Overview of OPEB Accounting Changes

Transcription

1 Overview of OPEB Accounting Changes More matter with less art Hamlet Act 2, Scene 2 Get your facts first, then you can distort them as you please. - Mark Twain

2 2 Bolton Partners. Inc. Bolton Partners Inc. is a national, independent actuarial, and employee benefits firm established in We specialize in pension & retirement programs, health & welfare benefits, and investment consulting services for public sector, multi-employer, and corporate organizations. Bolton Partners serves clients all over the country from its offices in Washington, D.C.; Boca Raton, FL; Philadelphia, PA; and our headquarters in Baltimore, Maryland. Our investment consulting services to pension funds are provided through Bolton Partners Investment Consulting Group, Inc. Jim McPhillips, FSA, EA, MAAA, FCA Joined Bolton Partners in Consulting actuary for pension and OPEB plan sponsors. Extensive exposure to plan funding and financial reporting for governments, corporations and church groups. Client base has been across the country with a primary focus in the northeast and now Florida. Assisted many Pennsylvania counties and Alameda County California with their initial and subsequent OPEB valuations.

3 3 Major Changes To the GASB OPEB Standards Change in Focus Tighter Timing Cost Sharing Employers Discount Rate Rules Increased Disclosure More Volatile Annual Expense

4 4 Similarities to GASB Pension Standards Focus, timing, and disclosures are all similar to pensions Many will already be familiar with the implementation issues Many questions from auditors and actuaries have already been resolved Pension standard and the new OPEB standards both require more reporting

5 5 Accounting Before GASB45 Pay as you go Bolton Partners Inc.

6 6 GASB 74/75 Change in Focus Focus on accrued liabilities instead of expense No Actuarial Required Contribution (ARC) The Net OPEB Obligation (NOO) is gone The liability on the financial statements is now the unfunded actuarial accrued liability

7 7 Tighter Timing I For Governments with no OPEB trust GASB75 required for fiscal years beginning after 6/15/17 Valuation date must be within 30 months of the end of the fiscal year (e.g. on or after 3/31/2016 for FYE 9/30/2018) ALL governments must perform a valuation at least once every two years Governments must select a measurement date The measurement date could be as early as the last day of the prior FY (e.g.9/30/2017) or as late as the last day of the FY (e.g.9/30/2018) for FYE2018 Roll forward from valuation date to measurement date

8 8 Tighter Timing II For Governments with OPEB trusts GASB74 governs plan accounting GASB74 measurements are as of the end of the plan year GASB74 was effective for fiscal years beginning after 6/15/2016 GASB75 governs employer accounting GASB75 measurements can be anytime in the fiscal year GASB75 is effective for fiscal years beginning after 6/15/17

9 9 Florida Valuation Timing (FYE 9/30) If the Last GASB45 Valuation Was For FY2016 and FY2017 (or FY for small employers) The valuation date can be as of 4/1/2017 or later to be used for FY2018 and FY2019 GASB75 Employer Accounting If the Last GASB45 Valuation Was For FY2015 and FY2016 (or FY for small employers) If the GASB45 Valuation Data is as of 4/1/2016 or later than the valuation data can be used for GASB45 Valuation For FY2017 GASB75 Valuation For FY2018 Bolton Partners Inc.

10 10 GASB75 Measurement Date Selection Generally pick either the earliest or the latest possible measurement dates (e.g. 9/30/2017 or 9/30/2018 for FYE2018) Reasons to pick the last possible measurement date GASB74 and GASB75 will have the same entries for the same year Not an issue for governments with no OPEB trust Reasons Not to pick the last possible measurement date Less time to prepare CAFR

11 11 Measurement Date Selection Reasons to pick the earliest possible measurement date CAFR footnote is ready a year in advance Reasons Not to pick the earliest possible measurement date GASB74 and GASB75 will have the same entries for different years GASB74 for YE 9/30/2017 would equal GASB75 for YE 9/30/2018 Can be confusing Not an issue for governments with no OPEB trust

12 12 Cost Sharing Employers Who Could Be a Cost Sharing Employer One trust, for County, Schools, Community College One trust for County, Landfill, Water Authority Trust Assets must be available for all participants Cost Sharing Accounting GASB74 for entire plan (e.g. County, Schools and College together) GASB75 for each employer separately Liability for the entire plan, is allocated to the cost sharing employer based on plan contributions Bolton Partners Inc.

