPEB in the Media School districts struggle to pay retirees' health benefits Re$ree Health Care: The Brick That Broke Municipali$es Backs The Retiree Medical Benefit Crisis The next retirement time bomb Taxpayers on the hook for billions in hidden government-worker healthcare costs Taming the OPEB Beast Slaying the OPEB Dragon District is stretching out OPEB burden 2. Why are things changing? Criticisms of GASB 45 accounting Amortization options are too generous up to 30 years open basis Net OPEB Obligation is an inaccurate measure of employer s liability Too much variation in liability calculation methods Discount rate determination not appropriate 8 3

4 New terminology GASB 45 Actuarial Accrued Liability (AAL) Plan assets UAAL Annual Required Contribution (ARC) OPEB Exposure Draft Total OPEB Liability Fiduciary Net Position Net OPEB Liability Actuarially Determined Contribution (ADC) 9 N/A Annual OPEB Cost; Net OPEB Oblig. Deferred inflows/outflows of resources N/A Move unfunded liability to the balance sheet Actuarial Accrued Liability (AAL) = $ 10M Trust assets = $ 0 Normal cost = $ 0.5M Annual payments = $ 0.4M 10 OPEB expense will become more complex 11 Change in Net OPEB Liability (balance sheet) recognized quickly Immediate recognition Service cost Interest on liability Expected asset return Plan changes Deferred recognition (deferred inflows/outflows of resources) Assumption changes Demographic experience Asset returns 4

5 More measurements/information to disclose Enhanced disclosure of historical contributions and funded status Explain basis for selecting assumptions Disclosure of Net OPEB Liability s sensitivity to changes in: Medical trend +/- 1% Discount rate +/- 1% Combinations thereof (9 total) Biennial actuarial valuations required for all plans (even if <200 members) 12 Discount rate changes 13 Actuarially Determined Contribution (ADC) Most MN Districts either unfunded or prefunded substantial portion of UAAL Proposed 10-year disclosure of actual contribution compared to ADC Unclear what to disclose if don t have a funding policy, but it s not $0 14 5

6 Impact on small plans 3-year actuarial reporting option eliminated if < 100 members Must have new report at least every two years AMM is preserved! Appears a bit more complex than the current GASB 45 model Applies Entry Age Normal method in a spreadsheet method 15 Other technical adjustments Actuarial costs must now be calculated as a percent of pay Many plans use a service allocation method now Unclear what the effect on the accrued liability will be Odd to allocate non-pay related benefits... based on pay Keeping track of deferred inflows/outflows of resources for many years Document basis for selecting assumptions What can I do to prepare? Implementation timeline Lots of time to prepare, but it will be here fast! Now is the time to create a plan and set expectations Exposure draft (May 2014) Comments due (August 2014) Final rules (June 2015) Effective for FY beginning after 12/15/

7 4. What can I do to prepare? There have been several technical objections to parts of the new rules but nothing substantial Estimate impact to your balance sheet For funded plans: reconsider investments and discount rate analysis Recap / questions Questions? 19 Contact Information Mark Schulte, FSA, EA, MAAA marks@vaniwaarden.com Van Iwaarden Associates 10 South Fifth Street, Suite 840 Minneapolis, MN