Implementing the New Pension Accounting Rules for Public Pension Plans

Transcription

1 Implementing the New Pension Accounting Rules for Public Pension Plans William G. Karbon, MSPA, CPC Sr. Vice President, Dir. of Compliance CBIZ Benefits & Insurance Services, Inc. Lawrenceville, NJ

2 What We Will Cover GASB Statements 67 and 68 Brief background Significant changes Overview and Implementation of GASB Statement 68 Examples Significant Implementation Guidelines 1

3 Background 2

4 Background Prior to GASB 67/68 GASB 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for DC Plans Issued November 1994 Effective for periods beginning after June 15, 1996 GASB 27, Accounting for Pensions by State and Local Governmental Employers Issued November 1994 Effective for periods beginning after June 15,

5 Background Current pension accounting and financial reporting standards GASB 50, Pension Disclosures Issued May 2007 Effective for periods beginning after June 15,

6 Background January Board approved project to gather information regarding effectiveness of Statements 25 and 27 April 2008 Postemployment benefit accounting and financial reporting project added to GASB s technical agenda 5

7 Background October 2009 through June 2010 Board reached tentative conclusions on basic employer accounting and financial reporting issues presented for public comment in the Invitation to Comment Preliminary Views on Pension Accounting and Financial Reporting Issued June 26,

8 Background Exposure Draft Issued July 8, 2011 Proposed rules after receipt of comments on Preliminary Views GASB Statements 67 and 68 Issued June 25, 2012 Amends GASB Statements 25, 27 and 50 7

9 Background Implementation Guide for GASB Statement 67 Issued June 2013 Implementation Guide for GASB Statements 68 Issued January

10 Background Effective Dates GASB Statement No. 67 Financial Reporting for Pension Plans Effective for fiscal years beginning after June 15, 2013 GASB Statement No. 68 Accounting and Financial Reporting for Pensions Effective for fiscal years beginning after June 15, 2014 Earlier application of new rules is encouraged 9

11 Background Next on the horizon OPEB and pensions not within scope of Statements 67/68 10

12 Significant Changes 11

13 Significant Changes Abbreviations TPL Total Pension Liability FNP Fiduciary Net Position NPL Net Pension Liability EAN Entry Age Normal FMV Fair Market Value 12

14 Significant Changes TPL is calculated using uniform funding method EAN NPL recognized on balance sheet 13

15 Significant Changes Discount rate function of: Expected return Rate for 20-year, tax-exempt general obligation municipal bonds Sufficiency of projected assets Accelerated amortization of: Plan changes Gains / losses Assumption changes 14

16 Significant Changes Uniform methodology to determine income/expense and balance sheet liability Does not require change to funding method or contribution strategy Volatility in accounting need not cause change to contribution strategy However, determination of discount rate may impact contribution strategy 15

17 Overview and Implementation of GASB Statement 68 16

18 Plans Subject to GASB Statement 68 Defined benefit pension plans provided through trusts that meet the following criteria: Employer/nonemployer contributions irrevocable Plan assets dedicated to providing pensions Plan assets legally protected from creditors Excludes all OPEB Applies to employers and nonemployer contributing entities that have legal obligation to make contributions directly to a pension plan Special funding situations Other circumstances 17

19 Types of Plans Requirements depend on type of pension plan administered Single-employer pension plan Pensions provided to employees of only one employer Agent multiple-employer pension plan Plan assets pooled for investment purposes, separate accounts maintained for each employer Employer s share of assets can only be used to pay benefits of its employees Cost sharing multiple-employer pension plan Plan assets are pooled for all purposes Assets are used to pay benefits of the employees of any employer 18

20 Key Definitions TPL - Portion of actuarial present value of projected benefit payments that is attributed to past periods of member service NPL - Liability of employers and nonemployer contributing entities to plan members for benefits provided through a defined benefit pension plan 19

