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THE NEW PENSION ACCOUNTING AND ITS IMPACT ON FUNDINGCSFMOOakland, CaliforniaFebruary 21, 2013

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GASB STATEMENT NO. 68Summary of changes

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Our focus• Employers in single employer and agent multiple-

employer defined benefit plans• Employers in cost-sharing plans

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SINGLE-EMPLOYER AND AGENT PLANSChanges for employers

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Preliminary• Only relevant for economic resources measurement focus

and accrual basis of accounting• No effect on governmental funds

• Report expenditures rather than expense• No effect on fund balance

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Key changes1. Employer liability2. Employer expense3. Discount rate4. Actuarial method5. Amortization6. Timing

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1. Employer liability• Now:

Annual required contribution (ARC)Less: Actual contributions

Net pension obligation (NPO)• Future:

Total pension liability (TPL)Less: Fiduciary net position (FNP)

Net pension liability (NPL)

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Employer liability - Illustration

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2. Employer expense• Now:

• Calculation tied to funding• ARC adjusted for the cumulative effect of prior differences between

required contributions and actual contributions

• Future:• Calculation tied to cost

• Changes in the net pension liability (NPL)

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Components of expense • Annual service cost• Interest on the net pension liability• Projected earnings on plan investments• The full effect of any changes in benefit terms• Amortization of deferred outflows/inflows of resources

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3. Discount rate• Now:

• Estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments

• Future:• Modification necessary if it is expected that FNP will not be

sufficient to pay benefits to active employees and retirees• Single blended rate

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Discount rate – single blended rate• Single rate equivalent to the combined effect of using the

following rates:• For projected cash flows up to the point the FNP will be sufficient

• Long-term expected rate of return on plan investments• For projected cash flows beyond that point

• A yield or index rate on tax-exempt 20-year, Aa-or-higher rated municipal bonds.

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4. Actuarial method• Now:

• Whatever actuarial method is used for funding• Six acceptable methods• Must be applied within parameters defined by GASB

• Future:• No tie to actuarial method used for funding

• All employers will use the entry age method for accounting and financial reporting purposes (with service cost determined as a percentage of pay)

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5. Amortization• Background

• Circumstances that could affect the net pension liability (NPL)A. Changes in benefit termsB. Changes in economic and demographic assumptionsC. Differences between economic and demographic assumptions and

actual experience (other than investment returns)D. Differences between expected and actual investment returns

• Now:• Effect amortized over a period not to exceed 30 years

• Future:• Effect to be amortized over a much shorter period

• Different periods, depending on the circumstances

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Future amortization periodsA. Changes in benefit terms

• Immediate recognition

B. Changes in economic and demographic assumptions• Closed period equal to average remaining service period of plan

members (average remaining service period of retirees = 0 years)

C. Differences between economic and demographic assumptions and actual experience (other than investment returns)

• Closed period equal to average remaining service period of plan members (average remaining service period of retirees = 0 years)

D. Differences between expected and actual investment returns

• Closed 5-year period (including current period)

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6. Timing• Now:

• Timing of actuarial valuation• Within 24 months of start of valuation period

• Future:• Measurement date for assets and TPL

• No earlier than 1 year + 1 day prior to reporting date• Actuarial valuation date

• Up to 30 months before employer reporting date• Update to “roll forward” to measurement date

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COST-SHARING PLANSChanges for employers

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Key changes1. Employer liability2. Employer expense

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1. Employer liability (cost-sharing)• Now:

• Liability only if employer contribution is less than the contractually required amount

• Future:• Liability equal to the employer’s proportionate share of the total

NPL of all participating employers

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2. Employer expense (cost-sharing)• Now:

• Expense = contractually required contribution• Future:

• Expense = employer’s proportionate share of total pension expense of all participating employers

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EFFECTIVE DATEEmployers

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Effective date of GASB Statement No. 68

• Implementation first required• Fiscal year ending 6/30/15

• Earlier application encouraged• Requires cooperation of the pension plan

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FUNDING CHALLENGEAccounting v. funding

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Background: Historic contribution of GASB Statement No. 27• Set parameters to ensure reasonable application of actuarial

methods• Displayed whether employers were meeting the goal of

systematic and rational funding each period• Highlighted the cumulative financial impact of underfunded

contributions • Information on funding progress also provided

• Notes • Required supplementary information (RSI).

