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New GASB Statements Impacting Post-Employment Benefit Valuations and Other

Tips to Ensure Proper Valuation

WASBO Accounting Conference

March 2015

Robert Goldthorpe & John LavardaActuarial Consultants

Key Benefit Concepts, LLC

Agenda

• Overview of Current Valuation and Reporting

• GASB Statement 67 & 68 Changes (Supplemental Pensions)

• Coming Changes to OPEB (GASB Statement 45 Exposure Draft)

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Statement 67 vs. 68• Statement 67

• Standards for Accounting of the PLAN

• Plan Fiscal Years beginning after June 15, 2013

• Statement 68• Standards for Accounting of the EMPLOYER

• Employer Fiscal Years beginning after June 15, 2014

• Applicable only if pension plan is administered through a trust.

Current Valuation and Reporting

Compensated

Absences

Stipends

Cash Payouts

Health, Dental,

Vision, Life,

Post Employment Benefits

Other Post Employment Benefits

16

27 & 50

45

Sick Leave, vacation pay, etc.

Cash or cash equivalents including

post employment TSA contributions

Continued insurance coverages or

HRA contributions available for

premium reimbursement or other

expenses

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Changes to Valuation and Reporting

Stipends

Cash Payouts

Pension with NO Trust

Stipends

Cash Payouts

27 & 50

Pension with a Trust

68

Why the change?

• Improve the decision-usefulness of reported pension information

• Increase the transparency, consistency, and comparability of pension information across governments

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Fundamental Changes to AccountingHard-line division of accounting from funding

• Pension obligation to be recognized on the balance sheet• Known as the Net Pension Liability (NPL), formerly known as the Unfunded

Actuarial Accrued Liability (UAAL)

• Pension expense to be recognized on the income statement• Known as the Pension Expense (PE)

Fundamental Changes to AccountingHard-line division of accounting from funding

$_______

$_______

$_______

$_______

Footnotes

$100,000

Balance Sheet Balance Sheet

UAAL

NPL

$_______

$_______

$100,000

$_______

Footnotes

$_______

$_______

$_______

$20,000

$_______

Income Statement

PE

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Fundamental Changes to AccountingHard-line division of accounting from funding

• These Statements Set Financial Reporting Standards NOT Funding or Contribution Standards.

• Annual Required Contribution (ARC) and Net Pension Obligation (NPO) are no longer applicable.

How are the NPL and PE Determined?

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Net Pension Liability (NPL)

• Difference between Total Pension Liability (TPL) and Fiduciary Net Position (FNP)• NPL = TPL – FNP

• Total Pension Liability:• Formerly known as the Actuarial Accrued Liability (AAL)

• The portion of the actuarial value of projected benefits attributed to past service

• How much of the projected benefits have been earned

Pension Expense (PE)• Accounting item designed to recognize for the current period certain

changes to the TPL

• Benefit changes will be recognized immediately in the year of adoption

• Other changes to the TPL will be tracked as deferred inflows and deferred outflows, and recognized incrementally in the PE over time.

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Pension Expense (PE)• Basic Formula

Service Cost Benefits earned for the year

+

Interest Interest earned for the year

+

Benefit Changes Inc. or dec. due to change in benefits

—

Return on assets Interest earned by assets for the year

+

Deferred outflows

— Inc. or dec. due to assumption experience

Deferred inflows

Total Pension Liability (TPL)

Pension Expense

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The Actuarial Valuation Process1. Project Benefits

2. Discount Projected Benefits• Interest Discount

• Decrement Discount

• Combined gives us the Actuarial Present Value (APV)

3. Attribute Discounted Benefits• Gives us the Service Cost

Changes to the Actuarial Valuation Process1. Project Benefits

• Actuary will project the Fiduciary Net Position (FNP)• Contributions intended to only fund the Service Cost will not be included in this

projection

• Compare to projected benefits to find out when the plan will become insolvent, i.e. benefit payments are no longer covered by the projected assets

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Changes to the Actuarial Valuation Process2. Discount Projected Benefits

• Discount rate will be a blended rate based on the following:

i. Long-term expected rate of return on investments used to finance benefit payments

ii. 20-year tax-exempt municipal bond yield or index rated AA/Aa or higher

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Changes to the Actuarial Valuation Process3. Attribute Discounted Benefits

• Must use the Entry Age Normal (EAN) cost method• Attributes projected benefits over the working life of the member as a constant %

of salary

• All service years are created equal

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Changes to the Actuarial Valuation Process3. Attribute Discounted Benefits

Entry Age Normal vs. Projected Unit Credit

EAN PUCEntry (Hire)

% of Salary

Retirement

What to Expect

• Increased complexity to an already complex topic

• Might bring increased scrutiny to the plan

• Most likely increased third party fees (auditor, actuary, plan administrator)

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Impact on Reporting Process

• More interaction between actuary and auditor

• More time to learn new process, outcomes and impact

• Preliminary steps need to be taken now to avoid time constraints come reporting time

Coming Changes to OPEBGASB 45 Exposure Draft

• Expect to see similar, almost identical, requirements as GASB 67 & 68, e.g. Net OPEB liability, OPEB Expense, etc.

• Actuarial Valuation at least every two years

• Alternative Measurement Method (AMM) still available

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Wrap-up

• GASB 67 & 68 only apply if pension benefits are administered through a trust

• Net Pension Liability to be recognized on the balance sheet

• Pension Expense to be recognized on the income statement

• Increased complexity and costs

• Expect to see identical changes to OPEB and unfunded pensions very soon…

Tips to Ensure Proper Valuation

• Provide census on all employees in the health plan (determining IRS)

• Value of assets as of valuation date provided in data collection agrees with prior financial statement

• Double check summary of benefits when accepting the proposal

• Remember to include salaries for those receiving an OPEB or Pension benefit

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Tips Continued

• On retire spreadsheet of future benefits be sure to include a date “as of”

• If you have a trust for OPEB and Pension wherein there is a small pension liability, you may want to speak with the trust administrator and investment manager about changing the trust to just OPEB (avoiding additional costs and accounting of the Pension benefit)

Thank you