MSBO Annual Conference Implementing GASB 75. Presented by Chris Geck and Eric Formberg

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1 MSBO Annual Conference Implementing GASB 75 Presented by Chris Geck and Eric Formberg

2 Accounting and Auditing Update Topics GASB 75 implementation year is here! GASB 68 - connecting the dots MPSERS contribution calculation change 147a1, a2, c1, c2, e COE and the UAAL contribution

3 Don t Fall into the Trap.. Since I ve already implemented GASB 67/68, implementing GASB 74/75 will be a piece of cake. I don t need to understand GASB 74/75 since I ve got the pensions standards memorized, and, hey, how different can they really be? 3

4 GASB 75 Implementation What does GASB 75 require (in addition to patience, thought, time)? Accounting and Financial Reporting for Postemployment Benefits other than Pensions (OPEB) Similar to Pension standards Plan s retiree health (and other non pension benefits) Most significant impact Recording Net OPEB liability and related Deferreds; disclosures Issued June 2015 Effective for June 30, 2018

5 GASB 75 Implementation What does GASB 75 require OPEB, like pension, is part of the employment exchange and should be recognized as the obligation is incurred (not as it is funded) Funding approach vs. approach focused on interperiod equity The statements will report a liability called Net OPEB liability Changes in the net OPEB liability will be immediately recognized in expense, with some limited exceptions Modified accrual funds continue to expense as contributions are paid/accrued Full accrual funds and Government-wide financial statements will recognize the OPEB obligation and expense. 5

6 GASB 75 Implementation What does GASB 75 require Recognition of Plan obligation, deferred inflows and deferred outflows Recognition of post plan year deferred inflows and outflows Plan disclosure, similar but not the same as GASB 68 Required Supplementary Information schedules (growing to 10 years) 6

7 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Overview MPSERS provides the OPEB plan for Michigan school districts Net OPEB liability allocated to each participating government Allocation based on Statutory Required Contribution to the OPEB plan Structure similar to GASB 68 but not the same! ORS creating a separate section of web site for GASB 75, similar to 68 OAG expected to issue mid-july 2018 Timing of information to be provided Preliminary net OPEB liability distributed in February Annual reporting at same time as GASB 68 information NOTE some districts provide an additional plan Examples paid insurance, supplemental benefits its more than health care!

8 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) basic formula Participating employers will now record the NET OPEB liability on the full accrual statements TOTAL OPEB liability OPEB Plan Net Position NET OPEB liability These amounts will be measured as of the measurement date Cost-sharing employers record their proportionate share of the net OPEB liability 8

9 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) cost-sharing employers (MPSERS) Participating Employer should recognize proportionate shares of collective net OPEB liability, OPEB expense, and deferred outflows/inflows of resources related to OPEB How is proportionate share determined? Consistent with the manner in which contributions to the OPEB plan are determined (essentially the statutory required contribution) ORS presumes it will result in reasonable allocation Multiply collective net OPEB liability and proportion % to determine employer s proportionate share Statewide liability approx. $8.9 billion as of For 6/30/18 District will have a beginning of year and end of year liability (similar to what happened with year 1 of GASB 68), prior period adjustment Employer s contributions subsequent to measurement date (since plan year different than the fiscal year end) deferred outflow (similar to GASB 68) 9

10 GASB 75 Implementation CAFR OPEB Summary Net OPEB Liability (in thousands) Total OPEB Liability $14,175,547 Plan Fiduciary Net Position 5,177,775 Net OPEB Liability $8,997,773 Plan Fiduciary Net Position as a Percentage of Total OPEB Liability 36.53% Net OPEB Liability as a percentage of Covered Employee Payroll % Total Covered Employee Payroll $8,452,983

11 GASB 75 Implementation Employer Income Statement Impact CHANGE IN NET OPEB LIABILITY DUE TO: EXPENSE DEFERRED I/O 1. Employees work and earn more benefits X 2. Interest on the total OPEB liability X 3. Changes in total OPEB liability due to: a) Actual economic & demographic changes differing from assumed Amortized Over Service Period b) Changing assumptions about economic & demographic factors Amortized Over Service Period c) Changes in the terms of OPEB benefits X 4. Changes in amount of OPEB plan net position due to: a) Projected investment earnings X b) Actual investment earnings experience different than assumed Amortized Over 5 Years c) All other (paying benefits, etc.) X 11