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Changes resulting from GASB Statement No. 68

• Elimination of GASB parameters• Compromises the usefulness of the actuarially determined

contribution (ADC) for other purposes by eliminating standardization

• No automatic requirement to provide information on funding progress• Required only if an ADC is calculated or contribution is statutorily

mandated

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DEVELOPMENT OF PENSION FUNDING GUIDELINESResponse to GASB Statement No. 68

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Objective• Provide guidance on funding in the wake of GASB

Statement No. 68• Take advantage of the fact that GASB Statement No. 68

requires the presentation of funding data if an ADC is used for funding purposes

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Task force• Convening organization – Center for State and Local

Government Excellence• Membership

• “Big seven”• Other organizations invited to participate

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“Big seven”• National Governors Association (NGA)• National Conference of State Legislatures (NCSL)• Council of State Governments (CSG)• National Association of Counties (NACo)• National League of Cities (NLC)• U.S. Conference of Mayors (USCM)• International City/County Management Association

(ICMA)

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Other participating organizations• National Association of State Auditors, Comptrollers and

Treasurers (NASACT)• Government Finance Officers Association (GFOA)• National Association of State Retirement Administrators

(NASRA)• National Council on Teacher Retirement (NCTR)

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Approach• Closely modeled on the work of the California Actuarial

Advisory Panel

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Structure• Five policy objectives

• Starting point = funding based upon an actuarially determined ARC• Application of policy objectives to three core elements

• Actuarial costs• Asset smoothing• Amortization policy

• Recognition that employers may need to adopt a transition plan to phase in the new practices over a period of years.

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General policy objectives• Actuarially Determined Contributions• Funding Discipline• Intergenerational equity• Contributions as a stable percentage of payroll• Accountability and transparency

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Actuarially determined contributions• A pension funding plan should be based upon an

actuarially determined annual required contribution (ARC) that incorporates both the cost of benefits in the current year and the amortization of the plan’s unfunded actuarial accrued liability.

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Funding discipline• A commitment to make timely, actuarially determined

contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees.

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Intergenerational equity• Annual contributions should be reasonably related to the

expected and actual cost of each year of service.

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Contributions as a stable percentage of payroll• Contributions should be managed so that employer costs

remain consistent as a percentage of payroll over time.

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Accountability and transparency• Clear reporting of pension funding should include an

assessment of whether, how, and when the plan sponsor will meet the funding requirements of the plan.

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NEXT STEPS FOR GFOABest Practices

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Overall best practice• “Guidelines for Funding Defined Benefit Pensions”

• Every state and local government that offers defined benefit pensions should formally adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner.

• Such a funding policy should incorporate each of the four principles and objectives1. Obtain ADC2. Balance stable contributions and equitable allocation3. Commit to funding full amount (with transition period, if needed)4. Provide information needed to assess funding progress

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1. Obtain ADC• Every government employer that offers defined benefit

pensions should continue to obtain no less than biennially an actuarially determined contribution (ADC) to serve as the basis for its contributions

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2. Balance contributions/allocation• The ADC should be calculated in a manner that fully funds

the long-term costs of promised benefits, while balancing the goals of 1) keeping contributions relatively stable and 2) equitably allocating the costs over the employees’ period of active service

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3. Commit to funding full amount • Every government employer that offers defined benefit

pensions should make a commitment to fund the full amount of the ADC each period. For some  government employers, a reasonable transition period will be necessary before this objective can be accomplished

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4. Transparency• Every government employer that offers defined benefit

pensions should demonstrate accountability and transparency by communicating all of the information necessary for assessing the government’s progress toward meeting its pension funding objectives

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Future best practices• The GFOA intends to develop additional best practices

that will provide specific guidance on the practical application of these principles and objectives to each of the three core elements of a comprehensive pension funding policy1. Actuarial cost method2. Asset smoothing3. Amortization.

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AUDITING CHALLENGEParticipants in multiple-employer plans

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Cost-sharing plans• Issues:

• Who should calculate the allocation percentages?• Who should calculate the allocated pension amounts?

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Potential solution 1• Opinion from plan auditor on

1. Supplemental schedule of employer allocations in plan financial statements

2. Either:a. Supplemental schedule of plan pension amounts

• Net pension liability• Deferred outflows• Deferred inflows• Pension expense

b. Supplemental schedule of employer pension amounts

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ExampleEXAMPLE COST SHARING PENSION PLAN

Schedule of Employer AllocationsJune 30, 2015

Employer/ 2015Nonmployer Actual Employer

(special funding Employer Allocation situation) Contributions Percentage

State of Example $ 2,143,842 38.9 %Employer 1 268,425 4.9Employer 2 322,142 5.8Employer 3 483,255 8.8Employer 4 633,125 11.5Employer 5 144,288 2.6Employer 6 95,365 1.7Employer 7 94,238 1.7Employer 8 795,365 14.4Employer 9 267,468 4.9Employer 10 267,128 4.8

