Teacher Retirement System of Texas. GASB 68 Implementation Guide for TRS Employers

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1 Teacher Retirement System of Texas GASB 68 Implementation Guide for TRS Employers Gloria Nichols, CPA June 18, 2015

2 Table of Contents GASB 68 Implementation of TRS Employers Chapter Topic Page 2 I. Overview 3 II. TRS History 4 III. GASB 67 & 68 Standards 9 IV. Basis of the Allocation 17 V. GASB 68 Allocation Schedules 27 VI. GASB 68 Implementation 31 VII. Instructions for using Schedules 44 VIII. Suggested Note Disclosures 70 VIII. Communication 101

3 Overview This GASB 68 presentation will touch just briefly on the GASB standard itself and focus primarily on TRS specific information that will help you in the implementation of GASB 68. The 2014 TRS GASB 68 plan information is now posted to the TRS website on the home page. Here is the link: We will review all of that information in this session. 3

4 TRS History The year 2015 marks the 78 th anniversary of the Teacher Retirement System of Texas. In 1937, only 38,000 teachers took part in the system. Today, there are over 1 million current members. TRS now manages one of the top five pension funds in the nation and one of the world s largest pension funds, with over $130 billion dollars in assets. 4

5 TRS History All employees of public, state-supported educational institutions in Texas who are employed for one-half or more of the standard work load and who are not exempted from membership under Texas Government Code, Title 8, Section , are covered by the system. 5

6 TRS History As of August 31, 2014, TRS gross membership consisted of the following: Retired members currently receiving benefits 363,182 Inactive members not receiving benefits 194,093 Active members 857,342 Total members 1,414,607 6

7 TRS History At August 31, 2014, participating employers included the following: Independent School Districts 1,026 Charter Schools(open enrollment only) 197 Community & Junior Colleges 50 Senior Colleges & Universities 48 Regional Service Centers 20 Medical Schools 9 Educational Districts 5 State Agencies 2 Total 1,357 7

8 TRS History Contributors to the plan include members, employers and the State of Texas as the only non-employer contributing entity. The State of Texas is also the employer for senior colleges, medical schools and state agencies including TRS. In each respective role, the State contributes to the plan in accordance with state statutes and the General Appropriations Act (GAA). 8

9 GASB 67 & 68 Standards Governmental Accounting Standards Board (GASB) Statement No. 67, Financial Reporting for Pension Plans amends GASB Statement No. 25. Statement No. 67 was issued in June 2012 and was effective for plan financial statements for fiscal years beginning after June 15, TRS implemented GASB 67 with the 2014 Comprehensive Annual Financial Report. (see Financial Reports section of the Publication page on the TRS website to view the CAFR). 9

10 GASB 67 & 68 Standards GASB Statement No. 68, Accounting and Financial Reporting for Pensions amends GASB Statement No. 27. Statement No. 68 was issued June 2012 and became effective for financial statements for fiscal years beginning after June 15, GASB is the authoritative, standard setting body which establishes governmental GAAP (Generally Accepted Accounting Principles) for state and local governments. As such, they establish financial reporting guidelines for TRS 10

11 GASB 67 & 68 Standards Together these statements define how pension liabilities will be calculated by plans and reported by employers and other non-employer contributing entities who prepare financial statements in accordance with Generally Accepted Accounting Principles (GAAP). Note: Statement 68 applies only to pension benefits and does not apply to Other Post- Employment Benefits (OPEB) or TRS-Care related liabilities. 11

12 GASB 67 & 68 Standards Statement 68 requires reporting entities to recognize their proportionate share of the net pension liability and operating statement activity related to changes in the collective pension liability. This means that reporting entities that contribute to the TRS pension plan should now report a liability on their financial statements for their proportionate share of the net pension liability. 12

13 GASB 67 & 68 Standards The first year of implementation for employers in the TRS plan is fiscal year The NPL should be measured as of a date no earlier than the end of the employer s prior fiscal year. This provision was made because the plan data cannot be finalized and audited in time for most employers to use the current year plan data. 13

14 GASB 67 & 68 Standards We anticipate all TRS participating employers to use fiscal year 2014 data with an initial measurement date of August 31, All future years will be reported on the same basis. Your fiscal year 2016 reporting period will use fiscal year 2015 plan data. 14

