April 24, 2018 Webinar

Transcription

1 Practical Implementation of GASB 75 (OPEB) April 24, 2018 Webinar Presented in association with

2 Presented by: Stephen W. Blann, CPA, CGFM, CGMA Director of Governmental Audit Quality Rehmann 2

3 Session Outline GASB 74 OPEB Plans GASB 75 OPEB for Employers Unique considerations for non-trusted plans Implementation challenges by plan type Initial journal entries Alternate Measurement Method (small plans) 3

4 The New OPEB Standards GASB 74 (effective 06/30/2017) Applies to the financial statements of OPEB plans (OPEB trust funds) GASB 75 (effective 06/30/2018) Applies to the financial statements of employers providing other postemployment benefits 4

5 The New OPEB Standards OPEB Plans defined Arrangements through which OPEB is determined, assets dedicated for OPEB (if any) are accumulated and managed, and benefits are paid as they come due. 5

6 Defining Pension & OPEB Pensions Retirement income and benefits (other than healthcare) provided through a pension plan 6

7 Defining Pension & OPEB Other Postemployment Benefits (OPEB) defined All postemployment healthcare benefits Medical, dental, vision, hearing, etc. Regardless of whether provided by a pension plan Postemployment benefits other than retirement income not administered by a pension plan Death benefits, life insurance, disability, long-term care Excludes termination benefits 7

8 Defining Pension & OPEB Termination benefits (GASB 47): An inducement to hasten the termination of services (e.g., early retirement incentives) May be voluntary or involuntary Requires professional judgment to determine employer s intent and employee s understanding Recorded at the NPV of the benefits to be paid when the agreement is made (not OPEB) 8

9 Defining Pension & OPEB Two broad types of OPEB plans: Defined benefit (DB) Benefits are defined by plan terms No individual accounts by plan member Primary focus of GASB 74/75 Defined contribution (DC) Contributions are defined Individual account for each plan member Little changed by GASB 74/75 9

10 Defining Pension & OPEB Three types of defined benefit plans: Single-employer OPEB plan A primary government and its component units may be considered to be one employer Agent multiple-employer OPEB plan Assets are pooled, but each employer s share is legally available to pay the benefits of only its employees Cost-sharing multiple-employer OPEB plan Assets are pooled, and may be used to pay benefits of the employees of any participating employer 10

11 Defining Pension & OPEB GASB has determined that OPEB plans are conceptually similar to pensions, and has largely replicated the guidance from GASB 67/68 in GASB 74/75 Retains requirement for actuaries to consider the implicit rate subsidy Retains the option for small plans to use the alternative measurement method 11

12 OPEB Plan Financial Statements Defined benefit or defined contribution plans administered through a qualifying trust or equivalent arrangement are reported in an OPEB trust fund Resources accumulated for OPEB not in a qualifying trust are reported in governmental / proprietary funds of the employer (or an agency fund if held for other governments) 12

13 OPEB Plan Financial Statements DB plans calculate and disclose the employer s net OPEB liability, but do not record it in the OPEB trust fund, itself GASB 74 does not apply if there is not an OPEB plan 13

14 OPEB Plan Financial Statements Statement of Fiduciary Net Position Major categories of assets held Principal components of investments and receivables Deferred outflows of resources, liabilities, and deferred inflows of resources typically small or non-existent Balance is fiduciary net position 14

15 OPEB Plan Financial Statements Statement of Changes in Fiduciary Net Position Additions (employer / employee contributions, investment income by component) Deductions (benefits, plan administrative expenses) Should report all benefits paid (even if initially paid directly by the employer) 15

16 OPEB Plan Financial Statements 16

17 CPE Prompt 1 of 4 What is the relationship between GASB Statements 74 and 75? A. You either implement one or the other, depending on the existence of an OPEB trust B. GASB 74 applies to OPEB plans, while GASB 75 applies to employers who provide OPEB C. GASB 74 applies to single-employer plans, while GASB 75 applies to multiple-employer plans D. All of the above 17

18 Net OPEB Liability Recorded by the employer (not the plan) Equal to the actuarially determined total OPEB liability, less the net position of the OPEB trust fund Recorded in full accrual financial statements (certain portions are offset by deferred inflows/outflows and amortized) 18

19 Total OPEB Liability Calculated by the actuary: Project future benefits Discount to present value Attribute present value to specific periods Hire Today Retirement Death 19

