Upcoming Changes to Pension Reporting Under GASB 67 & 68 and the Impact to Municipalities Participating in PERA Retirement Plans

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1 Upcoming Changes to Pension Reporting Under GASB 67 & 68 and the Impact to Municipalities Participating in PERA Retirement Plans Patricia (Patty) French, Board Chair, PERA Wayne Propst, Executive Director, PERA

2 Agenda GASB 67 What governments does it apply to? Plan specifics What changes are brought about by the new pronouncement? GASB 68 New disclosures Census data testing What governments does it apply to? Participation, type of plans What changes are brought about by the new pronouncement? Financial Statement impact Schedule of Employer allocations

3 GASB 67 What governments does it apply to? June 2012 The Governmental Accounting Standards Board (GASB) approved Statement No. 67, Financial Reporting for Pension Plans Applies to plans that administer pension benefits, such as the Public Employees Retirement Association (PERA) of New Mexico Public Employees Retirement Fund is a cost-sharing, multiple employer defined benefit pension plan. This fund has six divisions of members, including State General, State Police/Adult Correction Officers, Municipal General, Municipal Police/Detention Officers, Municipal Fire, and State Legislative Divisions, and offers 24 different types of coverage within the PERA plan. GASB 67 establishes financial reporting standards for state and local governmental pension plans, defined benefit pension plans that are administered as trusts in which; a. Contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable. b. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms. c. Pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members.

4 GASB s Change to Pension Accounting The adoption of GASB 67 and 68 bring new terms to the financial statements: Total Pension Liability (TPL) Definition: The portion of the actuarial present value of projected benefit payments that is attributed to past periods of member service Pension Plan s Fiduciary Net Position or the Plan s Net Position Definition: The pension plan s net assets at fair value Net Pension Liability or NPL TPL Pension Plan s Fiduciary Net Position = NPL

5 GASB s Change to Pension Accounting GASB changes under statements 67 and 68 are intended to promote consistency and transparency of employer reporting. Approach based on GASB s decision that reporting the Net Pension Liability (NPL) on the face of a government s financial statements allows users of the financial statements to better assess: The long-term benefit obligations of a governmental entity; The general long-term financial health of a governmental entity; How well a governmental entity has supported and maintained the pension promises made to their employees.

6 GASB s Change to Pension Accounting GASB 67 Financial Reporting for Pension Plans Applies to PERA and will be implemented in FY 2014 Net Pension Liability (NPL) will be disclosed in PERA s 2014 financial report Cost-sharing multi-employer plan is one in which the participating government employers pool their assets and their obligations to provide defined benefit pensions (plan assets can be used to pay the pensions of the retirees of any participating employer) Example: Approximately $14.4 billion in assets in PERA fund used to pay for City of Las Cruces retiree, San Juan County retiree and State of New Mexico Correctional Officer retiree Cost-sharing employers will share the NPL, on a proportional basis Changes will be noted in the notes to the financial statements and required supplementary information (RSI)

7 GASB 67 Total Pension Liability (TPL) Three essential steps for measure Project total future pension benefit payments for current and former employees Based on terms of the plan Actuary assumptions, such as how long the employees are expected to work for participating government, what salaries are expected to be, period of collection of benefits after retirement Discount the projected benefit payments to the their value at the time of the measurement (present value) Attribute the present value of projected benefit payments to the periods when they were or will be earned past and future. Net Pension Liability or NPL To the extent that the cumulative long-term obligation to provide pension benefits of the participating governments in a cost-sharing plan (TPL) is larger than the value of the assets available in the pension plan s trust to pay pension benefits.

8 GASB 67 Example of required GASB 67 note disclosure: Calculation of the Net Pension Liability (NPL) Fiscal Year Ending June 30, 2014 Total Pension Liability $16,700,000,000 Fiduciary Net Position - $12,000,000,000 Net Pension Liability $ 4,700,000,000 Ratio of Fiduciary Net Position to Total Pension Liability 71.85% This example is similar to what will be required to be disclosed in PERA s notes to the financial statements in FY 2014 under GASB 67. The note will also include details of the actuarial assumptions used in the calculation.