15 GASB 67 & 68 Standards A liability should be recognized for the Net Pension Liability (NPL). The NPL should be measured as the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee service, net of the pension plan s fiduciary net position. So that essentially means that on a pay-as-you-go basis, the amount you should have paid into the pension fund for future retirement benefits for services performed to date less the money you currently have in the pension fund equals the net pension liability. 15

16 GASB 67 & 68 Standards As of TRS most recent year-end, August 31, 2014: Total Pension Liability $ billion Less: Net Position ( billion) Net Pension Liability $ 26.7 billion ========== 16

17 Basis of the Allocation As a multi-employer, cost-sharing plan with a special funding situation, GASB 67/68 requires TRS to allocate the unfunded net pension liability among all participating employers proportionately. The proportion is based on who makes contributions to the pension plan. According to GASB 68, paragraph 48(a) allocation of the liability should be consistent with the manner in which contributions to the plan are determined. 17

18 Basis of the Allocation TRS and state oversight agencies determined that one year of historical, actual contributions best represents that proportion. Employee contributions are not included in the allocation because the employees do not share in the liability. 18

19 Basis of the Allocation For the TRS pension fund, either the State of Texas or the employer pays the employer contribution to the pension fund as established by the General Appropriations Act. The State of Texas will be reporting its proportionate share of the net pension liability as the non-employer contributing entity for the TRS pension fund as well as its proportionate share as the employer for senior colleges, universities and medical schools. 19

20 Basis of the Allocation The state s total share of the net pension liability for both is approximately 75% percent of the net pension liability as of the initial measurement date of August 31, The methodology for allocating the net pension liability and the operating statement activity (pension expense, deferred inflows and deferred outflows) to each employer will be based on each employer s contributions as a percentage of all employer and non-employer contributing entity contributions. 20

21 Basis of the Allocation Participating employers pay contributions for the following contribution types: EG- Educational/General Funds FG- Federal Funds/Private Grants NE Noneducational/General Funds NM New Members * PS Pension Surcharge SM Statutory Minimum CJ Community and Junior Colleges NO Non-OASDI Members ** eff. In FY

22 Basis of the Allocation Collectively, these categories account for the remaining approximate 25% of the total contributions to the plan. Each participating employer s proportionate share is based only on these contributions. 22

23 Basis of the Allocation 2014 Employer Contributions Percentages State of TX - Non-Employer Contributing Entity (State Match) State of TX - Employer Contributing Entity for Higher Ed (State Match) Higher Education Employers Public Education Employers and JR Colleges

24 Basis of the Allocation 2014 Employer Contributions State of Texas Other Employers

25 Basis of the Allocation 12 months of contributions and adjustments (if any) reported to TRS thru the TRAQS reporting system are used. Incomplete reports in a pending status are included. Proportionality amounts are included. New schools that reported a partial year are annualized. 25

26 Basis of the Allocation Adjustments related to prior years are disallowed. Contributions reported for the Allocation Schedule are not the same as Contributions reported for GAAP and the CAFR. The difference in methods gives rise to a deferred outflow of resources that must be amortized over the Average Expected Remaining Service Life (AERSL). 26

27 GASB 68 Allocation Schedules TRS has provided a Schedule of Employer Allocations to allocate the Net Pension Liability (NPL) to all employers and the non-employer contributing entity based upon their respective contributions to the pension fund. TRS has provided a Schedule of Pension Amounts by Employer which contains the plan pension expense, deferred inflows and deferred outflows for the pension plan by employer. 27

28 GASB 68 Allocation Schedules The State Auditor s Office audited these 2 schedules and the related Notes to the Schedules. We have posted this file to our website. The file contains 4 tabs: Audit Opinion Schedule of Employer Allocations Schedule of Pension Amounts by Employer Notes to the Schedules 28

29 GASB 68 Allocation Schedules TRS has also provided a Schedule of Changes in the Net Pension Liability at a summary level for fiscal year 2014 to demonstrate how the various adjustments affect the Net Pension Liability. This schedule is not a required GASB schedule and accordingly was NOT AUDITED. However, the data was extracted from the audited Schedule of Pension Amounts by Employer. 29