12 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Implementation details OPEB includes a DC plan and a DB plan Obligation is focused on DB plan Note, DC participants have a small DB benefit UAAL effective 11/1/17 the UAAL (147c1) amount is 100% pension Reporting OAG report, likely 1 report with 2 sections pension and OPEB Deferrals, similar to GASB 68 District financial report will have 2 sets of disclosures for 68 and 75. Some elements may be combined Unrestricted net position becomes a bigger negative amount Net Position deficit likely grows No change in fund level expense recognition

13 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) To do s Watch for more information regarding timing of information and content Capture district level contribution information and participant wage information Ensure census information on employee elections is available 9/30/17 obligation uses 9/30/16 participant data Discuss audit test requirements with auditor Census, contributions, reportable compensation, plan and district deferrals, prior period adjustment, integration with 68 tests Use ORS Net OPEB liability information provided in February to prepare Board and community as needed

14 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Questions What covered payroll number do we use? Since all participants in Pension have a contributed amount to OPEB, reportable compensation is the same as for GASB 68 Is Census testing required? YES, but it may be able to be combined with the GASB 68 tests. It would need to consider the correct OPEB participation What about 147a2, 147c2, 147e; how are those contributions handled? Good questions! Amounts related to these sections do not directly impact the statutory required contributions 147a2 No deferral, similar to 147a1 147c2 Not tied to contribution rate, essentially a pay down of the ERI liability 147e Will be small in 2018, related to DC plan (not part of DB or OPEB)

15 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Questions What contribution rate do we use to recalculate contribution? Unlike Pension the rate differential between employee elections is not significant. An average rate will likely be sufficient (see rate table) How do I record beginning balance? Recorded as a prior period adjustment for initial OPEB liability, no deferred inflows/outflows other than deferred outflow for contributions subsequent to the measurement date Government-wide statements and full accrual statements with payroll as an expenditure Emphasis of matter in audit opinion, accounting change footnote

16 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Questions How will I know beginning balance amounts? OAG audit report will include beginning balance amounts. Proportionate share % is same as the ending proportionate share % Result. Total OPEB liability * SD proportionate share Deferred outflow for contributions made after must be calculated (note you did this for the pension piece last year!) Deferred inflow for 147c1, remainder of the 147c1 amount not deferred last year What amount of 147c1 should be deferred for OPEB this year? From on, 100% of the 147c1 payment is attributed to Pension. All will be deferred but will be a pension deferral

17 GASB 75 Implementation GASB 75 Other Post Employment Benefits (OPEB) Questions What reports will I need to complete GASB 75 information? ORS retirement rate sheets to and to OAG audit report on proportionate share ORS data tables (similar to GASB 68) Download Detail 2 reports ORS CAFR on GASB 68 and 75 (useful for disclosures) Internal reports for reportable compensation and contributions made 941s to verify compensation data

18 GASB 75 Implementation ORS GASB 75 content page Similar to GASB 68 page Sections: Data Tables inputs to compute balances RSI - 10 year table inputs Sample Notes Information to create/update footnotes Unique to OPEB sensitivity analysis for healthcare trend rate Financial Reports CAFR, OAG report FAQ s - explain basic requirements