21 Key Definitions FNP presents the following items as of the end of the pension plan s reporting period Assets measured at FMV plus Deferred outflows of resources minus Liabilities, such as benefit payments due minus Deferred inflows of resources 20

22 Implementing GASB Statement 68 Single and Agent Employers Balance sheet liability recognized for NPL which is TPL net of plan s FNP. NPLs associated with different plans can be displayed in the aggregate, aggregated liabilities and assets should be displayed separately NPL should be measured as of date no earlier than end of prior fiscal year applied consistently from year to year 21

23 Agent Multiple-Employer Plan Audited financial statements of plan do not include actuarial information, nor do they include each employer s interest in FNP Allocation of FNP position reported by plan to employer is unaudited Employers needs the following elements to record as of the measurement date: TPL less NFP = NPL Deferred outflows/inflows based on investment experience Deferred outflows/inflows based on changes in assumptions Deferred outflows/inflows based actuarial gains and losses Pension expense 22

24 Agent Multiple-Employer Plan How does a participating employer determine and get comfortable that these amounts as of the measurement date are accurate and verifiable? 23

25 Agent Multiple-Employer Plan Include supplemental condensed schedule of changes in FNP by employer in plan financial statements for which plan auditor is engaged to provide opinion Plan auditor engaged to issue SOC 1 (type 2) report on allocation of inflows (i.e., contributions, investment income, etc.) and outflows (i.e., benefit payments, administrative expenses, etc.) of plan to individual employer accounts 24

26 NPL: Measurement timing Potentially 3 different dates FYE NPL Measurement date As of date no earlier than end of prior fiscal year TPL and NPL measured as of the same date TPL Actuarial valuation date If not measurement date, as of date no more than 30 months (+1 day) prior to FYE Actuarial valuations at least every 2 years (more frequent valuations encouraged) Coordination with pension plan Measurement date will most likely correspond to year-end of plan. In this case, employers with same year-end as plan must choose measurement date as of their prior or current year-end 25

27 Timing Example 6/30/13 6/30/14 6/30/15 Employer FYE 26

28 Timing Example Prior FYE 6/30/13 6/30/14 6/30/15 Employer FYE Measurement Date 27

29 Timing Example 30 months + 1 day Prior FYE 12/31/12 6/30/13 6/30/14 6/30/15 Employer FYE Actuarial Valuation Date Measurement Date 28

30 Timing Example 30 months + 1 day Prior FYE 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date 29

31 Timing Example 30 months + 1 day 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date 30

32 Timing Example 30 months + 1 day 12/31/12 12/31/12 6/30/13 12/31/13 6/30/14 12/31/14 6/30/15 12/31/13 12/31/14 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date 31

33 Timing Example 12/31/13 12/31/14 12/31/14 6/30/15 Employer FYE Plan FYE Actuarial Valuation Date Measurement Date 32

34 Timing Example 33

35 Timing Example 34

36 Timing of Measurement of Total Pension Liability Pension Expense (measurement period) Deferred Outflows of Resources Plan Prior Year-End Employer Prior Year- End Plan Current Year-End Employer Current Year-End Measurement Date June 2014 December 2014 June 2015 December 2015 Employer contributions made directly by employer subsequent to measurement date of NPL and before the end of the employer s fiscal year should be recognized as a deferred outflow of resources

37 Example Sample County participates in an agent multiple-employer defined-benefit plan sponsored by an Association of Counties. Sample County is implementing GASB Statement 68 during the year ended June 30, The agent plan also has a fiscal year-end of June 30th and implemented the provisions of GASB Statement 67 during the year ended June 30, Sample County s financial statements are a single-year presentation. When should Sample County s measurement date be? Does it have any options? 36 37

38 Example (Cont d) In accordance with GASB Statement 68, the measurement date for Sample County must be as of a date no earlier than the end of its prior fiscal year. Since Sample County and the Plan have the same year end, Sample County may elect to use June 30, 2014 or June 30, 2015 as the measurement date. However, once selected, the measurement date should be consistently applied from period to period

