2011-12 Financial Statements Changes

1. 2011-12 Financial Statements Changes Information Session for School Boards and External Auditors Financial Analysis and Accountability Branch Fall 2012

2. Employee future benefit plan changes, New Sick Day plan and Regulatory Amendments

3. Agenda • Employee future benefits background • Provisions in Memorandum of Understanding • Changes to Employee future benefits • New Sick Day Plan • Impact of Plan Changes • Accounting for Plan Changes • Impact to 2011-12 Financial Statements • Impact to 2012-13 Revised Estimates • Regulatory Changes • Legislation

4. Employee Future Benefits Background • Retirement Gratuity liability (vested sick days) represents the accumulated sick days that are paid out as a lump-sum to an employee upon retirement • Post Employment/compensated absences liability consists mainly of accumulated (non-vested) sick days for use as future paid sick leave • Retirement Gratuity Plans vary across boards • Some boards have a minimum years of service requirement • Some boards have % payouts which vary from 35% - 50% • Some boards have capped payout amounts • Boards vary in the maximum number of allowable accumulated days

5. Retirement Gratuity Plans • The most common type of Retirement Gratuity Plan offered is: • 20 or 24 sick days per year with any unused days accumulated up to a maximum number (200 or 260 days in many plans), of which 50% may be paid out at retirement (equivalent to half a salary at retirement) • Some boards have closed their retirement gratuity plans by limiting them to employees hired before a certain date and have offered new employees other benefits in lieu (hybrid plans): • Some boards offer yearly lump-sum payments based on the number of unused sick days which can be contributed to an RRSP • Other boards offer a payout for each day over and above a maximum number of accumulated days • Provisions in the Memorandum of Understanding apply to all forms of retirement gratuities – all forms of retirement gratuities will cease

6. Retirement Gratuity Plans Cont’d • Approximately 40% of boards currently have open plans (retirement gratuity available to all employees), while most others have closed or hybrid plans (grandfathered plan to employees hired before a certain date and new reduced provision for newer employees) • For boards with open plans, future benefit expenses have continued to increase every year as new teachers enter the plan • The liabilities for boards with open plan have been increasing at a more rapid pace than those boards with closed or hybrid plans • Currently, boards have few reserves set aside to provide for future cash payout of retirement gratuities

7. Retirement - Health, Life and Dental benefits • Represent benefits for retirees up to the age of 65 • Incidence rates for retirees are higher creating higher premium rates than those for active employees • However, many collective agreements allow retirees to continue paying the premium rate of an active employee • For many boards, retirees are included in the same experience pool as active employees for health, life and dental benefits and therefore, benefit from a lower premium rate than they otherwise would have paid if they were in a separate experience pool • Some boards also partially fund the premium paid by retirees • The structure of these plans has created an unfunded liability for the Ministry that is growing at approximately $25M per year • Variation in degree of benefits provided across boards

8. Memorandum of Understanding (MOU) • Ontario English Catholic Teachers Association (OECTA), Association des enseignantes et des enseignants franco-ontariens (AEFO), Association of Professional Student Services Personnel (APSSP), Education Assistants and the Ministry of Education negotiated a new collective agreement that outlines new provisions related to employee future benefits: • Changes to retirement gratuities plan • Eliminates non-vested sick days • Provides for a new short-term sick leave plan • Restricts current health/dental/life benefits received after retirement to existing retirees and to new retirements in 2012-13 • Changes will significantly reduce boards’ unfunded liabilities and related expenses • Result in one-time savings for boards and on-going savings

9. Highlights of MOU Retirement Gratuity and Non-vested sick days • Effective August 31, 2012, employees currently eligible for a retirement gratuity shall have accumulated sick days vested, up to the maximum eligible under the retirement gratuity plan • Upon retirement, employees eligible for retirement gratuity as at August 31, 2012 shall receive payout based on employees’ current accumulated vested days (up to maximum eligible amount under plan) and years of service and salary at that date. • Effective September 1, 2012, all accumulated non-vested sick days shall be eliminated

