gasb pension accounting and financial reporting changes

GASB Pension Accounting and Financial Reporting Changes

Presented by:Frederick G. Lantz, CPA

Partner-in-Charge, Government ServicesSikich LLP

1415 W. Diehl Road, Suite 400Naperville, IL 60563

(630) [email protected]

SIKICH LLPWelcome to our webinar on GASB Pension Fund Accounting and Financial Reporting Changes.

• Over 100 participants• Illinois• Wisconsin• Missouri

• Copy of the slides• Ask questions

2©2013 Sikich LLP. All Rights Reserved.

SIKICH LLPGASB Pension Fund Accounting and Financial Reporting Changes –the next big bang in state and local government.

• Two primary issues that are being addressed:• Employers accounting for the costs of pensions

• Significant changes will occur for most• Cost sharing plans have the most significant changes

• Accounting and reporting by the Pension Plan• Not many substantive changes will occur


GASB PENSION PROJECT• Where we have been

• GASB Statement No. 4 (1986)• Don’t apply FASB S-87

• GASB Statement No. 5 (1986)• Required the use of projected unit credit (PUC) actuarial cost

method for accounting and reporting• Also required disclosure of entry age normal (EAN) if used

for funding• Will the real funded status please stand up! • Required Supplementary Information (RSI)

• 10 years• Revenues and expenses



• GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans (1994)

• GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers (1994)

• Both still effective today



• GASB Statement No. 25 and No. 27• Allowed the use of 5 different actuarial cost methods• Amortization over at most 30 years (after initial 10 years)• Assets generally at fair value

• Asset or liability on face of the statement of position • Net Pension Obligation/Net Pension Asset (NPO/NPA)

• Annual Required Contribution (ARC) versus funded• ARC > funding= NPO; ARC<funding= NPA

• Actuarial Accrued Liability (AAL) in RSI • No RSI for cost sharing plans

• GASB Statement No. 50 (2007)Moved 1 year of AAL into the notes



• Problem with GASB Statement No. 27• Budget friendly, modified accrual basis• Not in accordance with accrual basis of accounting

• Liability when earned by employee, regardless of funding• Lack of comparability due to choices of actuarial valuation

methods and assumptions • Not recognizing pension spikes, cost of retro benefits or true

cost of pensions and any changes• Does not measure interperiod or intergenerational equity


GASB PENSION PROJECT• Where are we now

• Current pension project• Research agenda in January 2006• Five roundtable discussions in 2007• Current project agenda in April 2008• Invitation to Comment (ITC) March 2009• Preliminary Views (PV) June 2010• Exposure Draft (ED) July 2011• Final Pronouncements June 2012


GASB PENSION PROJECT• Where are we are heading

• “The final statements relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials”

• GASB has “divorced” accounting from funding• The new pronouncements do not:

• Set funding guidelines• Lower discount rates used for funding


PENSION FUNDING POLICY• GASB Statement No. 27 was based on funding

• Many governments used this statement to develop their funding policy/philosophy

• No longer true under revised standards• Every government should adopt a pension funding policy

• Define your annual required contribution (ARC) methodology • Actuarial cost method

• Adopted by the entity legally required to make the employer contribution to the plan

• Government Finance Officers Association best practice• gfoa.org

• IGFOA samples• Village of North Aurora, Illinois

• IMRF funding policy• MO LAGERs funding policy• WRS funding policy


GASB STATEMENT NO. 67• Pension Plan Reporting

• Defines a pension plan • Administered through an irrevocable trust

• Retains current basic financial statements• Statement of plan net position • Statement of changes in plan net position

• Accrual basis of accounting• Economic resources measurement focus • Notes greatly expanded• RSI greatly expanded• Can reduce disclosures in employers report

• Multi-employer plan reports generally do not contain information by individual employer