9 GASB 67 Example of required GASB 67 note disclosure: Actuarial Assumptions related to the calculation of the NPL The TPL was determined by an actuarial valuation as of June 30, 2014, using the following assumptions, applied to all prior periods included in the measurement: Inflation Salary Increases Investment rate of return 3.5 percent 4.5 percent, average, including inflation 7.75 percent, net of pension plan investment expense, including inflation

10 GASB 67 Example of required GASB 67 note disclosure: Discount rate used to measure TPL, sensitivity 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 future contributions will be made in accordance with statutory rates. On this basis, the pension plan s fiduciary net position together with the expected future contributions are sufficient to provide all projected future benefit payments of current plan members as determined in accordance with GASB Statement No. 67. The table below depicts the required disclosure of sensitivity to changes in the discount rate. 1% Decrease (6.75%) Current Discount Rate (7.75%) 1% Increase (8.75%) Net Pension Liability 5,700,000,000 4,700,000,000 3,700,000,000

11 GASB 67 Example of required GASB 67 RSI: Schedule of Changes in the Net Pension Liability ($ In thousands) Total pension liability Service Cost 400,000 Interest 1,300,000 Benefit changes 0 Difference between expected and actual experience 0 Changes of assumptions (90,000) Benefit payments (900,000) Refunds of contributions (48,000) Net change in total pension liability 660,000 Total pension liability - beginning 17,000,000 Total pension liability - ending (a) 17,700,000 Plan net position Contributions - employer 300,000 Contributions - member 245,000 Net investment income 2,200,000 Benefit payments (900,000) Administrative expense (10,000) Refunds of contributions (47,000) Other 17,000 Net change in plan net position 1,720,000 Plan net position - beginning 12,700,000 Plan net position - ending (b) 14,400,000 Net pension liability - ending (a) - (b) 3,300,000

12 GASB 67 Example of required GASB 67 RSI: Schedule of the Net Pension Liability ($ In thousands) Total pension liability 17,700,000 Plan net position 14,400,000 Net pension liability 3,300,000 Ratio of plan net position to total pension liability 81.31% Covered-employee payroll 2,100,000 Net pension liability as a percentage of covered-employee payroll %

13 GASB 67 Example of required GASB 67 RSI: Schedule of Employer Contributions ($ In thousands) Contractually Required Contributions $300,000 $285,860 $274,906 $283,377 $291,683 $311,082 $292,569 $269,571 $249,740 $234,232 Actual employer contributions 300, , , , , , , , , ,232 Annual contribution deficiency (excess) Covered-employee payroll 2,100,000 2,049,783 1,994,280 1,935,014 1,993,517 2,081,259 1,965,064 1,908,520 1,774,918 1,607,839 Actual contributions as a percentage of covered-employee payroll 14.00% 13.93% 13.78% 14.64% 14.63% 14.95% 14.89% 14.12% 14.07% 14.57%

14 GASB 68 June 2012 GASB also approved Statement No. 68, Accounting and Financial Reporting for Pensions Applies to governments that provide pension benefits to their employees Examples: The City of Santa Fe and Santa Fe County that participate in PERA

15 GASB 68 Summary of Employer Reporting Employers will report the following elements: Net Pension Liability (NPL) Pension Expense Pension Deferred Outflows and Inflows of Resources

16 GASB 68 Net Pension Liability Net pension liability (asset) equals the total pension liability for the pension plan, less the fiduciary net position: Total pension liability is the actuarial present value of projected benefit payments attributed to past employee service Fiduciary net position is determined using same valuation methods as used for plan s GAAP financial reporting Total Pension Liability Less: Fiduciary Net Position Net Pension Liability

17 GASB 68 Net Pension Liability timing Dates to consider! The employer s year end date The measurement date The actuarial valuation date

18 GASB 68 Pension Expense Certain aspects of the change in net pension liability should be recognized immediately as pension expense and others should be recognized as deferred outflows/inflows of resources and recognized (amortized) into pension expense over time. Employers participating in cost-sharing plans will recognize their proportionate share of the collective pension expense and deferred amounts determined for the plan as a whole.

19 GASB 68 Pension Expense Changes in the Total Pension Liability Changes in Plan s Fiduciary Net Position Current period service cost Projected earnings on plan investments Interest on the beginning total pension liability Impact of changes in benefit terms Changes in plan fiduciary net position other than employer contributions and benefit payments (e.g., employee contributions, admin costs)

20 GASB 68 Pension Expense Deferred expenses Differences between expected and actual changes in economic and demographic factors Changes in the assumptions about economic and demographic factors Differences between actual and projected earnings on plan investments Contributions to the pension plan from the employer subsequent to the measurement date

21 GASB 68 Cost-Sharing Plan Challenges Audited financial statements of the plan only include disclosure of the collective net pension liability for the plan as a whole. They do NOT include: Deferred outflows/inflows of resources by category Pension expense Each participating employer s share of collective pension amounts Standard is silent on who (plan or each individual participating employer) should calculate allocation percentages. Audited financial statements of the plan may not include necessary information to calculate allocation percentages. Standard encourages an allocation method would be extremely difficult to audit as it is based on projected future contributions.

