GASB Roll Forwards. David Kausch, FSA, EA, MAAA, PhD Senior Consultant and Chief Actuary Gabriel, Roeder, Smith & Company October 29, 2014

Transcription

1 GASB Roll Forwards David Kausch, FSA, EA, MAAA, PhD Senior Consultant and Chief Actuary Gabriel, Roeder, Smith & Company October 29, 2014 Copyright 2014 GRS All rights reserved.

2 Agenda GASB Roll Forwards What? Why? When? How? Who? Questions and Answers 1

3 What? Roll over Beethoven 2

4 Brief GASB Background Key Terms Total Pension Liability (TPL) Portion of the present value of benefits attributed to past periods of member service Plan Fiduciary Net Position (PFNP) Market value of assets Net Pension Liability (NPL) NPL = TPL - PFNP 3

5 Brief GASB Background Key Dates GASB Statement No. 67 Measurement date/reporting date/plan s Fiscal Year-End (FYE) Actuarial valuation date GASB Statement No. 68 Measurement date Reporting date/employer s FYE Actuarial valuation date 4

6 Timing and Linkage Issues Three dates and three periods for at least two reporting entities all need to be linked in a manner that: Cooperates with (or dictates) the needs and deadlines of the Plan s financial statements, preparers, and auditors Cooperates with (or dictates) the needs and deadlines of the Employer s financial statements, preparers, and auditors Cooperates with (or dictates) the actuary s valuation process This is a big deal! 5

7 Roll Forwards Actuarial valuations are only required by GASB every other year Most systems have annual actuarial valuations TPL on the measurement date may be rolled forward from a prior valuation performed no more than 24 months prior to the plan s fiscal year-end 6

8 Why? You ve got to roll with the changes 7

9 Timing Reasons for Rolling Forward System s Timing First time around there may be new procedures to set up May require additional data collection Auditor s Timing Need to audit controls of any new procedures Additional burden on cost-sharing plan auditor Additional testing contributions needed Level of additional testing may make it impossible to audit current year s data in time Actuary s Timing Actuarial valuation may not be done by reporting deadline Roll forward quicker than full valuation 8

10 Complications with Roll Forwards May cause confusion Rolled forward TPL will not match the actuarial accrued liability (AAL) in the funding valuation This may not be a big issue because TPL may not match funding AAL for other reasons (e.g., different discount rate, actuarial cost method) NPL will not match the Unfunded Actuarial Accrued Liability because the assets are not smoothed Get the message out (often) that we have two sets of numbers now we should not expect them to match 9

11 Complications with Roll Forwards The Actuary still needs some current year data even if rolling forward a prior year s valuation Need municipal bond rate as of plan year-end* Roll forward may be delayed while waiting for asset data Must reflect actual benefits paid during the plan year in the roll forward** Must reflect actual PFNP as of the end of the plan year in determining the discount rate * If the plan s funding policy does not result in a cross-over date, the municipal bond rate will not be used in the determination of the single discount rate ** There may be circumstances where expected benefits paid are a reasonable proxy for roll forward purposes 10

12 When? Let the good times roll 11

13 Timing is Everything Have a planning meeting Get agreement and understanding of the timing needs of: The System The Actuary The Auditor (Plan s and/or Employer s) The Employer(s) Even though GASB No. 68 will not come into effect until next year, this year s decisions will have implications on that process 12

14 Common Timing Issues Plan Consolidated Annual Financial Report (CAFR) may be required quickly after FYE May require roll forward If a single or agent employer plan does not issue a stand alone CAFR, the employer must disclose GASB No. 67 information in employer s financials need to know employer s reporting deadlines Employers in cost-sharing plans may have different fiscal year-ends and may need to pull information from the plan s GASB No. 67 report sooner than expected 13

15 How? Like a rolling stone 14

16 What Happens From One Year to the Next? Time goes by Benefits accrue Benefits get paid Circumstances may change 15

17 What Happens to the TPL in a Roll Forward? Time goes by Add Interest Benefits accrued Add Service Cost Benefits get paid Subtract Benefits Circumstances may change Adjust for: Assumption changes (including changes in the single discount rate) Plan changes Other significant events between the valuation date and measurement date 16

18 Determining the Single Discount Rate (SDR) Projection to determine the SDR Project future contributions coming in, benefit payments and administrative expenses going out If assets deplete, there is a crossover date Benefits prior to the crossover date are discounted at the expected rate of return to determine their present value Benefits after the crossover date are discounted at the municipal bond rate to determine their present value The SDR is the discount rate that results in a total present value which is the sum of the prior two present values Beginning of year TPL depends on the beginning of year PFNP and municipal bond rate End of year TPL depends on the end of year PFNP and municipal bond rate 17

19 Determination of the SDR SDR at the beginning of year and end of year may differ even if based on the same valuation with implementation In a roll forward, the projection begins with expected benefit payments generated from last year s valuation For the first year of GASB No. 67 it may be acceptable to use the prior valuation for both the beginning and end of year SDR determination But projections at the beginning of year and end of year may differ even in this case for reasons stated 18

20 Determination of the SDR This year s PFNP will likely change a lot This may not impact the SDR If The plan s funding policy targets a 100% funded ratio in an appropriate and systematic manner, Actuarially determined contribution rates reflect the impact of gains and losses in the rate and The employer contributes regularly on that basis Then Expected future changes in the employer contribution rate may be reflected in the projection to fund the current year s asset gain or loss according to the policy There should not be a crossover date 19

