Minnesota Association of School Business Officials (MASBO) Employer Pension Reporting Under GASB 68

Transcription

1 Minnesota Association of School Business Officials (MASBO) Employer Pension Reporting Under GASB 68 November 15, 2013 Presented by: Dave DeJonge, Assistant Executive Director, PERA John Wicklund, Assistant Executive Director, TRA

2 GASB accounting changes Governmental Accounting Standards Board (GASB) will dramatically alter accounting rules for pension funds and their sponsoring employers (school districts, cities, counties, state) starting in FY GASB changes will: o Make pension costs more prominent on employers financial statements each entity s share of the PERA and TRA unfunded liability must be shown on face of government-wide financial statements. o Make pension costs 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. Big question: Who owns and records the public pension fund liability? Or in better times, its surplus assets? 2

3 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 that 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. Pension Expense developed on accounting basis, not contribution basis. o Totally different from current GASB standards. o Disconnect between accounting numbers, funding numbers. o Will require significant rethinking and retraining. 3

4 We are in this together PERA and TRA membership data annual actuarial valuations required under statute. PERA General and TRA are cost-sharing, multiple-employer plans. PERA and TRA will regularly report actuarial valuation results and disclosures for employers financial statements. 4

5 GASB Statement 67 (Effective for FY 2014 PERA and TRA CAFRs released Dec. 1, 2014) Replaces current Statement of Plan Net Assets with Statement of Fiduciary Net Position (GASB 63). Replaces current Statement of Changes in Plan Net Assets with Statement of Changes in Fiduciary Net Position. Revisions to Notes to the Financial Statements. Required Supplementary Information (RSI): Ten-year Funding Trends. Required Supplementary Information (RSI) Schedule of the Net Pension Liability. Conclusion: Little impact on employer units. 5

6 GASB Statement 68: Impact on employer units (FY2015) Government-wide financial statements, not fund-level statements. PERA/TRA conduct actuarial valuation reports at the close of every fiscal year. Audited results available every December. PERA/TRA calculate proportionate share assigned to each employer unit (based on employer contributions). PERA/TRA transmits assets, liabilities, disclosure data, Required Supplementary Information to each employer. Large unfunded actuarial liabilities exist ($4 billion to $6 billion each), likely higher based on revised methodologies. Result: Many employers will experience sticker shock at their share of the net pension liability, higher than net assets reported. (Remember: Liabilities paid over decades.) 6

7 GASB Statement 68: Impact on employer units (FY 2015) 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 Normal Costs o Changes due to plan amendments for any members. o Change in actuarial assumptions for inactives. o Experience gain/loss for inactives. o Exceptions (deferred inflows/deferred outflows): Experience gain/loss and assumption changes for actives amortized over average work lives of all active and retired members. (Estimated eight years.) Difference between assumed and actual investment return on market value is recognized over a five year period. Will create volatility in pension expense. Pension expense reported not directly related to actual pension contributions sent to PERA or TRA. 7

8 How GASB 68 affects employers GASB 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 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 be volatile. Cannot be calculated by the employer. 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). Shorter amortization. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average working lifetime. Higher pension expense and more volatility. Permits asset smoothing method (5 years for MSRS/PERA/TRA). Difference between assumed and actual investment return spread over 5 years. Creates more volatility. 8

9 How GASB affects employers GASB changes will force employers to show their portion of the pension system s unfunded liability on financial statements. Using school districts as an example: Large school district Medium school district Small school district Old GASB TRA annual contributions $8.9 million $2.9 million $475,673 PERA annual contributions (Annual expense) $3.0 million $11.9 million $1.2 million $4.1 million $152, $628,005 New GASB Employer portion of TRA unfunded liability $226.6 million $74.9 million $12.0 million Employer portion of PERA unfunded liability Balance sheet liability TOTAL $37.8 million $264.4 million $15.1 million $90.0 million $1.9 million $13.9 million School district s net assets $166.5 million $60.0 million $14.2 million NOTE: Allocation method of unfunded liability is estimated. 9

10 Role of PERA/TRA external auditor External auditor: Office of the Legislative Auditor Auditing of plan financial statements Auditing of the allocation method of the net pension liability (NPL) Auditing of Schedule of Plan Amounts to determine employer s deferred outflows, deferred inflows and pension expense. 10

11 Implementation costs Implementation and ongoing costs undetermined but will include: o o o o Additional external actuary fees Additional external audit fees Additional staffing cost to comply Unknown impact upon employer units 11

