gasb 68—the new world of employer pension accounting and reporting

Public Employees Retirement Association of Minnesota

GASB 68—The New World of Employer Pension Accounting and Reporting

December 17, 2013

Presenter: Dave DeJonge, PERA Moderator: Gary Carlson, LMC


AgendaBackgroundSummary of ProvisionsNet Pension LiabilityPension ExpenseFootnotesRSI SchedulesWhat PERA Will ProvideAudit IssuesNext Steps


BackgroundGASB 68 applies to pension plans (DB and DC)

administered through a trust in which:

Contributions from employers and non-employer contributing entities are irrevocable;

Plan assets are dedicated to providing pensions to plan members; and

Plan assets are protected from creditors of employers, the plan administrator, and plan members.


BackgroundThere are several reasons GASB made changes to

pension accounting and reporting standards:GASB 34 required employers to develop full accrual

government-wide financial statements;GASB concept statement 4 defined liabilities that need

to be shown on the face of the financial statements;Users of financial statements requested more

information about unfunded pension liabilities; andGASB’s emphasis is on comparability between

reporting entities and the use of similar accounting standards with the international/corporate community


Background“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations. Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.” Former GASB Chairman Robert Attmore


Effective DatesGASB 67, Financial Reporting for Pension Plans, is

effective 6/30/14 for PERA

GASB 68, Accounting and Financial Reporting for Pensions, is effective for fiscal years beginning after 6/15/14

Cities: Effective Date 12/31/2015

School Districts: Effective Date 6/30/15


Current StandardsPension costs are directly related to funding.

Pension Expense is equal to an employer’s contributions paid to PERA.

A Pension Liability is only booked if the employer’s required contributions were not fully paid.

PERA’s unfunded liability is disclosed in PERA’s footnotes.

Footnote disclosures are limited to a description of benefits and contribution amounts for 3 years.


Summary of ProvisionsThe Net Pension Liability (NPL) replaces the

Unfunded Actuarial Accrued Liability (UAAL).

The NPL is calculated differently than how we calculate the UAAL.

The annual change in the NPL is recognized as Pension Expense or Deferred Inflows/Outflows of Resources, depending on the nature of the change.

GASB assumes the employer is ultimately responsible for paying off any unfunded liability.


Summary of ProvisionsEmployers include their proportional share of the

NPL and Pension Expense on the face of their government-wide financial statements.

Each employer’s proportional share will be determined based on contributions paid to PERA during the measurement period.

New extensive footnote disclosures will be required.

Two new RSI schedules will be required.


Net Pension Liability (NPL)Equal to the Total Pension Liability (TPL) minus

PERA’s Fiduciary Net Position. Similar to Unfunded Liability calculation except:

Unfunded Liability NPL

Discount Rate Long-term rate of investment return

Long-term rate of return and possibly a 20-year municipal bond index rate combination

Asset Valuation Smoothed actuarial value of assets

Fair (market) value of assets

Actuarial cost method Use one of 6 possible methods

Entry Age Normal


Net Pension Liability (NPL)The NPL will be allocated to all of PERA’s employers

and included as a liability on the government-wide financial statements.

The allocation method will be based on employer’s contributions paid to PERA in relationship to all employer contributions received.

EmployerContributions Paid to PERA

PERA’s Total ER Contrib.

Proportionate Share (%)

Total NPL

Proportionate Share of NPL ($)

City A $830,387 $375,000,000 0.221% $4.5 Billion $9,945,000

City B $ 62,590 $375,000,000 0.017% $4.5 Billion $765,000


Net Pension Liability (NPL)Calculated as of a “Measurement Date” which will

always be June 30, PERA’s fiscal year end.

Measurement Date must be no earlier than the end of the employer’s prior fiscal year.

December 31, 2014 June 30, 2015 December 31, 2015June 30, 2014

Measurement Date

Employer’s Fiscal Year EndPrior Fiscal Year End


Net Pension Liability (NPL)Estimate of NPL for General Plan:

2013 PERA Contribution / $375,000,000 x $4.5 Billion

Estimate of NPL for Police & Fire Plan:

2013 PERA Contribution / $126,000,000 x $1 Billion


Pension Expense (PE)No longer tied to funding (contributions)

Directly tied to changes in the NPL from one year to the next

Must be calculated by PERA’s actuary

Will likely be very volatile

May be a negative expense (revenue)


Pension Expense (PE)Calculated during the “Measurement Period” ending

on the Measurement Date, always 6/30/20xx


Measurement Date

Employer’s Fiscal Year EndPrior Fiscal Year EndPrior Measurement

Date

Measurement Period


Pension Expense (PE)NPL Components immediately recognized in PE:

Item Effect on PE

Service Cost (Normal Cost) Increase

Interest on the TPL Increase

Projected Investment Earnings Decrease

Member Contributions Decrease

Administrative Costs Increase

Benefit Provision Changes Increase or Decrease


Pension Expense (PE)Components deferred and recognized later include:

Deferred portions are accumulated as “deferred outflows of resources” or “deferred inflows of resources” and recognized as PE in future years.