30 GASB 68 Allocation Schedules A Schedule of On-Behalf Contributions is provided which shows amounts to be recognized as grant revenue for each fiscal year for the amounts paid by the State of Texas as the nonemployer contributing entity. This schedule is UNAUDITED. 30

31 GASB 68 Implementation Try to focus on the overall concept that GASB is trying to achieve...reporting your share of the NPL. We will provide the beginning NPL. We will provide the amounts that need to be recorded as collective pension expense. We will provide the amounts that need to be recorded as deferred inflow of resources and deferred outflow of resources. We will provide your ending NPL prior to your employer specific journal entries. 31

32 GASB 68 Implementation Selection of Measurement Date Audited TRS plan data for fiscal year ending 08/31/15 will not be available until May/June of Employers are allowed to select a measurement date one year prior to their reporting period end date. We expect that all TRS employers will be selecting a measurement date of August 31,

33 GASB 68 Implementation If the participating employer selects August 31, 2014 as its measurement date, the deferred outflows of resources for contributions subsequent to the measurement date of 08/31/14 and before the end of the participating employer s reporting period will have to be calculated by the participating employer. This means that the following contributions paid by the participating employer to TRS will need to be reported as a deferred outflow of resources: 33

34 GASB 68 Implementation Fiscal Year-End Contributions Paid August 31, /1/2014 thru 8/31/15 June 30, /1/2014 thru 6/30/15 34

35 GASB 68 Implementation Proportionate Share and Change in Proportion To prepare participating employers for the impact of reporting a proportionate share of the Net Pension Liability, TRS prepared a 2013 Allocation schedule using 2013 contributions so that each participating employer could see their estimated proportionate share. This is the schedule that was previously posted on the TRS website. 35

36 GASB 68 Implementation The Net Pension Liability was not calculated by our actuary yet for 2013 when we prepared this schedule. The closest number we had was the Unfunded Actuarial Accrued Liability (UAAL) which was calculated according to GASB

37 GASB 68 Implementation The NPL(GASB 67) and the UAAL(GASB 25) are calculated according to different actuarial methods. The technical differences are not necessary to understand but those of you that would like to know... 37

38 GASB 68 Implementation The UAAL is the liability calculated using Ultimate Entry Age Normal and a Smoothed Value of Assets and is used as a funding target and was appropriate under the old GASB 25 standard. The NPL is the liability calculated using Individual Entry Age Normal and the Market Value of Assets and is used for the new GASB 67 standard. 38

39 GASB 68 Implementation The UAAL number ($28.9 billion) and the 2013 contribution amounts were used as an estimate only. It cannot be used as the basis of the change in proportion in the initial year of implementation. For the first year of implementation, the change in proportion was immaterial so we are reporting no change in proportion for the first year of implementation. The ending proportion will be used for the beginning proportion. 39

40 GASB 68 Implementation The actuary has now calculated the beginning Net Pension Liability for TRS for the first year of implementation. This is the Beginning Net Pension Liability as of 08/31/13 which will be used as the starting point. The proportionate share measured as of 08/31/14 was applied to the Beginning NPL number to determine each participating employer s proportionate share of the Beginning NPL. 40

41 GASB 68 Implementation The proportionate share measured as of 08/31/14 was applied to the Ending NPL number to determine each participating employer s proportionate share of the Ending NPL. The change in proportions were immaterial and thus not addressed this year. 41

42 GASB 68 Implementation For all future years, there will be a calculation to measure the change in proportion from year to year. If it is immaterial, then it can be disregarded. TRS used 9 decimal places to report each participating employer s share of the net pension liability on the 2014 allocation schedule. If a participating employer decides to round to a smaller decimal place, it could result in no 42 change in proportion from year to year.