39 Sample County Impact of Using Prior Year Measurement Date Pension Expense (measurement period) Deferred Outflows of Resources County Prior Year- End County Current Year-End Plan Year-End Plan Year- End Measurement Date June 2013 June 2014 June

40 Sample County Impact of Using Current Year Measurement Date Pension Expense (measurement period) County Prior Year- End County Current Year-End Plan Year-End Plan Year-End Plan Year-End Measurement Date June 2013 June 2014 June

41 NPL: Measurement general approach Three broad steps Project benefit payments Discount projected benefit payments to actuarial present value Attribute actuarial present value to periods Methods and assumptions Generally, assumptions in conformity with Actuarial Standards of Practice Fewer alternatives than in Statement 27 for methods and assumptions for GAAP reporting purposes No changes required to actuarial methods and assumptions used to determine funding amounts 40

42 NPL: Measurement projection Benefit terms/agreements at measurement date Current active and inactive employees Incorporate expectations of: Salary changes Service credits Automatic postemployment benefit changes (including COLAs) Ad hoc postemployment benefit changes if substantively automatic 41

43 NPL: Measurement discounting Single discount rate Reflects: Long-Term Rate of Return (LTeRoR) on pension plan investments (return on investments that are expected to be used to finance pension benefits), to extent that plan net position: Projected to be sufficient to pay benefits Plan assets expected to be invested using a strategy to achieve that return Rate for 20-year, tax-exempt general obligation municipal bonds to extent that conditions for LTeRoR not met 42

44 Discount rate Sufficiency of projected plan net position for use of LTeRoR Includes: Employer contributions for current and former employees Contributions from current employees Projected investment earnings on projected plan net position Projected benefit payments and administrative expenses Does not include: Employer contributions for service costs of future employees Contributions of future employees, unless expected to exceed their own service cost 43

45 Discount rate Sufficiency of projected plan net position for use of LTeRoR (cont.) Projections of employer contributions Apply professional judgment if amounts established by statute, contract, or formal written policy Consider most recent 5-year contribution history Reflect all known events and conditions In other circumstances, projected contributions limited to average over most recent 5 years May be modified by consideration of subsequent events Basis for average determined through professional judgment 44

46 Discount rate Determining the single rate Compare projected benefit payments to plan s projected fiduciary net position in each period Apply relevant rate to each period s projected benefit payments Total the present values of all projected benefit payments Calculate single discount rate that results in same present value (if applied to all projected benefit payments) as use of the two rates 45

47 Discount rate calculation: Steps Step 1: Project benefit payments. Step 2: Project plan NFP. 46

48 Discount rate calculation: Steps 1 and 2 Projected Benefit Payments Actuarial Present Values of Projected Benefit Payments Year (a) Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 Future benefit payments (column c) and plan fiduciary net position (column b) are both projected. 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, Total $ 2,109,333 + $ 1,724,534 = $ 3,833,867 47

49 Discount rate calculation: Step 2 (more detail) Year Projected Beginning Fiduciary Net Position (a) Projected Total Contributions (b) Projected Benefit Payments (c) Projected Administrative Expense (d) Projected Investment Earnings (e) Projected Ending Fiduciary Net Position (f) = (a) + (b) (c) (d) + (e) $ 1,431,956 $ 73,211 $ 109,951 $ 1,000 $ 105,981 $ 1,500,197 1,500,197 72, ,500 1, ,815 1,565,686 1,565,686 72, ,749 1, ,454 1,628,547 1,628,547 72, ,690 1, ,871 1,687,890 1,687,890 72, ,229 1, ,998 1,742,722 1,742,722 72, ,168 1, ,768 1,792,194 1,792,194 71, ,466 1, ,120 1,835,463 1,835,463 71, ,332 1, ,983 1,871,402 1,871,402 71, ,591 1, ,277 1,898,930 1,898,930 70, ,069 1, ,929 1,917,104 Include only cash flows associated with current employees Cash flows from future employees should not be included, unless those employees contribute more than their own service cost. 48