GASB STATEMENT NO. 67• Pension Plan Reporting

• Effective for plan periods beginning after June 15, 2013 • Fiscal years ending June 30, 2014 and thereafter • One year before GASB Statement 68 and employer reporting

is effective


GASB STATEMENT NO. 68• Issued June 2012• Accounting and financial reporting for defined benefit pensions and

defined contribution pensions provided to employees and volunteers of state and local government employers plans • Employer reporting• Special funding non-employer situations

• Illinois Teachers Retirement System (TRS)


GASB STATEMENT NO. 68• Covers pension plans administered through trusts or similar

arrangements if:• Contributions to the plan are irrevocable• Plan assets dedicated to providing pensions to plan members• Plan assets are protected from creditors and plan administrator

• Otherwise continue to follow GASB S-27, S-50


GASB STATEMENT NO. 68• Effective for fiscal periods beginning after June 15, 2014

• Fiscal year ending June 30, 2015 and thereafter• September 30, 2015• December 31, 2015• April 30, 2016• May 31, 2016

• Early implementation allowed and encouraged• May depend on others such as MO LAGERs, IMRF, WRS,

SURS, TRS• Does not cover other post employment benefits other than pensions

(OPEB)• Continue to follow GASB S-45

• Probable change in the future15

©2013 Sikich LLP. All Rights Reserved.

GASB STATEMENT NO. 68• Defines two types of pensions

• Defined contribution• Individual account for each employee• Contribution employer makes is defined• Benefits received based on balance in employee’s account• Employee bears market risk of investments

• Defined benefit• Income or other benefits to be received by employee are

defined by the benefit terms• Employer bears market risk of investments


GASB STATEMENT NO. 68• Defines types of defined benefit plans

• Single employer• Police and Fire Pension plans in Illinois

• Multiple employer• Agent

• IMRF• Cost-sharing

• IMRF, MO LAGERS, WRS, TRS, SURS• May also apply to component unit reports issued

separately from the primary government• Village Libraries in Illinois


GASB STATEMENT NO. 68• Special Funding Situations

• Non-employer entity is legally required to be responsible for making contributions directly to a pension plan that provides pensions to employees of another entity or entities and either

• Amount of non-employer contributions not dependent on occurrence of a future event unrelated to pensions, or

• The non-employer entity is the only one legally required to contribute to the plan

• TRS, SURS


GASB STATEMENT NO. 68 • Liabilities for defined benefit pensions

• Current• Liabilities for payments to a defined benefit pension plan

• Net Pension Obligation• Future

• Liabilities to employees for pension benefits as earned by the employee

• Total pension liability


GASB STATEMENT NO. 68 • Accrual basis, economic resources measurement focus financial

statements (Entity-wide, enterprise funds)• Recognize and record a net pension liability

• Total pension liability• Actuarial present value of projected benefit payments

• Less pension plans net position (net assets)• Measured as of employers fiscal year end

• No more than one year old• Apply consistently


GASB STATEMENT NO. 68 • Recognize and record a net pension liability

• Measured as of employers fiscal year end or 1 year old, consistently

• Timing of multiple employer plans• Same or different than employer

• Timing of single employer plans Police and Fire• Funding versus accounting/reporting

• Not as of employer year end• Interim contributions are deferred outflows

• Actuarial valuations performed at least biennially• Annually if significant changes in plan benefits or

demographics


GASB STATEMENT NO. 68 • Measuring the total pension liability

• Projected benefit payments• Assumptions – Actuarial Standards of Practice

• Future salary increases (if part of the formula for benefits)

• COLAs• Projected service credits• Investment rate of return (IRR)

• Supported by expected IRR by asset class


GASB STATEMENT NO. 68 • Measuring the total pension liability

• Projected benefit payments• Assumptions – Actuarial Standards of Practice

• Discount rate – single rate that reflects• Long-term expected rate of return on plan

investments to the extent that the plan’s net position is sufficient to make projected benefit payments, assuming assets are invested to achieve that return

• Yield or index rate for 20 year, tax exempt GO municipal bond rated AA/aa or higher

