Pensions – Are We There Yet? October 12, 2017

1. TGFOA Fall Conference Pensions – Are We There Yet? October 12, 2017 Jerry E. Durham, CPA, CGFM, CFE

2. The Opinions expressed during this presentation are my own. They do not necessarily represent the views of the Tennessee Comptroller of the Treasury, his representatives, or the Tennessee Department of Audit.

3. Implementation Issues • The Real Problem • The other real problem • Information - Sheer complexity and involvement of outside parties • Actuary, auditor, census data Testing, Deferrals, Employer responsibility, Footnotes • Discount Rate • Measurement dates • Multiple plans • Allocations • GASB Statements 71, 73, 78, 82, 85 • GASB Statement 84 • Uniform Guidance • OPEb

4. The Real Problem

5. The Other Real Problem

6. Effective Dates—June 30 • 2015 • Statement 68—Pensions—Employers • Statement 69—Government Combinations and Disposals of Government Operations • Statement 71—Pension Transition for Contributions Made Subsequent to the Measurement Date • 2016 • Statement 72—Fair Value Measurement and Application • Statement 73—Pensions—Related Assets (outside scope of Statements 67 and 68) • Statement 76—Hierarchy of GAAP for State/Local Governments • Statement 79 – Certain External Investment Pools and Pool Participants

7. Effective Dates—June 30 • 2017 • Statement 73—Pensions Amendments to Certain Provisions of 67 & 68 • Statement 74—Financial Reporting – OPEB Plans • Statement 77—Tax Abatement Disclosures • Statement 78 – Pensions Provided through Certain Multiple-Employer Defined Benefit Plans • Statement 79 – Certain External Investment Pools and Pool Participants • Statement 80 - Blending Requirements for Certain Component Units • Statement 82 – Pension Issues • 2018 • Statement 75—Accounting and Financial Reporting – OPEB – Employers • Statement 81 – Irrevocable Split-Interest Agreements • Statement 82 – Pension Issues (Certain Provisions related to Assumptions) • Statement 85 – Omnibus 2017 • Statement 86 – Certain Debt Extinguishments • 2019 • Statement 83 - Certain Asset Retirement Obligations • 2020 • Statement 84 - Fiduciary Activities • 2021 • Statement 87 - Leases

8. Mission Impossible - Information

9. GASB’S Top Five Five Main Issues in the new standards 1. Placing the Net Pension Liability on the Balance Sheet 2. Decoupling Expense from Funding 3.Accounting for Cost-Sharing Plans 4. Expanding Disclosure Information (Notes & RSI) 5. Timing of Measurements, Effective Dates Implementation Guide, and AICPA Whitepapers, and 110 pages in 2015 AICPA Audit Guide

10. GASB Opening Thoughts • Financial statement recognition and disclosures don’t create pension obligations; instead, they simply make existing obligations more transparent. • Collectively, the changes in Statements 67, 68, and 71, represent major improvements in public pension reporting, and will make pensions more understandable and comparable. • Theoretically speaking then, 73, 78, 82, 84, and 85 do the same thing!

11. Information • Types of Plans • Census Data, Testing • Contributions • Measurement date • Discount rate • Allocations (Special Funding Situations, Contributions on behalf of Employees, Funds, component units, Cost-Sharing plans, Etc.) • Deferrals, Amortization schedules • Actuarial report (Actuary Competence) • value of plan assets

12. Actuary and TCRS Provided Information • Actuarial Certification Letter • Actuarial Report • Journal Entries • Footnotes to Financial Statements, RSI Schedules, RSI Footnotes • Census Data

13. State Audit Provided InformationWill Be Provided on LGA Website • Workpapers for Use of Specialist • Examination Engagement Report for Inactive and Retiree Census Data • Opinion Report on Two Cost Sharing Schedules • Opinion Report on Changes in Plan Net Position • Cost-sharing census data testing plan