Item Amortization Period

Difference between actual and projected earnings on investments

5 Years

Changes in actuarial assumptions (mortality, disability, salary growth, inflation, payroll growth, etc.)

Closed period equal to the average of the expected remaining service lives of all employees (active, inactive, and retirees)

Difference between actual and assumed actuarial experience


ExampleItem Pension Expense Deferred Outflows Deferred Inflows

Service Cost $20,000

Interest on TPL $10,000

Projected Investment Earnings $ (8,000)

Member Contributions $ (1,000)

Admin Expenses $ 100

Change in Benefit Provisions $ (200)

Change in Assumptions (8 years) $ 100 $ 1,000 $ 300

Diff. Between Assumed and Actual Experience (8 years)

$ (50) $ 150 $ 500

Diff. Between Actual & Projected Investment Earnings (5 Years)

$ (100) $ 400

Total $20,850 $ 1,150 $1,200


Employer ContributionsDuring the measurement period

Directly reduce NPL (no expense impact)

Subsequent to measurement dateDeferred outflow of resources related to pensionsDirectly reduce NPL in next reporting period


Employer ContributionsBooking ER Contrib. during the Employer’s fiscal year


Measurement Date

Employer’s Fiscal Year EndPrior Fiscal Year EndPrior Measurement

Date

Measurement Period

Reduce NPL Def Outflows


Footnote DisclosuresDisclosure Reference Source of InfoTotal of employer’s pension liabilities, pension assets, deferred outflows/inflows related to pensions, and pension expense for the period (if not identifiable in financials)

74 PERA

Name of pension plan(s), type of plan, entity that administers the plan 76.a. PERA or Employer

Description of benefit terms, including types of employees covered, types of benefits, pension formulas, COLAs, and authority under which benefit terms are established

76.b. PERA or Employer

Description of contribution requirements, including how contributions are determined, how rates are changed, actual contribution rates, and the amount of contributions recognized by the pension plan for that period.

76.c. PERA or Employer

How to obtain PERA’s CAFR 76.d. PERA or Employer

Significant assumptions/inputs used to measure the total pension liability, including: inflation, salary changes, COLAs, mortality, and dates of experience studies on which assumptions are based.

77 PERA

Discount rate applied when measuring the TPL and change in the discount rate since the prior measurement date, if any.

78.a. PERA

Assumptions made about projected cash flows when calculating the discount rate.

78.b. PERA


Footnote DisclosuresDisclosure Reference Source of InfoLong-term expected rate of return and how it was determined, including significant methods and assumptions used for that purpose.

78.c. PERA

If the discount rate incorporates a municipal bond rate, the bond rate used and source of that rate.

78.d. PERA

Periods of projected benefit payments to which long-term ROR is used and municipal bond rate is used when determining the discount rate.

78.e. PERA

Assumed asset allocation of portfolio, long-term expected real ROR for each asset class, whether ROR is presented as arithmetic or geometric.

78.f. PERA

Employer’s NPL calculated using discount rates that are 1% higher and 1% lower than the actual discount rate used to calculate the TPL.

78.g. PERA

The fiduciary net position used to calculate the NPL has been determined on the same bases used by PERA, and a brief description of PERA’s basis of accounting, including policies regarding benefit payments and the valuation of plan investments.

79 PERA

Employer’s proportionate share (amount) of the collective NPL 80.a. PERA

Employer’s percentage share of the collective NPL, the basis on which its proportion was determined, and any change in its proportion since the prior measurement date.

80.b. PERA


Footnote DisclosuresDisclosure Reference Source of Info

Measurement date of NPL and date of actuarial valuation on which the TPL is based.

80.c. PERA

Assumption changes or other inputs that affected measurement of the TPL since the prior measurement date

80.d. PERA

Changes of benefit provisions that affected measurement of the TPL since the prior measurement date

80.e. PERA

Nature of changes between the measurement date of the NPL and the employer’s reporting date—if they are expected to have a significant effect on the employer’s share of the NPL in the future.

80.f. PERA/Employer

Amount of Pension Expense recognized by the employer in the reporting period.

80.g. PERA/Employer

Amount of revenue recognized for the support provided by a non-employer contributing entity, if any.