12 Paperwork and report tsunami Three ways to measure pension fund status: o o o Books (GASB 67-68) for CAFR publication. Budget Minnesota likely to continue current actuarial reporting to assist funding decisions (GASB 25). Bonds Moody s: 5.5 percent investment assumption, 17-year amortization period. Standard & Poor s and Fitch developing their own assumptions. 12

13 Public Pension Financial Forum (P2F2) The annual P2F2 conference was held Oct , Walk-through of GASB implementation presented by public pension systems in Ohio and Michigan. State of Kentucky implementing GASB 67 for fiscal year ended June 30, GASB 68 Implementation Guide scheduled for release in January

14 GASB timeline: Measurement dates for school districts GASB Measurement Period Actuarial valuation measurement date Release of 7/1/14 actuarial valuation results Retirement systems transmit results to school districts School districts use 7/1/14 actuarial valuation results School district CAFRs w/gasb 68 published June 2013 June 30, 2014 Dec. 1, 2014 June 30, 2015 Late 2015 Key point: There will be a one-year lag in school district reporting of GASB 68 results. Example: School districts, in their FY 2015 reporting, will use FY 2014 actuarial valuation results from PERA and TRA. 14

15 GASB Statement No. 68 (Paragraphs 48-51) Statement of net position for FY ended June 30, 2015: Cost-sharing employers Total Assets Liabilities Accounts payable Salaries payable $x,xxx,xxx $xx,xxx $xx,xxx Net pension liability $x,xxx,xxx (New) Total Liabilities $x,xxx,xxx Change from old GASB Net Position Possibly negative Remember: Pension liability is paid over decades of time and could be very volatile based on conditions of the pension fund at the state level. 15

16 GASB Statement No. 68 (Paragraphs 52-73) Statement of Changes in Net Position for FY ended June 30, 2015 Instruction expenses Support expenses Pension expenses Total expenses $x,xxx,xxx $x,xxx,xxx $xx,xxx (Revised) $x,xxx,xxx Impact upon net position from pension expense Positive or negative each year Currently: The pension expense is contributions made. GASB 68: Pension expense consists of multiple elements, including pension investment returns, plan changes, contributions, assumption changes, etc. 16

17 GASB Statement No. 68 (Paragraphs 74-80) Notes to Financial Statements for FY ended June 30, 2015 Pension assets, pension liabilities, deferred outflows of resources, deferred inflows. Public pension plan description Assumptions (inflation, salaries, mortality tables, COLAs) Discount rate (used by PERA and TRA) to measure liabilities Public pension plan s fiduciary net position Sensitivity analysis on the impact on NPL of a one percentage increase and decrease in the discount rate. Funding policy for determining contributions. Other: Numerous (paragraph 80) 17

18 GASB Statement No. 68 (Paragraph 81) Required supplementary information (RSI) Ten-year trend schedules School district s proportionate share of net pension liability o District-covered payroll o Net pension liability as a percent of covered payroll Schedule of school district contributions o Statutory contributions o Contributions as a percent of covered payroll GASB grace: Only go back retroactively if data is present. 18

19 GASB Statement No. 68 footnote disclosures Disclosure Reference Source Requirement Total of employer s pension liabilities, pension assets, deferred outflows/inflows related to pensions, and pension expense for the period (if not identifiable in financials) 74 PERA/TRA New Name of plan, ID of system that administers the plan, ID as 76.a PERA/TRA or Existing agent or cost-sharing plan Employer Description of benefit terms, including types of employees 76.b PERA/TRA or Existing covered, types of benefits, pension formulas, COLAs, and authority under which benefit terms are established/amended. Employer Description of contribution requirements, including how contributions are determined, how contribution rates are 76.c PERA/TRA or Employer Existing (with slight changes) changed, actual contribution rates, and amount of contributions recognized by the pension plan for that period. How to obtain PERA s and TRA s CAFR 76.d PERA/TRA or Existing Employer Significant assumptions/inputs used to measure the total 77 PERA/TRA New pension liability, including: inflation, salary changes, COLA s, mortality, and dates of experience studies on which assumptions are based. Discount rate applied when measuring TPL and change in the discount rate since the prior measurement date, if any. 78.a PERA/TRA (Actuary) New Assumptions made about projected cash flows when calculating the discount rate 78.b PERA/TRA (Actuary) New 19

