Wednesday, October 16, 2013
Citrus Hills Golf and Country Club
Hernando, Florida
New Pension Accounting
Standard:
A Game Changer!
NATURE COAST CHAPTER
GOVERNMENT FINANCE OFFICERS
ASSOCIATION
(LOCAL CHAPTER OF THE FGFOA)
Bert A. Martinez, CPA
Purvis, Gray and Company, LLC
Senior Audit Manager
Sarasota Office
BAM@purvisgray.com
Copyright © 2011 GRS – All rights reserved.
Introduction
 Two new GASB Statements have been
issued in June of 2012;
►GASB No. 67 – Financial Reporting for
Pension Plans, an amendment of GASB No. 25
• Effective for Plans in FYE 2014
►GASB No. 68 – Accounting and Financial
Reporting for Pensions, an amendment of
GASB No. 27
• Effective for Employers in FYE 2015
2
Introduction
 The GASB’s long and deliberative process
►Added to research agenda in January 2006
►Added to project agenda in April 2008
►Invitation to Comment issued in March 2009
►Preliminary Views issued in June 2010
►Exposure Drafts issued June 2011
►Since then, the GASB has reaffirmed most of the ED
►Final Standards adopted and issued June 2012
3
The Presentation in 1 Slide

The Big Picture
► Local
Governments will now be required to record the
liability for their unfunded defined benefit pension plan
obligations to their employees within their economic
resource based financial statements, rather than merely
disclosing this amount in the notes to the financial
statements as was previously required under GASB No.
27.
► The formula for calculating the liability is similar to the
old UAAL found in notes to FS under GASB 27, with
some differences in how the components are calculated.
4
Scope

Provisions apply to employers with employees
covered under:
► defined
benefit pension plans and
► defined contribution account balance plans

Provisions apply to employers with employees
covered under:
► Single
employer plans (e.g., local plans)
► Agent multiple employer plans
► Cost sharing multiple employer plans (e.g., FRS)
5
Scope (continued)

Provisions apply to financial statements that use
the economic resources measurement focus
► Government-wide/proprietary
fund financial statements
► Not governmental funds statements

Provisions apply to all employers subject to GASB
standards for issuing GAAP financials:
► States
and school districts
► Cities and counties
► Other governments and districts
6
Implementation
 New Standard’s Provisions are Retroactive
► Balance sheet liability - restate with a beginning balance
► Deferred inflow/outflows accounts - restate with
beginning balances if information to do so is available,
else start with zeroes
► Unlike OPEB’s transition treatment ( which may soon
change)
7
Significant Provisions
 “Worse” Provisions:
► Heavy use of deferred inflow and deferred outflow
accounts (GASB No. 63)
► Immediate recognition in pension expense of all plan
changes; some say this is good
► Much more disclosure; some say a little more would
be good
► More costly to comply
► Pension expense method will cause more confusion
than clarity
8
Significant Provisions
 “Worser” Provisions:
► The new rules for cost sharing employers (e.g.,
Florida counties and school districts in FRS) will be
just like the new rules for employers with local plans
► Throw away everything you ever knew about govt.
pension accounting
► Lots more work with communications challenges
► Large new liability on the balance sheet
► Unstable/volatile income statements and balance
sheets
9
Significant Provisions
 It could have been even “worster” (since the ED):
► The GASB delayed the effective date for the employer
financial statements - FYE 2015
► But still FYE 2014 for standalone Plan financials
► Since the ED, the GASB made several cost-reducing
changes:
• Combined actuarial gains/loss for actives and inactives
• Measurement date anytime between reporting date and prior
fiscal year end; gives more time to prepare entries and
disclosures
10
The GASB Files for Divorce !
 Government-wide employer accounting and
funding have been delinked, decoupled, . . .
DIVORCED !
11
The Marriage

Government-wide employer accounting and
actuarial funding/contributions have been ONE

Old GASB Statement No. 27 (current)
► The
employer’s obligation is to fund the plan
► The accounting expense (APC) -an actuarial funding contribution Member
► The balance sheet liability -contribution
Funding Obligation
Employer
Plan
shortfall
12
The Marriage

Government-wide pension accounting expense
was based on the Annual Required Contribution
(the “ARC”) for sole and agent employers

The ARC was:
► usually
a reasonable number for funding purposes,
► determined under fairly stable methods,
► a benchmark – users knew if a government was
funding its pension obligation adequately, and
► known in time for budgeting a funding contribution
13
The Divorce
14

Accounting and actuarial funding will be separate

The GASB has found a new, completely new, way
to define the government-wide expense and
liability

“We do accounting; actuaries do funding.” – Bob
Attmore, GASB Chairman
The Marriage

Remember how the GASB looked at it this way:

