GASB Pension Reporting Update

Minnesota Association of School Business Officials (MASBO)

Presented by:

Dave DeJonge, Assistant Executive Director, PERAJohn Wicklund, Assistant Executive Director, TRA

November 14, 2014

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On the doorstep of implementation

GASB 67: Pension Plan Reporting

PERA and TRA will implement for their CAFRs for the period ending June 30, 2014.

GASB 68: Accounting and Financial Reporting for Pensions

School districts will implement for CAFRs for the period ending June 30, 2015.

Replaces current Statement of Plan Net Assets with Statement of Fiduciary Net Position (GASB 63).

Replaces current Statement of Changes in Plan Net Assets with Statement of Changes in Fiduciary Net Position (GASB 63).

Revisions to Notes to the Financial Statements.

Required Supplementary Information (RSI): Ten-year Funding Trends.

Required Supplementary Information (RSI) Schedule of the Net Pension Liability.

Conclusion: Little impact on employer units.

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GASB Statement 67(Effective for FY 2014 PERA and TRA CAFRs released December 2014)

GASB Statement 68 impact on employer units (FY2015)

Government-wide financial statements, not fund-level statements.

PERA/TRA perform with actuarial valuation reports every 6/30/xx. Results done 12/1/xx.

PERA/TRA calculate proportionate share assigned to each employer unit (based on employer contributions).

PERA/TRA transmits assets, liabilities, disclosure data, Required Supplementary Information to each employer.

Large unfunded actuarial liabilities exist (now called Net Pension Liability).

Result:

Many employers will experience sticker shock at their share of the net pension liability, higher than net assets reported. (Remember: Liabilities paid over decades.)

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Adds net pension liability (NPL) – similar to the unfunded liability PERA and TRA report today (government-wide financial statements).

Pension expense for school district is the difference between beginning NPL and ending NPL.

Deferred inflows and deferred outflows retained from GASB 63 and 65. Affects timing of expenses. Example: Investment gains or losses smoothed over five years.

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Major reporting changes:Statement of net position (GASB 68)

Schedule of the Net Pension Liability:

Ten year schedule presenting: Employer’s percentage and amount of NPL

Employer’s covered employee payroll

Employer’s NPL as percentage of covered employee payroll

Pension plan’s Fiduciary Net Position (FNP) as a percentage of TPL

Required supplementary information

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Required supplementary information

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Schedule of Employer Contributions

Ten-year schedule presenting: Statutorily required employer contribution

Actual contributions paid by employer

Difference between required contributions and paid contributions

Amount of contributions paid in relation to required contributions as a percentage of the employer’s covered-employee payroll

Required supplementary information

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Required supplementary information

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Schedule of Employer Contributions

Notes to the financial statements

Adds more extensive note disclosures, including sensitivity analysis of investment return assumption

Requires employer to track annual balances of deferred outflows of resources and inflows of resources.

Must describe significant assumptions and other inputs used to measure total pension liability.

PERA/TRA to provide suggested footnotes

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Measurement period

Actuarial valuation

measurement date

Release of 7/1/14

actuarial valuation

results

School districts use

7/1/14 actuarial valuation

results

School district CAFRs

w/GASB 68 published

Retirement systems transmit results to school districts

July 1, 2013 June 30, 2014 Dec. 1, 2014 June 30, 2015 Late 2015

Key point: There will be a one-year lag in school district reporting of GASB 68 results. Example: School districts, in their FY 2015 reporting, will use FY 2014 actuarial valuation results from PERA and TRA.

GASB 67-68 timeline: Measurement dates for school districts

GASB 68 implementation guide

Released January 2014. www.gasb.org

272 Q&A (questions 121-217): Cost-sharing employers.

Appendix 3 (PERA and TRA are multi-employer cost-sharing plans).

Illustration 3a, 3b are helpful.

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PERA – TRA plan level

Perform annual actuarial valuations to determine funded status and liabilities

Require plan actuary to calculate collective amount of items requiring deferred treatment

Engage external auditor (unknown at present) to audit actuarial census data and schedule of employer’s proportionate share

Communicate results to the school districts

Provide RSI and suggested footnotes

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Determination of employer proportionate share

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Allocation based on employer contributions for fiscal year

Time lag – schools will use FY14 results and data for their FY15 CAFR

PERA/TRA to provide GASB 68 allocations to each employer based on plan totals calculated by actuary

Allocation policy is in progress

Determination of employer proportionate share--PERA

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Allocation based on employer contributions for fiscal year, but not all contributions reflect future contribution effort, so some will be excluded from the allocation.

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GASB Statement No. 68 (Paragraphs 48-51)

Statement of net position for FY ended June 30, 2015: Cost-sharing employers

Change from old GASB

Total Assets $x,xxx,xxx

Liabilities

Accounts payable $xx,xxx

Salaries payable $xx,xxx

Total pension liability $x,xxx,xxx (New)

Total Liabilities $x,xxx,xxx

Net Position Possibly negative

Remember: Pension liability is paid over decades of time and could be very volatile based on conditions of the pension fund at the state level.

GASB 71

Amends paragraph 137 of Statement 68

Contributions after the measurement date prior to fiscal year end

Booked to deferred outflows rather than pension expense (GASB 63)

At the beginning of the period in which the provisions of Statement 68 are adopted the government should recognize a beginning deferred outflow of resources only for its pension contributions (with an offset to Net Position).