• Blended rate


GASB STATEMENT NO. 68 • Discount rate calculation

• Projected cash inflows• Employer and employee contributions related to current

employees, active and inactive• Based on five year history• Pension funding policy

• Should have adopted 2 years ago• Payments to existing retirees and future retirees (currently

active or inactive)• Net position > benefit payments – IRR• Otherwise blended rate impacted by borrowing rate• Calculation of the Discount Rate > see Illustration 1 at the end of

this document


GASB STATEMENT NO. 68 • Measuring the net pension liability

• Entry age actuarial cost method is required, regardless of actuarial cost method used for funding

• Attribution made on individual employee basis• Each employees service cost level as a percentage of

projected pay• Inflation rate if no projected pay (e.g., volunteers)

• Start as of date employees service credits begin to accrue


GASB STATEMENT NO. 68 • Report net pension liability (NPL) in all accrual based financial

statements• Generally offset is to unrestricted net position• Many governments will report a deficit unrestricted net position

• Changes in the NPL recognized as pension expenses in the current period except for:• Difference between projected and actual investment rate of

return • Amortize over closed 5 years

• Differences between expected and actual economic or demographic assumptions and/or changes in these assumptions

• Amortize over a closed period reflecting remaining service lives


GASB STATEMENT NO. 68 • Difference not reported as pension expense of the current period are

reported as deferred outflows or deferred inflows of resources related to pensions • As defined in GASB Statement No. 63


GASB STATEMENT NO. 68 • Modified accrual basis/current financial resources measurement

focus financial statements (e.g., general fund)• Net pension liability to the extent liquidated with available

spendable resources (unlikely)• Pension expenditure =

• Amounts paid by the employer to the pension plan• Change in NPL to the extent liquidated with available

spendable resources• Unpaid matured benefits (no plan assets)


GASB STATEMENT NO. 68• Notes to financial statements

• Total of all• Pension liabilities• Pension assets• Deferred inflows/outflows of resources related to pensions• Pension expense/expenditure for the period• Unless fully disclosed on face of financial statements

• May be if you participate in only one pension plan for all your employees



• Separate disclosures for each plan you participate in• Separate primary government from discretely presented

component units for disclosures• Difficult if you participate in a multiple employer plan

• Information usually provided only for employer as a whole

• Plan description• Name• Type of plan• Benefit terms• Classes of employees covered

• Types of benefits



• Plan description (continued)• Key elements of benefit formula• Benefit changes• COLAs• Authority for establishing and amending benefit changes

• Number of employees covered• Inactive receiving benefits• Inactive not receiving benefits• Active employees



• Contribution Requirements• Employee• Employer• Authority for changing• Basis for determining employer contributions• Contribution $ amount or % of covered payroll

• Reference to pension plan separate financial statements• And how to obtain separate report • Multi-employer plans do not include data by employer

• Do not reference something that does not exist



• Information about the net pension liability• Assumptions

• Inflation• Salary changes• COLAs• Mortality assumptions and table

• Dates of experience studies • Discount rate

• Change from prior period• Cash flow assumptions• Long-term expected rate of return



• Discount rate (continued)• Bond index rate incorporated, if applicable• Period of projected benefit payments each rate applies to

• Assumed asset allocation of the portfolio• Long-term expected real rate of return for each asset class• RRR Arithmetic or geometric means

• Impact on net pension liability of 1% swing higher and lower in discount rate



• Pension Plans Fiduciary Net Position• Reference to separately issued plan report• Otherwise disclose summary plan financial information in

notes for each plan• Required for multi-employer plans



• Schedule of changes in net pension liability for each pension plan the employer participates in

• Beginning balance of total pension liability, the plans fiduciary net assets and the net pension liability

• Service cost• Former “normal” cost

• Interest on total pension liability• Changes of benefit terms• Differences between actual and expected experience• Changes in assumptions or other inputs• Contributions from employer/non-employer contributor• Contributions from employees