19 activities GASB 75 Implementation ASSETS Ending amounts Cash and cash equivalents $ 13,518,186 Investments 25,929,622 Receivables (net) 15,085,177 Capital assets (net of accumulated depreciation) Depreciable assets: 81,769,640 Non-depreciable assets: 88,253,120 TOTAL ASSETS 224,555,745 DEFERRED OUTFLOWS OF RESOURCES Deferred outflows related to pensions 1,050,000 Deferred outflows related to OPEB 980,000 TOTAL DEFERRED OUTFLOWS OF RESOURCES 2,030,000 LIABILITIES Accounts Payable 6,538,206 Non-current liabilities: Current portion of long-term debt 1,680,000 Long-term debt (net of current portion) 21,660,000 Net pension liability 24,589,000 Net OPEB liability 19,875,654 TOTAL LIABILITIES 74,342,860 DEFERRED INFLOWS OF RESOURCES Deferred inflows related to pensions 6,589,000 Deferred inflows related to OPEB 3,569,782 TOTAL DEFERRED INFLOWS OF RESOURCES 10,158,782 NET POSITION Net investment in capital assets 146,682,760 Restricted for: Capital projects 11,705,864 Debt service 11,046,053 Unrestricted (27,350,574) TOTAL NET POSITION $ 142,084,103 19

20 GASB 75 Implementation RSI 20

21 GASB 75 Implementation RSI 21

22 GASB 75 Implementation Post Contribution Requirements

23 GASB 75 Implementation Contribution Rates

24 GASB 75 Implementation Contribution Rates Health Rates

25 Contribution Rates GASB 75 Implementation Health Rates

26 GASB 75 Implementation GASB 75 Audit Guidance - AICPA Audit and Accounting Guide, State and Local Governments (2017 version) New chapter addressing OPEB for plans & employers Part 1: Plan Accounting, Financial Reporting, and Auditing Considerations for Defined Benefit OPEB Plans Administered Through a Qualifying Trust Part 2: Single and Agent Employers Administered Through a Qualifying Trust Part 3: Cost-Sharing Employers Administered Through a Qualifying Trust MPSERS Reporting Unit OPEB audit scope addressed here Part 4: Employer Accounting for OPEB Not Administered Through a Qualifying Trust

27 GASB 75 Implementation Audit Issues OAG audit of the allocations will be necessary, similar to GASB 68 OAG assumptions, shared with the SD auditor OAG assessment of Actuary shared with the SD auditor Validation of Statutory Required Contribution Validation of Government-wide and full accrual expense recognized Validation of proportionate share of Plan deferred inflows/outflows Validation of post measurement period deferred inflows/outflows Validation of payroll data Completeness of disclosures Verification of RSI data Prior Period Adjustment, report letter modifications Communication of emphasis of matter, planning letter and end of audit letter Reconciliation between GASB 68 data and GASB 75 data Use of a specialist assessment Key question: is key census data accurately reported to the actuary? When should census testing start? What should be tested? 9/30/15 census used for actuarial determined amount which is rolled forward to 9/30/16 (beginning balance)

28 GASB 75 Implementation Significant census elements may include (similar to GASB 68): a. Name b. Social Security number c. Date of birth d. Date of hire e. Marital status f. Gender g. Dependents h. Spouse s date of birth i. Class of employee j. Service credits (periods of time worked) k. Position or job code (or both) l. Date of termination or retirement m. Plan election of employee n. Contributions from inactive members receiving benefits o. Employment status (active, deferred, retired). Likely census testing can be linked between GASB 68 and 75

29 GASB 68 Issues

30 GASB 68 GASB 68 short summary Balances as of 9/30/17 for 6/30/18 reporting Contributions from 10/1/17 to 6/30/18 identified for: Out of pocket pension, out of pocket OPEB, DC plan, and UAAL allocation ORS and OAG processes will not significantly change Census information should still be maintained KEEP detail 2 reports! Data should be available mid July on ORS website OAG will be sending confirmations again, need 100% response rate

31 GASB 68 - Net Pension Liability (in thousands) MPSERS Total Pension Liability Plan Fiduciary Net Position Net Pension Liability Plan Fiduciary Net Position as a Percentage of Total Pension Liability Net Pension Liability as a percentage of Covered Payroll Total Covered Payroll $ 73,501,296 47,011,783 $ 26,489, % % $ 8,452,983

