UFOs, Greased Pigs, and Pensions Joint Accountants Meeting May 15, 2014

1. UFOs, Greased Pigs, andPensionsJoint Accountants MeetingMay 15, 2014

2. Show of hands… • Do you currently participate in a defined benefit pension plan? • Has your utility made significant changes to the pension plan in the last several years or is considering changing it soon?

3. Goals • Basic Pension Concepts • Awareness of New Rules for Recording Pensions • General Update on Other Pension Stuff (Tennessee Law, PBGC, Funding) Presented in no particular order

4. Defined Benefit Pension Plans • Why have a Pension Plan? • 1. Incentivize workers to not leave until retirement age • 2. Incentivize workers to leave at retirement age • Types of Plans: -Single Employer -Multiple Employer – group of employers treated as one plan -Multiple Employer - Agent: grouped for administration but separated actuarially

5. Multiple Employer Plan Examples Cooperatives: NRECA CSA Municipals: TCRS - Tennessee RSA – Alabama PERS - Mississippi CERS – Kentucky ERSGA – Georgia NCRS – North Carolina VRS – Virginia CSA

6. The worst and best funded… Market Valued Liability vs Actuarial Assets Statebudgetsolutions.org Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers by Cory Eucalitto | September 3, 2013

7. - Pay the required contribution and report it as expense - Add a footnote to their financials (that no one really understands) Currently most utilities account for pensions as …

8. Why the Analogy to UFO’s and Greased Pigs?

9. UFO - Unidentified Flying Objects -Pensions - Undeterminable Financial Obligations Greased Pig When you think you have it in your grasps it wiggles loose and sends you chasing after it again

10. How much has your employer recorded as a liability for the service that you have accrued? • How much SHOULD it accrue?

11. + Benefits Paid + Expenses – Investment ReturnNet Cost of Pension Calculate your cost….

12. Susie Sample: $50,000 X 25 years service X 2% multiplier = Retirement Benefit of $25,000 at age 65 Susie is currently 50 years old. HOW MUCH SHOULD THE UTILITY HAVE ACCRUED FOR SUSIE TODAY?

13. Accounting for the PAST is so much simpler than accounting for the FUTURE.

14. How much liability should be accrued today for Susie? • Municipal • Governmental • GASB • Bond underwriters, Banks, and lenders • TVA • Public Service Commissioners • U.S. Congress • State and local governments Depends on who you ask…. Cooperative NON-Governmental • FASB (GAAP) • ERISA • PBGC • IRS • Bond underwriters, Banks, and lenders • TVA • Public Service Commissioners • U.S. Congress • State and local governments

15. The Society of Enrolled Actuaries We enhance the ability of actuaries to be trusted financial and business advisors on problems involving uncertain future events. - 24,000 Enrolled Actuaries

16. An actuary is someone who wanted to be an accountant, but didn't have the personality for it. Actuaries are accountants who couldn't stand the excitement. After collecting hundreds of obituaries, an actuary concludes that on any given day, people die in alphabetical order! Source: www.actuarialjokes.com

17. How much liability should be accrued today for Susie? • ESTIMATED present value of the expected benefits payable at the normal retirement date adjusted for • probable mortality and disability occurrences, • anticipated raises, • likelihoodof termination or early or late retirement (healthcare cost?), • assumed investment rate, • projected overtime pay in the final five years, • projected sick leave added to service • Only two things are certain: 1. her name is Susie 2. the cost that the actuary projects will be wrong

18. Present Value of Current Accrued BenefitsorPresent Value of Future Benefits? How much liability should be accrued today for Susie? Current At age 50 $50,000 Salary x 25 years _____x2%_____ $25,000 At age 65 Future At age 65 $65,000 Salary x 40 years _____x2%_____ $52,000 At age 65 At age 50 with projected salary $65,000 Salary x 25 years _____x2%_____ $32,500 At age 65

19. How much liability should be accrued today for Susie? • ASSUME an actuary determines Susie’s accrued service (25) with projected salary ($65,000) will be $32,500. • The present value of Susie’s benefit today is $600,000*. • Susie’s cost is added to all the other employees to come up with the total amount of pension liability….say $6,000,000* * Note that there are numerous methods and assumptions required to be used by various regulators that can significantly change this.