• Schedule of changes in net pension liability• Plan net investment income• Benefit payments• Refunds• Administrative expenses• Other changes in net pension liability, disclosed separately

• Spikes• Retroactive benefits• Early retirement incentives

• Ending balance of total pension liability, plan fiduciary net position and net pension liability



• Measurement date of net pension liability, date of actuarial valuation used to calculate total pension liability, and if roll forward procedures were used

• Brief description of changes in assumptions • Description of changes in benefit terms• Pension expense recognized in the period• Deferred inflows/outflows related to pensions



• Deferred inflows/outflows related to pensions• Changes due to expected/actual experience• Changes in assumptions or other inputs• Net difference between projected and actual investment

experience• Employer contributions to the plan subsequent to the

measurement date of the net pension liability (if not the employer’s fiscal year end)



• Schedule of deferred inflows/outflows related to pensions by year for 5 years and in the aggregate thereafter that will be recognized in pension expenses

• Schedule that will be recognized as a reduction of the net pension liability

• Greatly expanded disclosures• Note Disclosures and Required Supplementary Information for a

Single Employer > see Illustration 2 at the end of this document


GASB STATEMENT NO. 68• Required Supplementary Information

• Separate for each plan• 10 years of information (prospective)• Schedule of changes in net pension liability, as of measurement

date• Same information required for notes to financial statements



• Schedule reporting• Total pension liability• Plans fiduciary net position• Net pension liability• Plan fiduciary net position as a % of total pension liability

• Used to be funded status• Covered payroll• Net pension liability as a % of covered payroll



• If employer contributions are actuarially determined, a schedule reporting

• A-Actuarially determined contribution• B-Actual contributions• C-A-B• D-Covered payroll• E-B/A as a % of D



• If employer contributions are not actuarially determined• A-Statutory or contractually required contribution• B-Actual contributions• C-A-B• D-Covered payroll• E-B/A as a % of D


GASB STATEMENT NO. 68• Notes to Required Supplementary Information

• Significant methods and assumptions used each year• Factors that significantly impact trends


GASB STATEMENT NO. 68• Cost sharing plans• Most significant changes relate to participation in cost sharing plans

• Employer recognizes proportionate share of collective net pension liability in accrual basis financial statements

• Your employer contribution as a % of total employer contributions• Record as previously discussed

• Proportionate share of pension expense and deferred inflows/outflows related to pensions calculated using the same methodology

• Change in proportionate share• Recognize in expense using a systematic and rational method

• Closed period reflecting average remaining service lives • Contributions after measurement date but before year end

• Deferred outflow46

©2013 Sikich LLP. All Rights Reserved.

GASB STATEMENT NO. 68• Cost sharing plans

• Timing of measurement date• No later than 30 months and 1 day before employer fiscal year end

• Modified accrual basis/current financial resources measurement focus financial statements (e.g., general fund)

• Proportionate share of net pension liability to the extent liquidated with available spendable resources (unlikely)

• Pension expenditure =• Amounts paid by the employer to the pension plan• Change in NPL to the extent liquidated with available spendable

resources• Notes to financial statements

• Similar to agent/single employer plans• Additional disclosures related to proportionate share calculation

• Required Supplementary Information• Again similar to agent/single employer, except report employers

proportionate share• Note Disclosures and Required Supplementary Information for a Cost-

Sharing Employer > see Illustration 3 at the end of this document47©2013 Sikich LLP. All Rights Reserved.

GASB PENSION REPORTING • Communication between employer and plan administrators is critical

for timing • Required actuarial information greatly expanded

• More time for preparation• Separate actuarial valuations for accounting versus funding

versus state minimum mandate or contractual minimum


QUESTIONS?

Call or E-mail:Frederick G. Lantz, CPA

Partner-in-Charge, Government ServicesSikich LLP

1415 W. Diehl Road, Suite 400Naperville, IL 60563

(630) [email protected]

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