Today s agenda Overview of GASB 74/75 VGFOA Conference Spring, 2018 Presented by: William Dowd, MAAA, EA, FCA Daniel Homan, MAAA, EA
Agenda» Why this? Why now?» Understanding the new reporting standards» Challenges to implementation
Why this? Why now? GASB 67/68 GASB 74/75 Full Disclosure and Comparability for Pension and OPEB benefits 3
Why this? Why Now?» Improve reporting transparency and consistency» Enhance comparability of OPEB obligation reporting» Normalize actuarial assumptions and methods» Next logical step following changes in pension reporting (GASB 68)» All in the best interest of stakeholders!
Other Post Employment Benefits Covered Other than Pension or those provided by a DC plan Medical Long Term Care Dental Life Insurance Vision 5
Why do I have a liability?» Must recognize the difference between the expected age-specific claims and administrative costs and the contributions expected to be made by the retiree» Many employers charge a portion of the blended premium rate to the retiree; the blended premium rate is usually lower than the age-specific claims cost unless the rate is based solely on the retiree population» This creates a liability for the implicit rate subsidy Age Specific Claims Cost $800 Blended Premium Rate $550 Retiree Contribution (50% of active employee rate) $225 Implicit Rate Subsidy $575 6
Applicability GASB 74 Reporting by Plans GASB 75 Reporting by Employers Fiscal years beginning after June 15, 2016 Fiscal years beginning after June 15, 2017 7
Summary of Employer Reporting Employers will report the following elements: Net OPEB Liability (NOL) Annual OPEB Expense Deferred Outflows and Inflows of Resources
Understanding the New Standards» Most significant change to accounting for OPEB in over 20 years.» Governments must now recognize a net OPEB liability in their financial statements Previously only a disclosure of the OPEB obligation was required in the notes to the financial statements Total OPEB Liability Less Fiduciary Net Position Equals Net OPEB Liability» Must also recognize annual OPEB expense in the statement of activities Change in Net OPEB Liability Plus or Minus Deferral Adjustments Equals OPEB Expense 9
New Terminology GASB 45 GASB 75 Normal Cost Service Cost Annual Required Contribution (ARC) Actuarially Determined Contribution (ADC) Annual OPEB Cost Annual OPEB Expense Net OPEB Liability N/A Accrued Liability Total OPEB Liability (TOL) Assets Fiduciary Net Position Unfunded Accrued Liability Net OPEB Liability (NOL) 10
Disclosure Comparisons Actuarial Information GASB 45 GASB 75 Funded status of the plan Yes (Notes) Yes (Balance Sheet) Discount Rate One rate Based on Trust investments or index (if no Trust); possibly a blended rate Actuarial Cost Method Had several options Must use Entry Age Normal Sensitivity Measurement None Discount rate and healthcare trend rates Amortization Periods Investment Gain/Loss Up to 30 years 5 years Liability Gain/Loss Up to 30 years Average working lifetime * Assumption Changes Up to 30 years Average working lifetime * Plan Changes Up to 30 years Immediate * Includes inactive participants at 0 years for the average. 11
Net OPEB liability timing Dates to consider! The employer s fiscal year end date The measurement date (can be up to one year prior to FYE) The actuarial valuation date
Net OPEB liability timing Dates to Remember for GASB 75» Effective for fiscal years beginning after June 15, 2017» Must restate beginning net position based on what it would have been if GASB 75 had applied a year earlier (two valuations for the first reporting date) More Dates to Remember» Reporting Date (RD) = Employer s fiscal year end» Measurement Date (MD) = on or later than the prior reporting date» Valuation Date (VD) = on or later than 30 months to one day before reporting date 13
