Upcoming Changes to Pension Reporting Under GASB 67 & 68and the Impact to Municipalities

Participating in PERARetirement Plans

• Patricia (Patty) French, Board Chair, PERA • Wayne Propst, Executive Director, PERA

Agenda

• GASB 67• What governments does it apply to?

• Plan specifics

• What changes are brought about by the new pronouncement?• New disclosures • Census data testing

• GASB 68 • What governments does it apply to?

• Participation, type of plans • What changes are brought about by the new pronouncement?

• Financial Statement impact• Schedule of Employer allocations

GASB 67 – What governments does it apply to?

• June 2012• The Governmental Accounting Standards Board (GASB) approved Statement No. 67,

Financial Reporting for Pension Plans• Applies to plans that administer pension benefits, such as the Public Employees Retirement

Association (PERA) of New Mexico

• Public Employees Retirement Fund is a cost-sharing, multiple employer defined benefit pension plan. This fund has six divisions of members, including State General, State Police/Adult Correction Officers, Municipal General, Municipal Police/Detention Officers, Municipal Fire, and State Legislative Divisions, and offers 24 different types of coverage within thePERA plan.

• GASB 67 establishes financial reporting standards for state and local governmental pension plans, defined benefit pension plans that are administered as trusts in which;

• a. Contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable.

• b. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms.

• c. Pension plan assets are legally protected from the creditors of employers, nonemployercontributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets also are legally protected from creditors of the plan members.

GASB’s Change to Pension Accounting

• The adoption of GASB 67 and 68 bring new terms to the financial statements:• Total Pension Liability (TPL)

• Definition: The portion of the actuarial present value of projected benefit payments that is attributed to past periods of member service

• Pension Plan’s Fiduciary Net Position or the Plan’s Net Position

• Definition: The pension plan’s net assets at fair value

• Net Pension Liability or NPL

• TPL – Pension Plan’s Fiduciary Net Position = NPL

GASB’s Change to Pension Accounting

• GASB changes under statements 67 and 68 are intended to promote consistency and transparency of employer reporting.

• Approach based on GASB’s decision that reporting the Net Pension Liability (NPL) on the face of a government’s financial statements allows users of the financial statements to better assess:• The long-term benefit obligations of a governmental entity;• The general long-term financial health of a governmental entity;• How well a governmental entity has supported and maintained the

pension promises made to their employees.

GASB’s Change to Pension Accounting

• GASB 67 Financial Reporting for Pension Plans• Applies to PERA and will be implemented in FY 2014

• Net Pension Liability (NPL) will be disclosed in PERA’s 2014 financial report• Cost-sharing multi-employer plan is one in which the participating government employers pool

their assets and their obligations to provide defined benefit pensions (plan assets can be used to pay the pensions of the retirees of any participating employer)

• Example: Approximately $14.4 billion in assets in PERA fund used to pay for City of Las Cruces retiree, San Juan County retiree and State of New Mexico Correctional Officer retiree

• Cost-sharing employers will share the NPL, on a proportional basis

• Changes will be noted in the notes to the financial statements and required supplementary information (RSI)

GASB 67

• Total Pension Liability (TPL)

• Three essential steps for measure

• Project total future pension benefit payments for current and former employees

• Based on terms of the plan

• Actuary assumptions, such as how long the employees are expected to work for participating government, what salaries are expected to be, period of collection of benefits after retirement

• Discount the projected benefit payments to the their value at the time of the measurement (present value)

• Attribute the present value of projected benefit payments to the periods when they were or will be earned –past and future.

• Net Pension Liability or NPL

• To the extent that the cumulative long-term obligation to provide pension benefits of the participating governments in a cost-sharing plan (TPL) is larger than the value of the assets available in the pension plan’s trust to pay pension benefits.

GASB 67

• Example of required GASB 67 note disclosure:• Calculation of the Net Pension Liability (NPL)

• This example is similar to what will be required to be disclosed in PERA’s notes to the financial statements in FY 2014 under GASB 67. The note will also include details of the actuarial assumptions used in the calculation.

Fiscal Year Ending June 30, 2014Total Pension Liability $16,700,000,000Fiduciary Net Position - $12,000,000,000Net Pension Liability $ 4,700,000,000

Ratio of Fiduciary Net Position to TotalPension Liability 71.85%

GASB 67

• Example of required GASB 67 note disclosure:• Actuarial Assumptions related to the calculation of the NPL

• The TPL was determined by an actuarial valuation as of June 30, 2014, using the following assumptions, applied to all prior periods included in the measurement:

Inflation 3.5 percentSalary Increases 4.5 percent, average, including

inflationInvestment rate of return 7.75 percent, net of pension plan

investment expense, including inflation

GASB 67

• Example of required GASB 67 note disclosure:• Discount rate used to measure TPL, sensitivity

• Discount rate. The discount rate used to measure the total pension liability was 7.75 percent. The projection of cash flows used to determine the discount rate assumed that future contributions will be made in accordance with statutory rates. On this basis, the pension plan’s fiduciary net position together with the expected future contributions are sufficient to provide all projected future benefit payments of current plan members as determined in accordance with GASB Statement No. 67.