10. Highlights of MOU Short-term sick leave and disability plan (STLDP) • Employee shall be paid 100% of regular salary for up to 10 non-accumulating days of absence due to illness and; • shall be entitled up to an additional 120 days short term sick leave paid at 66.67% of regular salary and; • be eligible for 90% of regular salary (short-term leave and disability plan) in accordance with the provisions in MOU • An employee is eligible for STLDP under the following conditions (subject to third party adjudication process): • All, or any part of, an absence of 5 consecutive work days, occurs beyond the 10 sick leave days paid at 100% • An absence of any duration beyond 10 sick leave days paid at 100% salary due to an ongoing or intermittent medical condition, such as recurring illness or any form of chronic condition

11. Short-term sick leave plan - Examples Example 1: An employee has used 10 sick days paid at 100% and requires an additional 2 consecutive or non-consecutive days off - The employee would be paid 66.67% for the 2 additional days Example 2: An employee has used 10 sick days paid at 100% and takes an additional 7 consecutive days off - The employee would be paid 90% for the 7 additional days - subject to 3rd party adjudication Example 3: An employee has used 10 sick days paid at 100% and takes an additional 5 non-consecutive days off due to an on-going illness - The employee would be paid 90% for the 5 additional days subject to 3rd party adjudication

12. Highlights of MOU Benefits After Retirement for Health, Life and Dental • As of September 1, 2013 any new retiree who has access to health/life/dental benefits and pays premiums for such benefits shall be included in an experience pool segregated from all active employees, such that the pool is self-funded. • As of September 1, 2013, no new retirees shall be eligible for employer contributions to any post-retirement benefits (retiree pays 100% of premium). • Existing retirees and any employee retiring before September 1, 2013 will continue to be included in the experience pool in which they are presently included and pay appropriate premiums. Employer contributions where they exist will continue.

13. Highlights of MOU WSIB and Maternity Leave • WSIB benefits shall be maintained in accordance with 2008-2012 local collective agreement. Where the WSIB top-up is deducted from sick leave, the board shall maintain same level of top-up without deduction from sick leave. • WSIB liability is expected to increase for those boards that have top-up arrangement in place. • For those boards who are not self-insured for WSIB (Schedule 1 employer) and therefore did not report a liability before, will now report a liability for the top-up portion. • The level of top-up provided to an employee will be based on provisions in previously negotiated collective agreement • For employees who have run out of sick days, top-up re-instated Sept 1st • Employees shall receive 100% of salary for not less than a 6 week period following the birth of a child.

14. Accounting Treatment for Retirement Gratuity • Actuarial assumptions used in valuing the retirement gratuity obligation prior to the plan change included future salary escalation and the future banking and usage of sick days and future increases in payout factor based on service • With the current plan change, future payout is frozen at August 31, 2012 salary, further accumulation and usage of banked sick days is eliminated, and employees’ years of service is recognized as of August 31, 2012 • As a result of the plan changes, most boards will experience a one-time change to their obligation and future years’ expenses • Most boards will experience a reduction to their obligation and expenses, few boards may experience an increase • The degree to which the obligation and expenses change will depend on whether boards have open or closed plans and on the parameters of the plan that existed before the change (ie. capped payouts, eligibility criteria, etc..) • Future services of employees will no longer qualify for benefits and therefore changes to the plan will be deemed a plan curtailment

15. Accounting Treatment for Retirement Gratuity • PSAB 3250.075 defines a plan curtailment as an event that significantly reduces the expected years of future service of present employees, or eliminates the accrual of defined benefits for some or all of their future services • As a result of the plan changes, boards will report a curtailment gain or loss • This will impact how existing unamortized actuarial gains/losses are recognized • PSAB handbook section 3250.078 states: gains and losses determined upon a plan curtailment should be accounted for in the period of curtailment • Therefore, all existing unamortized gains and losses prior to the plan change should be recognized when determining a curtailment gain or loss • Actuaries will provide the calculated curtailment gain/loss and new liability to school boards • If boards in consultation with auditors disagree with approach, they should call the ministry for further discussion

