GASB Update. North Dakota University System June 2015

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1 GASB Update North Dakota University System June 2015 Prepared for the North Dakota SBHE Budget and Finance Committee by Robin Putnam, Director of Financial Reporting

2 New GASB Pronouncements Effective FY2015: GASB Statement No. 68 Financial Reporting for Pension Plans. GASB Statement No. 69 Government Combinations and Disposals of Government Operations. GASB Statement No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date. Effective FY2016: GASB Statement No. 72 Fair Value Measurement and Application.

3 GASB 68 and 71 GASB Statement No. 68 and No. 71 Financial Reporting for Pension Plans. GASB 68 and 71 significantly revise accounting and financial reporting for pensions. Shifts focus from expense to balance sheet. Statement of Net Position: A liability will be recorded if actuarially determined plan liability is greater than plan s fiduciary net position. An asset will be recorded if actuarially determined plan liability is less than plan s fiduciary net position. Previous GASB standards: record liability for difference between what the actuaries say is the required contribution versus what the institution actually contributes. For actuarially determined contribution plans, liability recorded was usually $0.

4 GASB 68 and 71 No impact to pension funding. Impacts accounting and financial reporting only. Not applicable to TIAA-CREF plans. NDPERS will provide amounts to be recorded by institutions and system office in NDUS financial statements. Impacts of New Standards: A potentially significant liability may need to be recorded for the first time. May impact credit ratings. Will not change contribution rates. Additional audit procedures for institutions payroll data used for plan calculations. Additional footnote disclosures.

5 GASB 68 and 71 Additional Footnote Disclosures: Basic information about the pension plan. Classes of employees covered. Information regarding pension liabilities, pension expense and deferred outflows and inflows of recourses related to pensions. Significant assumptions including salary increases, inflation, discount rate, mortality and experience studies. Target asset allocation and projected rate of return by asset class. Sensitivity of the net pension liability to the discount rate. Required Supplementary Information: Schedule of the net pension liability for ten years. (not required retroactively) Schedule of employer contributions for ten years. (not required retroactively) Schedule of changes in net pension liability.

6 GASB 69 GASB Statement No. 69 Government Combinations and Disposals of Government Operations Establishes accounting standards for government combinations and disposals of government operations. Not expected to impact NDUS financial statements.

7 GASB 72 GASB Statement No. 72 Fair Value Measurement and Application. Requires fair value measurement for certain investments not previously measured at fair value. GASB fair value definition: Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Use valuation techniques that best represent fair value for the particular circumstances: Market approach Cost approach Income approach

8 GASB 72 Assets that meet definition of an investment generally should be measured at fair value. Definition of investment: a security or other asset that is held primarily for income or profit generation and with a present service capacity that is based solely on its ability to generate cash or to be sold to generate cash. Money Market accounts and Certificates of Deposit are excluded. Land and land rights classified as investments. Equity securities, stock warrants and stock rights with no readily determinable fair value. Commingled investment pools that are not government sponsored Life settlement contracts. Debt securities reported as assets

9 Establishes hierarchy of inputs used to measure fair value Level 1: Quoted prices in active markets for identical assets or liabilities. Most reliable method Level 2: Quoted prices such as quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active. Level 3: Unobservable inputs, such as nonbinding quote for an interest rate swap, a financial forecast for commercial real estate. Least reliable method. Required disclosures GASB 72 Fair value measurement at the end of the fiscal year, Level of the fair value hierarchy that each asset or liability is categorized, A description of the valuation techniques used, Significant changes in valuation techniques and the reason for such changes, Fair value measurement by investment type, For Level 3 investments, the effect of those investments on investment income for the fiscal year.