• The table below depicts the required disclosure of sensitivity to changes in the discount rate.

1% Decrease (6.75%)

Current

Discount Rate (7.75%)

1%

Increase (8.75%)

Net Pension Liability 5,700,000,000

4,700,000,000

3,700,000,000

GASB 67• Example of required GASB 67 RSI:

• Schedule of Changes in the Net Pension Liability• ($ In thousands) 2014 2015 2016 2017 2018

Total pension liability

Service Cost 400,000

Interest 1,300,000

Benefit changes 0

Difference between expected

and actual experience 0

Changes of assumptions (90,000)

Benefit payments (900,000)

Refunds of contributions (48,000)

Net change in total pension liability 660,000

Total pension liability - beginning 17,000,000

Total pension liability - ending (a) 17,700,000

Plan net position

Contributions - employer 300,000

Contributions - member 245,000

Net investment income 2,200,000

Benefit payments (900,000)

Administrative expense (10,000)

Refunds of contributions (47,000)

Other 17,000

Net change in plan net position 1,720,000

Plan net position - beginning 12,700,000

Plan net position - ending (b) 14,400,000

Net pension liability - ending (a) - (b) 3,300,000

GASB 67• Example of required GASB 67 RSI:

• Schedule of the Net Pension Liability• ($ In thousands)

2014 2015 2016 2017 2018

Total pension liability 17,700,000

Plan net position 14,400,000

Net pension liability 3,300,000

Ratio of plan net position to total pension liability 81.31%

Covered-employee payroll 2,100,000

Net pension liability as a percentage of covered-employee payroll 156.29%

GASB 67• Example of required GASB 67 RSI:

• Schedule of Employer Contributions• ($ In thousands)

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005

Contractually Required Contributions $300,000 $285,860 $274,906 $283,377 $291,683 $311,082 $292,569 $269,571 $249,740 $234,232

Actual employer contributions 300,000 285,860 274,906 283,377 291,683 311,082 292,569 269,571 249,740 234,232

Annual contribution deficiency (excess) 0 0 0 0 0 0 0 0 0 0

Covered-employee payroll 2,100,000 2,049,783 1,994,280 1,935,014 1,993,517 2,081,259 1,965,064 1,908,520 1,774,918 1,607,839

Actual contributions as a percentage of covered-employee payroll 14.00% 13.93% 13.78% 14.64% 14.63% 14.95% 14.89% 14.12% 14.07% 14.57%

GASB 68

• June 2012• GASB also approved Statement No. 68, Accounting and Financial

Reporting for Pensions• Applies to governments that provide pension benefits to their employees

• Examples: The City of Santa Fe and Santa Fe County that participate in PERA

GASB 68

Summary of Employer ReportingEmployers will report the following elements:

Net Pension Liability (NPL)

Pension Expense

Pension Deferred Outflows and

Inflows of Resources

GASB 68

Total Pension Liability

Less: Fiduciary Net Position Net Pension Liability

• Net pension liability (asset) equals the total pension liability for the pension plan, less the fiduciary net position:

• Total pension liability is the actuarial present value of projected benefit payments attributed to past employee service

• Fiduciary net position is determined using same valuation methods as used for plan’s GAAP financial reporting

Net Pension Liability

GASB 68Net Pension Liability—timing

Dates to consider!

The employer’s year end date

The measurement date

The actuarial valuation date

GASB 68Pension Expense

Certain aspects of the change in net pension liability should be recognized immediately as pension expense and others should be recognized as deferred outflows/inflows of resources and recognized (amortized) into pension expense over time.

Employers participating in cost-sharing plans will recognize their proportionate share of the collective pension expense and deferred amounts determined for the plan as a whole.

GASB 68Pension Expense

Current period service cost

Changes in the Total Pension Liability

Changes in Plan’s Fiduciary Net Position

Interest on the beginning total pension 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 (e.g., employee contributions,

admin costs)

GASB 68Pension Expense—Deferred expenses• Differences between expected and actual changes in economic and

demographic factors• Changes in the assumptions about economic and demographic

factors• Differences between actual and projected earnings on plan

investments

• Contributions to the pension plan from the employer subsequent to the measurement date

GASB 68Cost-Sharing Plan Challenges• Audited financial statements of the plan only include disclosure of the

collective net pension liability for the plan as a whole. They do NOT include:• Deferred outflows/inflows of resources by category• Pension expense• Each participating employer’s share of collective pension amounts

• Standard is silent on who (plan or each individual participating employer) should calculate allocation percentages.

• Audited financial statements of the plan may not include necessary information to calculate allocation percentages.

• Standard encourages an allocation method would be extremely difficult to audit as it is based on projected future contributions.