Old GASB Statement No. 27 (current)
► The
employer’s obligation is to fund the plan
► The accounting expense (APC) -an actuarial funding contribution
Member
► The balance sheet liability -contribution
shortfall
Employer
15
Funding Obligation
Plan
The Divorce

Now the GASB is looking at it this way:

New GASB Statement No. 68
► The
employer’s obligation is “ultimately to the members”
► The accounting expense -- not determined w.r.t. to any
actuarial funding contribution
► The balance sheet liability -Member
an unfunded actuarial
accrued
liability
Employer
16
Plan
The Divorce

Accounting expense will not be viable for funding
► Too
volatile for contributing

No more ARC, APC or NPO

Two sets of numbers –
► One
set for accounting and financial reporting purposes
► One set for actual funding/contribution purposes
17
Net Pension Liability (NPL)
 The Net Pension Liability is the new, different
and much larger balance sheet liability - the
entire Unfunded Actuarial Accrued Liability
 NPL =
Total Pension Liability (TPL)
minus
Fair Value of Plan Assets (FVA)
(aka Plan Net Position)
 TPL is calculated using only one actuarial cost
method, to achieve better comparability
18
Total Pension Liability (TPL)
 TPL =
Actuarial Accrued Liability (AAL)
determined under the traditional
Entry Age normal (EA)
actuarial cost method
 Not the so-called Ultimate EA
 Not the Frozen Entry Age or Frozen Initial
 Not the Projected Unit Credit method
19
Total Pension Liability (TPL)
 The interest discount rate used to calculate the
TPL is determined by a specific and complex
process
► No details in this presentation because:
► “Most” Florida plans will likely use only the long-
term expected rate of return (LTeROR) for the interest
discount rate
 Disclosure will require that you describe how
you determined your LTeROR
20
Net Pension Liability (NPL)
 To summarize so far, the balance sheet liability
is the Net Pension Liability (NPL)
 NPL =
Total Pension Liability (TPL)
minus
Fair Value of Plan Assets (FVA)
(aka Plan Net Position)
21
Statement of Activities
 Expense is “based on” the change in the NPL
from one year to the next
 There are many reasons for the NPL changing
from one year to the next
 There are many different components of the total
change in NPL from one year to the next; and
different components are treated differently
22
Statement of Activities
 NPL = TPL minus FVA
 The total change in NPL is separated into:
► Changes in the TPL from one year to the next and
► Changes in the FVA from one year to the next
23
Statement of Activities
 These components of each year’s change in the
TPL and FVA are either:
► Immediately recognized in the expense in full, OR
► Gradually recognized in the expense and deferred
• Some components are amortized/recognized over the average
expected service life of plan members
• One component is recognized over a fixed five year period.
 Gradually recognized components of change may
be amortized for expense recognition using
straight-line, level-percent-of-pay, etc.
24
Statement of Activities
 Immediate recognition of TPL changes:
► Service cost (normal cost) attributed to the year
► Interest (at the discount rate) on last year’s TPL
► Actual benefits paid for the year
► All plan benefit changes
► Other changes in the TPL from one year to the next
 Gradual recognition TPL change:
► Assumption changes
► Actuarial gains/losses (liability side)
25
Statement of Activities
 Immediate recognition of FVA changes:
► Projected investment earnings
► Actual benefits paid for the year
► Administrative expenses paid for the year
► Actual contributions made for the year by employer(s),
by employees, by retirees and by other sources without
a “legal obligation” to contribute
► Other changes in the FVA from one year to the next
 Gradual recognition FVA change:
► Difference between projected investment earnings and
actual investment earnings for the year
26
Nine High-Level Implications
1.
2.
3.
4.
5.
6.
7.
8.
9.
27
A new and very large balance sheet liability
Pension expense (or pension income)
Unstable financial statements
Spot light on pension liabilities
Communication challenges
Re-visit funding policies
Additional disclosures
A lot of work
Get it right
Nine High-Level Implications
1. Net Pension Liability (NPL):
a new and very large balance sheet liability
2. Pension expense - or pension income
28
Nine High-Level Implications
3. Unstable employer financial statements . . .
►
►
►
►
29
due to the use of the fair value of plan assets, instead
of a smoothed actuarial value, as the offset to the TPL
in the balance sheet liability (NPL)
due to immediate recognition of benefit changes
due to short amortization/recognition of other
sources of change in the TPL
due to short amortization/recognition of investment
return deviations from expected
Nine High-Level Implications
4. Spot light on pension liabilities . . .
►
►
►
►
30
Moves the liability from the Notes
to the Balance Sheet
Pension liability will have a higher profile in the
CAFR
Could make the government’s Net Assets (now being
called Net Position) to be negative when it would
otherwise have been positive
Could add more fuel to pension roll-back movement