43 GASB 68 Implementation TRS has provided sample language for Note Disclosures and Required Supplementary Information (RSI) for the plan as a whole. Note Disclosures relating to employer specific items will be the responsibility of the participating employer. Sample language for Note disclosures has now been posted to the website. 43

44 Instructions for using Schedules The following instructions are intended to explain the purpose of each schedule and how to use the associated information. Schedules Provided Audited Purpose Schedule of Employer Allocations Yes To show basis of proportion. Schedule of Pension Amounts By Employer Yes To provide amounts for journal entries. Schedule of Changes in the NPL No To provide flow from beg to end NPL. Schedule of On-Behalf pmts from No To provide amounts Non-employer contributing entity for journal entries. 44

45 Instructions for using Schedules *The audit was performed by the Texas State Auditor s Office and was a stand-alone audit specifically for the two AICPA recommended GASB 68 Schedules. The two 2014 audited schedules are: The Schedule of Employer Allocations contains the employer contributions and their proportionate shares only. This schedule provides the contribution amounts on which the proportions are based. 45

46 Instructions for using Schedules Refer to the Notes to the Allocation Schedule, D- Employer Contributions for potential adjustments that may have been made to your entity to arrive at the contributions as presented. The Schedule of Pension Amounts by Employer is a 39 column schedule of very detailed information that is the basis of the journal entries required by GASB. 46

47 Instructions for using Schedules It contains the Beginning Net Pension Liability, the components that make up the pension expense, the deferred outflows of resources, the deferred inflows of resources, the Ending Net Pension Liability and the future deferrals by year. An optional third schedule is presented which is called the Schedule of Changes in the Net Pension Liability and while it is was not audited, the data was extracted from the audited Schedule of Pension Amounts by Employer. 47

48 Instructions for using Schedules This schedule shows the beginning Net Pension Liability (NPL), the changes to the NPL and the Ending NPL in summary form which may be easier to understand at first. Please note that this schedule represents collective amounts for the pension plan as a whole. In future years, after 2014, this schedule will be presented only on a summary basis, because your employer specific journal entries will impact the math on this schedule. 48

49 Instructions for using Schedules The fourth schedule is the Schedule of On- Behalf Payments by the Non-Employer Contributing Entity. It will be the source of your journal entry for GASB 68, paragraphs 94 and

50 Instructions for using Schedules In an effort to simplify your journal entry preparation, the following step by step instructions for using the GASB 68 schedules have been provided. The data in each link was extracted from the Audited Schedules. The EXTRACT file contains only the columns needed for the journal entries discussed and is a much smaller file and should be easier to access the data needed. Column references below can be found in row 12 of the first two spreadsheets. 50

51 Instructions for using Schedules The Schedule of Pension Amounts by Employer will be needed for items 1,2,3,5,6,9,14 and 15 below: Here is the EXTRACT file of the Schedule of Pension Amounts by Employer: Schedule of Pension Amts by Employer Extract The Notes to the Allocation Schedule is with the Audited Schedules and will be needed for items 7,8,11,12,13: Here is the Notes to the Allocation Schedules: Notes to the Allocation Schedule on CAFR template.pdf 51

52 Instructions for using Schedules 1. GASB 68, paragraph 137 requires a restatement of the Beginning Net Position for the Beginning Net Pension Liability. This number is from column 4 of the Audited Schedule of Pension Amounts by Employer. 52

53 Instructions for using Schedules 2. GASB 71, paragraph 3 requires a restatement to the Beginning Net Position for the recording of deferred outflow of resources (for the year of transition only), for contributions made after the measurement date of the Beginning NPL and the beginning of the reporting entity s fiscal year. (For employers with an 8/31 fiscal year-end contributions from 9/1/13 to 8/31/14.) Column (2) for 8/31 employers. For 6/30/14 employers you will use the contributions from 9/1/13 to 6/30/14 and will need to adjust column (2) for timing differences). 53

54 Instructions for using Schedules The date of this will be 09/01/13. Please see item #15 for the reversing journal entry. 54

55 Instructions for using Schedules 3. There is an additional restatement to the Beginning Net Position for certain (not all) reporting entities. This is a TRS specific onetime restatement for the recognition of accumulated overpayments of contributions prior to and including 2014 that were recognized by TRS in The Additional Contributions Adjustment is in Column 5. If your reporting entity does not have a number in this column, then you will not have a restatement for this item. 55

56 Instructions for using Schedules 4. GASB 68, paragraph 33.c states that contributions to the pension plan should not be recognized in pension expense. You need to record the contributions as a reduction to net pension liability and remove the pension contributions from the account you charged them to when the payment was made. 56

