Minnesota Association of School Business Officials

Transcription

1 Minnesota Association of School Business Officials November 2, 2012 Presented by: Dave DeJonge, Assistant Executive Director, PERA John Wicklund, Assistant Executive Director, TRA

2 GASB Statements Governmental Accounting Standards Board (GASB) will dramatically alter accounting rules for pension funds and their sponsoring employers (school districts, cities, counties, state) in FY GASB changes will: o Present a pension liability more prominently on employers financial statements each entity s share of the MSRS/PERA/TRA unfunded liability must be shown on face of financial statements. (Government-wide financials.) o Make annual pension expense appear larger and volatile giving the incorrect impression that employers are shouldering an immense debt that they must pay off immediately, when pension funding actually works much like a home mortgage. o Abandon current funding standards, creating confusion for policymakers and taxpayers about costs and funded status. 2

3 Which GASB standards and why? The Governmental Accounting Standards Board is concerned with how state and local governments and school districts present accounting and financial information. Reasons behind GASB changes: o Improve consistency and transparency. o Enhance decision usefulness of pension information. o Assist users in evaluating accountability and inter-period equity related to pensions. GASB s authority extends only to accounting and financial reporting, not to funding. GASB 25 financial reporting for retirement plans. GASB 27 accounting and financial reporting for employers who have retirement plans. o For cost-sharing multiple employer plans, only actual contributions are recorded as an expense. 3

4 How did we get here? GASB periodically reviews and revises standards. Existing GASB 25 and 27 were released in 1994 and reflected a substantial change from GASB 5. Current revision process: o Staff research completed in 2008 o Invitation to comment in 2009 o Preliminary views presented in 2010 o Exposure drafts issued June 2011 o Amends GASB 25 and 27 o Standards finalized August 2012 o Effective with school district CAFRs for fiscal year ending June 30,

5 Underlying principles Pensions are part of the employee/employer compact. o Pension plans are part of total compensation. o Employer incurs a pension obligation as a result of employment exchange. o Cost/expense should be recognized in period services are provided. Plan responsible for paying benefits if plan has sufficient assets. Employer responsible if plan does not have sufficient assets. Difference between total pension liability and plan net position is the liability on financial statements of the government. Cost allocation developed on accounting basis, not funding or contribution basis. o Totally different from current GASB standards. o Disconnect between accounting numbers, funding numbers. o Will require significant rethinking and retraining. 5

6 Major changes to standards Unfunded portion of pension obligation would be reported as a liability on balance sheet portion of employer s financial statement. MSRS, PERA and TRA will regularly report actuarial valuation results for employers financial statements. If current and expected future plan assets related to current members are insufficient to cover future benefit payments, the long-term rate of return cannot be used as the discount rate. o Single blended rate is developed. o Long-term rate of return is used for period where plan assets are available for benefit payments and a high-quality tax-exempt, 20-year municipal bond rate is used for projected benefit payments not covered by plan assets. 6

7 Major changes to standards All plans required to use Entry Age Normal cost method to develop the Total Pension Liability. Not an issue in Minnesota. Annual changes in Net Pension Liability will generally be reported as pension expense as they occur. o Changes due to plan amendments for any members. o Change in actuarial assumptions for inactives. o Experience gain/loss for inactives. o Exceptions: Experience gain/loss and assumption changes for actives amortized over future working life of combined retiree and active lives. (Estimated six to seven years.) Difference between assumed and actual investment return on market value is recognized over a five year period. Will create volatility in pension expense. 7

8 Major changes to standards An employer in a cost-sharing, multiple-employer plan (local governments, school districts, etc.) will report a net pension liability in their own financial statements based on their proportionate share of collective unfunded liability for the entire plan. o Allocation based on percentage of total contribution effort. Deferred items of inflows and outflows will go through Statement of Changes. GASB is NOT requiring more rapid funding of the UAL. o GASB s new shorter amortization periods apply only to pension expense, NOT funding. o Legislature and retirement systems will need to have a standalone funding policy. 8

