gasb 67 and 68 what it all means for fppa employers · the gasb’s process june 2012: the...

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GASB 67 and 68 What It All Means for FPPA Employers

Dana Woolfrey, ASA, EA, MAAA October 11th, 2012

Agenda

Intro and Overview The Old: GASB 25/27 The New: GASB 67/68

►Cost sharing Blended Discount Rate Timing

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The Most Interesting Actuary in the World:

“His personality is so magnetic, he is unable to carry credit cards”

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Why the interest?

Generally Accepted Accounting Principles(GAAP) Compliance ►Seeking Unqualified Opinion ►One of the 10 GAAP Commandments is thou

shall be GASB Compliant ►Governmental Accounting Standards Board

(GASB)

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Why the interest?

GASB is the accounting standard affecting the Employer and the Plan accounting

The plan accounting will change, potentially showing much higher liabilities ►In some cases, a liability will be shown where

there was none before Retirement plans will be questioned about

the higher liabilities and expense 5

The GASB’s Process

June 2012: The Governmental Accounting Standards Board (GASB) issued GASB Statements Nos. 67 and 68 ► Amending GASB Statement No. 27 for Employer reporting ► Amending GASB Statement No. 25 for Plan reporting

The Statements were issued after a lengthy deliberative process ► An Invitation to Comment in 2009 ► A Preliminary Views document in 2010 ► Related hearings and testimony, field testing ► Exposure Draft issued in July 2011

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What has GASB done?

The Statements change current pension accounting and financial reporting standards for state and local governments ► Disconnect pension accounting from pension funding ► Require employers to recognize the Net Pension Liability (NPL)

on their balance sheets (where NPL is code for the Unfunded Accrued Liability based on Market Value of Assets)

► Require employers to recognize a new measure of the Pension Expense (PE) on their income statements, which would be different from their actuarially determined contributions (ARC)

► Replace most of the current note disclosures and required supplementary information with information based on the new measures

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Timing

When does the ship hit the van? GASB 67 Plan Reporting

►Effective for fiscal years beginning after June 15, 2013 ►For plans with a December 31 fiscal year end,

December 31, 2014 financial statements GASB 68 Employer Reporting

►Effective for fiscal years beginning after June 15, 2014 ►For employers with a December 31 fiscal year end,

December 31, 2015 financial statements More details specific to distribution and

reporting of FPPA information to follow…

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GASB 25/27 – “The Old”

The Most Interesting Actuary in the World: “At his 40th birthday party, he bought his

friends gag gifts.”

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The Annual Required Contribution ►Normal Cost plus an Amortization payment

on the Unfunded Accrued Liability The liability is the Net Pension Obligation

(NPO) ►Cumulative difference between the ARC and

the actual contribution made Calculations based on methods and

assumptions approved by GASB 10


Key Valuation Methods and Parameters ►Six allowable actuarial cost methods ►Discount rate based on expected long-term

investment return ►Amortization of actuarial gains/losses and

other changes in the unfunded actuarial accrued liability over a maximum of 30 years • Could be open or closed amortization • Could be level dollar or level percent of pay

amortization

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Employers participating in a cost-sharing multiple-employer plan, such as the Statewide Defined Benefit Plan, did not have to report a liability for their share of the obligation

*cost-sharing = pooled assets and risks,

accounts not separated by employer

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GASB 67/68 - The New


“When asked about the newest fashion trends, he locates the nearest mirror.”

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GASB 67/68 – “The New”

Total Pension Liability (TPL) ►Analogous to Actuarial Accrued Liability

(AAL) but with critical differences • Must use Entry Age Normal Cost method • Will require use of a discount rate blended

between the long-term rate of return and municipal bond rates

– lower discount rate means higher liability and expense – lowering the discount rate from 7.5% to 6.5% could

increase liabilities 10-20% • Must recognize ad hoc Cost of Living Adjustments

(COLAs) if “substantively automatic” 14


Net Pension Liability (NPL) ►TPL less the market value of plan assets (Plan

Net Position) • Must also report Net Pension Liability calculated

using blended discount rate +/-1% ►Sticker shock for employers – proportionate

share of NPL (for cost sharing employers) likely much larger than current pension entry on balance sheet • Also volatile

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Pension Expense (PE) ►Also based on Entry Age Method and

blended discount rate ►Much shorter amortization periods

• Deferred Inflows and Outflows – Five year deferral of investment gains and losses – Average working lifetime for demographic gains and

losses and assumption changes » Simplified from original recommendation in

exposure draft

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The New: Cost-sharing


His cheap friends ask him if they can pick up the tab for the table. His generous friends ask if they can pick up the tab for the bar.

