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:

o 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.

o 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

New Underlying Principles

Pensions are part of the employee/employer compact.

o Pension costs are a deferred part of total compensation.o Employer incurs a pension obligation as a result of

“employment exchange.”o 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.

o Totally different from current GASB standards.o Disconnect between accounting numbers, funding numbers.o PERA will calculate annual pension costs for employers. 4

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.)

5

GASB Statement 68Impact on Employer Units

Annual changes in Net Pension Liability will generally be reported as pension expense as they occur.

o Normal Cost for active members

o Changes due to plan amendments for any members.

o Change in actuarial assumptions for inactives/retirees.

o Experience gain/loss for inactives/retirees.

o 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.

6

GASB 25-27 GASB 67-68 IMPLICATIONS

For pension systems, pension expense reported by employer equals statutory contribution rate.

Pension expense is change in net pension liability each year.

Pension expense will be volatile, must be calculated by PERA’s actuary.

Pension systems’ unfunded liability does not impact individual employer financial statements.

Employer responsible for pension system unfunded liability and must show proportionate share on balance sheet.

Employers who never had a pension liability on their books will now report one. Impact on bond ratings unclear.

Long-term rate of return used to discount future benefits, which determines liabilities.

Discount rate is long term rate of return while assets exist and municipal bond rate after that.

Potential for higher liabilities if assets are projected to be depleted in the future.

Actuarial cost method used by plan for funding calculations is used for ARC calculations.

All plans must use Entry Age Normal actuarial cost method.

No real impact for pension systems; Entry Age Normal already used for valuation.

Accounting numbers linked to funding numbers. De facto standard for contributions.

Decoupling of accounting and funding numbers.

Two sets of numbers confusing. Boards or legislature have to set funding policy. More variance without benchmark.

Unfunded liability can be amortized over maximum 30 years regardless of source of UAL (plan amendment, assumption change, gain/loss).

Shorter amortization period. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average working lifetime.

Higher pension expense and more volatility.

Permits asset smoothing method (5 years for MSRS/PERA/TRA).

Difference between assumed and actual investment return spread over 5 years.

Creates more volatility.

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.

Large City Medium City Small City

Old GASB

PERA annual contributions

(Annual expense)

$2.9 million $400,000 $42,000

New GASB

Employer portion of pension expenses for the year

Employer portion of PERA unfunded liability

No Idea

$74 million

No Idea

$12 million

No Idea

$570,000

City’s net position (2012) $1.1 billion $63 million $10 million

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. 68Required Supplementary Information

Required Supplementary Information (RSI)

Ten-year trend schedules

City’s proportionate share of net pension liability

o City covered payroll

o Net pension liability as a percent of covered payroll

o Funding Ratio

Schedule of employer contributions

o Statutory contributions required and % paid

o Contributions as a percent of covered payroll

GASB grace: Only go back retroactively if data is present.

11

Actuarial valuation

measurement date

Release of 6/30/15

actuarial valuation

results

Cities use 6/30/15

actuarial valuation

results

PERA publishes results

June 30, 2014 June 30, 2015 Dec. 1, 2015 December 31, 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.

GASB 67-68 Timeline: Measurement Date for Cities

Measurement Period

What is PERA Working On in 2013?

12

Time Period Activity

Summer 2013 Meet with groups to hash out issues, determine employer / auditor needs• State Auditor’s Office• Legislative Auditor’s Office• Employer Groups (MICA, LMC, MASBO)• State of Minnesota MMB• Actuary

Fall 2013 Develop communication plan (who, what, when, how)• Education plan prior to implementation• Ongoing communication plan

Winter 2013 Develop educational tools• Sample disclosures• Online videos or webinars• List of services/figures PERA will provide• Finance Director talking points

January 2014 GASB issues GASB 68 Implementation Guide

13

Future Activities

Time Period Activity

Spring 2014 Finalize educational tools based on final GASB guidance

June 30, 2014 GASB 68 initial measurement date for employers who have a 6/30 FYE

Summer 2014 Work with actuary to develop reports

Winter 2014 Prepare allocation, schedules, suggested footnote disclosures for employers who have a 6/30 FYE

June 30, 2015 6/30 FYE employers implement GASB 68 using 6/30/14 actuarial valuation. Initial measurement date for employers who have a 12/31 FYE.

December 2015 Prepare allocation, schedules, suggested footnote disclosures for all employers

December 31, 2015 12/31 FYE employers implement GASB 68 using 6/30/15 actuarial valuation.

14

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

Next Steps