GASB 68—The New World of Employer Pension Accounting and Reporting

1. GASB 68—The New World of Employer Pension Accounting and Reporting December 17, 2013 Presenter: Dave DeJonge, PERA Moderator: Gary Carlson, LMC

2. Agenda • Background • Summary of Provisions • Net Pension Liability • Pension Expense • Footnotes • RSI Schedules • What PERA Will Provide • Audit Issues • Next Steps

3. Background • GASB 68 applies to pension plans (DB and DC) administered through a trust in which: • Contributions from employers and non-employer contributing entities are irrevocable; • Plan assets are dedicated to providing pensions to plan members; and • Plan assets are protected from creditors of employers, the plan administrator, and plan members.

4. Background • There are several reasons GASB made changes to pension accounting and reporting standards: • GASB 34 required employers to develop full accrual government-wide financial statements; • GASB concept statement 4 defined liabilities that need to be shown on the face of the financial statements; • Users of financial statements requested more information about unfunded pension liabilities; and • GASB’s emphasis is on comparability between reporting entities and the use of similar accounting standards with the international/corporate community

5. Background “The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations. Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.” Former GASB Chairman Robert Attmore

6. Effective Dates • GASB 67, Financial Reporting for Pension Plans, is effective 6/30/14 for PERA • GASB 68, Accounting and Financial Reporting for Pensions, is effective for fiscal years beginning after 6/15/14 • Cities: Effective Date 12/31/2015 • School Districts: Effective Date 6/30/15

7. Current Standards • Pension costs are directly related to funding. • Pension Expense is equal to an employer’s contributions paid to PERA. • A Pension Liability is only booked if the employer’s required contributions were not fully paid. • PERA’s unfunded liability is disclosed in PERA’s footnotes. • Footnote disclosures are limited to a description of benefits and contribution amounts for 3 years.

8. Summary of Provisions • The Net Pension Liability (NPL) replaces the Unfunded Actuarial Accrued Liability (UAAL). • The NPL is calculated differently than how we calculate the UAAL. • The annual change in the NPL is recognized as Pension Expense or Deferred Inflows/Outflows of Resources, depending on the nature of the change. • GASB assumes the employer is ultimately responsible for paying off any unfunded liability.

9. Summary of Provisions • Employers include their proportional share of the NPL and Pension Expense on the face of their government-wide financial statements. • Each employer’s proportional share will be determined based on contributions paid to PERA during the measurement period. • New extensive footnote disclosures will be required. • Two new RSI schedules will be required.

10. Net Pension Liability (NPL) • Equal to the Total Pension Liability (TPL) minus PERA’s Fiduciary Net Position. • Similar to Unfunded Liability calculation except:

11. Net Pension Liability (NPL) • The NPL will be allocated to all of PERA’s employers and included as a liability on the government-wide financial statements. • The allocation method will be based on employer’s contributions paid to PERA in relationship to all employer contributions received.

12. Net Pension Liability (NPL) • Calculated as of a “Measurement Date” which will always be June 30, PERA’s fiscal year end. • Measurement Date must be no earlier than the end of the employer’s prior fiscal year. Prior Fiscal Year End Employer’s Fiscal Year End Measurement Date June 30, 2015 December 31, 2014 December 31, 2015 June 30, 2014

13. Net Pension Liability (NPL) • Estimate of NPL for General Plan: 2013 PERA Contribution / $375,000,000 x $4.5 Billion • Estimate of NPL for Police & Fire Plan: 2013 PERA Contribution / $126,000,000 x $1 Billion

14. Pension Expense (PE) • No longer tied to funding (contributions) • Directly tied to changes in the NPL from one year to the next • Must be calculated by PERA’s actuary • Will likely be very volatile • May be a negative expense (revenue)

15. Pension Expense (PE) • Calculated during the “Measurement Period” ending on the Measurement Date, always 6/30/20xx Measurement Period Prior Measurement Date Prior Fiscal Year End Employer’s Fiscal Year End Measurement Date June 30, 2015 December 31, 2014 December 31, 2015 June 30, 2014

16. Pension Expense (PE) • NPL Components immediately recognized in PE:

17. Pension Expense (PE) Components deferred and recognized later include:Deferred portions are accumulated as “deferred outflows of resources” or “deferred inflows of resources” and recognized as PE in future years.

18. Example

19. Employer Contributions • During the measurement period • Directly reduce NPL (no expense impact) • Subsequent to measurement date • Deferred outflow of resources related to pensions • Directly reduce NPL in next reporting period

20. Employer Contributions • Booking ER Contrib. during the Employer’s fiscal year Measurement Period Prior Measurement Date Prior Fiscal Year End Employer’s Fiscal Year End Measurement Date Reduce NPL Def Outflows June 30, 2015 December 31, 2014 December 31, 2015 June 30, 2014

21. Footnote Disclosures

22. Footnote Disclosures

23. Footnote Disclosures

24. Footnote Disclosures

25. Footnote Disclosures

26. Required Supplementary Information (RSI) • Two 10-year schedules • May be built prospectively • Separate schedules for each pension plan • PERA’s General Employees Retirement Fund • PERA’s Police & Fire Fund • MERF • Notes to RSI will include significant changes in actuarial assumptions, benefit provisions, etc. that affect the identification of trends in RSI schedules

27. Required Supplementary Information (RSI) CITY’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY PERA General Employees Retirement Fund Last 10 Fiscal Years* (Dollar amounts in thousands) 6/30.

28. Required Supplementary Information (RSI) PERA General Employees Retirement Fund Last 10 Fiscal Years (Dollar amounts in thousands)

29. What Will PERA Provide? • Total Pension Liability (Collective Level) • PERA’s Fiduciary Net Position • Total Net Pension Liability • Total Pension Expense/Deferred Inflows & Outflows • Proportionate Share for Each Employer • Employer Contributions (Individual and Collective) • Footnote Disclosure Information

30. Audit Issues • The Net Pension Liability, Pension Expense, and other pension costs will come from PERA • Allocation of employer proportional shares is not a schedule that is required to be audited by PERA’s auditor as part of the financial statements • How does an employer get comfortable that these amounts as of the measurement date are accurate and verifiable?

31. Audit Issues • AICPA Audit Standards & Recommendations are being developed (Guidance within 30 days) • Employer Allocation, NPL, Pension Expense numbers from PERA will be audited by the Legislative Auditor’s Office • Will the City’s auditor need anything additional in order to issue an unqualified opinion?

32. Summary

33. Summary • New accounting numbers are unrelated to funding • Contribution rates still set in MN State Statute • Three ways to measure pension fund status: • Books—GASB 67-68 for CAFR publication • Budget—GASB 25 actuarial reports for funding • Bonds—Moody’s: 5.5% investment assumption, 17 year amortization period

34. Next Steps • GASB 68 Toolbox • “How To” Videos • Basic Concepts • Calculating Pension Costs • Determining Proportionate Shares • Deferred Inflows/Outflows of Resources • Pension Accounting Journal Entries • Transition Year Transactions • Footnote Disclosures • Accounting for Changes in Proportionate Share

35. Next Steps • GASB 68 Toolbox (Contd.) • Spreadsheets/Templates • Calculating Pension Expense • Calculating Deferred Inflows/Outflows of Resources • Maintaining Deferred Inflow/Outflow Balances • Calculating Employer’s Share of the NPL • Contribution Reconciliation • Implementation Guide for Employers • Talking Points for Governing Boards

36. More Information • GASB Website—Educational Resources • Podcasts • Fact Sheets • PERA’s Website—Employer tab • GASB 68 Toolkit • Contact Dave DeJonge dave.dejonge@mnpera.org