20 Total OPEB Liability Calculated by the actuary: Project future benefits Discount to present value Attribute present value to specific periods Future Benefits Hire Today Retirement Death 20

21 Total OPEB Liability Calculated by the actuary: Project future benefits Discount to present value Attribute present value to specific periods Discount Rate Future Benefits Hire Today Retirement Death 21

22 Total OPEB Liability Calculated by the actuary: Project future benefits Discount to present value Attribute present value to specific periods Service Cost TOL Discount Rate Future Benefits Hire Today Retirement Death 22

23 Key Actuarial Principles Actuarial cost method Entry Age, Level Percent of Pay Project future benefits using age-adjusted premiums (implicit rate subsidy) 23

24 Key Actuarial Principles Expected return/discount rate Single blended rate comprised of: Expected rate of return (years w/ sufficient assets) AA 20-year muni bond rate (years w/ insufficient assets) A lower discount rate produces a higher liability and vice versa 24

25 Key Actuarial Principles Expected return/discount rate Example: Long-term Money Expected Weighted Target Real Rate of Rate of Allocation Return Return Domestic equity 46% 5.4% 2.48% International equity 21% 5.5% 1.16% Fixed income 26% 1.3% 0.34% Real estate 6% 4.5% 0.27% Cash 1% 0.0% 0.00% 100% 4.25% Inflation 3.50% Investment rate of return 7.75% 25

26 Key Actuarial Principles AA 20-year muni bond rate Examples (12/31/17): Bond Buyer % S&P % Fidelity % Source: 26

27 Key Actuarial Principles Expected return/discount rate Single blended rate calculation (example): Expected rate of return = 7.75% for 36 years AA 20-year muni bond rate = 3.44% for 24 years Blended rate = 6.03% (applied to all years) 27

28 Key Actuarial Principles Asset method Fiduciary net position is calculated based on GAAP (i.e., fair value of plan assets) 28

29 Key Actuarial Principles Annual Cost OPEB Expense equal to the benefits earned during the period with adjustments for deferred recognition of some gains/losses Net OPEB Liability is not smoothed OPEB Expense (and impact on employer net position) is smoothed through offsetting deferred inflows/outflows 29

30 Key Actuarial Principles Deferred inflows/outflows Plan changes expense immediately Assets returns other than expected 5 years Other actuarial liability gains and losses average remaining service life of plan participants 30

31 Key Actuarial Principles Sensitivity analyses Changes in the discount rate Changes in the healthcare cost trend rate 31

32 Other Actuarial Considerations Significant challenges for OPEB valuations OPEB plans are less likely to be well funded Healthcare cost trend assumptions Effect of the Affordable Care Act Assumed age at retirement Participation rate assumptions Pensions/OPEB are different actuarial specialties 32

33 CPE Prompt 2 of 4 How should the actuary discount future projected benefits? A. Using the long-term expected real rate of return on plan assets B. Using a risk-free rate of return C. Using a single blended rate based on A and B D. It s a mystery 33

34 What to Expect from Your Actuary GASB 75-specific valuation Valuation date & measurement date Plan membership Total OPEB Liability Plan Fiduciary Net Position (may be separate) Development of the single discount rate Sensitivity analysis - discount rate (cont.) 34

35 What to Expect from Your Actuary GASB 75-specific valuation Sensitivity analysis - healthcare cost trend rate List of actuarial assumptions used Calculation of OPEB expense Deferred inflows/outflows (may be separate) Allocation by division (optional) Sample footnotes and RSI (optional) 35

36 Timing Implications In an ideal world, everything would be measured in real time at the employer s fiscal year end In reality, plans and employers don t always have the same year end, and actuarial valuations take time to complete 36

37 Timing Implications Actuarial valuations GASB 74 allows up to 24 months prior to the FYE of the OPEB plan Use update procedures to roll forward to the OPEB plan s FYE (i.e., the measurement date ) GASB 75 allows up to 30 months prior to the FYE of the employer Use update procedures to roll forward to the OPEB plan s FYE (i.e., the measurement date ) 37

38 Timing Implications Measurement date Date at which the NOL is measured Based on the plan s FYE May be up to one year prior to the employer s FYE OPEB contributions (including direct benefit payments) made after the measurement date are reported as deferred outflows of resources 38

