Overview of New Pension Accounting Requirements Under GASB Statements No. 67 and No. 68

1. Overview of New Pension Accounting Requirements Under GASB Statements No. 67 and No. 68 September 2013

2. Introduction • Purpose is to review the new pension requirements from the Governmental Accounting Standards Board (GASB) • General requirements • From the plan’s perspective (GASB No. 67) • From the employer’s perspective (GASB No. 68) • Implementation Suggestions

3. Cautionary Note • This presentation does not provide official SAO interpretive accounting guidance. • It is a general overview and is not intended to address specific requirements for any particular reporting entity. • Users should not make decisions based on this information but should review the GASB standards in total and seek professional advice from their accountants, auditors, and actuaries as appropriate.

4. GENERAL REQUIREMENTS

5. Effective Dates • GASB 67 (Pension Plans) • Effective for periods beginning after June 15, 2013 • Implementation guide issued June 2013 • GASB 68 (Employer Accounting and Reporting) • Effective for periods beginning after June 15, 2014 • ED amending transition guidance issued June 2013 • Implementation guide expected January 2014

6. Scope of Standards • GASB 67 applies to governmental pension plans administered through trusts where: • Contributions and earnings are irrevocable • Plan assets are dedicated to providing pensions based on benefit terms • Plan assets are legally protected from creditors • GASB 68 applies to: • Governments whose employees participate in plans covered under GASB 67 • Governmental nonemployer entities who are obligated to provide contributions directly to the plans

7. Significant Change in Focus • Accounting focus instead of funding focus • GASB no longer defines the ARC for covered plans • For accounting and reporting purposes, employers have an obligation for pensions based on the employment exchange (special funding situation exceptions) • Obligation is not satisfied until benefits paid when due • Pension plan is responsible only to extent that trust assets are available to make payments • Funding is a policy decision of governments • A formal funding policy is recommended • Legislative changes may be needed

8. Defined Benefit Classifications • Single-employer • Provides pensions to employees of only one employer • A primary government and its component units are considered to be one employer • Cost-sharing multiple-employer • Obligations of more than one employer are pooled • Assets can be used to pay benefits to employees of any employer • Agent multiple-employer • Assets are pooled for investment purposes • Separate accounts are maintained for individual employers • Each employer’s share of pooled assets is legally available to pay benefits of only its employees

9. From the Plan’s Perspective:GASB Statement No. 67Financial Reporting for Pension Plans

10. Plan Valuation vs. Measurement Dates • Valuation Date (V Date) • Actuarial valuation required at least every two years • Valuation date can be no more than 24 months earlier than the plan’s fiscal year-end • Measurement Date (M Date) • A plan must measure the total pension liability as of its fiscal year-end (FYE), by either: • Using a valuation as of its fiscal year-end, or • Using roll-forward procedures from the valuation date to the fiscal year-end measurement date M Date V Date No more than 24 months FYE

11. Valuation Method & Assumptions • Must comply with Actuarial Standards of Practice • Discount Rate for Accounting Purposes • Restates projected liability for benefits to today’s dollars • GASB 67 defines how to calculate and disclose the rate • Reflects a blend of two rates (based on whether assets are projected to be available to pay future benefits): • Long-term expected rate of return on investments • Index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher • Project future payments, apply appropriate rate by year (funded vs. unfunded), and solve for the blended rate • Disclose the single blended discount rate • NPL based on market value of assets (not smoothed)

12. Valuation Method & Assumptions • Actuarial Cost Method • Allocates present value of expected future benefits to years that employees have worked (or will work) • Liability reflects the portion for years already worked • Previously six cost methods were allowed • GASB 67 allows only one method for accounting purposes: the entry age actuarial cost method • Other assumptions • Salary increases • Average service life and other demographic factors • Must include substantively automatic cost of living adjustments • Etc. • Other methods/assumptions still allowed for funding purposes

13. Measurement Approach Measure the Total Pension Liability (TPL)Using Three Step Approach The TPL minus the plan’s net position at the measurement date is the net pension liability (NPL)

14. Disclosures and RSI – GASB 67 • Plan statements are not significantly changed • Note disclosures and RSI are expanded • Disclosures include additional information on: • Investment policy, rates of return, measurement assumptions • TPL–plan’s net position=NPL, with net position% to TPL • NPL sensitivity to discount rate changes • RSI expanded to ten years and schedules added • Schedule of changes in net pension liability and related ratios • Schedule of contributions with funding valuation assumptions • Schedule of investment returns (money weighted) • Refer to GASB 67 for full requirements

15. From the Employer’s Perspective:GASB Statement No. 68Accounting & Financial Reporting for Pensions • Note: Plans and employers should use the same assumptions when measuring similar or related pension information

16. Employer Valuation vs. Measurement Dates • Valuation Date (V Date) • Actuarial valuation required at least every two years • Valuation date can be no more than 30 months and 1 day earlier than the employer’s fiscal year-end • Measurement Date (M Date) • Employers may use a measurement date up to one year prior to fiscal year-end, consistently applied • Roll-forward procedures from the valuation date to the measurement date are acceptable V Date No more than 30 months + 1 day FYE M Date No earlier than prior FYE

17. Recognition Requirements • Employers use same assumptions as plan • Employers (not plans) record: • NPL (total pension liability less plan’s net position) • Pension Expense • Deferred Items (e.g. assumption/experience differences) • Expense for certain items is spread over future periods • New rules for amortizing deferred amounts • Above recognition applies to statements prepared using the economic resources measurement focus and accrual basis of accounting (a long-term focus)

18. Recognition Requirements • Recognized expense is based on past service • As described in step 3 of the plan’s measurement approach (present value attributed to service periods) • Expense is no longer based on contributions to the plan • Cost-sharing employers recognize their proportion • Nonemployers with special funding situations have similar recognition/disclosure requirements • Modified accrual expenditures in governmental fund statements still based on contributions that are due and payable (a current resources focus)

19. Disclosures and RSI – GASB 68 • Employer accrual basis statements will include pension liabilities, expense, and deferrals • Note disclosures and RSI are expanded • Disclosures include additional information on: • Investment policy, rates of return, measurement assumptions • NPL sensitivity to discount rate changes • Changes in NPL (single/agent employers) • Pension expense & deferred items with amortization schedule • RSI expanded to ten years and schedules added • Schedule of changes in NPL with related ratios (single/agent) • Schedule of proportionate NPL with related ratios (cost-sharing) • Schedule of contributions (single/agent include funding assumptions) • Refer to GASB 68 for full requirements

20. IMPLEMENTATION SUGGESTIONS

21. Getting Started • Communication and education • Actuaries and auditors • Employers and nonemployers who provide funding • Legislators and other stakeholders • Governing bodies • Budget departments • Bond rating agencies • Establish or update formal funding policy • Funding level (ARC) is no longer defined by GASB • May require legislative changes

22. Getting Started • Establish valuation approach • Determine plan classification (single, agent, cost-sharing) • Select measurement date and valuation timing • Determine if roll-forward from valuation date to measurement date is required • Develop assumptions and establish approval process • Identify special funding situations • Develop implementation plan • Establish timeline • Consider employer reporting dates • Consider obtaining estimated impacts

23. Additional Accounting Resources • Governmental Accounting Standards Board • www.gasb.org • Pension project information page • National Association of State Auditors, Comptrollers and Treasurers • www.nasact.org • NASACT committee = Pension Standards Implementation Work Group • American Institute of Certified Public Accountants • www.aicpa.org • Interest Area = Governmental Audit Quality Center