16. Accounting treatment for Retirement Health, Life and Dental • With the current plan change, most employees who were once eligible to pay the “blended” employee’s health and dental premium rate upon retirement and/or receive further subsidization of premiums from the board when retired, are no longer eligible • As a result of the plan changes, most boards will experience a one-time change to their obligation and future years’ expenses • The degree to which the obligation and expenses change will depend on demographics, the parameters of the plan that existed before the change, etc.. • As there is a significant reduction in the number of employees who can now qualify for these benefits, this change will be deemed a plan curtailment • Only those who are currently retired or will retire on or before August 31, 2013 can qualify for these benefits

17. Example of curtailment gain calculation Board A Accrued benefit obligation (ABO) before plan change :$1,500,000 Unamortized actuarial losses :$ 200,000 Liability before plan change :$1,300,000 ABO after plan change :$ 700,000 Reduction in ABO (gain) :($ 800,000) Reduced by unamortized act. losses : $ 200,000 Total curtailment gain to be reported :($ 600,000) Liability after plan change : $ 700,000 Entry Dr. Liability 600,000 Cr. Curtailment Gain 600,000

18. Impact to 2011-12 Financial Statements • The impact of plan changes for retirement gratuity and retirement health, life and dental changes will come into effect August 31, 2012, and will need to be reflected in the 2011-12 financial statements • The following changes will occur : • One-time reduction to boards’ closing retirement gratuity and health, life and dental obligation will be disclosed in 2011-12 • This will result in one-time savings to the board which will remain “out of compliance” in 2011-12 • The impact of plan changes for non-vested sick days will come into effect September 1, 2012,however, the liability will be eliminated for 2011-12 Financial Statements and the gain reported “out of compliance” • Note(s) will be required disclosing the changes made to employee future benefit plans and its impact, as well as the date legislation was passed • For reporting purposes, the Ministry advises boards to have an actuarial valuation done as at August 31, 2012 based on the provisions agreed upon in the MOU even though some boards are not scheduled for review

19. Impact to 2012-13 Revised Estimates Reporting for Compliance Purposes • 2012-13 Estimates included the phase-in of the difference between cash and PSAB expense for Retirement Health, Life and Dental, however, this will change for 2012-13 Revised Estimates • 2012-13 Revised Estimates will now include the full PSAB expense and the phase-in of the Retirement Health, Life and Dental liability over a maximum of 10 years • Boards will still be required to phase into compliance the gap between PSAB expense and cash for all other employee future benefits (Long-term disability, WSIB and other) within the next four years • This change will help contain the rate at which the unfunded portion of these liabilities increase over time • The opening liability for all other employee future benefits (LTD, WSIB) will remain out of compliance. • 2011-12 full actuarial evaluation should be used to prepare the Revised Estimates

20. Impact to 2012-13 (1) Cash expenditure in the past included pay-out for people that retired that year. Boards will now manage their PSAB expense and the phase-in of their retirement gratuity liability. Conceptually, over EARSL these two approaches would add to the same amount.

21. Example - Phasing in Retirement Gratuity/Retirement Health, life and dental liability for 2012-13 A • For 2012-13 Revised Estimates, $100,000 would be reported on schedule 10 representing the in year PSAB expense, and $100,000 would be reported on Schedule 10 ADJ to include the amortization of the retirement gratuity over a period of 15 years. • In previous years, only $150,000 would have been reported in compliance on Schedule 5. • For 2012-13, $200,000 will now be reported in compliance on Schedule 5. • This method should also be applied to Retirement Health, Life and Dental liability.

22. Multi-year example of Retirement Gratuity Phase-in (1) Assumes EARSL of 10 years

23. 4 Year phase-in of Other Employee Future Benefits – 2012-13 Revised Estimates Note: For 2012-13 Estimates, this method was used to phase in the Retirement Health, Life and Dental benefits. For 2012-13 Revised Estimates, boards should report the full PSAB expense and phase-in the liability over 10 years for retiree benefits.