13 13 Discount Rate Rules I For Governments with No OPEB Trust Based on an index rate The index must be a 20 year tax exempt municipal bonds average AA/Aa or higher Will change daily We can no longer provide two years of results in advance Bond rates had been below 3 percent in the summer of 2016 and trending downward Around 3.5% as of 9/30/2017 after being over 3.75% earlier in the year

14 14 Discount Rate Rules II For Governments with a Trust If an Actuarially Determined Contribution is made, the discount rate is still based on the long term expected rate of return More rigor More transparency For the long term rate of return on trust assets Must disclose long term inflation assumption Must look at investment policy and long term real rate of return by asset class If funded but with ad hoc contributions, the discount rate is still based on a blended rate The funded portion is still based on the long term expected rate of return on trust assets The unfunded portion is based on a bond index as of the measurement date

15 15 Long Term Rate of Return Example Asset Class Domestic Equity Target Allocation Long Term Expected Real Rate of Return Weighted Average Calculation 40% 5.8% 2.3% Fixed Income 35% 1.0% 0.4% Private Equity 20% 6.0% 1.2% Real Estate 3% 5.9% 0.2% Cash 2% 0.0% 0.0% Total 100% 4.0% Inflation 3.0% Rate of Return 7.0%

16 16 Blending Method Based on when plan is projected to be insolvent Use long term expected rate of return to discount benefit payments while solvent Use bond index to discount benefit payments while insolvent Determine single equivalent discount rate

17 17 Blending Method To determine date of insolvency, consider contribution policy or past contributions Contribution level based on average contributions (including pay-go) over last 5 years Must subtract normal cost of future hires from the contribution levels

18 18 Sample Rate Blending Table continues until final projected benefit payment is made FYE Projected Employer Future Hire Net Benefit Projected Projected Year BOY Assets Contributions Normal Cost ER Contribution Payments Earnings EOY Assets ,753,325 24,023, ,822 23,041,925 26,820,000 7,200, ,175, ,175,750 24,744,000 1,940,910 22,803,090 28,711,000 7,365, ,633, ,633,366 25,486,000 2,907,818 22,578,182 30,824,000 7,385, ,773, ,773,279 26,251,000 3,908,993 22,342,007 33,257,000 7,232, ,090, ,090,391 27,039,000 4,970,851 22,068,149 35,770,000 6,876,763 98,265, ,265,303 27,850,000 6,074,336 21,775,664 38,546,000 6,291,609 87,786, ,786,576 28,686,000 7,245,828 21,440,172 41,544,000 5,441,426 73,124, ,124,175 29,547,000 8,514,209 21,032,791 44,822,000 4,286,070 53,621, ,621,036 30,433,000 9,826,632 20,606,368 48,277,000 2,785,000 28,735, ,735,404 31,346,000 11,294,261 20,051,739 51,773, , ,286,000 12,833,016 19,452,984 55,494,000 (1,261,436) ,255,000 14,436,871 18,818,129 59,579,000 (1,426,630) ,253,000 16,181,484 18,071,516 63,834,000 (1,601,687) - Bolton Partners Inc.

