Pension Trends & Understanding Changes to GASB 68

1. Pension Trends & Understanding Changes to GASB 68 Presented by Betsy Waldofsky, Finance Director & Leon Hank, Chief Finance Officer

2. About MERS • MERS is a nonprofit organization, independent from the State, that provides retirement plans for municipal employees • We listen and work in partnership with our members to deliver a superior value that meets their needs • We provide one-stop access to shared professional retirement services • MERS administers over 2,000 plans represented by 800 Michigan municipal employers and more than 100,000 participants

3. Trends in Retirement

4. Trends in Plans

5. Pension Trends – Plan Design Changes 2013, as of Q3 2010 2011 2012

6. MERS Defined Benefit Plan • Our Defined Benefit Plan is a multiple-employer plan meaning that assets are pooled for investment purposes but separate trusts are maintained for each individual employer • Each municipality is responsible for their own plan liabilities; we do not borrow from one municipality’s account to pay for another • This is in contrast to a single-employer plan run by a municipality or a cost-sharing multiple-employer planrun by the State • MERS does not have a “funded status” (each municipality has its own funded level) • 67% of all MERS’ 711 defined benefit and hybrid municipalities are funded over 70% • 108 municipalities are more than 100% funded

7. Distribution of Funded Percentage

8. What is Unfunded Liability? • Unfunded liability is simply the difference between a pension or OPEB plan’s estimated benefits and assets that have been set aside to pay for them • The dollar value of the benefits is actuarially determined each year • Assets are held in a trust and are professionally managed

9. Why Do Unfunded Liabilities Occur? • Benefit improvements adopted • When municipalities don’t make et the minimal required contributions as determined by the actuary • Experience of the plan (investment experience and demographic experience) • This is the difference between what actually happens in the plan compared to the actuarial assumptions

10. Economic Vitality Incentive Program (EVIP) EVIP (for eligible cities, villages or townships) and CIP (for eligible counties) are revenue sharing packages for municipalities. • Include three categories of eligibility, each with its own set of requirements and deadlines, and • Offering 1/3 of the total available incentive revenue EVIP Category 3 addresses unfunded accrued liabilities Requires local units of governments with unfunded accrued liabilities in pensions or other post employment benefits to submit a plan to lower liabilities

11. Unfunded Accrued Liability Resources Web Resources EVIP Template • GASB 68 Resources • GFOA Resources • Webinars • Fact sheets • Glossary of Terms • How to communicate changes with your board • Strategic Partnerships • Michigan Municipal League • Department of Treasury • Michigan Local Government Management Association

12. Understanding Changes to GASB

13. New Pension Reporting Standards The Governmental Accounting Standards Board (GASB) issued two new standards that will substantially change the accounting and financial reporting of public employee pensions

14. Key Changes for 2015 Net Pension Liability (NPL) Net Pension Expense Deferred Outflows and Inflows Discount Rate

15. What is Net Pension Liability? Today: Future:

16. Net Pension Expense • Today • Annual Required Contribution (ARC) and Pension Expense are the SAME • Future • Annual Required Contribution (ARC) and Pension Expense are DIFFERENT

17. Deferred Outflows and Inflows Differences between projected and actual experience Changes in assumptions Difference between projected and actual earnings Similar to depreciation, spread out over future years

18. Discount Rate • Today • Public pension plans use the rate of return they expect on their investments (8% typically) • Future • Severely underfunded plans that do not make contributions must use a lower rate for some of their obligations

19. What will municipalities actually see?

20. The Bottom Line If pension is well-funded (95%), the liability is likely small If plan is less well-funded (60%), the new liability could be the largest number on your balance sheet These new rules may make local governments appear weaker

21. NPL Effects at 94% Funding

22. NPL Effects at 79% Funding

23. NPL Effects at 63% Funding

24. GASB Next Steps Communications • Municipalities need to find out what this means for them • Help explain reporting changes to board/council, media, and citizens to help them understand • Talk about long-term changes • Use resources • MERS • GFOA

25. Contacting MERS This presentation contains a summary description of MERS benefits, policies or procedures. MERS has made every effort to ensure that the information provided is accurate and up to date. Where the publication conflicts with the relevant Plan Document, the Plan Document controls. MERS of Michigan 1134 Municipal Way Lansing, MI 48917 Phone: 800.767.6377 Fax: 517.703.9707 www.mersofmich.com