League of Minnesota Cities Fiscal Futures Policy Committee

1. League of Minnesota CitiesFiscal Futures Policy Committee August 28, 2013 Presented by: Dave DeJonge, Assistant Executive Director, PERA

2. GASB 67-68 Accounting Changes • Governmental Accounting Standards Board (GASB) will dramatically alter accounting rules for pension funds and their sponsoring employers (school districts, cities, counties, state) starting in FY 2015. • GASB changes will: • Make pension costs more prominent on employers’ financial statements – each entity’s share of PERA’s unfunded liability must be shown on face of government-wide financial statements. • Make annual pension costs appear larger and volatile – giving the incorrect impression that employers are shouldering an immense debt that they must pay off immediately, when pension funding actually works much like a home mortgage.

3. Existing Pension Principles--Employers • Pension costs for employers are directly related to when those costs are funded • Pension expense = contributions paid to PERA • Pension liability recognized only if contributions paid to PERA are less than required by statute • Pension plan (PERA) discloses unfunded liability in footnotes and Required Supplemental Information

4. New Underlying Principles • Pensions are part of the employee/employer compact. • Pension costs are a deferred part of total compensation. • Employer incurs a pension obligation as a result of “employment exchange.” • Cost/expense should be recognized in period that services are provided. • Plan responsible for paying benefits if plan has sufficient assets. • Employer responsible if plan does not have sufficient assets. • Difference between total pension liability and plan’s net assets is the “net pension liability” allocated to employers and included in government-wide financial statements. • Pension costs developed on accounting basis, not funding or contribution basis. • Totally different from current GASB standards. • Disconnect between accounting numbers, funding numbers. • PERA will calculate annual pension costs for employers.

5. GASB Statement 68 Impact on Employer Units (FY2015) • Government-wide financial statements, not fund-level statements. • PERA’s actuary develops actuarial valuation reports every 6/30/xx. Results ready by 12/1/xx. • PERA will calculate proportionate share assigned to each employer unit (based on employer contributions). • PERA prepares pension costs, disclosure data, Required Supplementary Information for each employer in December. • Large unfunded actuarial liabilities exist ($6 billion). Result: • Many employers will experience sticker shock at their share of the net pension liability. (Remember: Liabilities are paid over decades.)

6. GASB Statement 68Impact on Employer Units • Annual changes in Net Pension Liability will generally be reported as pension expense as they occur. • Normal Cost for active members • Changes due to plan amendments for any members. • Change in actuarial assumptions for inactives/retirees. • Experience gain/loss for inactives/retirees. • Exceptions (deferred inflows/deferred outflows): • Experience gain/loss and assumption changes for actives, change in allocation amortized over average work lives of all active and retired members. (Estimated eight years.) • Difference between assumed and actual rate of return on investments is recognized over a five year period. • Will create volatility in pension expense.

7. How GASB 68 Affects Employers

8. How GASB Affects Employers • GASB changes will force employers to show their portion of the pension system’s unfunded liability on financial statements. Using cities as an example: NOTE: Allocation of unfunded liability is estimated.

9. GASB Statement No. 68 Footnote Disclosures • Notes to Financial Statements for FY ended June 30, 2015 • Employer’s share of pension assets, pension liabilities, deferred outflows/inflows of resources, pension expense • Public pension plan description (plan type, benefit provisions, contribution requirements) • Actuarial Assumptions (inflation, salaries, mortality tables) • Discount rate used to measure liabilities and how it was determined • Investment portfolio information (asset allocation, rates of return for each asset class) • Sensitivity analysis on the impact on NPL of a one percentage increase and decrease in the discount rate. • Other: Numerous (paragraph 80), including 2 schedules

10. GASB Statement No. 68 Required Supplementary Information • Required Supplementary Information (RSI) • Ten-year trend schedules • City’s proportionate share of net pension liability • City covered payroll • Net pension liability as a percent of covered payroll • Funding Ratio • Schedule of employer contributions • Statutory contributions required and % paid • Contributions as a percent of covered payroll • GASB grace: Only go back retroactively if data is present.

11. GASB 67-68 Timeline: Measurement Date for Cities Cities use 6/30/15 actuarial valuation results Release of 6/30/15 actuarial valuation results Actuarial valuation measurement date PERA publishes results Measurement Period Dec. 1, 2015 December 31, 2015 June 30, 2014 June 30, 2015 • Key point: There will be a 6 month lag in reporting of GASB 68 results. Example: Cities, in their FY 2015 reporting, will use PERA’s FY 2015 actuarial valuation results, audited by the Legislative Auditor’s Office.

12. What is PERA Working On in 2013?

13. Future Activities

14. Next Steps • Stay in tune with GASB 67-68 – talk with your accountants, auditors, boards • If you have questions, send them to Dave DeJonge at PERA:dave.dejonge@mnpera.org • The statewide retirement systems will provide more information and training in 2014 and 2015. • Visit the “employer” tab on PERA’s website: www.mnpera.org