57 Instructions for using Schedules 5. GASB 68, paragraph 57 requires recording the contributions made after the measurement date of the ending NPL and before the end of the reporting entity s current fiscal year end. (R.E. contributions 9/1/14 to 8/31/15 for employers with an 8/31 fiscal year end) This will come from the Reporting Entity s records. 57

58 Instructions for using Schedules 6. GASB 68, paragraph 53 requires recording your proportionate share of the pension expense for the plan as a whole. We recommend that you exclude the current year expense portion of the deferred outflows and deferred inflows (columns 13-17) from this journal entry and do a separate entry for the deferrals. We believe this approach will make it easier to track future deferrals and their related amortization. The pension expense columns (excluding the deferrals) you will sum are columns 6 thru

59 Instructions for using Schedules 7. Differences between Expected and Actual Experience a. GASB 68, paragraph 53 requires recording your proportionate share of the pension expense for the Differences between Expected and Actual Experience. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. 59

60 Instructions for using Schedules Apply your proportionate share times the Difference between Expected and Actual Experience line, in the Recognized in Expense column to arrive at your expense or negative expense (revenue) number. If the number is positive, debit pension expense. 60

61 Instructions for using Schedules b. The Differences between Expected and Actual Experience is one of the items that GASB requires to be amortized. If the item is material to your entity or if your oversight agency does not allow the expensing of immaterial items, then a schedule such as the one in the GASB 68 Implementation Guide, pages 141 to 151 is encouraged for tracking the multi-year amortization that is required. This decision and schedule would also apply to items below. 61

62 Instructions for using Schedules 8. GASB 68, paragraph 53 requires recording your proportionate share of the pension expense for the Changes in Actuarial Assumptions. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. Apply your proportionate share times the Changes in Actuarial Assumptions line, in the Recognized in Expense column to arrive at your number. 62

63 Instructions for using Schedules 9. GASB 68, paragraph 53 requires recording your proportionate share of the pension expense for the Net Difference between Projected and Actual Investment Earnings. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. Apply your proportionate share times the Net Difference between Projected and Actual Investment Earnings line, in the Recognized in Expense column to arrive at your number. 63

64 Instructions for using Schedules 10. GASB 68, paragraph 53 requires recording your proportionate share of the pension expense for the Changes in Proportion and Differences between Employer Contributions and Proportionate Share of Contributions. For this first year of implementation, TRS is not recognizing a change in the proportionate share but there is a Difference between Actual Employer Contributions and Proportionate Share of Contributions due to other adjustments to contributions. This amount is from column

65 Instructions for using Schedules GASB 68, paragraph 71 requires that the proportionate share of deferrals per section C of the Notes, Deferred Outflows and Deferred Inflows of Resources by Source for the Pension Plan as a Whole that is NOT recognized in the current year should be recorded as a deferred inflow/ outflow. The recognition period is show beside each item in the Note. GASB 68, paragraph 52 allows certain of these items to be recognized on a net basis. 65

66 Instructions for using Schedules 11. GASB 68, paragraph 53 requires recording your proportionate share of the deferred outflows for the Difference between Expected and Actual Experience. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. Apply your proportionate share times the Differences between Expected and Actual Experience line, in the Deferred Outflow of Resources column to arrive at your number. 66

67 Instructions for using Schedules 12. GASB 68, paragraph 53 requires recording your proportionate share of the deferred outflows for the Changes in Actuarial Assumptions. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. Apply your proportionate share times the Changes in Actuarial Assumptions line, in the at your number. Deferred Outflow of Resources column to arrive at your number. 67

68 Instructions for using Schedules 13. GASB 68, paragraph 53 requires recording your proportionate share of the deferred outflows for the Net Difference between Projected and Actual Investment Earnings. Due to the fact that the Schedule of Pension Amounts by Employer does not break this number out, we have included the information in the accompanying Notes to the GASB 68 Schedules. This amount is from Section C of the Notes. Apply your proportionate share times the Net Difference between Projected and Actual Investment Earnings line, in the Deferred Outflow of Resources column to arrive at your number. 68

69 Instructions for using Schedules 14. GASB 68, paragraph 53 requires recording your proportionate share of the deferred outflows for the Difference between Employer Contributions and Proportionate Share.. From column 21 on the Schedule of Pension Amounts by Employer. 69