50 Discount rate calculation: Steps (cont.) Step 3: In each period, determine whether plan fiduciary net position is projected to be sufficient to make the benefit payments. 49

51 Discount rate calculation: Step 3 Year (a) Total Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of Each year s projected "Unfunded" Benefit Payments (g) = (e) (1 + 4%) benefit payments (column (a) c) are compared to projected beginning plan fiduciary net position (column b) and are assigned to one of two benefit payment streams (columns d and e) depending upon whether plan fiduciary net position is projected to be sufficient to make the benefit payments. Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,867 50

52 Year (a) Total Discount rate calculation: Step 3 (cont.) Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) In this example, projected beginning plan fiduciary net position is greater than projected benefit payments through year 26. Therefore, those projected benefit payments are assigned to the funded benefit payment stream in column d. Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,

53 Discount rate calculation: Step 3 (cont.) Year (a) Total Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) In year 27, the total of projected benefit payments exceeds projected beginning plan fiduciary net position. Beginning in that year, projected benefit payments are assigned to the unfunded benefit payment stream in column e. Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,867 52

54 Discount rate calculation: Steps (cont.) Step 4: Calculate the present value of each period s projected benefit payments using the relevant rate. 53

55 Year (a) Total Discount rate calculation: Step 4 Projected Beginning Fiduciary Net Position (b) The present values of projected benefit payments in the funded payment stream are calculated using the long-term eror. Projected Benefit Payments (c) Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,867 54

56 Year (a) Total Discount rate calculation: Step 4 (cont.) Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments The present (c) values of projected benefit payments in the unfunded payment stream are calculated using the bond index rate. Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,867 55

57 Discount rate calculation: Steps (cont.) Step 5: Calculate the sum of: (a)the present values of projected benefit payments discounted using the LTeRoR (b)the present values of projected benefit payments discounted using the bond index rate. 56

58 Discount rate calculation: Step 5 Projected Benefit Payments Actuarial Present Values of Projected Benefit Payments Year (a) Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, ,918 The sum of the present values of the two benefit payment streams is calculated. 547, , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, Total $ 2,109,333 + $ 1,724,534 = $ 3,833,867 57

59 Discount rate calculation: Steps (cont.) Step 6: Determine the single discount rate that, if applied to all projected benefit payments, will result in a present value equal to the result of step 5. 58

60 Discount rate calculation: Step 6 Year (a) Total Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) Projected Benefit Payments "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Actuarial Present Values of Projected Benefit Payments Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Through a process of interpolation, the single discount rate is determined such that, when applied to the projected benefit payments in column c, the result is the same present value as the sum of columns f and g. Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, , , , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74,168 In this example, that rate is 5.29% , , ,135 70, $ 2,109,333 + $ 1,724,534 = $ 3,833,867 59

61 Determining TPL Single and Agent Employers EAN used to attribute actuarial present value of projected benefit payments Attribution made on individual employee basis Employee s service costs should be level as % of that employee s project pay (use inflation rate if no projected pay) Attribution begins with first period in which employee s service accrues pensions under benefit terms 60

62 Determining TPL EAN used to attribute actuarial present value of projected benefit payments Service cost of all pensions should be attributed through all assumed exit ages, through retirement Service cost determined on same benefit terms reflected in employee s actuarial present value of projected benefit payments 61

63 Changes in NPL Statement of Changes in NPL Changes in NPL recognized in pension expense Present value of attributed benefit accruals Interest on NPL Present value of benefit change resulting from plan amendment 62

64 Changes in NPL Changes in NPL recognized in pension expense Amortization of liability experience gains/losses and impact of assumption change Amortized over expected remaining service lives (actives and inactives) Remaining service life for inactive is zero Liability experience gains/losses and changes due to assumption changes not recognized in pension expense should be reported as deferred inflow/outflow 63