10 Source: GASB Statement # 68. Illustration 3 Note Disclosures and Required Supplementary Information for a Cost-Sharing Employer (No Nonemployer Contributing Entities) [Note: This illustration includes only note disclosures and required supplementary information required by this Statement. If the employer includes the pension plan in its financial reporting entity, the employer should apply the requirements of footnotes 18, 20, and 25 of this Statement, as applicable. The circumstances of this employer do not include all circumstances for which note disclosures and required supplementary information should be presented.] Sample School District Notes to the Financial Statements for the Year Ended June 30, 20X9 (Dollar amounts in thousands) Summary of Significant Accounting Policies Pensions. For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Teachers Pension Plan (TPP) and additions to/deductions from TPP s fiduciary net position have been determined on the same basis as they are reported by TPP. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Note X [If the District s employees were provided with benefits through more than one defined benefit pension plan, the District should disclose information required by paragraph 74 of this Statement and should apply the requirements of paragraph 75 of this Statement.] General Information about the Pension Plan Plan description. Teaching-certified employees of the District are provided with pensions through the Teachers Pension Plan (TPP) a cost-sharing multipleemployer defined benefit pension plan administered by the Teachers Retire-

11 ment System (TRS). Article 33 of the State Statutes grants the authority to establish and amend the benefit terms to the TRS Board of Trustees (TRS Board). TRS issues a publicly available financial report that can be obtained at [Internet address]. Benefits provided. TPP provides retirement, disability, and death benefits. Retirement benefits are determined as 2.5 percent of the employee s final 3-year average compensation times the employee s years of service. Employees with 10 years of continuous service are eligible to retire at age 60. Employees are eligible for service-related disability benefits regardless of length of service. Five years of service is required for nonservice-related disability eligibility. Disability benefits are determined in the same manner as retirement benefits but are payable immediately without an actuarial reduction. Death benefits equal two times the employee s final full-year salary. [If the benefit terms included postemployment benefit changes, the District should disclose information about those terms, as required by paragraph 76b of this Statement.] [If the pension plan was closed to new entrants, the District should disclose that fact, as required by paragraph 76b of this Statement.] Contributions. Per Article 33 of the State Statutes, contribution requirements of the active employees and the participating school districts are established and may be amended by the TRS Board. Employees are required to contribute 6.20 percent of their annual pay. The school districts contractually required contribution rate for the year ended June 30, 20X9, was percent of annual payroll, actuarially determined as an amount that, when combined with employee contributions, is expected to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Contributions to the pension plan from the District were $2,095 for the year ended June 30, 20X9. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 20X9, the District reported a liability of $14,910 for its proportionate share of the net pension liability. The net pension liability was measured as of December 31, 20X8, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The District s proportion of the net pension liability was based on a projection of the District s long-term share of contributions to the pension plan relative to the

12 projected contributions of all participating school districts, actuarially determined. At December 31, 20X8, the District s proportion was 0.20 percent, which was an increase of 0.01 from its proportion measured as of December 31, 20X7. [If there had been a change of benefit terms that affected the measurement of the total pension liability since the prior measurement date, the District should disclose information required by paragraph 80e of this Statement.] [If changes expected to have a significant effect on the measurement of the net pension liability had occurred between the measurement date and the reporting date, the District should disclose information required by paragraph 80f of this Statement.] For the year ended June 30, 20X9, the District recognized pension expense of $2,395. At June 30, 20X9, the District reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

13 $1,065 reported as deferred outflows of resources related to pensions resulting from District contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, 20Y0. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Actuarial assumptions. The total pension liability in the December 31, 20X8 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Mortality rates were based on the RP-2000 Combined Mortality Table for Males or Females, as appropriate, with adjustments for mortality improvements based on Scale AA. The actuarial assumptions used in the December 31, 20X8 valuation were based on the results of an actuarial experience study for the period January 1, 20X6 October 31, 20X8. As a result of the 20X8 actuarial experience study, the expectation of life after disability was adjusted in the December 31, 20X8 actuarial valuation to more closely reflect actual experience. [If the benefit terms included ad hoc postemployment benefit changes, the District should disclose information about assumptions related to those changes, as required by paragraph 77 of this Statement.]