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GASB 67/68 – “The New” Cost-Sharing Plans & Employers

FPPA cost-sharing plans ►Statewide Defined Benefit Plan ►Statewide Hybrid Plan ►Statewide Death and Disability

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Cost-sharing plans calculate the total NPL, PE and deferred outflows/inflows

Employers in cost-sharing plans recognize their “proportionate share” of the plan’s NPL, PE and deferred outflows/inflows

Proportionate share may be different from stand-alone funding valuation of employer’s members

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Proportionate share based on the employer’s contributions relative to the collective contributions of all employers in the plan

For FPPA Statewide Plans, where flat percentage is applied to payroll to determine contributions, the proportionate share directly relates to payroll

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Changes in an employer’s NPL due to changes in the employer’s proportionate share compared to the prior period would be recognized in the PE over the remaining service lives of active employees

Differences between cost-sharing employer’s actual contributions and proportionate share would be deferred and recognized in PE over the remaining service lives of active employees

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Big Picture Wrap-up

The Most Interesting Actuary in the World: “His pictures are worth a million words”

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Big Picture Wrap-up

There will be a liability on the governments’ books that is larger than ever seen ► It will encompass all systems ► This will be a “bumpy” liability; changing each year with a new

blended discount rate and change in market value of assets There will be an expense on the governments’ books-a

larger expense than ever seen ► The new funding method will increase the expense for all

systems using the projected unit credit cost method ► The shorter amortization will also accelerate recognition of

pension cost

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Big Picture Wrap-up

TPL, NPL, and PE ►Entirely separate set of calculations from the

typical funding policies; ►Two valuations each year, instead of one (a

funding valuation and an accounting valuation)

Cost sharing employers will have to report their proportionate share

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The Nitty Gritty: The Blended Discount Rate


“He scolds the dental hygienist for not flossing regularly enough.”

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Determining the Discount Rate

The premise… ►The pension plan is primarily responsible for

paying pension benefits to the extent the plan has sufficient assets • Assets invested with long-term investment horizon

►The employer is primarily responsible for paying benefits to the extent the plan does not have sufficient assets • From the general fund or bond revenues

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Discount rate used in determining the Total Pension Liability (TPL) is a blend of two rates: ►Long-term expected rate of return on pension plan

investments • This rate is generally consistent with the funding valuation • 7.5% for FPPA

►Yield or index rate for a 20-year, tax-exempt general obligation municipal bond • Will vary • ~4.0%

Weight given to the long-term rate is based on a closed group projection

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Starting point is market value of assets in a bank account earning returns from long-term investments (FPPA 7.5%)

Deduct projected benefit payments from closed group ► Does not include benefit payments of future hires ► Does include benefits attributable to future service of current

actives Add back in contributions attributable to closed group

► Employee contributions for current employees ► Employer contributions for current employees ► Employer contributions for future employees in excess of their

normal cost Include investment earnings When does account (or Plan Net Position) run out?

► “Breakeven” 28

Projection of Plan Net Position

Year

Projected Beginning Plan Net Position

(a)

Projected Total Contributions

(b)

Projected Benefit

Payments (c)

Projected Administrative

Expenses (d)

Projected Investment

Earnings (e)

Projected Ending Plan Net Position

(f) = (a) + (b) – (c) – (d) + (e)

0 $ 1,431,956 $ 73,211 $ 109,951 $ 1,000 $ 105,981 $ 1,500,197

1 1,500,197 72,204 116,500 1,030 110,815 1,565,686

2 1,565,686 72,217 123,749 1,061 115,454 1,628,547

3 1,628,547 72,255 131,690 1,093 119,871 1,687,890

4 1,687,890 72,189 140,229 1,126 123,998 1,742,722

5 1,742,722 72,032 149,168 1,160 127,768 1,792,194

6 1,792,194 71,810 158,466 1,195 131,120 1,835,463

7 1,835,463 71,519 168,332 1,231 133,983 1,871,402

8 1,871,402 71,110 178,591 1,268 136,277 1,898,930

9 1,898,930 70,620 189,069 1,306 137,929 1,917,104

10 1,917,104 70,090 199,709 1,345 138,872 1,925,012

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Note: Years subsequent to year 10 have been omitted from this table.