24. Schedule 10 and 10ADJ 2012-13 Revised Estimates- 4 Year phase-in Note: For 2012-13 Estimates, this method was used to phase in the Retirement Health, Life and Dental benefits. For 2012-13 Revised Estimates, boards should report the full PSAB expense and phase-in the liability over 10 years for retiree benefits.

25. Regulatory Amendments Amendments will be made to Education Act beginning September 1, 2012 to reflect changes in the new Memorandum of Understanding: • O. Reg. 488/10 – “Determination of Boards’ Surpluses and Deficits” • amended to reflect the impact of the changes in retirement gratuity and retiree benefits and • O. Reg. 193/10 – “Restricted Purpose Revenues” • amended to reflect provision in MOU which requires approval of the Minister of Education on any withdrawal of monies by school boards from any health care benefit plan reserves, surpluses or deposits

26. Impact of changes – Reg. 488/10 Beginning September 1, 2012 • Changes to Reg. 488/10 will require boards to manage their in-year PSAB expense and phase-in their unfunded liabilities for retirement gratuity over the boards’ EARSL in accordance with the approach used in 2012 Estimates • Ministry is also amending the same regulation to allow school boards to manage unfunded retirement gratuity liabilities over a shorter period than the boards’ EARSL • Changes to Reg. 488/10 will also require boards to manage their in-year PSAB expense and phase-in their unfunded liabilities for retirement health/dental/life benefits for a period up to 10 years • Changes will require boards to phase-in the gap between their PSAB expense and cash for other employee benefits (excluding retirement gratuity and health, life and dental benefits) over a period of 4 years

27. Impact of changes – Reg. 193/10 • Currently, some boards may be running surpluses on their self-funded insurance plans (ie. health, life and dental). Surpluses arise from a board paying more in premiums than in claims and administrative costs for health care benefits in any one year • Given existing provisions in the MOU, boards will now be required to request Ministry approval if they choose to withdraw money from a health care benefit plan surplus or reserve • Amendment to Reg. 193/10 will restrict application/use of surpluses refunded to the board for the purpose of providing insurance or services under subsection 177 (1) of the Act • Boards must request approval from the Ministry if they want to use such surpluses for purposes other than for providing insurance for employees • Approval form and SB memo will be issued shortly

28. Legislation Bill 115 - Putting Student First Act, 2012 • Establishes a restraint period of 2 years beginning September 1, 2012 • Sets out requirements for terms to be included in the employment contracts and collective agreements • Collective agreements must include terms that reflect the MOU or the terms of other negotiated collective agreements • For employees who do not bargain collectively, provisions in the current MOU will apply • No further accumulation of sick days and a sick banks will be frozen • Payout of retirement gratuity will be based on teachers’ salary and accumulated sick days as at August 31, 2012 • Non –vested sick days will be eliminated • New sick day plan (10 non-accumulated sick days at 100% pay, remaining at 66.67% pay or 90% pay where STDLP applies) • Health, life and dental post-retirement benefits will be grandfathered

29. Questions? 29

30. 2011-12 Audit Report and Notes to the Financial Statements Financial Analysis and Accountability Branch

31. Summary of Changes • Audit Report • Management Report • Note 1 – Significant Accounting Policy • Note 2 – Change of Accounting Policy • Note 6 – Deferred Capital Contribution • Note 7 – Retirement and Other Employee Future Benefit • Note 20 – Budget Data • Note 21 – Subsequent Event