80.j. Employer


Footnote DisclosuresDisclosure Reference Source of InfoEmployer’s balances of deferred outflows/inflows of resources related to pensions, classified in 5 categories

80.h. PERA/Employer

Deferred Outflows of Resources

Deferred Inflows of Resources

Difference between expected and actual experience $ 2,657 $ 142

Change of actuarial assumptions 1,714 130

Net difference between projected and actual earnings on investments

2,188

Changes in proportionate share 747 153

City’s contributions subsequent to measurement date 1,065 0

Totals $ 6,183 $ 2,613


Footnote DisclosuresDisclosure Reference Source of InfoSchedule showing net amount of balances of deferred outflows/inflows that will be recognized in the employer’s pension expense and recognized as a reduction in the NPL in the future.

80.h. PERA/Employer

Year ended Dec. 31:20Y0 $

(269)20Y1 161

20Y2 217

20Y3 545

20Y4 551

Thereafter 1,300

$1,065, reported as deferred outflows of resources related to pensions resulting from the City’s contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, 20Y0. Other amounts reported as deferred outflows/inflows of resources related to pensions will be recognized in pension expense as follows:


Required Supplementary Information (RSI)Two 10-year schedules

May be built prospectively

Separate schedules for each pension planPERA’s General Employees Retirement FundPERA’s Police & Fire FundMERF

Notes to RSI will include significant changes in actuarial assumptions, benefit provisions, etc. that affect the identification of trends in RSI schedules


Required Supplementary Information (RSI)

6/30.

CITY’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITYPERA General Employees Retirement Fund

Last 10 Fiscal Years* (Dollar amounts in thousands)


Required Supplementary Information (RSI)PERA General Employees Retirement Fund

Last 10 Fiscal Years(Dollar amounts in thousands)


What Will PERA Provide?Total Pension Liability (Collective Level)

PERA’s Fiduciary Net Position

Total Net Pension Liability

Total Pension Expense/Deferred Inflows & Outflows

Proportionate Share for Each Employer

Employer Contributions (Individual and Collective)

Footnote Disclosure Information


Audit IssuesThe Net Pension Liability, Pension Expense, and

other pension costs will come from PERAAllocation of employer proportional shares is not a

schedule that is required to be audited by PERA’s auditor as part of the financial statements

How does an employer get comfortable that these amounts as of the measurement date are accurate and verifiable?


Audit IssuesAICPA Audit Standards & Recommendations are

being developed (Guidance within 30 days)Employer Allocation, NPL, Pension Expense

numbers from PERA will be audited by the Legislative Auditor’s Office

Will the City’s auditor need anything additional in order to issue an unqualified opinion?


SummaryGASB 25-27 GASB 67-68 IMPLICATIONS

Pension expense is equal to employer contributions sent to PERA

Pension expense is related to the change in net pension liability each year.

Pension expense will be volatile. Cannot be calculated by the employer.

Pension systems’ unfunded liability does not impact individual employer financial statements.

Employer must show proportionate share of the Net Pension Liability (unfunded liability) on balance sheet.

Employers, who previously did not have a pension liability, now have a large liability shown on the balance sheet.

Long-term rate of return used to discount future benefits, which determines liabilities.

Discount rate is long term rate of return while assets exist and municipal bond rate after that.

Potential for higher liabilities if assets are projected to be depleted in the future.

Accounting numbers linked to funding numbers. De facto standard for contributions.

Decoupling of accounting and funding numbers.

Two sets of numbers confusing and hard to explain, and may cause “panic” by citizens and governing bodies.

Unfunded liability can be amortized over maximum 30 years regardless of source of UAL (plan amendment, assumption change, gain/loss).

Shorter amortization. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average working lifetime.

Higher pension expense and more volatility.


SummaryNew accounting numbers are unrelated to funding

Contribution rates still set in MN State Statute

Three ways to measure pension fund status:Books—GASB 67-68 for CAFR publication

Budget—GASB 25 actuarial reports for funding

Bonds—Moody’s: 5.5% investment assumption, 17 year amortization period


Next StepsGASB 68 Toolbox

“How To” Videoso Basic Conceptso Calculating Pension Costso Determining Proportionate Shareso Deferred Inflows/Outflows of Resourceso Pension Accounting Journal Entrieso Transition Year Transactionso Footnote Disclosureso Accounting for Changes in Proportionate Share


Next StepsGASB 68 Toolbox (Contd.)

Spreadsheets/Templateso Calculating Pension Expenseo Calculating Deferred Inflows/Outflows of Resourceso Maintaining Deferred Inflow/Outflow Balanceso Calculating Employer’s Share of the NPLo Contribution Reconciliation

Implementation Guide for Employers

Talking Points for Governing Boards


More InformationGASB Website—Educational Resources

PodcastsFact Sheets

PERA’s Website—Employer tabGASB 68 Toolkit

Contact Dave DeJonge [email protected]

gasb 68—the new world of employer pension accounting and reporting

Documents

net pension liabilities

financial reporting

pension plans db

financial obligations

financial reports

employers contributions

reporting standards

required employers