39 Timing Implications Examples Plan FYE = June 30 Employer FYE = June 30 Measurement date = June 30, 2018 OPEB Expense Measurement Date Jun 2016 Jun 2017 Jun

40 Timing Implications Examples Plan FYE = June 30 Employer FYE = June 30 Measurement date = June 30, 2017 OPEB Expense Deferred Outflows Measurement Date Jun 2016 Jun 2017 Jun

41 Timing Implications Examples (MERS) Plan FYE = December 31 Employer FYE = June 30 Measurement date = December 31, 2017 OPEB Expense Deferred Outflows Measurement Date Jun 2016 Dec 2016 Jun 2017 Dec 2017 Jun

42 Timing Implications Examples (MSPERS) Plan FYE = September 30 Employer FYE = June 30 Measurement date = September 30, 2017 Pension Expense Deferred Outflows Measurement Date Jun 2016 Sep 2016 Dec 2016 Mar 2017 Jun 2017 Sep 2017 Dec 2017 Mar 2018 Jun

43 Non-trusted Plans Not all OPEB plans are administered through a qualifying trust or equivalent arrangement Contributions/earnings are irrevocable Plan assets are dedicated to providing OPEB Plan assets are legally protected from creditors 43

44 Non-trusted Plans Many non-trusted plans are fully unfunded (i.e., no trust) Some are funded through non-qualifying trusts Report Total OPEB Liability (not net) Report any offsetting assets in governmental / proprietary funds of the employer Use 20-year AA muni bond rate for discounting 44

45 Non-trusted Plans GASB Implementation Guide Trust agreement calls for a return of amounts remaining in trust once all obligations have been fulfilled Qualifying trust 45

46 Non-trusted Plans GASB Implementation Guide Trust agreement calls for a return of trust assets to an employer if funded status reaches a specified level Not a qualifying trust 46

47 Non-trusted Plans GASB Implementation Guide Trust reimburses employer for OPEB benefits paid as they come due Qualifying trust 47

48 Non-trusted Plans GASB Implementation Guide A single trust is used for both OPEB and some other benefit that is not OPEB (e.g., pensions or active employee healthcare) Not a qualifying trust, unless the OPEB partition of the trust is dedicated solely to providing OPEB 48

49 Non-trusted Plans GASB Implementation Guide Trust A is a qualifying OPEB Trust, that pays benefits. A second trust (Trust B) is established for the sole purpose of making payments to Trust A. Trust A is a qualifying OPEB trust Trust B is not a qualifying OPEB trust, as it does not make benefit payments; it is reported as employer assets 49

50 Non-trusted Plans - Recap Description Trust meeting par. 4 Non-Trust 1 Recognize in Statement of Net Position 2 Present Value for TOL determined using 3 Recognize in Statement of Net Position 4 Recognize in Statement of Net Position Net OPEB Liability (NOL) Long term rate of return (LTROR) or single blended rate of LTROR and AA 20 year Municipal Bond Index Deferred O/I for both TOL and Investments Deferred outflow for contributions after Measurement Date (MD) 5 OPEB related assets Recorded in Plan FS and used to determine Plan Fiduciary Net Position 6 OPEB expense Change in the NOL with appropriate deferrals and amortization Total OPEB Liability (TOL) AA 20-year municipal bond index Deferred O/I for TOL only Deferred outflow for OPEB payments after MD Recorded in appropriate governmental or proprietary fund Change in TOL with appropriate deferrals and amortization 50

51 CPE Prompt 3 of 4 If an employer provides OPEB, but has not established a qualifying trust: A. It should report its total OPEB liability, rather than its net OPEB liability B. It should use the risk-free rate of return to discount C. It should report any assets accumulated for OPEB as employer assets D. All of the above 51

52 Unique Challenges by Plan Type Single-Employer May be administered by pension, but must be accounted for separately May be in a multiple-employer pension but singleemployer OPEB (different actuaries/processes) More frequently pay-as-you-go May share some assumptions with pension, and differ in others 52

53 Unique Challenges by Plan Type Agent Multiple-Employer Actuarial valuations are conducted separately for each participating employer, but may not allow for unique assumptions for each Need to ensure that the actuarial certification (cover letter) is addressed to the employer Will need employer-specific info provided by plan for fiduciary net position 53