21 Other Disclosures with Roll Forwards GASB No. 67 disclosures require a description of the roll forward procedures An actuarial roll forward implicitly assumes all assumptions are met Except if actual benefit payments are used in the roll forward rather than expected New entrants between the valuation date and the fiscal year-end may be reflected by basing the service cost on open group payroll Typical assumption is that active population will remain constant and total payroll will grow with wage inflation 20

22 Example 1 No Changes During Year Plan A has a June 30 FYE The employer contributes the actuarially determined employer contribution based on the plan s written funding policy The discount rate as of both the beginning of the year and the end of the year is the expected rate of return of 7.5% There are no plan changes, assumption changes, or other significant events during the year 21

23 Example 1 Continued Example 1 - No Change in SDR 2014 A. Total Pension Liability - Beginning of Year (7.5%) $ 145,087,356 B. Service Cost 10,381,542 C. Benefit payments, including refunds of member contributions (15,787,403) D. Interest [(A. + (B. + C.) / 2) x 7.5% ] 10,678,832 E. Total Pension Liability - End of Year (7.5%) [A. + B. + C. + D. ] $ 150,360,327 Generally, only the final TPL will appear in the GASB disclosures 22

24 Example 1 Continued Beginning TPL and Service Cost are determined by the prior valuation Actual Benefits Paid are reported with the assets Interest calculated based on valuation methods and assumptions 7.5% interest in this case Full year s interest on beginning TPL Half a year s interest on Service Cost and Benefits* Figures shown in the example will generally differ from the reconciliation of the TPL for GASB purposes * May vary depending on assumptions and methods 23

25 Example 2 SDR Changes at FYE Plan A has a June 30 FYE Prior to June 30, 2013, the employer regularly contributes the actuarially determined employer contribution based on the plan s funding policy As of June 30, 2013, there is no crossover date and the discount rate is the expected rate of return of 7.5% In FYE 2014, the employer contributes nothing even though its required to contribute 12% of payroll There are no plan changes, assumption changes, or other significant events during the year 24

26 Example 2 SDR Changes at FYE For the FYE 2014 GASB projection, the actuary assumes that the employer will contribute 80% of the actuarially determined contributions in all future years This is based on the 5-year history with four years of contributing 100% and one year of contributing 0% This procedure is not standard and requires the professional judgment of the actuary As a result, the plan has a crossover date of 2035 and a SDR of 6.5% as of June 30,

27 Example 2 Continued Example 2 - Change in SDR 2014 A. Total Pension Liability - Beginning of Year (6.5%) $ 163,948,712 B. Service Cost 12,873,112 C. Benefit payments, including refunds of member contributions (15,787,403) D. Interest [(A. + (B. + C.) / 2) x 6.5% ] 10,561,952 E. Total Pension Liability - End of Year (6.5%) [A. + B. + C. + D. ] $ 171,598,387 Rolled forward TPL at 6.5% is $21 million higher than at 7.5% 26

28 Example 2 Continued Beginning TPL, Service Cost, Interest, and Actual Benefits Paid are all the same as Example 1 Ending TPL is based on a roll forward of a 6.5% beginning TPL which is not shown The impact as of June 30, 2014 in an increase in TPL of approximately $21 million Note that this $21 million directly increases the NPL on the employer s balance sheet May not bear any resemblance to the 12% of payroll missed contribution 27

29 What About Next Year? Once you establish a roll forward procedure, stick with it If June 30, 2014 NPL is based on a roll forward of the June 30, 2013 valuation, then June 30, 2015 s NPL will be based on a roll forward of the June 30, 2014 valuation Gain or loss on the FYE 2015 TPL will essentially be a roll forward of the June 30, 2014 liability gain or loss 28

30 What About Next Year? GASB No. 68 kicks in for employers They may use a measurement date up to a year and a day prior to their FYE This could mean that the June 30, 2014 GASB No. 67 NPL gets reported as the employer s NPL as of June 30, 2015 Or maybe not Results need to be adjusted for significant events, plan changes, etc. A change in the municipal bond rate affecting the SDR is likely to be a significant event 29

31 Who? Papa was a rolling stone 30

32 Who Should Be Involved in Planning? System Staff Actuary Auditor(s) Employer(s) 31

33 The Best Laid Plans We have a case where the System staff and the Actuary have been holding regular planning meetings for nearly two years including conversations with the Plan s Auditor We drafted a pro forma GASB No. 67 and 68 report System staff has issued multiple communications and held regular education sessions with employers We were READY 32

34 Can Go Awry But then the AICPA guidelines came out very late in the game Some of the decisions we made about timing and procedures had to be changed including having to do a roll forward when we thought we did not need one! Thankfully, we had done good ground work and were able change course We are on target to meet the original deadlines 33

35 Other Horror Stories We had a planning discussion with a local plan and plan auditor and set up a very manageable time frame to issue GASB No. 67 with the regular valuation smooth sailing Then we got the call from the City finance director with the City s auditor in his office asking for the GASB No. 67 report and we did not have the data yet 34

36 Moral of the Story Plan Plan Plan And then plan some more 35

37 Questions and Answers Roll with it 36

38 Disclaimers Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual s circumstances from an independent tax advisor. This presentation shall not be construed to provide tax advice, legal advice or investment advice. Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation. This presentation expresses the views of the author and does not necessarily express the views of Gabriel, Roeder, Smith & Company. 37

39 Acknowledgement Thank you to Randy Dziubek and Mita Drazilov who checked and peer reviewed this presentation 38