65 Changes in NPL Changes in NPL recognized in pension expense Five year amortization of asset experience gains/losses Liability experience gains/losses and changes due to assumption changes not recognized in pension expense should be reported as deferred inflow/outflow 64

66 Cost Sharing Multiple-Employer Plans Cost Sharing Employers Suggested employer proportionate share of collective NPL = (1) (2) (3) as follows: (1) = Employer s projected long-term contribution effort to the plan (including nonemployer contribution entities) (2) = Long-term contribution effort to the plan of all employers (including nonemployer contribution entities) (3) = Collective NPL 65

67 Cost Sharing Multiple-Employer Plans Cost Sharing Employers Proportionate share of collective NPL determined at measurement date. Use valuation date if contribution is actuarially determined 66

68 Cost Sharing Multiple-Employer Plans Cost Sharing Employers Pension expense, deferred outflows and deferred inflows should be employer s proportionate share of collective pension expense, collective deferred outflows and collective deferred inflows. Proportionate share should be determined using employer s proportion of collective NPL 67

69 Cost Sharing Multiple-Employer Plans Cost Sharing Employers Changes in the employer s proportion of the collective NPL since prior measurement date should be amortized in the employer s pension expense. Amortization period is the expected remaining service lives of all employees (active and inactive) 68

70 Cost Sharing Multiple-Employer Plans Cost Sharing Employers The following are determined using the same methodologies as single and agent employers: Collective NPL Timing and frequency of valuations Selection of assumptions Projection of benefit payments Discount rate 69

71 Example 70

72 Example Sample County FYE 6/X9 Increase (Decrease) Total Pension Plan Fiduciary Net Pension Liability Net Position Liability (a) (b) (a) - (b) Balances at 6/30/X8 $2,853,455 $2,052,589 $800,866 Changes for the year: Service cost 73,034 73,034 Interest 219, ,345 Experience (gain)/loss (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 ee contribs (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 71

73 Sample County s Pension Expense for FYE June 30, 20X9 Amount Components: Service cost 73,034 Interest on TPL 219,345 Amortization of experience (gain)/loss 3,454 Change in assumptions 20,101 Contributions employee (31,451) Projected earnings on plan investments (158,625) Differences between projected and actual earnings on plan investments 29,155 Administrative expense 3,373 Other changes in FNP (8) Total Pension Expense 158,378 72

74 Interest on TPL 7.75% Amount for Period Portion of Period Interest on TPL TPL 2,853, % 221,143 Service Cost 73,034 50% 2,830 Benefit Payments, Including Employee Contributions (119,434) 50% (4,628) Total Interest on TPL 219,345 73

75 Amortization of Experience (Gain)/Loss Experience (Gain)/Loss Recognition Period Amortized Amount Year 20X0 35, X1 30, ,117 20X2 13, ,622 20X3 34, ,137 20X4 (28,228) 8.2 (3,442) 20X5 19, ,430 20X6 38, ,688 20X7 (3,562) 8.0 (445) 20X8 (15,211) 8.0 (1,901) 20X9 (37,539) 7.9 (4,752) Amortized Amount $3,454 74

76 Amortization of Assumption Changes Increase in TPL Recognition Period Amortized Amount Year 20X X1 32, ,195 20X X X4 92, ,280 20X X X7 61, ,626 20X X Amortized Amount 20,101 75

77 Projected Earnings on Plan Assets 7.75% Amount for Period Portion of Period Interest on TPL Beginning FNP 2,052, % 159,076 Employer Contributions 79,713 50% 3,089 Employee Contributions 31,451 50% 1,219 Benefit Payments (With Refund of EE Contribs) (119,434) 50% (4,628) Administrative Expense and Other 3,365 50% (130) Total Projected Earnings 158,625 76