32 GASB 68 - Employer Information Website The GASB 68 section of Employer Information website (mi.gov/psru) similar to last year will provide: Data Tables (universities and non-universities) New table: covered-employee payroll as of 9/30/16 and 6/30/17 (for use in RSI schedules) Notes to Financial Statements sample language, including updates Required Supplemental Information (RSI) sample schedules and some data for these schedules Report: ORS Schedules of Employer Allocations and Schedule of Collective Pension Amounts (with OAG opinion letter) Additional resources (FAQ, Glossary)

33 GASB 68 Specific Element Reminders Contribution After Measurement Date Determining/recording ending deferred outflows for defined benefit plan MPSERS contributions (made by Districts) after September 30, 2017 measurement date Reversing beginning of year deferred outflow 147c1 contribution treatment Considered part of statutorily required contribution May be a challenge to reconcile activity/amounts when including 147c1 contributions 147c1 revenue treatment on government-wide statements These amounts must be determined by each individual district and audited by district auditors. Note 147a1, 147a2, 147c2, 147e, do not impact GASB 68 reporting or disclosure

34 Section 147 Impact on Retirement Contributions

35 Section a(2) MPSERS normal cost offset Additional resource to help pay for impact reduced rate of return assumption Rate change increases out of pocket district contribution Not tied to a pension/opeb contribution rate Treatment similar to 147a(1) additional revenue

36 Section c(2) MPSERS one time deposit Result of change in amortization Not tied to a contribution rate Resource is returned to State (similar to 147c (1)) Amount to be expensed when remitted to ORS, accrued at 6/30/18 Since not tied to a pension/opeb rate, is NOT federal grants chargeable Impact on COE yes (likely unable to exclude)

37 Section e Reimbursement for additional costs - PA million Funds to support first year new reform costs (PA92) For reimbursement for additional defined contribution costs for choosing new plan (4% contributions + 3% matching) For reimbursement for the more costly hybrid option for new hires PA92 only requires reimbursement for additional defined contribution plan costs. Funding additional costs for the hybrid plan will be determined annually Anticipating payments to begin April (now) 1/11ths using ORS first 2 qtrs. actual numbers. Going to cross periods Expected June 30, 2018 impact = insignificant Accounting for 147e going forward likely to be more significant 2019 estimate of receivable will need to be evaluated

38 COE and Retirement Contribution Implications

39 COE and Retirement Effective FY 2019, Current Operating Expenditures (COE) comparisons will be used to determine the amount owed in UAAL. FY 2017 reported payroll will be adjusted by the percent change in COE from 2017 to 2018 to establish the base COE Adjusted Payroll. Flat rate of 20.96% continues to be used in the calculation. COE Adjusted Payroll19 = Payroll17 x (%ΔCOE17-18)

40 COE and Retirement Continue reporting payroll in FY 2019 as normal. After the close of FY 2019, ORS will determine what you reported in UAAL contributions on actual payroll. Essentially a comparison of what was paid to what the modified required payment is. Note, each year the required amount will be modified by change in COE. Essentially a compounding effective of COE changes over time applied to FY 17 payroll. Note, SD can know earlier what the required contribution IS Question is is there a receivable or payable at the end of FYE 19? Budget Q How do I build in a potential receivable/payable in budget projections for FYE 19

41 COE and Retirement Other preliminary thoughts COE data based on SD fiscal year (6.30) Payroll data based on State fiscal year (9.30) ORS will calculate the adjustment and initiate settlement Only applies to UAAL, normal cost is still paid using stated rates Receivable will not be received until into 2020 unavailable at Payable is payroll related likely booked at , but not paid for several months, likely spread over several months Ability to charge grants since payable not paid until later, requesting reimbursement likely delayed

42 QUESTIONS How can we help? What s on your mind? Thinking about Retirement?

43 GASB 68 Reminders Background and requirements

44 GASB 68 Information Sources Release of data tables and ORS Schedules Report (with audited data) targeted for early or mid-july Information provided on Employer Information website (mi.gov/psru) OAG audits of selected reporting units are underway, if you were visited let your auditor know

45 GASB 68 Plan Audit Routine audit, performed annually Office of Auditor General (OAG) sends confirmation audit letters to 100 reporting units OAG visits approximate 54 schools Uses confirmation and site visits data as part of OAG audit of the plan

46 GASB 68 - Data Tables Table 1: Schedule of Pension Amounts by Employer Table 2: Schedule of Deferred Resources by Year by Employer Table 3: Schedule of Recognition of Outflow (Inflow) of Resources Due to Differences Between Actual and Expected Employer Contributions Table 4: Schedule of Recognition of Outflow (Inflow) of Resources Due to Changes in Proportion Table 5: Schedule of Covered-Employee Payroll as of 9/30/17 and 6/30/17 (For use in RSI schedules; estimated availability: August 1.)