GASB 68AICPA Recommendations

• Plans should prepare schedules of employer allocations.• Plan auditor issues opinion on the employer allocations and on the

total of each of the four “elements” in accordance with AU-C 805• Net pension liability, total deferred outflows of resources, total deferred inflows of

resources, and total pension expense for the sum of all participating entities• Materiality calculated separately for each element

• Plan auditor needs to consider the appropriateness of the materiality used in the audit of plan financial statements.

• For audit of a public employee retirement system (PERS) plan financial statements, the audit opinion is provided on the system as a whole (which often includes more than one plan).

• Audit of plan financial statements effectively has to be performed at a lower level consistent with the “allocation” pool.

EXAMPLE COST SHARING PENSION PLANSchedule of Pension Amounts by EmployerAs of and for the year ended 6/30/20X5

Pension Expense

Net Amortizationof Deferred

Amounts fromChanges in Changes in Changes in

Net Difference Proportion Proportion ProportionBetween and Differences and Differences and Differences

Projected Between Between BetweenDifferences and Actual Employer Total Differences Employer Total Proportionate Employer

Between Investment Contributions Deferred Between Contributions Deferred Share of Contributions TotalExpected Earnings on and Proportionate Outflows Expected and Proportionate Inflows Plan and Proportionate Employer

Net Pension and Actual Pension Plan Changes of Share of of and Actual Changes of Share of of Pension Share of PensionEntity Liability Experience Investments Assumptions Contributions Resources Experience Assumptions Contributions Resources Expense Contributions Expense

Employer 1 $ 45,224,620 438,859 1,569,847 1,404,206 695,426 4,108,338 355,917 – 726,425 1,082,342 1,907,283 12,375 1,919,658Employer 2 5,661,780 54,942 196,533 175,796 84,231 511,502 44,558 – 74,326 118,884 238,777 (1,793) 236,984Employer 3 6,795,628 65,945 235,892 211,001 117,354 630,192 53,481 – 98,465 151,946 286,596 (8,088) 278,508Employer 4 10,193,442 98,917 353,838 316,502 161,215 930,472 80,222 – 165,453 245,675 429,894 3,021 432,915Employer 5 13,355,038 129,597 463,584 414,668 199,845 1,207,694 105,103 – 197,645 302,748 563,229 (9,900) 553,329Employer 6 3,043,487 29,534 105,646 94,499 53,453 283,132 23,952 – 48,453 72,405 128,355 599 128,954Employer 7 2,011,585 19,520 69,827 62,459 33,458 185,264 15,831 – 35,345 51,176 84,836 625 85,461Employer 8 1,987,964 19,291 69,007 61,725 35,425 185,448 15,645 – 16,453 32,098 83,839 (5,712) 78,127Employer 9 16,777,717 162,811 582,393 520,941 248,356 1,514,501 132,040 – 284,543 416,583 707,576 8,405 715,981Employer 10 5,641,888 54,749 195,843 175,178 95,465 521,235 44,401 – 44,356 88,757 237,938 (1,188) 236,750Employer 11 8,512,562 82,606 295,490 264,312 136,453 778,861 66,993 – 148,543 215,536 359,005 1,254 360,259Employer 12 3,499,761 33,962 121,485 108,666 52,145 316,258 27,543 – 64,354 91,897 147,597 453 148,050Employer 13 1,443,418 14,007 50,104 44,818 23,156 132,085 11,360 – 33,453 44,813 60,874 (205) 60,669Employer 14 131,785 1,279 4,575 4,092 1,968 11,914 1,037 – 894 1,931 5,558 147 5,705Employer 15 44,757 434 1,554 1,390 1,456 4,834 352 – 698 1,050 1,888 7 1,895

Total for All Entities $ 124,325,432 1,206,453 4,315,618 3,860,253 1,939,406 11,321,730 978,435 – 1,939,406 2,917,841 5,243,245 – 5,243,245

Deferred Outflows of Resources Deferred Inflows of Resources

Employer Responsibilities!

REPORT: Complete and accurate data to plan

EVALUATE: Appropriateness of information used to record financial statement amountsWhether plan auditor’s report on schedules are adequate and appropriate for employer purposes

VERIFY: Amounts in schedules specific to employerRecalculate allocation percentage of employerRecalculate allocation of pension amounts based on allocation percentage of employer

PERA’s Role in Implementation Process

• First Steps:• Implement GASB 67 and include required information in PERA’s

FY 2014 financial report• Users will be able to view the Net Pension Liability for 6/30/14 that will be

allocated amongst the participant employers for reporting in FY 2015

• Issue separate report containing employer allocations

• “Schedule of Employer Allocations” available in the Spring of 2015

• This separate report will include the information needed by employer participants in order to comply with the required GASB 68 disclosures

PERA’s Role in Implementation Process

• On-going communication:• Visit PERA’s website for updated information

• http://www.pera.state.nm.us/

• Future trainings

• New Mexico Association of Counties Legislative Conference

• January of 2015

• Contact us!

• Natalie Cordova, CFO

• Natalie.cordova@state.nm.us or 505-476-9313