14 The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: 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 employee contributions will be made at the current contribution rate and that contributions from school districts will be made at contractually required rates, actuarially determined. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. [If there had been a change in the discount rate since the prior measurement date, the District should disclose information about that change, as required by paragraph 78a of this Statement.] Sensitivity of the District s proportionate share of the net pension liability to changes in the discount rate. The following presents the District s proportionate share of the net pension liability calculated using the discount rate of 7.75

15 percent, as well as what the District s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentagepoint lower (6.75 percent) or 1-percentage-point higher (8.75 percent) than the current rate: Pension plan fiduciary net position. Detailed information about the pension plan s fiduciary net position is available in the separately issued TRS financial report. [If significant changes had occurred that indicate that the disclosures included in the pension plan s financial report generally did not reflect the facts and circumstances at the measurement date, the District should disclose additional information, as required by paragraph 79 of this Statement.] Payables to the pension plan [If the District reported payables to the defined benefit pension plan, it should disclose information required by paragraph 122 of this Statement.]

16 Schedules of Required Supplementary Information SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years* (Dollar amounts in thousands)

17 20X5 20X4 20X3 20X2 20X1 20XO 0.20% 0_ 20% 02 0% 021% 0_ 21% 0 14, ,605 $ 4,372 (2,355) (1,264) 9, 522 9,299 $ 8, , % % 50.20% (28. 81%) (15.98%) ( % 79.74% 91.78% % % 102

18 SCHEDULE OF DISTRICT CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years (Dollar amounts in thousands)

19 20X5 20X4 20X3 20X2 20X1 20XO $ 1,176 $ 898 $ 820 $ 769 $ 880 $ 1 (1,176) (898) (820) (769) (880) (1 $ $ $ $ $ $ 9,538 $ 9,410 $ 9,004 $ 8,442 $ 8,042 $ % 9.54% 9.10% 9.11% 10.94% 13

20 Notes to Required Supplementary Information for the Year Ended June 30, 20X9 Changes of benefit terms. Amounts reported in 20X8 reflect an increase in disability benefits to be equivalent to retirement benefits. Amounts reported in 20X4 reflect a modification to the benefit terms to incorporate a new definition of base compensation. Changes of assumptions. Amounts reported in 20X9 reflect an adjustment of the expectation of life after disability to more closely reflect actual experience. For amounts reported in 20X6 and later, the expectation of retired life mortality was based on RP-2000 Mortality Tables rather than on the 1983 Group Annuity Mortality Table, which was used to determine amounts reported prior to 20X6. Amounts reported in 20X3 reflect an adjustment of expected retirement ages to more closely reflect actual experience. Amounts reported in 20X0 reflect an adjustment of assumed life expectancies to more closely reflect actual experience.

21 Source: GASB Statement # 72 Example 2 Defined Benefit Pension Plan Facts and Assumptions A retiree pension defined benefit plan holds significant amounts of investments that are measured at fair value on a recurring basis. Because investing is a key part of the plan s activities, the plan shows greater disaggregation in its disclosures. The plan chooses a tabular format for disclosing the levels within the fair value hierarchy. All of the derivative instruments are investments, not hedging derivative instruments. Illustrative Disclosure The Plan categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The Plan has the following recurring fair value measurements as of December 31, 20X1:

22 Debt and equity securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets for those securities. Debt securities classified in Level 2 of the fair value hierarchy are valued using a matrix pricing technique. Matrix pricing is used to value securities based on the securities relationship to benchmark quoted prices. Commercial and residential mortgage-backed securities classified in Level 3 are valued using discounted cash flow techniques. Collateralized debt obligations classified in Level 3 are valued using consensus pricing.