Net OPEB liability timing What we are doing for most of our clients» Reporting Date = June 30, 2018» Valuation Date = July 1, 2017» Measurement Date = June 30, 2017» Measurement Period = July 1, 2016 to June 30, 2017 This approach requires us to rerun the July 1, 2016 valuation based on the new GASB 75 requirements to determine the net position for the beginning of the first year. 14
Components of Net OPEB Liability Total OPEB Liability Actuarial present value of future benefits attributable to prior service Fiduciary Net Position Market value of assets set aside for the payment of OPEB benefits Based on plan design, contribution strategy, actuarial assumptions, participant census Trust needs to be irrevocable and segregated from other employer assets in order to be included in FNP 15
Total OPEB Liability (TOL) Inputs for Projection Census Data Date of birth Gender Date of hire Marital status Salary Plan election Actuarial Assumptions Expected investment return rate, if funded; Municipal bond rate, if not; blended rate if projected to be unfunded Age-specific claims cost Health Care trend Assumed retirement age Rates of mortality Other assumptions
Total OPEB Liability(TOL) PROJECTED CASH FLOWS 25 40 65 80 DISCOUNTING P R E S E N T V A L U E A T T R I B U T I O N
Why Establish a Trust Fund?» Two reasons A trust provides an untouchable pool of assets which can be used to pay future benefits; accumulated assets reduce the Net OPEB Liability and improve the funded ratio The discount rate used to value liabilities is based on the expected long term rate of return on plan assets, to the extent there are projected to be trust assets available to pay benefits» It is based on the current yield on 20 year AA Municipal bonds if the plan is unfunded or projected to be unfunded at some point in the future in which case a blended discount rate would apply» The lower the discount rate, the higher the liability and vice versa» Assets held in trust and invested in a diversified portfolio can be expected to outperform 20 year AA Municipal bonds in the long term 7.50% long term assumed rate of return 3.50% 20 year AA municipal bond rate 18
Why Establish a Trust Fund? Results based on different rates of returns Effective discount rates to value liabilities: 3.00% Return = 2.92% 4.00% Return = 3.52% 5.00% Return = 4.46% 5.75% Return = 5.75% 19
Net OPEB Liability Increase (Decrease) Total OPEB Plan Fiduciary Net OPEB Liability Net Position Liability (a) (b) (a) - (b) A. Balances at December 31, 2017 $56,825,408 $13,966,102 $42,859,306 B. Changes for the year 1. Service cost 0 0 2. Interest on the total OPEB liability 1,659,545 1,659,545 3. Difference between expected and actual experience 5,303,077 5,303,077 4. Changes in plan provisions 0 0 5. Employer and miscellaneous contributions 2,880,818 (2,880,818) 6. Changes in assumptions (10,984,642) (10,984,642) 7. Net investment income 279,438 (279,438) 8. Benefit payments (3,014,467) (3,014,467) 0 9. Administrative expenses (294,117) 294,117 10. Other changes 0 0 0 11. Net changes: (1) + (2) + (3) + (4) + (5) + (6) + (7) + (8) + (9) + (10) (7,036,487) (148,328) (6,888,159) C. Balances at December 31, 2018: A + B(11) $49,788,921 $13,817,774 $35,971,147
Annual OPEB expense Certain aspects of the change in net OPEB liability should be recognized immediately as OPEB expense and others should be recognized as deferred outflows/inflows of resources and recognized (amortized) into OPEB expense over time.