54 Unique Challenges by Plan Type Cost-Sharing Multiple-Employer Actuarial valuation is conducted for the plan as a whole, with each employer having a proportionate share to record Will need employer-specific info provided by plan Pension and OPEB portions may be comingled internally, and need to be separated for GAAP reporting 54

55 Employer FN Disclosures Plan Description A B C D Name of plan, administrator of plan, and type of plan Benefit terms, including (1) classes of employees covered, (2) types of benefits, (3) key elements of OPEB formula, (4) terms or policies with respect to automatic benefit changes, including ad hoc cost of living adjustments (COLAs), (5) legal authority Number of employees covered Fact that no assets accumulated in a trust Contribution requirements, including (1) authority under which contributions made, (2) legal or maximum contributions rates, (3) contribution rates, and (4) contributions made Authority under which to pay OPEB benefits as they come due and amount Availability of audited plan financial statements A = Trusted: Single/Agent B = Trusted: Costsharing C = Non-Trusted Single D = Non-Trusted PG + CU (stand-alone reports only) 55

56 Employer FN Disclosures Assumptions and Other Inputs A B C D Significant assumptions, including inflation, healthcare cost trend rates, salary changes, postemployment benefit changes Source of mortality assumptions Dates of experience studies Fact that projections of sharing of benefit costs based on established pattern of practice NOL sensitivity to healthcare cost trend rate (±1%) TOL sensitivity to healthcare cost trend rate (±1%) A = Trusted: Single/Agent B = Trusted: Costsharing C = Non-Trusted Single D = Non-Trusted PG + CU (stand-alone reports only) 56

57 Employer FN Disclosures Discount Rate A B C D Discount rate used Assumptions about projected cash flows Long-term expected rate of return on plan investments and how determined Municipal bond rate used Periods of projected benefit payments applied to long-term rate of return and municipal bond rate, if applicable Assumed asset allocation and long-term expected real rate of return for each major asset class NOL sensitivity to discount rate (±1%) TOL sensitivity to municipal bond rate (±1%) A = Trusted: Single/Agent B = Trusted: Costsharing C = Non-Trusted Single D = Non-Trusted PG + CU (stand-alone reports only) 57

58 Employer FN Disclosures Additional Disclosures A B C D Information about plan s fiduciary net position if report not publicly available Schedule of changes in NOL Schedule of changes in TOL MD Actuarial valuation date Employers proportionate share of net (total) OPEB liability and basis for allocation Changes in assumptions and benefit terms Changes subsequent to MD OPEB expense in current period Balance of deferred O/I by source and aggregate impact on OPEB expense in each of next 5 years and thereafter A = Trusted: Single/Agent B = Trusted: Costsharing C = Non-Trusted Single D = Non-Trusted PG + CU (stand-alone reports only) 58

59 Employer RSI Changes in NOL by source 10-Year Schedules A B C D A = Trusted: Single/Agent Components of NOL and related ratios Proportionate share of NOL B = Trusted: Costsharing Employer contributions Changes in TOL by source C = Non-Trusted Single TOL as a percentage of covered employee payroll Proportionate share of TOL D = Non-Trusted PG + CU (stand-alone reports only) 59

60 Transition Restate beginning equity Remove any Net OPEB Obligation (GASB 45) Add beginning Net OPEB Liability (GASB 75) Add any beginning deferred outflow for contributions subsequent to the measurement date (all other deferrals are prospective only) RSI schedules Prospective only (if information is not available) Contributions history will generally be available 60

61 Transition Initial Journal Entries Sample City, a 06/30 FYE has the following facts related to its 12/31 OPEB Plan: Sample City uses a third-party to collect and invest OPEB assets in a qualifying trust The amounts on the next slide occurred related to the self-insured OPEB Plan 61

62 Transition Initial Journal Entries GASB 45 OPEB Obligation-6/30/17 A $ 800,000 Net OPEB Liability-12/31/16 B 3,500,000 Net OPEB Liability-12/31/17 C 4,200,000 Net OPEB Claims & Expense 01/01/17-6/30/17 D 1,000,000 Contributions to the Trust 01/01/17-6/30/17 E 600,000 Net OPEB Claims & Expense 01/01/18-6/30/18 F 1,100,000 Contributions to the Trust 01/01/18-6/30/18 G 600,000 Net OPEB Claims & Expense FY 6/30/18 H 2,200,000 Annual Contributions to the Trust 6/30/18 I 1,200,000 Investment return over expectation CY 2017 J 200,000 Actuarial losses on liability assumption for CY 2017 K 210,000 62