23 Venture capital investments classified in Level 3 are valued using either a discounted cash flow or market comparable companies technique. Private equity funds international are valued as described in the following schedule, Note 6. The valuation method for investments measured at the net asset value (NAV) per share (or its equivalent) is presented on the following table. Derivative instruments classified in Level 2 of the fair value hierarchy are valued using a market approach that considers benchmark interest rates and foreign exchange rates. 1. Equity long/short hedge funds. This type includes investments in 12 hedge funds that invest both long and short primarily in U.S. common stocks. Management of each hedge fund has the ability to shift investments from value to growth strategies, from small to large capitalization stocks, and from a net long position to a net short position. The fair values of the investments in this type have been determined using the NAV per share of the investments. Investments representing approximately 22 percent of the value of the investments in this type cannot be redeemed because the investments include restrictions that do not allow for redemption in the first 12 to 18 months after acquisition. The remaining restriction period for these investments ranged from three to seven months at December 31, 20X1.

24 2. Event-driven hedge funds. This type includes 3 investments in hedge funds that invest in approximately 60 percent equities and 40 percent bonds to profit from economic, political, corporate, and government-driven events. A majority of the investments are targeted at economic policy decisions. The fair values of the investments in this type have been determined using the NAV per share (or its equivalent) of the investments. 3. Global opportunities hedge. This type includes investments in 5 hedge funds that hold approximately 80 percent of the funds investments in non-u.s. common stocks in the healthcare, energy, information technology, utilities, and telecommunications sectors and approximately 20 percent of the funds investments in diversified currencies. The fair values of the investments in this type have been determined using the NAV per share (or its equivalent) of the investments. For one investment, valued at $8.75 million, a gate has been imposed by the hedge fund manager, and no redemptions are currently permitted. This redemption restriction has been in place for six months, and the time at which the redemption restriction might lapse cannot be determined. 4. Multi-strategy hedge funds. This type invests in 15 hedge funds that pursue multiple strategies to diversify risks and reduce volatility. The hedge funds composite portfolio for this type includes investments in approximately 50 percent U.S. common stocks, 30 percent global real estate projects, and 20 percent arbitrage investments. The fair values of the investments in this type have been determined using the NAV per share (or its equivalent) of the investments. Investments representing approximately 15 percent of the value of the investments in this type cannot be redeemed because the investments include restrictions that do not allow for redemption in the first year after acquisition. The remaining restriction period for these investments ranged from four to six months at December 31, 20X1. 5. Real estate funds. This type includes nine real estate funds that invest primarily in U.S. commercial real estate. The fair values of the investments in this type have been determined using the NAV per share (or its equivalent) of the Plan s ownership interest in partners capital. These investments can never be redeemed with the funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated. It is expected that the underlying assets of the funds will be liquidated over the next 7 to 10 years. Twenty percent of the total investment in this type is expected to be sold. However, the individual investments that will be sold have not yet been determined. Because it is not probable that any individual investment will be sold, the fair value of each individual investment has been determined using the NAV per share (or its equivalent) of the Plan s ownership interest in partners capital. Once it has been determined which

25 investments will be sold and whether those investments will be sold individually or in a group, the investments will be sold in an auction process. The investee fund s management is required to approve of the buyer before the sale of the investments can be completed. 6. Private equity funds international. This type includes two private equity funds that invest primarily in foreign technology companies. These invest- ments can never be redeemed with the funds. Instead, the nature of the investments in this type is that distributions are received through the liqui- dation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over five to eight years. However, as of December 31, 20X1, it is probable that all of the investments in this type will be sold at an amount different from the NAV per share (or its equivalent) of the Plan s ownership interest in partners capital. Therefore, the fair values of the investments in this type have been determined using recent observable transaction information for similar in- vestments and nonbinding bids received from potential buyers of the invest- ments. As of December 31, 20X1, a buyer (or buyers) for these investments has not yet been identified. Once a buyer has been identified, the investee fund s management is required to approve of the buyer before the sale of the investments can be completed.

(Dollar amounts in thousands)

(Dollar amounts in thousands) Illustration 1 Note Disclosures and Required Supplementary Information for a Single Employer That Provides OPEB through a Defined Benefit OPEB Plan That Is Administered through a Trust That Meets the Criteria