Items Immediately expensed Changes in the Total OPEB Liability Changes in Plan s Fiduciary Net Position Current period service cost Interest on the beginning total OPEB liability Impact of changes in benefit terms Projected earnings on plan investments Changes in plan fiduciary net position other than employer contributions and benefit payments (employee contributions, admin costs)
Deferred Expense Recognition Differences between expected and actual changes in economic and demographic factors (recognized over expected future service, including retirees) Differences between actual and projected earnings on plan investments (recognized over 5 years) Changes in the assumptions about economic and demographic factors (recognized over expected future service, including retirees) Contributions to the plan from the employer subsequent to the measurement date
OPEB Expense Fiscal Year Ending 12/31/2018 12/31/2017 A. OPEB Expense / (Income) 1. Service cost $0 $4,364 2. Interest on the total OPEB liability 1,659,545 1,721,361 3. Current period benefit changes 0 0 4. 5. 6. 7. Projected earnings on plan assets (negative for credit against expense) Recognition of Outflow (Inflow) of resources due to differences between expected and actual experience in the measurement of the total OPEB liability Recognition of Outflow (Inflow) of resources due to assumption change Recognition of Outflow (Inflow) of resources due to differences between projected and actual earnings on plan investments (400,995) (400,815) 5,303,077 (889,509) (10,984,642) 0 60,251 35,940 8. OPEB administrative expense if not included in claims costs 0 0 9. Total OPEB expense / (income): sum of (1) through (8) ($4,362,764) $471,341
Deferred Inflows/Outflows Table 6 - Increase (Decrease) in OPEB Expense From Recognizing the Effect of Differences Between Projected and Actual Earnings on OPEB Plan Investments Differences Between Fiscal Expected & Recognition Year Actual Period Annual Recognition Amount for Fiscal Year Ending Ending Experience (Years) 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2022 2023 2024 $179,702 5.00 $35,940 $35,940 $35,940 $35,940 $35,940 $121,557 5.00 24,311 24,311 24,311 24,311 Total $35,940 $60,251 $60,251 $60,251 $60,251 Table 7 - Deferred Outflows of Resources and Deferred Inflows of Resources From The Differences Between Projected and Actual Earnings on OPEB Plan Investments Balances as of Investment Investment Amounts Recognized December 31, 2018 Earnings Earnings in OPEB Expense Deferred Deferred Fiscal Less than Greater than Through Outflows of Inflows of Year Projected Projected December 31, 2018 Resources Resources Ending (a) (b) (c) (a) - (c) (b) - (c) 2017 2018 2019 2020 2021 2022 2023 2024 $179,702 $71,880 $107,822 $121,557 $24,311 $97,246 Total Deferred Outflows and Inflows $205,068 $0
Types of plans» Single-employer plans Involve only one government» Agent multiple-employer plans Separate accounts are maintained to ensure that each employer s contributions are used to provide benefits only for the employees of that government» Cost-sharing multiple-employer plans Governments pool (share) the costs of providing benefits and administering the plan and the assets accumulated to pay benefits A single actuarial valuation is conducted for all of the employees of the participating governments combined
Participation in Cost-Sharing Plans» Each employer recognizes a proportionate share of collective net OPEB liability, OPEB expense, deferred outflows of resources/ deferred inflows of resources» Collective measure x proportion = proportionate share of collective measure
RSI» Descriptive information Type of plan Benefit terms Contributions basis, authority, rates» Significant assumptions used» Sensitivity to +/- 1% change in discount rate and medical trend» 10 year history of contributions versus ADC and change in Net OPEB Liability» Apportioned information if cost sharing plan 28
RSI 10 Year History Fiscal Year Ending December 31: 2018 2017 2016 2015 Actuarially Determined Contribution $2,880,818 $2,777,670 $2,777,670 $3,376,825 Contribution in Relation to the Actuarially Determined Contribution $2,880,818 $2,777,670 $2,777,670 $3,376,825 Contribution Deficiency (Excess): A - B 0 0 0 0 Covered Employee Payroll $0 $0 $0 $0 Contributions as a Percentage of Covered Employee Payroll: B D N/A N/A N/A N/A
Challenges to Implementation GASB 75 OPEB Information Required by Employers Information Provided by Cost Sharing Fund? Information Generated Internally?
Employer Concerns» Where will the amounts and disclosures come from to record in the financial statements?» Who is responsible for the accuracy of the information?» Will my auditors have to perform any audit procedures on the information provided?
Next Steps Toward Implementation» Identify note disclosure and RSI requirements» Understand journal entries required for implementation and on an ongoing basis Net OPEB Liability (beginning and end of year) OPEB expense Deferred inflows and outflows» Identify sources for required information
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