Total $ 5,514,641 100.0

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ExampleEXAMPLE COST SHARING PENSION PLAN

Schedule of Pension AmountsJune 30, 2015

Deferred Outflow of Resources Deferred Inflows of Resources Pension Expense

Changes in Changes in NetEmployer Employer Amortization

Proportion Proportion of Deferredand Differences and Differences Amounts from

Differences Differences Between Differences Differences Between Changes inBetween Between Contributions Between Between Contributions Proportionate Propotion and

Employer/ Expected Projected and Proportionate Expected Actual and and Proportionate Share of ProportionateNonmployer and Actual and Actual Share of and Actual Projected Share of Plan Share of

(special funding Net Pension Economic Investment Changes of Pension Economic Investment Changes of Pension Pension Pensionsituation) Liability Experience Earnings Assumptions Expense Experience Earnings Assumptions Expense Expense Expense

State of Example $ 38,589,135 428,768 2,058,088 1,500,690 782,365 380,371 1,063,285 – 584,365 1,878,717 12,375Employer 1 4,831,647 53,685 257,688 187,898 96,633 47,625 133,131 – 125,325 235,229 (1,793)Employer 2 5,798,553 64,428 309,256 225,499 115,971 57,156 159,773 – 245,386 282,303 (8,088)Employer 3 8,698,585 96,651 463,925 338,279 173,972 85,742 239,681 – 125,632 423,492 3,021Employer 4 11,396,244 126,625 607,800 443,188 227,925 112,332 314,012 – 386,325 554,828 (9,900)Employer 5 2,597,183 28,858 138,516 101,002 51,944 25,600 71,563 – 42,358 126,444 599Employer 6 1,716,569 19,073 91,550 66,756 34,331 16,920 47,298 – 24,325 83,571 625Employer 7 1,696,283 18,848 90,468 65,967 33,926 16,720 46,739 – 125,325 82,584 (5,712)Employer 8 14,316,562 159,073 763,550 556,756 286,486 141,118 394,478 – 152,005 697,004 8,405Employer 9 4,814,421 53,494 256,769 187,228 68,325 47,456 132,657 – 87,325 234,391 (1,188)Employer 10 4,808,301 53,426 256,443 186,990 67,528 47,395 132,488 – 41,035 234,093 1,656

Total $ 99,263,485 1,102,928 5,294,055 3,860,249 1,939,406 978,435 2,735,105 – 1,939,406 4,832,655 –

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Agent multiple-employer plans• Issue:

• Employer assurance regarding the following amounts as of measurement date• Total pension liability - fiduciary net position = net pension liability• Deferred outflows/inflows

• Investment experience• Changes in assumptions• Actuarial gains and losses

• Pension expense

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Potential solution – fiduciary net position

• Potential solution – fiduciary net position• Opinion from plan auditor on

• Supplemental condensed schedule of changes in fiduciary position (by employer)

• SOC 1 (type 2) report from plan auditor on • Allocation of plan inflows to individual employer accounts

• Contributions• Investment income

• Allocation of plan outflows to individual employer accounts• Benefit payments• Administrative expenses

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ExampleExample Agent Multiple-Employer PERS

Combining Schedule of Changes in Fiduciary Net PositionYear ended June 30, 2015

Employer 1 Employer 2 Employer 3 TotalAdditions:

Contributions:Employer 86,252,000  34,500,000  51,751,000  172,503,000 Member 32,662,000  13,065,000  19,597,000  65,324,000 

Investment income: 80,965,000  20,347,000  37,112,000  138,424,000 Total additions 199,879,000  67,912,000  108,460,000  376,251,000 

Deductions:Pension benefits, including refunds 384,635,000  184,352,000  228,356,000  797,343,000 Administrative expenses 4,716,000  1,886,000  2,829,000  9,431,000 

Total deductions 389,351,000  186,238,000  231,185,000  806,774,000 Net increase (decrease) (189,472,000) (118,326,000) (122,725,000) (430,523,000)

Net position restricted for pension benefits:Beginning of year 5,843,645,000  1,468,538,000  2,678,595,000  9,990,778,000 End of year $ 5,654,173,000  1,350,212,000  2,555,870,000  9,560,255,000 

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Potential solution – other amounts• Plan auditor

• Engaged to issue SOC 1 (type 2) report on census data controlled by plan (retired employees)

• Plan actuary • Issues separate actuarial report for each participating employer

which includes net pension liability, deferred outflows/inflows by type and year, pension expense, and discount rate calculation

• Employer auditor • tests census data of active employees and confirms actuarial

information used by actuary• Employer and employer auditor

• Responsible for validating deferred outflows/inflows and pension expense related to individual employer