9 How GASB affects employers OLD GASB NEW GASB IMPLICATIONS For pension systems, pension expense reported by employer equals statutory contribution rate. Pension systems unfunded liability does not impact individual employer financial statements. Long-term rate of return used to discount future benefits, which determines liabilities. Actuarial cost method used by plan for funding calculations is used for ARC calculations. Accounting numbers linked to funding numbers. De facto standard for contributions. Pension expense is change in net pension liability each year. Employer responsible for pension system unfunded liability and must show proportionate share on balance sheet. Discount rate is blend of long-term rate of return while assets exist and municipal bond rate after that. All plans must use Entry Age Normal actuarial cost method. Decoupling of accounting and funding numbers. Pension expense will need to be calculated by the pension system actuaries. Employers go from no liability on their books to potentially large liability. Impact on bond ratings unclear. Potential for higher liabilities if assets are projected to be depleted in the future. No real impact for pension systems; Entry Age Normal already used for valuation. Two sets of numbers confusing. Boards or legislature have to set funding policy. More variance without benchmark. Unfunded liability can be amortized over maximum 30 years regardless of source of UAL (plan amendment, assumption change, gain/loss). Permits asset smoothing method (5 years for MSRS/PERA/TRA). Shorter amortization. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average retiree and active member working lifetime. Difference between assumed and actual investment return spread over 5 years. Volatility with annual pension expense reported. Creates more volatility. 9

10 How GASB affects employers (sample calculations) GASB changes will force employers to show their portion of the pension system s unfunded liability on government-wide financial statements. Using school districts as an example: Large school district Medium school district Small school district Old GASB TRA annual contributions $8.3 million $2.7 million $434,699 PERA annual contributions (Annual expense) $3.0 million $11.3 million $1.2 million $3.9 million $152, $587,000 New GASB Employer portion of TRA unfunded liability $171.8 million $56.7 million $8.9 million Employer portion of PERA unfunded liability Balance sheet liability TOTAL $37.8 million $209.6 million $15.1 million $71.8 million $1.9 million $10.8 million School district s net assets $158.4 million $47.3 million $4.9 million NOTE: Allocation method of unfunded liability is estimated. 10

11 New funding standards needed While GASB is giving us new standards for calculating pension costs, it is abandoning standards that Minnesota used for the past 20 years to measure the financial health of the pension funds. For example, prior GASB standards were relied upon heavily to develop Minnesota s 2010 pension reforms, which reduced benefits by $5.9 billion in order to stabilize the pension funds after the downturn. Now that GASB has moved away from funding standards, it will be important for Minnesota policymakers to adopt substitute standards that will permit ongoing financial assessments of the pension funds. Big 7 national organizations representing elected officials, legislators and local units of government have developed a draft pension funding policy. 11

12 National Association of Bond Lawyers (NABL) Considerations in preparing disclosure in official statements regarding an issuer s pension funding obligations (public defined-benefit pension plans). Issued May 15, Disclosures required (tables, texts). NABL could modify for consistency with GASB Bond counsel will be seeking retirement system disclosures. 12

13 Recent developments GASB Statement 67: Effective for fiscal year ending June 30, Primarily impacting the retirement systems financial reporting. GASB Statement 68: Effective for fiscal year ending June 30, Initial pension liability established for each employer unit. Deferred items of inflows and outflows established (pension expense). Required supplemental information (RSI). Notes to the financial statements. Major changes with schedules and other disclosures. 13

14 Communication: Decision-makers Auditors and local government officials might have a lot of questions. Communication plans: Senior school administrators and school board members need to know. The appearance of liabilities on school district financials might alarm local governments, the public and the press. Retirement systems will report on GASB implementation efforts to the 2013 legislature. Legislative challenge: High turnover of legislators means many will be unfamiliar with public pension issues. 14

15 Summary Estimated PERA unfunded liability of $4.3 billion (6/30/11). Estimated TRA unfunded liability of $6.5 billion (6/30/12). PERA and TRA liabilities will start to land on your financial statements. Substantial increase in actuarial costs for retirement systems to provide information. Additional work in the accounting department for both school district and the retirement systems. Results presented by employers are not necessarily linked to funding policy. Legislature will ultimately decide funding policy and contribution rates to pay off long-term PERA and TRA unfunded liabilities. 15

16 Resources available PERA website: TRA website: Retirement systems working with actuarial consultants Fact sheets, Q&A, employer newsletters, videos GFOA Feb. 6, 2013, webinar on pension accounting GASB 67 implementation guide (May 2013) GASB 68 implementation guide (January 2014) 16

17 Question and answer 17