20. Susie’s Employer does not have $6,000,000 put aside in the plan. They only have $4,000,000 in Plan Asset. The unfunded $2,000,000 balance is amortized over a set period of time. Here is where the “IT DEPENDS ON WHO YOU ASK” gets really tricky…

21. How much liability should be accrued today for Susie? “It Depends on who you ask”… amortize the $2,000,000 unfunded over a set period of time…. • GASB – up to 30 years • FASB ( GAAP) – average working life of participants • ERISA – 7 years (Pension Protection Act of 2006) • PBGC – the shorter the better for less risk exposure • IRS – the longer the better so there is less tax deductions • Bond underwriters, Banks, and Lenders -reasonable for business cash flow • TVA - Protection of the current rate payers (Maybe Distributors should be asking about TVA’s unfunded pensions) • U.S. Congress – whatever will appease the squeaky wheels, improve the economy, and protect the growing national debt • State and local governments –??? (Each of the above typically has differing methods of determining discount rates, costing methods, mortality tables, retirement assumptions, etc., etc., etc.)

22. How much liability should be accrued today? It really depends on who you ask Let’s see what the Governmental Accounting Standards Board (GASB) has to say about it….

23. GASB 68Accounting and Financial Reporting for Pensions • Who – Governmental organizations with pensions (includes Multiple and Single employer plans) (Coops don’t go to sleep…it does not apply YET, but it could be coming …) • What – Record net pension liability on books and changes footnotes. • When – Fiscal years beginning after June 15, 2014. • Where – On the Statement of Net Assets, Statement of Revenue and Expenses, and footnotes. • Why – Better presentation of financial position • How - ??? (GASB issued guidance January 30, 2014) www.gasb.org

24. GASB 68 is for Governmental Employers Does NOT require employers to contribute more to their pension plans!

25. Before After New Rules – GASB 67 & 68 Pension expense = change in Net Pension Liability from one year to the next Unfunded pension liability is now recorded on the financial statements. Current Rules – GASB 25 & 27 • Pension expense = contributions required to be paid during the year • Unfunded pension liability recorded in the footnotes

26. Concerns about GASB 67 & 68 • Increase contributions? – No, not directly… may increase political pressure • Bond, ratings, and lenders: Will it cause non-compliance with covenants? • TVA – what about the cash ratio policy? • City Government – are the liabilities accurately separated from the City and other utility departments? • Media – (Think it is hard enough for accountants to understand… just let a local reporter try to do an article on the local utility’s unfunded pension obligations) • Comparative financial statements – should you show restated prior year impact or just try to get by with just showing non-comparative statements?

27. Where to get specific unfunded info for your group? • Your Plan’s Actuary or the Plan Administrator • Your Auditor Don’t wait until you start closing books for June 30, 2015 to look at this. Could be a shocker for your board.

28. Tennessee Public Employee Defined BenefitFinancial Security Act of 2014 • Approved by Tennessee Senate and House – April 2014 • Main emphasis is to require employers to pay the minimum Actuarially Required Contributions (which some large underfunded employers were not doing) • Will require governing boards to officially adopt a funding policy by June 15, 2015 and submit a copy to the State Treasurer • Funding requirements include up to 30 year amortization and rates that are similar to the TCRS assumptions. • Modifies the enforceable right precedence.

29. Tennessee Public Employee Defined BenefitFinancial Security Act of 2014 Tennessee Enforceable Right Precedence 9-3-507. (a) In the event the political subdivision shall fail to fund the ADC according to the percentages established in § 9-3-505, the commissioner of finance and administration, at the direction of the comptroller of the treasury, is authorized to withhold such amount or part of such amount from any state-shared taxes that are otherwise apportioned to such political subdivision. The money withheld from state shared taxes shall be paid to the political subdivision’s pension plan. (b) The deduction shall be made as a first charge against any moneys payable to such political subdivision regardless of the source of such payment and regardless of the purpose or contemplated use of such funds. 9-3-506. (a) The following provisions shall apply to all political subdivisions subject to this act: (1) For political subdivision employees hired on or after the later of effective date of the political subdivision’s chief legislative body by resolution, the political subdivision may freeze, suspend or modify benefits, employee contributions, plan terms and design on a prospective basis; and (2) For any pension plan that is funded below sixty percent (60%), the political subdivision shall not establish benefit enhancements. (b) For all political subdivision employees hired on or after the effective date of this act, the accrued benefits earned prior to any adjustment pursuant to subsection (a)(1) above shall remain an enforceable right and may not be reduced without the written consent of the employee. http://www.capitol.tn.gov/Bills/108/Bill/SB2079.pdf