14. Other information • Employer responsibility Memo or something similar for Each Employer • Cost sharing testwork from cpa firms • https://publicreports.treasury.tn.gov/

15. Discount Rate

16. 1) Project Benefit Payments The Basic Three-Step Approach for Defined Benefit Pensions For Active and Inactive Employees 25 40 62 80 2) Discount Future Payments Present Value of Payments How much money would I need to invest today to cover all the expected Retirement Benefits for this employee? TPL 3) Attribute to Employee Service Periods

17. Pension Plan Discount Rate Assumptions • Most states still use 7.5 to 8%, Is this realistic? • Calpers (the largest public fund): Current assumption 7% • Actual results: .6% in 2016 • 6.9% last three years • 5.1% last ten years • 7% last 20 years • Are plans taking on more risk to achieve targets? Too much risk? • What responsibility does the auditor have?

18. Measurement Date

19. Timing and Frequency—GASB 68 (Employer) Possible Approach RD = reporting date VD = actuarial valuation date MD = measurement date Each dot is one year • MD Possible Approach Possible Approach

20. Diverse year end dates • Component units • Utility Districts • School Districts • Authorities • Charter Schools • ETC.

21. Housing authority letter • xxxxxxxx, • Thank you for your assistance.  I located the email you referenced and our auditor has this information.  Our auditor is telling us because the TCRS data currently available is unaudited he has to give us a Qualified Opinion on our 2016 Audit.  According to our auditor this is true for all housing authorities with a year-end date of September 30 or December 31 because there is a 12 month cap on the age of the data and apparently TCRS will not have audited data until after our audit deadline of 9/30/2017. •  Housing Authorities are scored through a Public Housing Assessment System and having a Qualified Opinion on our audit will cause us to automatically lose a point and could lower the score from High Performer Status (90-100) to a Standard Status (70-89) and would cause the authority to lose a High Performer funding bonus.  While it probably will not affect our PHAS status this year it could in future years and may have this effect on other housing authorities now.  Also we would like to have a clean audit with no findings and this finding is beyond our control.  • I just want to notify TCRS and The State of Tennessee of the negative affect this is causing for several if not most housing authorities in Tennessee. • Sincerely, • Xxxxxxx xxxxxxxx, Executive Director • City Housing Authority

22. Multiple Plans

23. Allocations and More Allocations

24. Allocations • Funds • Enterprise Funds • Component units • Charter Schools • Special Funding situations • Separately Financed Specific Liabilities • Contributions made on behalf of employees • On-Behalf payments

25. Recalculating

26. GASB Recalculating 73, 78, 82

27. Accounting and Financial Reporting for Pensions and Related Assets that are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 73

28. Pensions Not In Scope of 68 • Do you Participate in a pension Plan other than TCRS? Yes ____ No __X__ ? • Do you make pension contributions on behalf of different funds (e.g. General Fund for Utility Fund) or other governments! Yes ____ No __X__ ? • If No, GASB 73 does not apply to you.

29. Pensions Not Administered through Trusts • Summary – 6/30/17 • Same purpose as if there were a Trust Arrangement • Only difference is, you don’t have Fiduciary Net Position because you can’t Net the Plan Assets against the Plan Pension Liability • Apply provisions of 67 and 68 in terms of calculations • Just don’t net assets and liabilities, and • Use a discount rate for a High-Grade Municipal Rate

30. Pensions Not Administered through Trusts • Summary – 6/30/17 • Same purpose as if there were a Trust Arrangement • Only difference is, you don’t have Fiduciary Net Position because you can’t Net the Plan Assets against the Plan Pension Liability • Apply provisions of 67 and 68 in terms of calculations • Just don’t net assets and liabilities, and • Use a discount rate for a High-Grade Municipal Rate

31. Pensions Provided Through Certain Multiple-Employer Defined Benefit Pension Plans 78

32. Pensions Not In Scope of 68 • Do you Participate in a pension Plan other than TCRS? Yes ____ No __X__ ? • If No, GASB 78 does not apply to you.