19 19 Sample Rate Blending Table continues until final projected benefit payment is made PVs: 2,146,961,933 2,146,961,933 FYE Projected Benefit Present Value of Benefit Payments Year BOY Assets Payments 7.00% 3.58% 3.65% ,753,325 26,820,000 25,927, ,343, ,175,750 28,711,000 25,940, ,208, ,633,366 30,824,000 26,027, ,182, ,773,279 33,257,000 26,244, ,336, ,090,391 35,770,000 26,381, ,442, ,265,303 38,546,000 26,568, ,650, ,786,576 41,544,000 26,761, ,911, ,124,175 44,822,000 26,984, ,258, ,621,036 48,277,000 27,163, ,599, ,735,404 51,773, ,066,554 36,833, ,494, ,357,387 38,091, Bolton Partners - Inc. 59,579, ,757,611 39,455, ,834, ,124,746 40,785,427

20 20 Comparison of Blending Methods 7.00% 6.00% 5.00% Discount Rate 4.00% 3.00% GASB 75 discount rate Old Blended Rate 2.00% 1.00% 0.00% Contribution Level ($ in millions) Bolton Partners Inc.

21 21 Increased Disclosure I Net OPEB Liability Reconciliation of OPEB Liability Expense for Period Deferred inflows and outflows Schedule of future inflows and outflows to be recognized in expense Description of Plan Number of employees and retirees in Plan Key assumptions

22 22 Increased Disclosure II Net OPEB Liability if trend is 1 percent higher or 1 percent lower Net OPEB Liability if discount rate is 1 percent higher and 1 percent lower The discount rate and the discount rate in the last measurement period Valuation and measurement date Description of changes in assumptions Description of changes in benefits

23 23 Additional Disclosure for Funded Plans Net OPEB Assets Asset Reconciliation Basis for determining contributions How the long term rate of return was set Investment allocation Long term real rate of return by major asset class Assumptions about projected cash flow to trust In the RSI - 10 year schedule of actuarially determined contribution and the actual contribution

24 24 Required Supplementary Information 10 year schedule of changes in the net OPEB liability 10 year schedule of Net OPEB Liability, Payroll, and Net OPEB Liability as a percent of payroll

25 25 The Annual Expense GASB75 Expense Components Service Cost Interest Cost Minus benefit payments Minus expected rate of return on assets Changes in the Plan Liability Experience Gains or Losses divided by expected remaining service lives of employees and retirees Asset Experience Gains or Losses are recognized over 5 years Changes in the liability due to changes in assumptions divided by expected remaining service lives of employees and retirees Experience Gains not yet expensed are deferred inflows of resources Experience Losses not yet expensed are deferred outflows of resources Will there be any interest in the expense??

26 26 Expense Example 1 Unfunded Plan OPEB Liability 50,000 40,000 55, Plan Fiduciary Net Position (i.e. assets) - 3. Net OPEB Liability (1.-2.) 50,000 40,000 55,000 Reconciliation of OPEB Liability 1. Service cost 1,200 1,000 1, Interest cost 1,500 2,000 2, Change in benefit terms - (8,200) - 4. Difference between expected and actual experience 2, Changes of Assumptions - (4,200) 11, Benefit Payments (500) (600) (700) 7. Net change in total OPEB liability 5,000 (10,000) 15, OPEB liability beginning 45,000 50,000 40, OPEB liability ending 50,000 40,000 55,000

27 27 Expense Example 1 Unfunded Plan Expense Determination (Note: Expected remaining service lives=7) Service cost 1,200 1,000 1, Interest cost 1,500 2,000 2, Change in benefit terms - (8,200) - 4. Difference between expected and actual experience Changes of Assumptions - (600) Deferred from previous years (600)=(200) 7. Benefit Payments (500) (600) (700) 8. Expense 2,600 (6,000) 4,600 Reconciliation to Total OPEB Liability 9. Cumulative Expense 47,600 41,600 46, Deferred Outflows 2,400 2,000 1,600+10,200 =11, Minus Deferred Inflows - 3,600 3, Total OPEB liability 50,000 40,000 55,000

28 28 Expense Example II Reconcile Liability OPEB Liability 52,000 41,500 56, Plan Fiduciary Net Position (i.e. assets) 25,000 31,000 35, Net OPEB Liability (1.-2.) 27,000 10,500 21,500 Reconciliation of OPEB Liability 1. Service cost 1,200 1, Interest cost 3,500 3,600 2, Change in benefit terms - (8,200) - 4. Difference in experience 2, Changes of assumptions - (6,300) 11, Benefit payments (500) (600) (700) 7. Net change in total OPEB liability 7,000 (10,500) 15, OPEB liability beginning 45,000 52,000 41, OPEB liability ending 52,000 41,500 56,500