30. Pension Benefit Guarantee Corporation • The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of more than 40 million American workers in more than 26,000 private-sector defined benefit pension plans. • PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans • The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans that end in 2014, the maximum guarantee for workers who retire at age 65 is $59,318.16 yearly ($4,943.18 monthly). • What plans are “insured” by the PBGC? • Private non-governmental defined benefit pension plans. • PBGC does NOT insure any governmental pension plans

31. Recap Goals • Basic Pension Concepts • Awareness of New Rules for Recording Pensions • General Update on Other Pension Stuff (Tennessee Law, PBGC, Funding)

32. Polling questions: How much will GASB 68  require employers to increase contributions to their Pension Plans? • a.       50% • b.      25% • c.       10% • d.      0%

33. Polling questions: Which type of Pension Plans are insured by the Pension Benefit Guaranty Corporation? • a.  All Pension Plans • b.  Only U.S. Government Employees • c.  Non-governmental Private Employer Plans, including Cooperatives • d. State and Local governmental Plans, including Municipal Utilities

34. Questions, comments, or appropriate humor?

35. Scott Blassingame, CPA, CPESecretary TreasurerCentral Service AssociationAfter eight years in public accounting, Scott joined Central Service Association in 1997 as its Secretary-Treasurer.  In addition to reporting as Secretary to the CSA Board of Directors, he serves as CSA’s Chief Financial Officer.  He also serves as the Plan Administrator for CSA’s employee benefit programs offered to CSA Members.  These programs include:  Governmental and Non-Governmental multiple-employer Defined Benefit Pension Plans (15+ utilities, 1,000+ participants, $190+ million in assets); 401k & 457 Defined Contribution Plans ( 35+ utilities, 1,200+ participants, $40+ million in assets);  and Life, Dental, LTD, and Retiree Medical Insurance Programs (60+ utilities, 1500+ participants, $2+ million annual premiums). sblassingame@csa1.com Central Service Association P.O. Box 3480 Tupelo, MS 38803-3480 662-842-5962 www.csa1.com

36. To be added to the weekly CSA Money Minute newsletter email sblassingame@csa1.com

37. CSA Employee Benefits For over 65 years, CSA has provided pooled purchasing and administration of Employee Benefit programs that benefits CSA Members and CSA employees. It is the intent that CSA will not create any unreasonable financial gain from sponsoring benefit plans nor will it create a significant financial drain on resource in other areas of the Association.

38. GASB S-65 ITEMS PREVIOUSLY REPORTED AS ASSETS AND LIABILITIES GASB Concepts Statement No. 4, Elements of Financial Statements Assets-resources with present service capacity that the institution presently controls (BS) Liabilities-present obligations to sacrifice resources that the institution has little or no discretion to avoid (BS) Outflow of resources is a consumption of net assets by the institution that is applicable to the reporting period (IS) Inflow of resources is an acquisition of net assets by the institution that is applicable to the reporting period (IS)

39. GASB S-65 ITEMS PREVIOUSLY REPORTED AS ASSETS AND LIABILITIES GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position A deferred outflow of resources is a consumption of net position by the institution that is applicable to a future reporting period (BS) A deferred inflow of resources is an acquisition of net position by the institution that is applicable to a future reporting period (BS) Net position is the residual of all other elements presented in a statement of financial position (BS/IS)

40. How much will GASB 68 require employers to increase contributions to their pension plans? Text a KEYWORD to 22333 or Submit responses at PollEv.com

41. Which type of Pension Plans are insured by the Pension Benefit Guaranty Corporation? Text a KEYWORD to 22333 or Submit responses at PollEv.com