47 GASB 68 - ORS Report with Audited Data Report consists of: OAG opinion letter ( Independent Auditor s Report ). Schedules of OAG-audited data Notes OAG will audit some but not all data Nothing after the measurement date, 9/30/17 Some data audited at the reporting unit level Some data audited at the plan level only Schedules: Schedules of Employer Allocations Proportionate share % for employers as of 9/30/17 Non-University and University on separate schedules Schedule of Collective Pension Amounts (plan-level) 9/30/17 balances for NPL Total deferred inflows/outflows Pension expense

48 GASB 68- Deferred Inflows/Outflows For 9/30/17 (6/30/18) ORS provides deferred inflow/outflow tables (non-university and university) Provided for each reporting unit Essential to track amortization of prior year and current year amounts. Necessary to complete journal entries Will not be audited and must be validated as part of the district s audit process Amortization layers are provided for some district-specific deferrals. Q: Implications of change in proportionate share on deferrals?

49 GASB 68 Recording and Reporting Key elements (District Responsibility): Record Net Pension Liability, Deferred Inflows/Outflows Government-wide statements and enterprise funds with pension responsibility DB contributions subsequent to Measurement Date, including 147c1 147c1 revenues related to DB contributions, deferred inflow Allocate obligation to Net Position amounts Food service, special ed, vocational ed, enterprise fund Allocate pension expense to functions in statement of activities Compile information for footnotes (See sample language on ORS website) Deferred inflow/outflow table 5-year amortization table

50 GASB 68 Recording and Reporting Key elements (District Responsibility): Compute DB pension contribution information for measurement period and fiscal period, including 147c1 allocations Compute/compare covered-employee payroll (reportable compensation) information for measurement period and fiscal year period Compute payable to retirement system at June 30 Describe what makes up the payable, (i.e., if it includes July/August accrual, reference that fact) Include 147c1 as part of payable Compute 147c1 amounts for use in contributions disclosure Note 147a, 147c2, 147e, do not impact GASB 68 reporting or disclosure Compute fiscal year DC contributions for disclosure

51 GASB 68 Validation and Audit Tests Validation/Tests are prescribed by the 2017 AICPA audit guide. Key elements: Validation of amounts reported by ORS by the plan auditor (OAG Responsibility) Validation of proportionate share information by the plan auditor (OAG Responsibility) Completion of census testing (9/30/16 census period) for plan participants at the reporting unit Detail 2 reports maintained (District Responsibility) ORS does not maintain past 18 pay periods and generally will not make them available to reporting units Test data, focus on changes (District Auditor Responsibility)

52 GASB 68 Validation and Audit Tests (cont.) Key elements: Assessment of assumptions used in the plan and capability of actuary (OAG, District Auditor Shared Responsibility) Validation of District transactions outside the measurement date (District Auditor Responsibility) Validation of District reported amounts, including deferred inflows and outflows new and prior year amortization and balance, net pension liability, allocation within Net Position amounts, footnote disclosures, and RSI (District Auditor Responsibility) Assessment of information communicated in MD&A (District Auditor Responsibility) KEY RESOURCE 1022 manual guidance on GASB 68, may require some updates!

Michigan Public School Employees Retirement System Updates

Michigan Public School Employees Retirement System Updates John Karagoulis Pension Administration Specialist, ORS Kayla Lintz Data Analyst, ORS Eric Formberg CPA, CGFM, Partner, Plante Moran MSBO CPA Workshop,