29 29 Expense Example II Reconcile Assets OPEB Liability 52,000 41,500 56, Plan Fiduciary Net Position (i.e. assets) 25,000 31,000 35, Net OPEB Liability (1.-2.) 27,000 10,500 21,500 Reconciliation of plan fiduciary net position 1. Contributions 3,500 3,500 2, Net investment income 400 3,200 2, Benefit payments (500) (600) (700) 4. Administrative expenses (100) (100) (100) 5. Net change in plan fiduciary net position 3,300 6,000 4, Plan fiduciary net position beginning 21,700 25,000 31, Plan fiduciary net position ending 25,000 31,000 35,000

30 30 Recognition in Expense Liability Expense Impact (Note: Expected remaining service lives=7) 1. Service cost 1,200 1, Interest cost 3,500 3,600 2, Change in benefit terms - (8,200) - 4. Difference in experience recognized Changes of assumptions recognized - (900) Deferred from previous years (900)=(500) 7. Benefit Payments (500) (600) (700) 8. Recognized in expense 4,600 (4,700) 4,300 Reconciliation to Total OPEB Liability 9. Cumulative liability recognized 49,600 44,900 49, Deferred outflows 2,400 2,000 1,600+10,200=11, Minus deferred inflows - 5,400 4, Total OPEB liability 52,000 41,500 56,500

31 31 Recognition of Investment Experience Asset Expense Impact Contributions 3,500 3,500 2,300 2.Net investment income 400 3,200 2,500 3.Expected Investment Income 1,400 1,700 2,000 4.Investment Gain (loss) (1,000) 1, Current investment gain (loss) recognized (200) Past investment gain (loss) recognized - (200) Benefit payments (500) (600) (700) 8.Administrative expenses (100) (100) (100) 9. Recognized in Expense [3.plus 5. through 8.] Reconciliation to Net Fiduciary Position 600 1,100 1, Cumulative assets recognized 25,800 30,400 34, Minus deferred outflows Plus deferred inflows - 1,200 1, Net fiduciary position 25,000 31,000 35,000

32 32 GASB75 Expense Expense Example Service cost 1,200 1, Interest cost 3,500 3,600 2, Expected investment income (1,400) (1,700) (2,000) 4. Administrative expenses Change in benefit terms - (8,200) - 6. Difference between expected and actual experience recognized in first year 600 (300) (100) 7. Changes of assumptions - (900) Deferred amounts from previous years (600) 9. Total Expense (income) 4,000 (5,800) 2,900

33 33 Net OPEB Liability Final Reconciliation OPEB Liability 52,000 41,500 56, Plan Fiduciary Net Position (i.e. assets) 25,000 31,000 35, Net OPEB Liability (1.-2.) 27,000 10,500 21,500 Reconciliation 4. Net OPEB liability recognized 23,300 23,800 14, OPEB Expense (income) 4,000 (5,800) 2, Deferred outflows 3,200 2,600 12, Minus deferred inflows - 6,600 5, Minus employer contributions 3,500 3,500 2, Net OPEB liability end 27,000 10,500 21, Net OPEB Liability recognized end 23,800 14,500 15, Deferred Amounts 3,200 (4,000) 6,400

34 34 Summary Changes very similar to pension standards (GASB68) Focus on the unfunded liability Requirement to produce valuations at least once every two years Measurement will need to be updated annually Can no longer produce 2 years of results at once Funding the OPEB will significantly reduce the balance sheet liability Allows measurement to be based on expected asset return (e.g. 6%-7%) rather than bond rates (e.g. 3%-4%)

35 35 THANK YOU everyone Bolton Partners, Inc. contact information: Jeff DeLisle, Senior Consultant (Boca Raton) or Jim McPhillips, Senior Actuary or Bolton Partners Inc.

36 36 Appendix Sample Report Bolton Partners Inc.