70 Instructions for using Schedules 15. GASB 68, paragraph 53 requires recording your proportionate share of the deferred inflows for the Difference between Employer Contributions and Proportionate Share. From column 27 on the Schedule of Pension Amounts by Employer. 70

71 Instructions for using Schedules 16. GASB 68, paragraph 94 and 95 requires that pension expense and revenue should be recognized for the non-employer contributing entity s total proportionate share of collective pension expense that is associated with the employer. This amount comes from the Schedule of On-Behalf Payments Made by the Non-Employer Contributing Entity column 3. 71

72 Instructions for using Schedules 17. You will need to reverse the deferred outflow of resources you recorded for GASB 71, journal entry #2 above. 72

73 Instructions for using Schedules Hints for Journal Entries These entries may be difficult in the first year, so keep one basic thought in mind. After all the entries have been made, the ending NPL for your entity should equal the amount in column 30 of the Schedule of Employer Amounts. Amounts may not foot across due to rounding. If this occurs, it may be preferable to adjust current year expense rather than deferrals to avoid 73 future year issues.

74 Suggested Note Disclosures Suggested GASB 68 Pension Footnotes for Employers Financial Statements for the Fiscal Year Ended August 31, 2015 Summary of Significant Accounting Policies Pensions. The fiduciary net position of the Teacher Retirement System of Texas (TRS) has been determined on the flow of economic resources measurement focus and full accrual basis of accounting. This includes for purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, pension expense, and information about assets, liabilities and additions to/deductions from TRS s fiduciary net position. Benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. 74

75 Suggested Note Disclosures Note X. Defined Benefit Pension Plans A. Plan Description The [employer] participates in a cost-sharing multipleemployer defined benefit pension that has a special funding situation. The plan is administered by the Teacher Retirement System of Texas (TRS). TRS s defined benefit pension plan is established and administered in accordance with the Texas Constitution, Article XVI, Section 67 and Texas Government Code, Title 8, Subtitle C. The pension trust fund is a qualified pension trust under Section 401(a) of the Internal Revenue Code. 75

76 Suggested Note Disclosures The Texas legislature establishes benefits and contribution rates within the guidelines of the Texas Constitution. The pension s Board of Trustees does not have the authority to establish or amend benefit terms. All employees of public, state-supported educational institutions in Texas who are employed for one-half or more of the standard work load and who are not exempted from membership under Texas Government Code, Title 8, Section are covered by the system. 76

77 Suggested Note Disclosures B. Pension Plan Fiduciary Net Position Detailed information about the Teacher Retirement System s fiduciary net position is available in a separatelyissued Comprehensive Annual Financial Report that includes financial statements and required supplementary information. That report may be obtained on the Internet at by writing to TRS at 1000 Red River Street, Austin,TX, ; or by calling (512)

78 Suggested Note Disclosures C. Benefits Provided TRS provides service and disability retirement, as well as death and survivor benefits, to eligible employees (and their beneficiaries) of public and higher education in Texas. The pension formula is calculated using 2.3 percent (multiplier) times the average of the five highest annual creditable salaries times years of credited service to arrive at the annual standard annuity except for members who are grandfathered, the three highest annual salaries are used. 78

79 Suggested Note Disclosures The normal service retirement is at age 65 with 5 years of credited service or when the sum of the member s age and years of credited service equals 80 or more years. Early retirement is at age 55 with 5 years of service credit or earlier than 55 with 30 years of service credit. There are additional provisions for early retirement if the sum of the member s age and years of service credit total at least 80, but the member is less than age 60 or 62 depending on date of employment, or if the member was grandfathered in under a previous rule. 79

80 Suggested Note Disclosures There are no automatic post-employment benefit changes; including automatic COLAs. Ad hoc postemployment benefit changes, including ad hoc COLAs can be granted by the Texas Legislature as noted in the Plan description in (A) above. 80

81 Suggested Note Disclosures D. Contributions Contribution requirements are established or amended pursuant to Article 16, section 67 of the Texas Constitution which requires the Texas legislature to establish a member contribution rate of not less than 6% of the member s annual compensation and a state contribution rate of not less than 6% and not more than 10% of the aggregate annual compensation paid to members of the system during the fiscal year. 81