78 Amortization of Asset (Gain)/Loss Asset (Gain)/Loss Recognition Period Amortized Amount Year 20X5 (43,058) 5.0 (8,610) 20X6 (159,517) 5.0 (31,903) 20X7 179, ,865 20X8 206, ,309 20X9 (37,529) 5.0 (7,506) Amortized Amount $29,155 77

79 Deferrals of Experience (Gain)/Loss Experience Losses Experience Gains Amount Recognized in Pension Expense Thru 6/30/X9 Deferred Outflows of Resources at 6/30/X9 Deferred Inflows of Resources at 6/30/X9 Year (a) (b) (c) (a) - (c) (b) - (c) 20X2 13,464 12, X3 34,335 28,959 5,376 20X4 (28,228) (20,652) (7,576) 20X5 19,927 12,150 7,777 20X6 38,438 18,752 19,686 20X7 (3,562) (1,335) (2,227) 20X8 (15,211) (3,802) (11,409) 20X9 (37,539) (4,752) (32,787) Total 33,327 (53,999) 78

80 Deferrals of Assumption Changes Increase in TPL Decrease in TPL Amount Recognized in Pension Expense Thru 6/30/X9 Deferred Outflows of Resources at 6/30/X9 Deferred Inflows of Resources at 6/30/X9 Year (a) (b) (c) (a) - (c) (b) - (c) 20X4 92,500 67,680 24,820 20X7 61,011 22,878 38,133 Total 62,953 79

81 Deferrals of Asset (Gain)/Loss Asset Loss Asset Gain Amount Recognized in Pension Expense Thru 6/30/X9 Deferred Outflows of Resources at 6/30/X9 Deferred Inflows of Resources at 6/30/X9 Year (a) (b) (c) (a) - (c) (b) - (c) 20X6 (159,517) (127,612) (31,905) 20X7 179, ,595 71,732 20X8 206,546 82, ,928 20X9 (37,529) (7,506) (30,023) Total 195,660 (61,928) 80

82 Accounting for NPL Net Pension Liability Pension Expense Experience Gain/(Loss) Deferred Outflows of Resources Experience Gain/(Loss) Deferred Inflows of Resources Balances at 6/30/X8 $800,866 47,321 (27,000) Changes for the year: Service cost 73,034 73,034 Interest 219, ,345 Experience gain/(loss) (37,539) (37,539) Amort of exp gain/(loss) 3,454 (13,994) 10,540 Amort of assum change 20,101 Contributions Er (79,713) Contributions Ee (31,451) (31,451) Net investment income (196,154) (158,625) Amort of asset gain/(loss) 29,155 Benefit payments Administrative Expense 3,373 3,373 Other Changes (8) (8) Net Changes (49,113) 158,378 (13,994) (26,999) Balances at 6/30/X9 $751,753 33,327 (53,999) 81

83 Significant Implementation Guidelines 82

84 GASB 67 Implementation Guidelines 50. Q For purposes of determining the money-weighted rate of return on pension plan investments, should the beginning and ending values of investments that are used as the basis for the calculation equal the amounts reported in the investments line item in the pension plan s statements of fiduciary net position? A Generally, no. For purposes of determining the money-weighted rate of return on pension plan investments, investments should include cash, investments, and other investment-related balances, such as receivables for investment income, receivables to/payables from brokers for unsettled trades, and assets/liabilities associated with securities lending cash collateral. (See Appendix 3, Illustration 2, for an example of the determination of beginning and ending pension plan investment balances using amounts reported in a pension plan s financial statements for purposes of calculating the money-weighted rate of return.) 83

85 GASB 67 Implementation Guidelines 51. Q What should be considered an investment expense for purposes of the calculation of the annual money weighted rate of return? A Similar to the manner in which investment expense is defined for financial statement recognition purposes, for purposes of calculating the money-weighted rate of return on pension plan investments, investment expense should include, to the extent separable from investment income and the administrative expense of the pension plan, investment management fees, custodial fees, and other significant investment-related costs. Within the context of calculating the money-weighted rate of return, investment expense should include such fees and costs that are associated with the types of assets and liabilities that are discussed in Question 50, whether or not those items are reported as investments in the pension plan s statement of fiduciary net position. 84