Nine High-Level Implications
5. Communication challenges . . .
►
►
►
►
►
31
With the press, legislators, local elected officials,
plan trustees, participating employers, your city
manager - executive director - superintendent, etc.
“So which is the true unfunded liability?”
“So which is the true expense?”
Delete ARC, APC and NPO from our vocabulary
Forget everything you knew about government
pension accounting
Nine High-Level Implications
6. Re-visit funding policies
►
►
Cannot just lean on an ARC to set funding level
City and Board jointly adopt a Funding Policy
•
•
•
•
•
32
Actuarial cost method
Robust, disciplined, unbiased and well-documented process
for setting the long-term expected rate of return
Amortization periods and methods
Target dates for funded ratios
Other related matters such as risk management, volatility
management, etc.
Nine High-Level Implications
7. Additional disclosures – Typically:
►
In the Notes to Financials
•
•
•
►
In the Required Supplementary Information
•
•
33
Changes in NPL
Significant Assumptions – discount rate, mortality, etc.
Numerous other disclosures
10 Year table(s) for: TPL, Plan Net Position, NPL, Net
Position as a % of TPL, Covered Payroll (PR), NPL as % of
Covered Payroll, Required & Actual Contributions, Covered
PR, Contributions as % of PR.
Other disclosures
Nine High-Level Implications
8. A lot more work
►
►
►
►
►
►
34
For the implementation year and
For subsequent years
More actuarial work
More preparer work
More auditor work
More work
More costs
Nine High-Level Implications
8. A lot more work (continued)
► One actuarial report for funding purposes
• Methods are driven by Funding/Contribution Policy
• Timing is driven by budget timetable
► One actuarial report (or two) for accounting purposes
• Methods are driven by the GASB standard
• Timing is driven by the GASB Standard and CAFR timetable
35
Nine High-Level Implications
8. A lot more work (continued)
► Much more disclosure language and tables for
preparer
• This presentation did NOT cover very much of the
substantial amount of disclosures in the Notes and RSI for
the employer’s FS or for the plan’s FS
► More work and attention by auditors
36
Nine High-Level Implications
9. Get it right
►
►
►
►
37
The GFOA is watching (Certificate of Achievement)
Taxpayers and their watchdog groups are watching
The press is watching
The SEC is watching
Employer Liability (Asset)
Item
Current treatment
Employer Employer ARC
Liability
v.
(Asset)
actual employer contribution
(cumulative effect over time)
Future treatment
Total employer pension liability
v.
plan net position
(as of the reporting date)
Assume for example, that an employer previously contributed the full amount of
it ARC each year. Also assume the following facts for the current year:
• Actuarially determined employer contribution = $100;
• Actual employer contribution = $90;
• Total employer pension liability (end of period) = $10,000; and
• Plan net position (end of period) = $9,300
Currently, the employer would report a $10 liability (NPO) as a result of its
failure to fully fund its actuarially determined contribution for the current year:
38
Employer Liability (Asset) cont.
Less:
Actuarially determined employer contribution
Actual employer contribution
NPO (liability)
$100
90
$ 10
In the future, the employer would instead report a $700 liability that represented
the amount by which its total pension liability exceeded plan net position:
Less:
39
Total employer pension liability
Plan net position
Employer net pension liability
$10,000
9,300
$ 700
Discount Rate
40
Item
Current treatment Future treatment
Discount rate
Long term
investment yield
for the plan
Single rate that blends
• The long-term expected rate of return on
plan investments (funded portion of
projected payments)
• High quality tax-exempt municipal bond
index rate (unfunded portion of projected
payments)
Actuarial Method
Item
Current treatment
Actuarial Method
Method used for
used for accounting
funding purposes
and financial reporting
41
Future treatment
Single method = entry age
(even if another method is used
for funding purposes)
Pension Expense
42
Item
Current treatment
Future treatment
Pension expense
ARC
(adjusted for the cumulative
effect of prior under and
overfunding)
Composite effect of changes in
the employer’s net pension
liability (except for deferred
outflows/inflows of resources)
Deferral and Amortization
43
Item
Current treatment
Future treatment
Effects of a change
in benefits
Amortize over a
period not to exceed
30 years
• Recognize pension expense
immediately to the extent the
change is attributable to prior
service
• Amortize the balance over the
remaining service life of the
affected individual
Changes in Economic and
Demographic Assumptions
44
Item
Current treatment
Future treatment
Effect of changes in
economic and
demographic
assumptions
Amortize over a period
not to exceed 30 years
Amortize over the
remaining service life of
the affected individuals
(immediate recognition
as part of pension
expense for those who
are no longer active
employees)
Differences between Economic and Demographic
Assumptions and Actual Experience
45
Item
Current treatment