20 GASB Statement No. 68 footnote disclosures Disclosure Reference Source Requirement Long-term expected rate of return and how it was determined, including significant methods and assumptions used for that purpose. If the discount rate incorporates a municipal bond, the bond rate used and source of that rate. Periods of projected benefit payments to which long-term ROR is used and municipal bond rate is used when determining the discount rate Assumed asset allocation of portfolio, long-term expected real ROR for each asset class, and whether ROR is presented as arithmetic or geometric. Employer s NPL calculated using discount rates that are 1% higher and lower than the actual discount rate used to calculate the TPL. Pension plan s fiduciary net position has been determined on the same basis used by the pension plan, and a brief description of pension plan s basis of accounting, including policies regarding benefit payments and the valuation of plan investments. 78.c PERA/TRA (SBI) New 78.d PERA/TRA (Actuary) 78.e PERA/TRA (Actuary) New New 78.f PERA/TRA (SBI) New 78.g PERA/TRA (Actuary) New 79 PERA /TRA New Employer s share of the NPL 80.a PERA/TRA New (Actuary) Employer s percentage of NPL, the basis on which its proportion was determined, and change in its proportion since the prior measurement date 80.b PERA/TRA New 20

21 GASB Statement No. 68 footnote disclosures Disclosure Reference Source Requirement Measurement date of NPL and date of actuarial valuation on which the TPL is 80.c PERA/TRA New based. Assumption changes or other inputs that affected measurement of the TPL 80.d PERA/TRA New since the prior measurement date Changes of benefit terms that affected measurement of the TPL since the prior 80.e PERA/TRA New measurement date Nature of changes between measurement date of collective NPL and employer s reporting date if they are expected to have a significant effect on the employer s share of the NPL. 80.f PERA/TRA or Employer New Amount of pension expense recognized by the employer in the reporting period. 80.g PERA/TRA or Employer New Employer s balances of deferred outflows/inflows related to pensions, classified in 5 categories: 80.h PERA/TRA and New Differences between expected and actual experience Employer Changes of assumptions/inputs Difference between expected and actual earnings Changes in employer s proportion and differences between contributions made and employer s proportionate share of contributions Employer s contributions to the pension plan subsequent to the measurement date Schedule showing net amount of balances of deferred outflows/inflows that will be recognized in the employer s pension expense and recognized as a reduction in the collective net pension liability in the future. Amount of revenue recognized for the support provided by non-employer contributing entities, if any. 80.i PERA/TRA and Employer New 80.j Employer New

22 GASB Statement No. 68: Deferred outflows + inflows 22

23 GASB 68: Schedules of required supplementary information DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years* (Dollar amounts in thousands) 6/30. 23

24 GASB 68: Schedule of district contributions Teachers Pension Plan Last 10 Fiscal Years (Dollar amounts in thousands) 24

25 GASB 68: Summary 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. Currently, these employers have no such reporting requirements in statements, footnotes or schedules. 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. o PERA/TRA likely to have two valuation reports: One GASB compliant; one funding standard report used to determine contribution rates. 25

26 Key take-aways Employers and the state are going to need to show much more information on their financial statements under GASB o Allocation issues joint effort involving the pension systems and actuaries. o Many questions are still open, pending implementation guide. o Auditors and local government/school district finance personnel will have a lot of questions. o Reporting is at the end of fiscal periods, so any variation in fiscal years will add complexity (hopefully not an issue). The appearance of liabilities on school district financials might alarm local governments, the public, and the press. The legislature must develop a formal funding policy or continue current funding reports under GASB

27 What are PERA/TRA doing right now? Communication initiatives (employers, external auditors, employer stakeholder groups, member/retiree groups) Working with our actuaries on programming, data infrastructure. Awaiting further guidance from GASB and AICPA o Implementation Guide Statement 67: June 2013 o Implementation Guide Statement 68: January 2014 Legislative communication and funding policy (Legislative Commission on Pensions and Retirement) Working with Office of Legislative Auditor (OLA) and Office of State Auditor (OSA) on audit responsibilities. 27

28 What can you do? Stay in tune with GASB spread this information back to your firms, school districts. PERA and TRA would be happy to speak to employer groups about GASB. To schedule a presentation for your group, contact Susan Barbieri, Communications Officer for the retirement systems, at or sbarbieri@minnesotatra.org. The retirement systems can provide you with GASB explanatory fact sheets for use in your board packets and as handouts for members of the public and the press. Visit the employer tab on PERA s and TRA s websites: