Pensions for Pros: A Detailed Look at the GASB s New Pension. Standards

Transcription

1 Pensions for Pros: A Detailed Look at the GASB s New Pension QR Code Presenters: Standards Moderator: Debra Roberts Maryland Supplemental Retirement Plans James J. Rizzo Gabriel Roeder Smith & Co. Sean Walker Clifton Larson Allen LLP Debby Cherney Eastern Municipal Water District Date: May 19, 2014

2 CONSIDERATIONS: GASB 67 & 68

3 Effective Dates GASB Statement No. 67 is effective for financial statements (FS) in fiscal years beginning after 6/15/13 (mostly for 2014 year ends) GASB Statement No. 68 is effective for financial statements (FS) in fiscal years beginning after 6/15/14 (mostly for 2015 year ends) Myth: Plans FS implement for their 2014 year end Employers FS implement for their 2015 year end Truth: GASB 67 is implemented for 2014 year end GASB 68 is implemented for 2015 year end

4 Effective Dates This May Surprise You If plan does not issue a stand alone GAAP basis FS: If an employer s GAAP basis 2014 FS presents the plan as a fiduciary fund, include all GASB 67 disclosures along with its GASB 27 recognitions and disclosures If plan does issue a stand alone GAAP basis financial statement (FS): GASB 67 will be implemented in the plan s 2014 FS If an employer s GAAP basis 2014 FS presents the plan as a fiduciary fund, include any GASB 67 disclosures essential to a fair presentation, along with its GASB 27 compliance Paragraph 5, Footnote 9 and 11 of GASB 67, Q&A 2 of GASB 67 IG, and GASB 14

5 Ask the Lawyers 1. Type of pension plan (cost sharing vs. agent) a. Can pension plan assets legally be used to pay the benefits of employees of any employer that provides pensions through the plan? b. Are plan assets pooled for investment purposes but each employer s share is legally available to pay benefits of only its employees? Par of GASB 67 and Q&A of GASB 67 IG 2. Number of plans. On an ongoing basis and regardless of other considerations, may all plan assets legally be used to pay benefits to any of the plan members? Par. 13 of GASB 67 and Q&A of GASB 67 IG

6 Ask the Lawyers 3. Trust. Does the plan document language and state law qualify the fund as a GASB defined trust? Irrevocable, dedicated and protected. Par. 3 of GASB 67, par. 4 of GASB Receivables/payables. Are employer contributions payable to the pension fund due pursuant to legal requirements? Par. 16 of GASB 67, par. 120 of GASB 68 and par. 13 of Concept Statement 4

7 Ask the Lawyers 5. Special funding situations. Do nonemployers have a legal obligation or requirement (legally responsible) to make contributions directly to a pension plan covering employees of another employer? Par of GASB 68, et al 6. Pension or OPEB. Does a benefit provision or program constitute a pension plan or Other Post Employment Benefits? Par. 6 of GASB 67, Q&A of GASB 67 IG 7. Employer expenses. Is there authorization for the plan to pay expenses relating to providing employer accounting information?

8 Timing and Linkage Puzzles Three dates to consider: Valuation Date Measurement Date Reporting Date Three periods to consider: Valuation Year Measurement Period Reporting Period At least two reporting entities to consider: Plan s FS reporting Employer s(s ) FS reporting

9 Timing and Linkage Puzzles Three Dates and three Periods for at least two Reporting entities all need to be linked together in a manner that complies with the standards and cooperates with (or dictates) the needs and deadlines of: The plan s FS preparers, actuaries and auditors The employer s FS preparers and auditors First Things First. Do this first. This is a big deal!

10 Timing and Linkage Puzzles GASB 67 does not use the term Measurement Date only because, for plan reporting, all liabilities and assets are measured as of the plan s Reporting Date; a plan s Measurement Date = its Reporting Date. This is not necessarily true for the employer. Par , 35, 37 of GASB 67, Q&A 55 of GASB 67 IG An employer s NPL on its Measurement Date should use the same assumptions as the plan s NPL on that Measurement Date Par. 23, 61 of GASB 68, Q&A 37 of GASB 68 IG

11 Timing and Linkage Puzzles Plan (employer) decision node: The Actuarial Accrued Liability (AAL) as of which actuarial Valuation Date is linked with the plan s/employer s Measurement Date? Employer (plan) decision node: Which Measurement Date is linked with the employer s Reporting Date?

12 Timing and Linkage Puzzles Actuarial liabilities are initially calculated as of the Valuation Date, and measured (either rolled forward or not) for financial reporting purposes as of the Measurement Date, to become a Total Pension Liability (TPL) Assets are measured as of the Measurement Date (assets are never rolled forward) Both are presented at the Reporting Date

13 Plan Reporting: Timing and Linkage Timing/Linkage A (No Roll forward) 9/30/13 RD 1 MD 1 PFNP 1 VD 1 (AAL 1 =TPL 1 ) 9/30/14 Downside: Timing challenges for doing all funding and accounting calculations Upside: More current TPL calc d, all at once Timing/Linkage B (With Roll forward) Plan s RD 1 VD 1 AAL 1 MD 1 PFNP 1 TPL 1 Roll forward Downside: Update AAL for actual benefits and significant changes Upside: Obtain a preliminary TPL early 13

14 Employer CAFR: Timing and Linkage Now for the NPL on the Employer s balance sheet Recall the timing and linkage for the Plan s FS: 9/30/13 9/30/14 No Roll forward (same $ amt) 9/30/15 Timing/Linkage B (With Roll forward) TPL 1 PFNP 1 =NPL 1 Plan s RD 1 VD 1 AAL 1 MD 1 PFNP 1 TPL 1 Employer s RD 1 Balance Sheet NPL 1 Employer s RD 1 Roll forward 14

15 Employer CAFR: Timing and Linkage Now what about the employer s pension expense? Recall, it s based on the change between two NPLs at two Measurement Dates No Roll forward (same $ amt) Timing/Linkage B 9/30/13 Change in NPL (During Measurement Period) Determines 9/30/14 Pension Expense (During Reporting Period) 9/30/15 NPL 0 NPL 1 Employer s RD 1 Change in NPL from 9/30/13 s NPL to the 9/30/14 s NPL (their MDs) forms the basis for the employer s pension expense for ye 9/30/15 RD CAFR 15

16 Discount Rate Determination Many plans contribute: Normal cost PLUS closed amortization payments These plans probably will have discount rates = LTeROR Probably no cross over date Some plans contribute: Normal cost PLUS open amortization payments These plans almost always will have lower rates than their LTeROR Almost always have a cross over date

17 Discount Rate Determination Other plans contribute: A flat statutory percent of pay, or According to target cost methods, or Pursuant to a more complex funding policy model These plans might have lower rates than their LTeROR Still other plans: Do not have a Funding Policy or Have one, but don t follow it, or Ignore the actuary These plans probably will have lower discount rates than their LTeROR

18 Discount Rate Determination Thousands $350,000 $300,000 Governmental Entity ABC Projection of Plan's Fiduciary Net Position (Plan Assets) $250,000 $200,000 $150,000 $100,000 Present value of benefits paid prior to crossover date, using LTeROR Present value of benefits paid after cross over date, using muni rate $50,000 $ Plan Assets Current Member Benefits

19 What s an Employer? An entity that employs active plan members (for legal and financial reporting purposes), regardless of whether it is a contributing entity; volunteers with retirement benefits for their service are treated as employees Distinguishable from a nonemployer contributing entity

20 What s an Employer? What s a component unit? Examples might include a primary government s utility, tourism board, housing authority, charter schools, hospital... or not Technical definitions in GASB 14, 34 and 61 relate to financial accountability, fiscal dependency, financial benefit or burden relationships, and other criteria As determined by the FS preparer and auditor

21 What s an Employer? GASB 68 affects financial reporting for primary governments and their component unit(s) Regardless of whether they are classified as major/nonmajor or blended/discretely presented component units Especially component units that issue their own GAAPbasis FS A component unit is not affected if it does not employ any active plan members or make contributions

22 What s an Employer? Proportionate shares for participation in a costsharing plan Separate proportionate shares for primary government and for each component unit Proportionate share calculations even for a singleemployer plan A primary government and its component unit(s) have their own separate proportionate shares for participating in a single employer plan (as if it were a cost sharing plan)

23 Disassembling the Cost sharing Borg The collective net pension liability (NPL) is allocated proportionately among each participating entity Regardless of whether issuing a GAAP basis FS or not Be alert to entities entering or leaving the collective during the measurement period or the reporting period Proportionate share methods: Not allocated to plan members Consistent with the manner in which contributions are determined; Separate rates for separate portions of the NPL; Proportions based on actual contributions for the year, or Proportions based on the projected long term contribution effort (actuarial present value of contributions or present value of pay)

24 Disassembling the Cost sharing Borg Respective duties of the plan and the employer in calculating the proportionate shares from plan to plan Plan s duties Employer s duties Actuary s duties Maintenance of employer amortization schedules may vary from plan to plan Plan s duties Employer s duties Actuary s duties

25 Disassembling the Cost sharing Borg Most cost sharing multiple employer plans maintain payer entity identifications But these often do not coincide with GAAP basis reporting entities that need their own proportionate shares. Example: Plan Payer Entity Id GAAP basis Entities Requiring Proportionate Shares 1 A 2 B, C, D 3 4 Information provided by the plan to Payer Entity Id 2 needs to be allocated among GAAP basis Entities B, C and D by someone on some basis plan or employer? Information provided by the plan for Payer Entity Id 3 and 4 needs to be added together and presented by GAAP basis Entity E. E

26 The Blame Game The GASB requires certain nonemployer entities to share the liability with employer entities Creates finger pointing among entities for how much liability will appear on whose books.

27 The Blame Game A Nonemployer Contributing Entity (NCE) is an entity, whether governmental or nongovernmental, that makes contributions to a pension plan in relation to covered employees of other entities.

28 The Blame Game There are new inter governmental tensions under GASB 68. For example: 1. A state pays the unfunded actuarial accrued liability payments for a teachers pension plan, while the local districts employing the teachers pay the normal costs. The state is the NCE.

29 The Blame Game 2. A county takes over fire service for a city and hires all the city s firefighters, giving the transferred employees the right to continue accruing benefits in the city s pension plan while working for the county. Thereafter, both the city and the county fund the plan in accordance with their contract for fire services. The city becomes a NCE. 3. A contributing entity could be both an employer and a NCE if it contributes to the plan for its own employees and it contributes to the plan for other employers employees

30 The Blame Game 15. A Special Funding Situation (SFS) [per par. 15 in GASB 68] is a circumstance in which a NCE is legally responsible for making contributions directly to a pension plan that covers employees of another entity or entities and EITHER: a. The amount of contributions is NOT dependent upon one or more events or circumstances UNrelated to the pensions, OR b. The NCE is the only entity with a legal obligation to make contributions directly to the pension plan.

31 The Blame Game Consider a state that contributes taxes collected from a dedicated revenue source, such as insurance premiums, tolls, gambling or oil revenue. These fail 15a, because they ARE dependent on circumstances unrelated to the pensions. But if that NCE is the only entity with a legal obligation to contribute directly, then it satisfies 15b.

32 The Blame Game Consider a NCE that pays its contribution to the employer who then forwards it (along with the rest of its own contributions) to the pension plan. This may satisfy all the other conditions for an SFS, but fails the directly to condition.

33 The Blame Game In an SFS, the employer recognizes PE equal to: 1. Its proportionate share of the collective PE, plus 2. Its share of the NCE s proportionate share of the collective PE, plus 3. The recognizable portion of its own NPL changes arising from changes in its proportionate share percentage, plus 4. The recognizable portion of the difference between actual and proportionate share of collective contributions. However, in a SFS the employer gets credit in revenue (grant or similar) for #2.

34 The Blame Game In an SFS, the employer discloses: 1. Its proportionate share of the collective NPL, 2. Its share of the NCE s proportionate share of the collective NPL, 3. The total of #1 and #2. 4. Similar information is required in the employer s RSI.

35 The Blame Game A governmental NCE not in an SFS should classify contributions the same a grant for on behalf payments of fringe benefits to another entity. Q&A 24 of GASB 68 IG, par. 13 of GASB 24 In an SFS, the NCE recognizes an expense (grant or similar) equal to: 1. Its proportionate share of the collective PE, plus 2. The recognizable portion of its own NPL changes arising from changes in its proportionate share percentage, plus 3. The recognizable portion of the difference between actual and proportionate share of collective contributions. Refer to Q&A 24 of GASB 68 IG, par. 13 of GASB 24.

36 AUDIT CONSIDERATIONS

37 Focus o Practical understanding of the audit challenges and issues from the preparer side o Discuss the issues behind the issues

38 Past Audit Effort Participant in State Plan HR and Payroll Records Employer Data Contributions Submitted Plan The Plan: Investments and earnings Contributions Distributions Plan Information CAFR

39 Better Audit Effort Participant in State Plan HR and Payroll Records Census Data Contributions Submitted Plan The Plan: Investments and earnings Contributions Census data Distributions Plan Information CAFR

40 Census Data o Who is going to audit the census data? Plan auditor needed for their audit opinion Participant auditor practical o Plan auditor How does the plan ensure census data is accurate prior to actuary valuation?

41 Techniques for Census Data Verification o Internal audit function System edit checks Rotational risk based on site audits o Service organization report SSAE #16, SOC 1, Type II SOC 1 = Financial Reporting, Type II = Internal control design and effectiveness User considerations for each participant o External audit function Audit requirement on participants for participation in the plan

42 Plan Information o It should (must) be audited? o Footnote versus Financial Statement

43 Separate Report or Section of Report o Attestation Report o Schedule of Pension Amounts by Employer or o Schedule of Employer Allocations o Schedule of Collective Pension Amounts Employer would need to calculate two additional types of deferred outflows and inflows 1. Change in proportion (allocation percentage) 2. Actual contributions versus proportion share of contributions

44 Sample Schedule of Pension Amounts by Employer

45 Sample Schedule of Employer Allocations

46 Sample Schedule of Collective Pension Amounts

47 Audit Procedures o Plan reports (read and review) Actuarially information Employer allocation schedule with audit coverage o Plan auditors and actuaries (qualified objective, etc.) o If available, review SSAE #16 SOC 1 Type II Findings User considerations o Evaluate management s internal controls over the information

48 What is the Hard Part for the Plan? Money Resources Confusion

49 The Challenge for the Employer o Will I have the information needed from the plan to prepare my financial statements? The current answer is MAYBE o In order to get to YES, the employer needs to concerned! Local GFOA chapters ask the plan to speak to you. Ask what is going on with census data and plan information? Ask them what happened after implementation of the new standard with our liability? Understand the timing! Communicate the changes to those charged with governance. Communicate a sense of urgency!

50 Management s Responsiblity o Rule of Thumb: If performed by an auditor, management should perform it first and then some o All employer s have a responsibility to understand what the plan is doing and how it impacts their financial statements and communicate that information to those charged with governance.

51 Single Employer Plans o Much easier, however, audit issues arise often: Actuaries Wrong accounting standards Wrong assumptions Lack objectivity Auditors Wrong opinions and accounting o Auditor may use an actuary to review the valuation

52 SO WHAT S A FINANCE DIRECTOR SUPPOSED TO DO?

53 Understand Your Plan o What kind of a plan are you in? Single Employer Have your own plan Agent Employer Assets are pooled for investment purposes Separate accounts are maintained for each employer State plans i.e. CalPERS Cost Sharing Multiple Employer Assets are pooled for investment purposes No separate accounts by employer State plans i.e. CalPERS pool

54 Communicate with your Plan o How is your plan deploying the new standards? What should you expect from them Information required to record: Net Pension Liability Deferred Outflows of Resources Information for Note Disclosures Information for the RSI When should you expect it

55 Communicate with your Plan o How is your plan addressing the new audit guidance from the AICPA? Will you have a SOC 1, Type II report What kind of census data testing might we expect as an employer/plan participant o If you ARE the Plan, you re probably well ahead of all this. If you re not, it s time to get busy!

56 Understand Timing Implications o Ack! What s this business about a modified opinion!? o When do you normally issue financial statements? o Will the plan deliver on time to issue timely financial statements? o Do I have problems with my bond covenants on the timing of my financial statements? 180 days from FYE 270 days from FYE Other? o Do I have problems with other disclosure obligations?

57 Understand Budget Implications o FY budgets are probably done by now but we re a long way off from knowing what we ll be recording as pension expense o Budgeting for cash/funding amounts vs. accounting treatment of pension expense o Our budget drives how we set our rates would a change in accounting treatment justify a portion of a rate increase?

58 Understand Impacts on Coverage Calculations o Bond covenants on debt service coverage o DSC is typically calculated based on net operating revenue o Definitions of net operating revenue are document dependant o Will net operating revenue be calculated using pension expense or actual amount funded? o Will the rating agencies recalculate it differently in their methodology?

59 Understand your Funding Policy o Do you have a funding policy? o For most of us, the funding policy was to contribute the ARC o Some other funding policies were established by state law or local mandate, or through collective bargaining o Without an ARC, what s an entity to do?

60 GFOA Best Practice: Core Elements of a Funding Policy Obtain an actuarially determined contribution (ADC) no less than every two years. Calculate the ADC in a manner that fully funds the long term costs of the benefits while balancing goals of stable contributions and allocations of costs over period of employees active service. Commit to fund the full amount of the ADC each period. Demonstrate accountability and transparency by communicating all information necessary to assess progress towards funding objectives.

61 Other Resources on Funding Policies o Your Actuaries Select based on qualifications, not just price! If you re in a big plan, you might want to engage separate consulting actuaries to help you o Statements about Funding Policies: American Academy of Actuaries February 2014 (actuary.org) Big 7 October 2012 CCA Public Plans Community soon releasing a major document

62 Communicate with your Governing Body o What s coming and what does it mean? o If the audit standards impose timing and cost considerations, how does that affect our entity? o If modified opinions end up widely being issued, what might that mean for your agency? o Don t forget your public affairs team in the dialogue this is an emotional, hot button issue