Future treatment
Effect of differences
between economic
and demographic
assumptions and
actual experience
Amortize over a period
not to exceed 30 years
Amortize over the remaining
service life of the affected
individuals (immediate
recognition as part of pension
expense for those who are no
longer active employees)
Difference between the Expected Rate of Return on
Plan Investments and Actual Experience
Item
Current treatment
Effects of
Amortize over a period
differences between not to exceed 30 years
the expected rate of
return on plan
investments and
actual experience
46
Future treatment
Amortize over a five-year
closed period
Cost-sharing defined benefit plans
Assume, for example, the following facts regarding a cost-sharing pension plan
and one of its participating employers (City of Example):
Total pension liability—all participating employers
$10,000
Total plan net position
$8,500
Contractually required contributions for current period
City of Example:
$5
Employers—total:
$100
Actual contributions for current period
City of Example:
$5
Employers—total:
$100
Further assume that the contributions of participating employers are expected to
remain stable over the long term in relation to employer contributions in total.
47
Cost-sharing defined benefit plans (cont.)
Currently, the City of Example would not report any liability since it paid its
contractually required contribution in full. In the future, however, the City of
Example will have to report its proportionate share of the total net pension
liability, calculated as follows:
Total pension liability—all participating employers
$10,000
Less:
Total plan net position
8,500
Net pension liability—all participating employers
$ 1,500
City of Example’s proportionate share of total contribution effort:
$5 City of Example/$100 employers in total = 5%
City of Example’s proportionate share of total net pension liability:
$1500 Net pension liability—all participating employers
x .05 City of Example’s proportionate share of contribution effort
$ 75 Net pension liability—City of Example
48
GASB Implementation Guide to Statement No. 67
 Intended to serve as a reference guide and an instructional tool to help
readers in applying provisions of Statement No. 67
 Released in June 2013, one year after Statement No. 67 was approved
 Questions and Answers (pages 1 to 27) – these ninety-nine Q&A’s are
serve two purposes:
1) Ready references for implementers who may encounter similar
questions or situations.
2) Provide a basis for resolving issues that an implementer may apply to
a question or situation not specifically addressed in this Guide.
 Glossary of terms (forty) are presented in Appendix 1 (pages 29 to 33) as
they are used in Statement 67. The terms may have different meanings in
other contexts.
 Appendix 2 (pages 35 to 48) – Summary of the Standards of Governmental
Accounting and Financial Reporting of this Statement for state and local
government pension plans. Includes a summary of the notes to financial
statements and required supplementary information.
49
GASB Implementation Guide to Statement No. 67
50
 Appendix 3 (pages 49 to 92) – presents expanded illustrations from
Statement 67, along with two additional illustrations developed for this
Guide.
1) Calculation of Money-Weighted Rate of Return – required by paragraph 30b(4) of No. 67. Considers the changing amounts actually
invested during a period and weights the amount of pension plan
investments by the proportion of time they are available to earn a
return during that period.
2) Reconciliation of Amounts Presented in the Financial Statements
to Amounts Used in Determining Money-Weighted Rate of
Return – key components include beginning and ending investments,
and net external cash flows into and out of pension plan investments.
3) Calculation of the Discount Rate – example of the projections and
calculations used to determine the discount rate as required by paragraphs 40 to 45 of Statement No. 67.
a) Table 1 – Projection of Contributions – assumed to be projected
cash flows into and out of pension plan.
GASB Implementation Guide to Statement No. 67
 Appendix 3 (Continued)
3) Calculation of the Discount Rate
b) Table 2 – Projection of Pension Plan’s Fiduciary Net Position the beginning of each period
c) Table 3 – Actuarial Present Values of Projected Benefit
Payments – assume long term expected rate of return
4) Determination of Certain Amounts to Be Presented in a Pension
Plan’s Required Supplementary Information Schedule of Contribution-Related Information
5) Financial Statements, Note Disclosures, and Required Supplementary Information for a SINGLE Employer Pension Plan
6) Financial Statements, Note Disclosures, and Required Supplementary Information for a MULTIPLE Employer Pension Plan
 Topical Index (pages 93 to 97)
51
Wednesday, October 16, 2013
Citrus Hills Golf and Country Club
Hernando, Florida
New Pension Accounting
Standard:
A Game Changer!
NATURE COAST
GOVERNMENT FINANCE OFFICERS
ASSOCIATION
(LOCAL CHAPTER OF THE FGFOA)
Bert A. Martinez, CPA
Purvis, Gray and Company, LLC
Senior Audit Manager
Sarasota Office
BAM@purvisgray.com
Copyright © 2011 GRS – All rights reserved.