4/25/ MASBO Annual Conference

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1 2017 MASBO Annual Conference Mark Schulte, FSA, EA, MAAA May 11, Background 2 What s changing Report frequency Report timing Terminology Financial disclosures Discount rate 3 What to do now 1 Compliance with GASB 45 since at least 2008 Have a liability on the books (Net OPEB Obligation) Record annual accounting expense (based on the ARC) Biennial or triennial actuarial valuations MN school districts generally funded OPEB before 2009 when could issue bonds without voter approval 2 1

2 Why can t we just keep using GASB 45? Net OPEB Obligation hides true cost of OPEB Cost recognition is too slow (never?) Too much variation in liability calculation methods Discount rate determination not appropriate 3 June 2015: GASB 74 and 75 published GASB 74 Plan-perspective accounting Effective for fiscal years beginning after 6/15/2016 (i.e., FYE 6/30/2017) GASB 75 Employer-perspective accounting Effective for fiscal years beginning after 6/15/2017 (i.e., FYE 6/30/2018) 4 Lots of new terminology and acronyms! More frequent actuarial reporting Accounting changes Unfunded liability goes on face of financial statements OPEB accounting expense more volatile More information to disclose Discount rate process standardized 5 2

3 How often do I need a new actuarial report? GASB 45 GASB 74/75 < 200 participants: Every 3 years All plans: Every 2 years >= 200 participants: Every 2 years Movement towards annual valuations because of OPEB volatility 6 GASB 45 Usually July 1 Valuation Date (beginning of year) Have 12+ months to complete calculations and report Get two years of accounting in one report Example July 1, 2015 valuation report Provides accounting information for FYE 2016 AND FYE 2017 Updated reports in the off-years were relatively rare 7 GASB 74/75 require full actuarial reports every two years for all employers Update procedures to reflect any changes since the actuarial valuation date [GASB 74 Q&A #4.104] In many cases will need an updated off-year report to reflect certain changes 8 3

4 GASB 74/75 report will likely only contain accounting information for one fiscal year Update Item Considerations Discount rate Muni bond index rate Crossover calculation for funded plans Assets Need to reflect actual year-end assets Benefit payments GASB 74/75 specify actual benefit payments for roll forwards and other calculations. May not be practical for implicit subsidy payments Plan changes What does this encompass? Retiree subsidies only; or health plan/premiums in general? 9 Date What it means Valuation Date Census and claims data gathered Liabilities calculated, but may then be rolled forward to the Measurement Date Measurement Date When liabilities and assets are measured Fiscal year end FYE2019 example (no trust) Calculate liabilities Roll liabilities Measure assets & net OPEB liability Net amount reported at FYE Valuation Date Measurement Date 6/30/2017 6/30/2018 6/30/ Synchronized method Measurement Date = Used for plans with or without trusts Calculate liabilities Measure assets & Report net amount at FYE Roll liabilities Valuation Date Measurement Date & 6/30/2017 6/30/2018 6/30/

5 Timing considerations: synchronized method VD before MD/RD makes report timing easier Still need to wait until MD/RD for actual benefit payments What happens if plan changes before MD/RD? Calculate liabilities Measure assets & Report net amount at FYE Roll liabilities Valuation Date Measurement Date & 6/30/2017 6/30/2018 6/30/ Lookback method Measurement Date up to one year before Used for plans without trusts Calculate liabilities & Measure assets Net amount Reported at FYE Valuation Date & Measurement Date 6/30/2017 6/30/2018 6/30/ Timing considerations: lookback method VD/MD before RD makes timing much easier Need to wait until RD for deferred contributions Don t have to deal with plan changes after MD Calculate liabilities & Measure assets Net amount Reported at FYE Valuation Date & Measurement Date 6/30/2017 6/30/2018 6/30/

6 Employers with irrevocable trusts should comply with GASB 74 for FYE2017 Include plan-perspective disclosures in Notes and RSI (if trust doesn t issue standalone financials) May be simplest to early adopt GASB 75 in FYE2017 Avoid two sets of numbers in Notes/RSI Similar costs for GASB 74/45 vs. GASB 74/75 reporting 15 GASB 45 GASB 74/75 Actuarial Accrued Liability (AAL) Total OPEB Liability (TOL) Plan assets Fiduciary Net Position (FNP) Unfunded Actuarial Accrued Liability (UAAL) Net OPEB Liability (NOL) N/A Deferred inflows/outflows of resources Annual OPEB Cost OPEB expense Net OPEB Obligation (NOO) Net OPEB Liability Annual Required Contribution (ARC) Actuarially Determined Contribution (ADC)

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8 21 22 GASB 45: long-term investment yield on the investments that are expected to be used to finance the payment of benefits GASB 74/75: Single rate that reflects: Long-term expected rate of return on OPEB plan investments [if have irrevocable OPEB trust] Index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher Crossover calculation for funded plans (irrevocable trust) 23 8

9 24 25 Funded plans (irrevocable trust) Figure out GASB 74 transition strategy now! Confirm strategy with auditor Early adoption of GASB 75 for FYE2017 may be easiest route Funded plans (revocable trust) Understand effect of using muni bond index rate Consider making trust irrevocable (FY ) 26 9

10 All plans Figure out reporting timing and implementation options Synchronized vs. Lookback: Is it a big deal if liabilities are a year old? Better tracking of retiree benefit payments Review contracts and benefit plans for potential cost savings Worthwhile/feasible to pre-fund OPEB? Mark Schulte, FSA, EA, MAAA Van Iwaarden Associates marks@vaniwaarden.com All information in this presentation is for general informational purposes only and should not be relied upon without the express written consent of the author