22 GASB 68 AICPA Recommendations Plans should prepare schedules of employer allocations. Plan auditor issues opinion on the employer allocations and on the total of each of the four elements in accordance with AU-C 805 Net pension liability, total deferred outflows of resources, total deferred inflows of resources, and total pension expense for the sum of all participating entities Materiality calculated separately for each element Plan auditor needs to consider the appropriateness of the materiality used in the audit of plan financial statements. For audit of a public employee retirement system (PERS) plan financial statements, the audit opinion is provided on the system as a whole (which often includes more than one plan). Audit of plan financial statements effectively has to be performed at a lower level consistent with the allocation pool.

23 EXAMPLE COST SHARING PENSION PLAN Schedule of Pension Amounts by Employer As of and for the year ended 6/30/20X5 Deferred Outflows of Resources Deferred Inflows of Resources Pension Expense Net Amortization of Deferred Amounts from Changes in Changes in Changes in Net Difference Proportion Proportion Proportion Between and Differences and Differences and Differences Projected Between Between Between Differences and Actual Employer Total Differences Employer Total Proportionate Employer Between Investment Contributions Deferred Between Contributions Deferred Share of Contributions Total Expected Earnings on and Proportionate Outflows Expected and Proportionate Inflows Plan and Proportionate Employer Net Pension and Actual Pension Plan Changes of Share of of and Actual Changes of Share of of Pension Share of Pension Entity Liability Experience Investments Assumptions Contributions Resources Experience Assumptions Contributions Resources Expense Contributions Expense Employer 1 $ 45,224, ,859 1,569,847 1,404, ,426 4,108, , ,425 1,082,342 1,907,283 12,375 1,919,658 Employer 2 5,661,780 54, , ,796 84, ,502 44,558 74, , ,777 (1,793) 236,984 Employer 3 6,795,628 65, , , , ,192 53,481 98, , ,596 (8,088) 278,508 Employer 4 10,193,442 98, , , , ,472 80, , , ,894 3, ,915 Employer 5 13,355, , , , ,845 1,207, , , , ,229 (9,900) 553,329 Employer 6 3,043,487 29, ,646 94,499 53, ,132 23,952 48,453 72, , ,954 Employer 7 2,011,585 19,520 69,827 62,459 33, ,264 15,831 35,345 51,176 84, ,461 Employer 8 1,987,964 19,291 69,007 61,725 35, ,448 15,645 16,453 32,098 83,839 (5,712) 78,127 Employer 9 16,777, , , , ,356 1,514, , , , ,576 8, ,981 Employer 10 5,641,888 54, , ,178 95, ,235 44,401 44,356 88, ,938 (1,188) 236,750 Employer 11 8,512,562 82, , , , ,861 66, , , ,005 1, ,259 Employer 12 3,499,761 33, , ,666 52, ,258 27,543 64,354 91, , ,050 Employer 13 1,443,418 14,007 50,104 44,818 23, ,085 11,360 33,453 44,813 60,874 (205) 60,669 Employer ,785 1,279 4,575 4,092 1,968 11,914 1, ,931 5, ,705 Employer 15 44, ,554 1,390 1,456 4, ,050 1, ,895 Total for All Entities $ 124,325,432 1,206,453 4,315,618 3,860,253 1,939,406 11,321, ,435 1,939,406 2,917,841 5,243,245 5,243,245

24 Employer Responsibilities! REPORT: Complete and accurate data to plan EVALUATE: Appropriateness of information used to record financial statement amounts Whether plan auditor s report on schedules are adequate and appropriate for employer purposes VERIFY: Amounts in schedules specific to employer Recalculate allocation percentage of employer Recalculate allocation of pension amounts based on allocation percentage of employer

25 PERA s Role in Implementation Process First Steps: Implement GASB 67 and include required information in PERA s FY 2014 financial report Users will be able to view the Net Pension Liability for 6/30/14 that will be allocated amongst the participant employers for reporting in FY 2015 Issue separate report containing employer allocations Schedule of Employer Allocations available in the Spring of 2015 This separate report will include the information needed by employer participants in order to comply with the required GASB 68 disclosures

26 PERA s Role in Implementation Process On-going communication: Visit PERA s website for updated information Future trainings New Mexico Association of Counties Legislative Conference Contact us! January of 2015 Natalie Cordova, CFO Natalie.cordova@state.nm.us or