82 Suggested Note Disclosures Texas Government Code section prohibits benefit improvements, if as a result of the particular action, the time required to amortize TRS unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or, if the amortization period already exceeds 31 years, the period would be increased by such action. 82

83 Suggested Note Disclosures Employee contribution rates are set in state statute, Texas Government Code Senate Bill 1458 of the 83 rd Texas Legislature amended Texas Government Code for member contributions and established employee contribution rates for fiscal years 2014 thru It also added a 1.5% contribution for employers not paying Old Age Survivor and Disability Insurance (OASDI) on certain employees effective for fiscal year 2015 as discussed in Note 1 of the TRS 2014 CAFR. The 83 rd Texas Legislature, General Appropriations Act (GAA) established the employer contribution rates for fiscal years 2014 and

84 Suggested Note Disclosures Contribution Rates Member 6.4% 6.7% Non-Employer Contributing Entity (State) 6.8% 6.8% Employers 6.8% 6.8% Employer # XXXX Employer Contributions $310,114,008 Employer # XXXX Member Contributions $xxx,xxx,xxx Employer # XXXX NECE On-behalf Contributions $xxx,xxx,xxx 84

85 Suggested Note Disclosures Contributors to the plan include members, employers and the State of Texas as the only non-employer contributing entity. The State is the employer for senior colleges, medical schools and state agencies including TRS. In each respective role, the State contributes to the plan in accordance with state statutes and the General Appropriations Act (GAA). As the non-employer contributing entity for public education and junior colleges, the State of Texas contributes to the retirement system an amount equal to the current employer contribution rate times the aggregate annual compensation of all participating members of the pension trust fund during that fiscal year reduced by the amounts described below which 85 are paid by the employers.

86 Suggested Note Disclosures Employers (public school, junior college, other entities or the State of Texas as the employer for senior universities and medical schools) are required to pay the employer contribution rate in the following instances: On the portion of the member's salary that exceeds the statutory minimum for members entitled to the statutory minimum under Section of the Texas Education Code. During a new member s first 90 days of employment. When any part or all of an employee s salary is paid by federal funding sources, a privately sponsored source, from non-educational and general, or local funds. 86

87 Suggested Note Disclosures When the employing district is a public junior college or junior college district, the employer shall contribute to the retirement system an amount equal to 50% of the state contribution rate for certain instructional or administrative employees; and 100% of the state contribution rate for all other employees. In addition to the employer contributions listed above, when employing a retiree of the Teacher Retirement System the employer shall pay both the member contribution and the state contribution as an employment after retirement surcharge. 87

88 Suggested Note Disclosures E. Actuarial Assumptions The total pension liability in the August 31, 2014 actuarial valuation was determined using the following actuarial assumptions: Valuation Date August 31, 2014 Actuarial Cost Method Individual Entry Age Normal Amortization Method Level Percentage of Payroll, Open Remaining Amortization Period 30 years Asset Valuation Method 5 year Market Value Discount Rate 8.00% Long-term expected Investment Rate of Return * 8.00% 88

89 Suggested Note Disclosures Salary Increases* 4.25% to 7.25% Weighted-Average at Valuation Date 5.55% Payroll Growth Rate 3.50% * Includes Inflation of 3% The actuarial methods and assumptions are primarily based on a study of actual experience for the four year period ending August 31, 2010 and adopted on April 8,

90 Suggested Note Disclosures With the exception of the post-retirement mortality rates for healthy lives and a minor change to the expected retirement age for inactive vested members stemming from the actuarial audit performed in the Summer of 2014, the assumptions and methods are the same as used in the prior valuation. When the mortality assumptions were adopted in 2011 they contained a significant margin for possible future mortality improvement. 90

91 Suggested Note Disclosures As of the date of the valuation there has been a significant erosion of this margin to the point that the margin has been eliminated. Therefore, the post-retirement mortality rates for current and future retirees was decreased to add additional margin for future improvement in mortality in accordance with the Actuarial Standards of Practice No

92 Suggested Note Disclosures F. Discount Rate The discount rate used to measure the total pension liability was 8.0%. There was no change in the discount rate since the previous year. The projection of cash flows used to determine the discount rate assumed that contributions from plan members and those of the contributing employers and the non-employer contributing entity are made at the statutorily required rates. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to all future benefit payments of current plan members. 92