Present Values of Projected Benefit Payments

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YearProjected Plan Net Position

Projected Benefit

Payments

Funded Portion of

Benefit Payments

Unfunded Portion of

Benefit Payments

Present Value of Funded Benefit Payments

(a) (b) (c) (d) (e) (f) = (d) ÷ (1 + 7.5%)(a)

0 1,431,956$ 109,951$ 109,951$ 109,951$ - 109,951$ 1 1,500,197 116,500 116,500 108,372 - 110,5862 1,565,686 123,749 123,749 107,084 - 111,5043 1,628,547 131,690 131,690 106,005 - 112,6354 1,687,890 140,229 140,229 105,004 - 113,8505 1,742,722 149,168 149,168 103,904 - 114,9606 1,792,194 158,466 158,466 102,680 - 115,9267 1,835,463 168,332 168,332 101,463 - 116,8928 1,871,402 178,591 178,591 100,136 - 117,7209 1,898,930 189,069 189,069 98,615 - 118,301

10 1,917,104 199,709 199,709 96,898 - 118,615

25 547,880 322,779 322,779 59,929 - 87,75226 316,985 326,326 316,985 9,341 48,352 3,369 84,21327 64,800 328,997 - 328,997 - 114,102 80,59228 - 330,678 - 330,678 - 110,274 76,89229 - 331,266 - 331,266 - 106,221 73,11830 - 330,744 - 330,744 - 101,975 69,297

95 - 1 - 1 - 1 - 96 - - - - - - -

Total 2,315,885$ 1,679,188$ 3,995,073$

Present Value of Unfunded Benefit

Payments (g) = (e) ÷ (1 + 4%) (a)

Present Value of Benefit Payments Using the Single

Discount Rate (h) = (c) ÷ (1 + 5.35%) (a)

Projected Benefit Payments Present Value of Projected Benefit Payments

Note: Years 11-24 and 31-94 have been omitted from this table.


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$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

0 5 10 15 20 25 30 35

Illustrative Projected Benefits and Projected Plan Net Position

Projected Benefit Payments

Projected Plan Net Position

This portion of projected benefits is discounted using a AA tax-exempt municipal bond index rate

This portion of projected benefits is discounted using the long-term expected rate of return.


Statewide Plans are well funded ► Will likely be able to use the full 7.50% or something close to it

Old Hire Plans ► Funded status varies ► But, the funding policy is such that can likely invoke safe harbor

provision and use full 7.50% ► As long as employer is actually contributing the required

contribution

Volunteer Plans ► Funded status and contribution levels vary ► Plans that are meeting contribution adequacy test in the report

can likely invoke safe harbor provision and use full 7.50% ► Plans that aren’t will likely require a lower blended rate.

• Higher liabilities and expense 32

Timing


“For him, timing is about 50%”

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Frequency & Timing of Measures

Valuation date ►Date as of which census data is collected and total

pension liability is measured. ►Employer’s TPL measured at least every two years

and valuation date can be no more than 30 months and 1 day earlier than the employer’s most recent fiscal year end.

Measurement date ►May or may not be the same as valuation date ►Should be no earlier than the end of the employer’s

prior fiscal year (Fiscal year ending December 31, 2015 can use measurement as of December 31, 2014 or later) 34


If no significant changes, can use rollforward to get from valuation date to measurement date

For example, accounting valuation is performed as of January 1, 2014

Employer needs to report results in December 31, 2015 financials

Can roll forward results from January 1, 2014 to January 1, 2015 ►Valuation date = January 1, 2014 ►Measurement date = January 1, 2015

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Can roll forward results from January 1, 2014 to January 1, 2015 ►Much less work than full valuation ►Accounting valuation date = January 1, 2014 ►Measurement date = January 1, 2015 ►Fiscal year end = December 31, 2015 ►Valuation date within 30 months, measurement date

within 12 months

Key for Old Hire and Volunteer Plans which only perform valuations every two years 36

Frequency & Timing of Measures FY 2014 Plan Accounting

Jan 2014

• January 1, 2014 Valuation Date and Measurement Date •Will need to use rollforward for Volunteer Plans (Valuation

date = January 1, 2013)

June 2014

•Deliver valuation results under new accounting basis May – June timeframe

June 2015

• Include January 1, 2014 results in December 31, 2014 Plan CAFR

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Frequency & Timing of Measures FY 2015 Employer Accounting

Jan 2015

•January 1, 2015 Valuation Date and Measurement Date •Will need to use rollforward for Old Hire Plans (Valuation date = January 1, 2014)

June 2015

•Deliver valuation results under new accounting basis May – June timeframe •Include proportionate share information

July 2015

•FPPA Staff distributes proportionate share information for Statewide plans to individual employers

Early/ Mid 2016

•Employers include January 1, 2015 results in Fiscal Year Ending Dec. 2015 CAFRs and information to State auditor

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“I don’t always read accounting statements, but when I do, I prefer GASB 67 and 68”

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Questions and Discussion

?

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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, investment advice, or accounting 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.

Disclaimers

Acknowledgement

Thank you to Leslie Thompson, FSA from whom I stole much of this presentation.

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gasb 67 and 68 what it all means for fppa employers · the gasb’s process june 2012: the...

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