86 GASB 67 Implementation Guidelines 52. Q Should cash flows associated with investment expense be included in the calculation of the money weighted rate of return on pension plan investments? A No. In the calculation of the money-weighted rate of return on pension plan investments, the beginning and ending values of investments reflect the effects of net investment income, which includes the effect of investment expense. (See Illustration 2 in Appendix 3.) Accordingly, cash flows for transactions associated with investment expense should not be included in the measures of the periodic external cash flows used to determine the money-weighted rate of return. 85

87 GASB 67 Implementation Guidelines 53. Q Should the money-weighted rate of return be calculated net of pension plan administrative expense? A No. Consistent with the measure of the long-term expected rate of return required by Statement 67, the money-weighted rate of return for purposes of that Statement should be determined net of investment expense but not net of pension plan administrative expense. Therefore, cash flows associated with transactions included in pension plan administrative expense, along with all other noninvestment-related cash flows, should be included in the measures of the periodic external cash flows used to determine the money-weighted rate of return. 86

88 GASB 67 Implementation Guidelines 54. Q For purposes of determining the money-weighted rate of return on pension plan investments, if external cash flows are determined monthly, how should those cash flows be weighted? A The plan should use a cash flow weighting methodology that is representative of the pattern of the plan s external cash flows. Depending on the timing of the cash flows throughout the month, weighting methodologies could include, for example, beginning of the month (1.0 weight), middle of the month (0.5 weight), and end of the month (zero weight). 87

89 GASB 68 Implementation Guidelines 22 Q A defined benefit plan is used to provide pensions to two classes of employees those in elected positions and those in nonelected positions. Does Statement 68 require that the employer report the benefits provided to each class of employees as a separate plan? A If, on an ongoing basis, all assets are available for the payment of pension benefits to either class of employees, even if the benefits differ by class, there is only one plan for financial reporting purposes. If, on an ongoing basis, a portion of the assets is legally restricted for the payment of benefits to one of the two membership classes, there are two separate plans for financial reporting purposes, even if the assets are pooled for investment purposes. 88

90 GASB 68 Implementation Guidelines 27 Q In the past, a governmental nonemployer entity that is not otherwise identified as being responsible for making contributions to a defined benefit pension plan has made contributions directly to the pension plan as a nonemployer entity. Should the nonemployer entity's involvement be accounted for as a special funding situation? If not, which accounting and financial reporting standards apply? A No. The first characteristic of a special funding situation as described in paragraph 15 of Statement 68 is that the nonemployer entity is legally responsible for making contributions directly to the pension plan. A historical pattern of appropriating resources to make contributions directly to the pension plan is not equivalent to a legal obligation for the nonemployer entity to make contributions to the pension plan. Therefore, in this circumstance, the nonemployer entity's involvement should not be accounted for as a special funding situation. The employers that provide benefits through the plan should apply the requirements of Statement 68 for employers that are not in special funding situations. 28 Q Would the answer to Question 27 be different if the governmental nonemployer contributing entity's resources have been appropriated specifically for the purpose of making the contributions to the pension plan? A No. An appropriation of resources for purposes of making a contribution to the pension plan is not, by itself, sufficient to create a legal requirement for the contributions for purposes of applying paragraph 15 of Statement

91 GASB 68 Implementation Guidelines 59 Q For employers whose employees are provided with pensions through an agent multiple-employer plan, should the discount rate used by each employer to measure its total pension liability be specific to the employer? A Paragraph 12 of Statement 68 specifies that the requirements of Statement 68 for agent employers apply to the pensions provided to the employer's own employees. Therefore, for purposes of Statement 68, the discount rate that is used by each employer whose employees are provided with pensions through an agent multiple-employer plan is required to be specific to the employer and is dependent upon the employer's individual facts and circumstances, including the timing and amount of projected benefit payments to employees provided with pensions through the employer's individual plan, the individual plan's fiduciary net position, and the employer's contribution policy. 90