33. Pensions Not In Scope of 68 • Do you Participate in a pension Plan that is a union Pension plan rather than a government sponsored pension plan? Yes __X__ No ____ ? • If Yes, GASB 78 does apply to you. • This should have a effect on very few in the audience.

34. Exception - Certain Pension Plans • During the implementation of Statement 68 an issue arose regarding the ability of state and local governmental employers to obtain necessary information related to pensions that are provided through “certain” multiple-employer defined benefit pension plans. The objective of this Statement is to address that issue. • Difficult or impossible to get information

35. Exception - Certain Pension Plans • GASB’s Solution: • Remove these plans from the scope of gASB 68. GASB 68 no longer applies to these plans. • Utilize an old approach

36. Exception - Certain Pension Plans • Certain Pension Plans - Criteria: • Provided to employees of state or local governmental employers through a Cost-Sharing Multiple-Employer defined benefit pension plan. • That is not a state or local governmental pension plan • That is used to provide defined benefit pensions both to employees of state and local governmental employers and to employees of employers that are not state and local governmental employers • That has no predominant state or local governmental (either individually or collectively with other state or local governmental employers that provide pensions through the pension plan

37. Exception - Certain Pension Plans • Certain Pension Plans - Solution: • Requirements apply whether the government’s financial statements are presented in stand-alone financial reports or are included in the financial reports of another government • Pension expense should be recognized equal to the employer’s required contributions to the pension plan for the reporting period, and a payable should be reported for unpaid required contributions at the end of the reporting period • The only Pension Liability that will be presented is the amount of any unpaid required contributions

38. Pension Issues 82

39. Pension Issues • Practice Issue – Pension Issues • Three Issues Covered – Items covered in accountant Therapy: • The presentation of payroll-related measures in Required Supplementary Information • Deviations from Actuarial Standards of Practice for financial reporting purposes • Classification of payments made to employers to satisfy employee contribution requirements

40. Pension Issues • Practice Issue – Pension Issues • The presentation of payroll-related measures in Required Supplementary Information • “Covered Payroll” is the portion of compensation paid to active employees on which contributions to a pension plan are based, and upon which certain RSI ratios calculated (Often referred to Pensionable payroll) • “Covered employee payroll” is the payroll of employees that are provided with pensions through the pension plan (total payroll)

41. Required Supplementary Information Net Pension Liability Covered Payroll Note: Only 5 years are presented here; 10 years of information would be required 41

42. Required Supplementary Information Employer Contributions Covered Payroll Note: Only 5 years are presented here; 10 years of information would be required 42

43. Pension Issues • Practice Issue – Pension Issues • #2 • Deviations from Actuarial Standards of Practice for financial reporting purposes: • The Statement would clarify that a deviation, as the term is used in Actuarial Standards of Practice, is not considered to be in conformity with the requirements of Statements 67, 68, and 73 for the selection of assumptions in determining the total pension liability

44. Pension Issues • Practice Issue – Pension Issues • #3 • Does the government Pick-up any payments that the plan officially designates as employee contributions. Yes ____ No __X__ ? • If no, this part of GASB 82 will not apply to you. • Do we have anyone here that does pick-up employee contributions??

45. Employer-Paid Member Contributions • GASBS 67, Footnote 2—In some circumstances, contributions are made by the employer to satisfy plan member contribution requirements. If the contribution amounts are recognized by the employer as salary expense, those contributions should be classified as plan member contributions for purposes of this Statement. Otherwise, those contributions should be classified as employer contributions. (same description in 68 & 73 considered employer contributions) • Pension Expense Definition – Using footnote 2 would result in a change in pension expense. • Consideration for Cost-sharing plans in determination of allocation of NPL, Deferred Outflows/Inflows, & Pension Expense.

46. GASB 84 Fiduciary Activities

47. Jerry E. Durham, CPA, CGFM, CFE Questions?