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GASB 71

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June 30, 2014 June 30, 2015June 30, 2013

Begin NewMeasurement

Date

Employer’s Fiscal Year

End

Prior Measurement

Date

Measurement Period

Def Outflows

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Determination of employer proportionate share

Schedule of employer allocations (6/30/20X5)

Employer Actual Employer Contributions Employer Allocation Percentage

Employer 1 $2,143,842 36.376

Employer 2 268,425 4.554

Employer 3 322,142 5.466

Employer 4 483,255 8.199

Employer 5 633,125 10.742

Employer 6 144,288 2.448

Employer 7 95,365 1.618

Employer 8 94,238 1.599

Employer 9 795,365 13.495

Employer 10 267,468 4.538

Employer 11 403,527 6.847

Employer 12 165,886 2.815

Employer 13 68,454 1.161

Employer 14 6,240 0.106

Employer 15 2,144 0.036

Total $5,893,764 100.000

Example A: Net pension liability(employer 2)

Employer proportionate share 4.554%

TRA net pension liability (estimated) $4 billion

Employer 2 initial liability on July 1, 2014 $182,160,000

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Pension expense

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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

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Pension expense

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

Pension expense

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Item 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

Pension expense

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Actuary-Determined Impact 8-Year Allocation

Current Deferred

Change in assumption

+1,142 loss $142 $1,000 (outflow – loss)

Change in assumption

+342 gain ($42)_____

$300 (inflow – gain)

Current year pension expense $100

Difference in assumed Actual experience

+171 loss

+571 gain

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($71)_____

$150 (outflow – loss)$500 (inflow – gain)

Current year pension expense ($50)

Investment experience

+500 gain ($100) $400 (inflow – gain)

Two reports

1. Accounting valuation TRA Annual Financial (GASB 67-68) Report for financial

reporting, not funding determinations.

2. Funding Valuation Report Prepared with statutory assumptions and requirements determined by Minnesota Legislature.

Two reports – different assumptions and methodologies.

TRA Actuarial Valuation Reports: December 2014

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TRA’s actuary will deliver the collective:

Net Pension Liability

Deferred outflows of resources by category

Deferred inflows of resources by category

Pension expense

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GASB 67-68 Actuarial Valuation Results

TRA

Results allocated and shared among 590 employer units

Allocation based on employer contributions for fiscal year

Each employer unit (school district) will have a percentage of TRA’s results

The percentage will be recalculated every year

TRA has a “special funding situation” impacting the calculation

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Determination of employer proportionate share

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Special funding situation

GASB 68 requires allocation of TRA net pension liability and other financial results to employer units.

Allocation based on annual employer contributions.

Based on the Minneapolis and Duluth teacher mergers, TRA

receives $16 million/year for Minneapolis and $14 million for

Duluth.

Question: How do direct state aid payments impact the

allocation of TRA results?

GASB 68 paragraph 15 defines a “special funding situation.”

After a conference call with GASB and MMB, TRA will treat

the State of Minnesota as an employer unit in the allocation

of pension liability and expense.

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Audit issues – TRA

Audited financial statements of the plan only include disclosure of the collective net pension liability for the TRA plan as a whole.

Does not include specific employer detail for:o Deferred outflows/inflows of resources by categoryo Pension expenseo Each participating employer’s share of collective pension

amounts

Problem: Audited financial statements of the plan may not include

necessary information to calculate allocation percentages. Lack of audit evidence for external auditor.

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Audit solution

TRA prepares “Schedule of Employer Allocations,” for which plan auditor is engaged to provide opinion.

Schedule includes the following elements for each employer:o Net Pension Liabilityo Deferred outflows of resources by categoryo Deferred inflows of resources by categoryo Pension expense

For the GASB 68 allocation schedule – TRA has engaged the Office of the State Auditor to verify the schedules distributed to the employer units.

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Audit issues: Census data

Auditing white paper guidance prescribes auditor must test member census data.

Example census data includes date of birth, years of service, pay

TRA is currently working with the Office of the State Auditor (OSA) on site visits to sample employer units.

Sample will be a risk-based approach by OSA.

Other risk factors may include:o Past errors or control deficiencieso New employero Length of time since last audito Media stories

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TRA: Communication of GASB 68 results

Financial statement

Required supplementary information

Notes to the financial statements

Report anticipated to be released by TRA in spring 2015o Attestation letter from the Office of the State Auditor

Exact mode for communication of report yet to be determined

Key messages

GASB 68 divorces funding and accounting

(Your GASB 68 pension expense will not match what the employer actually contribute to the plan.)

Unfunded pension liabilities exist today

(GASB 68 changes who reports them)

Unfunded pension liabilities may be very large to the employer

(liabilities represent pension payments due over decades of time)

Governing boards will still need to develop a funding policy to pay off the liabilities

(No different than today)

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Resources

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Visit the “Employer” tab on PERA’s and TRA’s websites.

www.mnpera.org

www.minnesotatra.org/employerinfo/gasb

You’ll find:

Links to GASB publications.

Links to AICPA audit guidance.

Toolkit of informational guides/articles.

Frequently asked questions.

News and developments on implementation.

Questions? E-mail Dave Dejonge (PERA) dave.dejonge@mnpera.org, or John Wicklund (TRA) jwicklund@minnesotatra.org.

PERA-TRA resources