63 Transition Initial Journal Entries Additional information: Sample City s actuary has determined that the average remaining service period of all OPEB participants is seven years Sample City has implemented procedures and controls to ensure that claims are properly classified as active or retiree and that cut-off/accruals for payments before and after the measurement date are fairly stated L (7 years) 63

64 Transition Initial Journal Entries Eliminate the Net OPEB Obligation from GASB 45 Net OPEB Obligation A 800,000 Net Position 800,000 Book Beginning Net OPEB Liability per GASB 75 Net Position B 3,500,000 Net OPEB Liability 3,500,000 Book Beginning Deferred Outflows for Contributions Subsequent to the MD Deferred Outflow-OPEB Payments/Contributions (1/1/17-6/30/17) D+E 1,600,000 Net Position 1,600,000 64

65 Transition Initial Journal Entries Record 2018 Amounts OPEB expense (next slide) 3,980,000 Deferred outflow - contributions after MD F+G-D-E 100,000 Deferred outflow - assumption losses K-(K/L) 180,000 Deferred inflow - excess investment return J-(J/5) 160,000 Payments / contributions to trust * H+I 3,400,000 Net OPEB Liability C-B 700,000 * Assumes these were expensed as paid 65

66 Transition Reconciliation of OPEB Expense Change in the Net OPEB Liability C-B 700,000 Current fiscal year OPEB payments H 2,200,000 Current fiscal year contributions I 1,200,000 Flow through of BOY deferred OPEB payments after MD D 1,000,000 Flow through of BOY deferred contributions to the Trust E 600,000 EOY deferral for OPEB Payments between MD & FYE F (1,100,000) EOY deferral for OPEB Payments between MD & FYE G (600,000) Deferred outflow - actuarial losses [K-(K/L)] (180,000) Deferred inflow - excess investment earnings [J-(J/5)] 160,000 Total = OPEB Expense $3,980,000 66

67 Transition Allocations by Fund GASB does not specify how to allocate by fund General rule: fund that is expected to pay the liability No JE in modified-accrual funds Allocate to enterprise and internal service funds on a rational basis (preferably contributions) Use cost-sharing methodology for significant changes in proportion from year to year 67

68 CPE Prompt 4 of 4 When recording adjustments for GASB 75, an employer should: A. Book a liability in the general fund B. Book a liability in the government-wide financial statements, split between governmental and business-type activities C. Book a liability in the government-wide financial statements and any proprietary funds that are expected to pay for the cost of OPEB D. Any of these approaches are permitted 68

69 Alternative Measurement Method Permitted by GASB 75 for plans with fewer than 100 employees (active and inactive) Uses simplifying assumptions Does not require the use of an actuary May be updated/modeled internally 69

70 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Assumptions: Average retirement age Benefits continue until (age/years/death) Years to vest Current cost of coverage (single/married, age-based) Healthcare cost trend rate AA 20-year muni bond rate (cont.) 70

71 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Assumptions: Fiduciary net position of OPEB trust Long-term expected rate of return Contribution rate (% of salaries) Assumed salary growth Probability of accepting benefits 71

72 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Sample calculation: 30 employees (26 active, 4 inactive) Average age at retirement = 62 Vest in 10 years, benefits provided until death Plan is minimally funded ($12k), and pay-as-you-go Rate of return = 5% investments; 3.31% AA 20-year Net OPEB Liability = $350,000 72

73 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Average age at retirement = Net OPEB Liability = $350,000 $110,000 73

74 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Rate of return = 5% 7% Net OPEB Liability = $350,000 $348,000 74

75 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Employer contributions = 0% 5% Net OPEB Liability = $350,000 $290,000 75

76 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Employer contributions = 0% 5% Rate of return = 5% 7% Net OPEB Liability = $350,000 $235,000 76

77 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Healthcare cost trend rate = 6% 9% Net OPEB Liability = $350,000 $511,000 77

78 Alternative Measurement Method Rehmann s GASB 75 OPEB AMM Template Change in assumptions: Years to vest = Net OPEB Liability = $350,000 $243,000 78

79 Questions? 79

80 For more information... Stephen W. Blann, CPA, CGFM, CGMA Director of Governmental Audit Quality Rehmann 80