32. Audit Report • After the 2010-11 Financial Statements were prepared, Ontario Regulation 395/11 (Financial Administration Act, Accounting Policies and Practices) came into effect. • This regulation gives specific direction on how to account for deferred capital contributions (DCC). • Reporting framework last year: PSAB and Ministry of Education direction – Special purpose fair presentation • Reporting framework this year: PSAB with the exception of revenue recognition for capital contributions (Reg 395/11) – General purpose compliance presentation • Emphasis of Matter paragraph will be incorporated, drawing users’ attention to the additional disclosure • Will no longer include the phrases “present fairly, in all material respects” or “fair presentation”

33. Management Report • Updated Management Report to indicate financial statements have been prepared in accordance with the financial provisions of the Financial Administration Act, Ontario Ministry of Education memorandum 2004:B2 and the accounting requirements of Ontario Regulation 395/11of the Financial Administration Act

34. Note 1 – Significant Accounting Policy • Basis of Accounting – Note 1 (a) • Prepared in accordance with the financial reporting provisions of the Financial Administration Act, Ontario Ministry of Education memorandum 2004:B2 and the accounting requirements of Ontario Regulation 395/11 of the Financial Administration Act • Note includes requirements of Ontario Regulation 395/11 • Retirement and other employee future benefit – Note 1 (g) • Budget Figures – Note 1 (l)

35. Note 2, Note 6 and Note 20 • Note 2 is deleted as there is no change of accounting policy this year • Note 6 – Deferred Capital Contributions: Prior year restatement column is deleted • Note 20 – Budget Data: note is deleted this year as there is no restatement from budget

36. Note 21 – Subsequent Events • The Bill was introduced August 27th, 2012, prior to the date of the financial statements • Numerous provisions in the Bill require consistency with the Memorandum of Understanding (MOU) signed July 5th, 2012 between EDU and OECTA • MOU requires changes to the Employee Future Benefit plans – this will impact the actuarial estimates for 2011-12 Financial Statements purposes

37. Note 21 – Subsequent Events • PSAB 2400.09 states that “Financial statements should be adjusted when events occurring between the date of the financial statements and the date of their completion provide sufficient, additional evidence relating to conditions that existed at the date of the financial statements” • As their was sufficient evidence at the date of the financial statements (the Bill was introduced and MOU signed), the Ministry believes an adjustment should be made

38. Note 7 – Retirement and Other Employee Future Benefits • Added disclosure for plan changes in accordance with MOU/legislation. • Actuary assumptions and estimates for 2011-12 should reflect impact plan changes

39. Questions?

40. Major changes in 2011-12 Financial Statements

41. Major changes in 2011-12 Financial Statements • Import data file for opening balances and budget amounts • Import data file is available for download in EFIS under the Reports module • Save the file and change the file extension from “.ASP” to “.CSV” • use “Import cell value” button to populate the EFIS submission • Imported values can be over-written if restatement of opening balances is required. • Executive Office restraint attestation form • Not in EFIS forms but part of the submission package • Attachment to 2012 SB memo# XX and available in FAAB website for download

42. Major changes in 2011-12 Financial Statements • Schedule 1.2 – Consolidated Statement of Cash Flow • Realign some sources of cash to proper categories • A/R and deferred revenues are separated into operating and capital, where the capital related items are under financing transactions • Change in deferred capital contributions (DCC) are broken down into different components. DCC revenues are classified as non-cash items while the additions/(disposal) from DCC are financing transactions • Long term liabilities issued and debt repayment/sinking fund contributions are changed from input to pick up from Section 12

43. Major changes in 2011-12 Financial Statements • Schedule 3 – Capital Expenditures • Headings change to align with the names used in CAPT • A new page 9 is added to report capital spending by project on existing buildings funded by Capital Priorities Grant – Major Capital Programs. • Schedule 3C – Tangible Capital Assets • For assets that are reported through the assets upload process, the “adjustment to opening balance” data entry is re-activated for input. • It should only be used for material adjustment agreed by the auditors to restate the opening balances. • Any immaterial adjustment should be treated as in-year transactions. • For assets that are not reported through the assets upload process, the opening balance restatement can be done directly to the opening balance column

44. Major changes in 2011-12 Financial Statements • Schedule 5 – Accumulated Surplus/(Deficit) • A new column is added to report the transfer of accumulated surplus to internally appropriated for committed capital or to Revenues recognized for land. • Another column is added for boards to adjust the pre-loaded unfunded employees’ future benefits (EFB) opening amounts if it is different from the liabilities amounts reported in Schedule 10G. The difference is due amounts that boards have funded in the past.