93 Suggested Note Disclosures Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The long-term rate of return on pension plan investments is 8%. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimates ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. 93

94 Suggested Note Disclosures * Best estimates of geometric real rates of return for each major asset class included in the Systems target asset allocation as of August 31, 2014 are summarized below: 94

95 95 Suggested Note Disclosures

96 Suggested Note Disclosures The Expected Contribution to Returns incorporates the volatility drag resulting from the conversion between Arithmetic and Geometric mean returns. 96

97 Suggested Note Disclosures G. Discount Rate Sensitivity Analysis The following schedule shows the impact of the Net Pension Liability if the discount rate used was 1% less than and 1% greater than the discount rate that was used (8%) in measuring the 2014 Net Pension Liability. 1% Decrease in Discount Rate (7.0%) Discount Rate (8.0%) 1% Increase in Discount Rate (9.0%) [Entity s] proportionate share of the net pension liability: $xx,xxx $xx,xxx $xx,xxx 97

98 Suggested Note Disclosures H. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At August 31, 2014, the [employer] reported a liability of $ for its proportionate share of the TRS s net pension liability. This liability reflects a reduction for State pension support provided to the [employer]. The amount recognized by the [employer] as its proportionate share of the net pension liability, the related State support, and the total portion of the net pension liability that was associated with the [employer] were as follows: 98

99 Suggested Note Disclosures [Employer s] Proportionate share of the collective net pension liability $XXX,XXX State s proportionate share that is associated with [employer] $XXX,XXX Total $XXX,XXX 99

100 Suggested Note Disclosures The net pension liability was measured as of August 31, 2014 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The employer s proportion of the net pension liability was based on the employer s contributions to the pension plan relative to the contributions of all employers to the plan for the period September 1, 2013 thru August 31, At August 31, 2014 the employer s proportion of the collective net pension liability was xx.x% which was an increase (decrease) of x.xxxxx% from its proportion measured as of August 31, The change in proportion was immaterial and therefore disregarded this year. 100

101 Suggested Note Disclosures There were no changes of assumptions or other inputs that affected measurement of the total pension liability during the measurement period. There were no changes of benefit terms that affected measurement of the total pension liability during the measurement period. 101

102 Suggested Note Disclosures There was a change in employer contribution requirements that occurred after the measurement date of the net pension liability and the employer s reporting date. A 1.5% contribution for employers not paying Old Age Survivor and Disability Insurance (OASDI) on certain employees went into law effective 09/01/2013. The amount of the expected resultant change in the employer s proportion cannot be determined at this time. For the year ended August 31, 2014, the [employer] recognized pension expense of $ and revenue of $ for support provided by the State. 102

103 Suggested Note Disclosures At August 31, 2014, the [employer] reported its proportionate share of the TRS s deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources $x,xxx Deferred Inflows of Resources $x,xxx Differences between expected and actual economic experience Changes in actuarial assumptions $x,xxx $x,xxx Difference between projected and actual $x,xxx $x,xxx investment earnings Changes in proportion and difference between the $x,xxx $x,xxx employer s contributions and the proportionate share of contributions Contributions paid to TRS subsequent to the measurement date [to be calculated by employer] $x,xxx Total $xxx,xxx $xxx,xxx 103

104 Suggested Note Disclosures The net amounts of the employer s balances of deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: 104 Year ended August 31: Pension Expense Amount 2016 $x,xxx 2017 $x,xxx 2018 $x,xxx 2019 $x,xxx Thereafter 0

105 Communication For more detailed information about the employer note disclosure, resources for financial reporting, employer audits and other related subjects, please refer to the TRS website at: reporting&page_id=/reporting/gasb67_68 TRS has a link to the GASB Allocation Schedules on the top center of the home 105

106 Communication We have met with the Texas Education Agency (TEA) to assist them with their guidance for public education. We are working with the Texas Higher Education Coordinating Board to assist them in further guidance for the community and junior colleges. The State Comptroller s Office will be providing guidance for Higher Education. 106

107 Communication Questions Contact info: Gloria Nichols, CPA Project Manager GASB 67 & 68 Financial Reporting Department Teacher Retirement System of Texas (512)