92 GASB 68 Implementation Guidelines 60 Q If the actuarial valuation date is earlier than a single or agent employer's measurement date and the long-term expected rate of return assumption remains the same at the measurement date as it was at the actuarial valuation date, does the discount rate have to be evaluated for significant changes between the actuarial valuation date and the measurement date? A Yes. A change in the discount rate can occur due to factors other than a change in the long-term expected rate of return. For example, a change in the municipal bond yield or index rate (if used in the determination of the discount rate) or a change in the projected fiduciary net position of the pension plan that affects the relative weighting of the long-term expected rate of return and the municipal bond yield or index rate can affect the discount rate. Therefore, these and other factors, if applicable, should be considered when evaluating whether changes have occurred that should be reflected in the total pension liability at the measurement date, either through update procedures or through a new actuarial valuation. 91

93 GASB 68 Implementation Guidelines 71 Q Should balances of deferred outflows of resources and deferred inflows of resources arising from a single source that is, from differences between expected and actual experience with regard to economic or demographic factors, changes of assumptions, or differences between projected and actual earnings on pension plan investments in different periods be reported as separate amounts or net of each other? A Consistent with the requirements of paragraph 33a of Statement 68, balances of deferred outflows of resources and deferred inflows of resources arising from differences between expected and actual experience in different periods should not be reported net. Similarly, balances of deferred outflows of resources and deferred inflows of resources arising from changes of assumptions in different periods should not be reported net. In contrast, paragraph 33b of Statement 68 requires that deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual earnings on pension plan investments in different periods be netted and reported as deferred outflows of resources related to pensions if the net balance is a debit and reported as deferred inflows of resources related to pensions if the net balance is a credit. 92

94 GASB 68 Implementation Guidelines 100 Q Should all contributions made to the pension plan by a single or agent employer during the employer's fiscal year be included in the amount of contributions that paragraph 40d of Statement 68 requires to be disclosed? A No. For purposes of paragraph 40d of Statement 68, contributions should include only (a) the amount of actual contributions, which are cash contributions from the employer to the pension plan that would be recognized as additions from contributions in the pension plan's schedule of changes in fiduciary net position during the period that coincides with the employer's fiscal year, and (b) the amount of contributions from the employer to the pension plan that would be recognized by the pension plan as a current receivable during the period that coincides with the employer's fiscal year. This would exclude, for example, payments made to satisfy employer payables to the pension plan that arose in an earlier fiscal year. 93

95 GASB 68 Implementation Guidelines 112 Q If an actuarially determined contribution is calculated for the pension plan's fiscal year and the employer's fiscal year does not coincide with the fiscal year of the plan, what amount should be reported in the contribution-related schedule required by paragraph 46c of Statement 68? A Information reported in the contribution schedule required by paragraph 46c of Statement 68 should be the amounts that are applicable to each of the employer's fiscal years presented. If the actuarially determined contribution is not calculated for the employer's fiscal year, the amount to be included in the schedule would be determined as the aggregate of the actuarially determined contributions for the portions of the plan's fiscal years that overlap the employer's fiscal year. For example, an employer's fiscal year is from July 1 to June 30, and the plan's fiscal year is from January 1 to December 31. The actuarially determined contribution applicable to the employer's fiscal year ended June 30, 20X6, would be the actuarially determined contribution for the last six months of the plan's fiscal year 20X5 (because that fiscal year overlapped the first six months of the employer's fiscal year) plus the actuarially determined contribution for the first six months of the plan's fiscal year 20X6 (because that fiscal year overlapped the last six months of the employer's fiscal year). 94