45. Major changes in 2011-12 Financial Statements • Schedule 5 – Accumulated Surplus/(Deficit) • Employees’ future benefits (EFB) are broken down into 4 categories for transition into 2012-13 and different compliance calculations: • Retirement gratuities (Closing 2011-12 liabilities to be amortized over EARSL or a shorter period starting in 2012-13) • Post employment benefits/compensated absences related to non-vested sick days. (Closing 2011-12 liabilities will be zero as the non-vested sick days will be eliminated as of September 1st, 2012) • Retirement Health, Dental, Life Insurance Plans, etc. (Closing 2011-12 liabilities to be amortized over 10 years or a shorter period starting in 2012-13.) This is a recent regulation amendment. • Other Benefits (In-year change in the liabilities will be phased into compliance calculation over a 4 years period starting 2012-13)

46. Major changes in 2011-12 Financial Statements • Schedule 5.1 – Deferred Revenues • New lines added • Line 1.28, Tuition Fees – International/VISA students • Line 2.6.2, Green School Pilot – capital deferred revenues • Line 2.27, Assets Held for Sale • Lines consolidated • Line 2.25, Proceeds of Disposition – School Buildings and line 2.26, Proceeds of Disposition – Prohibitive to Repair School Buildings are now combined. • Line removed • Line 1.4.3, Interest on multi-year Capital Lease - Full Day Kindergarten is removed

47. Major changes in 2011-12 Financial Statements • Schedule 5.2 Accounts Receivable – Approved Capital and Schedule 5.3 Deferred Capital Contribution • A new column is added in both schedule for reporting any prior year capital grant entitlement adjustment received in the 2011-12 school year • Schedule 5.5 – List of committed capital amounts funded by accumulated surplus • A new column, col. 2, is added for boards to identify if the project funded by accumulated surplus being approved by the Ministry • Schedule 9 – Revenues • Two new cells are added under item 8.3 for tuition fees collected from international VISA students. One for transfers from deferred revenues and the other one is for fees recorded as revenues through the accrual approach.

48. Major changes in 2011-12 Financial Statements • Schedule 10G - Supplementary Information on Retirement Benefits, Post-employment Benefits, Compensated Absences and Termination Benefits • Format changed to be consistent with the 2012-13 Estimates • EFB divided into 4 categories (same as those in Schedule 5) • The line for change in benefit liabilities due to plan amendments negotiated in current year is removed. • New column to capture impact of MOU benefits plan changes (retirement gratuities. Retiree benefits, post employment/compensated absences)

49. Major changes in 2011-12 Financial Statements • Schedule 13- Enrolment • Items 4.1 – 4.2, the number of full time pupils enrolment in Full Day Kindergarten (FDK) approved sites are now pre-loaded based on the enrolment reported in ONSIS and the list of Ministry approved FDK sites. This information will be used in Appendix L to calculate the final Early Childhood Educator (ECE) funding under the Education Program – Other Grant (EPO).

50. Major changes in 2011-12 Financial Statements • Section 12 – Debt charges allocation • The Permanent debt retirement/NPF issues column is split into 2 columns. Column 2 for permanent debt retirement and Column 2.1 for NPF or capital lease issue. • A new section is added in the second page to capture sinking fund debenture retirement to distinguish between amount funded by the sinking fund assets and amount funded by the Ministry, if any, through cash payment rather than refinancing through OFA. • Data Form A2 – Special Education Envelope • A modification is made to show the envelopes for FDK special education EPO amount; Special Equipment Amount (SEA) and the regular Special Education Allocation separately. This is similar to the change in 2012-13 Estimates.