GASB 67/68 and its Implications

advertisement
GASB’ing For Air!
Brad Heinrichs, FSA, EA, MAAA
What’s GASB?
• Governmental Accounting Standards Board
– Applies Generally Accepted Accounting Principles
(GAAP)
– Tells plans and cities how to account for pensions
– Goal is to seek unqualified opinion of “GASB
compliance.”
Oh, Please Tell Me More!
• Currently
– Accounting liabilities are identical to the funding
liabilities
– Public entity records as a liability on their books
the cumulative difference between what the
actuary says is required (ARC) versus what the
entity actually contributes
• For actuarially determined contribution plans, it is likely
that the entity currently records a $0 liability
More, Please!
• Currently
– Funding and Accounting numbers are married!
GASB Has Become Unhappy With the Marriage
What’s About to Happen?
This Didn’t Happen Overnight…
• June 2012: The Governmental Accounting Standards
Board (GASB) issued GASB Statements Nos. 67 and 68
– Amended GASB Statement No. 25 for Plan reporting
– Amending GASB Statement No. 27 for Employer reporting
• The Statements were finally issued after our repeated
efforts to stall the process
–
–
–
–
An Invitation to Comment in 2009
A Preliminary Views document in 2010
Related hearings and testimony, field testing
Exposure Draft issued in July 2011
What’s the Impact?
• Accounting liabilities will likely be higher than
funding liabilities
• Accounting liability may need to be recorded for
first time
– Might cause employers to rethink defined benefit plan
– May impact credit ratings
•
•
•
•
Will not increase contribution rates
Will increase confusion
Might bring increased scrutiny to the plan
Increased actuarial fees!
When Does This Go Into Effect?
• GASB 67 Plan Reporting
– Effective for fiscal years beginning after June 15,
2013
– For plans with a December 31 fiscal year end,
December 31, 2014 financial statements
• GASB 68 Employer Reporting
– Effective for fiscal years beginning after June 15,
2014
– For employers with a December 31 fiscal year end,
December 31, 2015 financial statements
When Does This Go Into Effect?
• For practical purposes, many plans will choose to
use a valuation date for liabilities a year or two
prior to the fiscal year end date
– Otherwise, may have trouble satisfying the audit team
from a timing standpoint
– GASB 67 – For 6/30/2014
• Could use 7/1/2013 valuation liabilities walked forward to
6/30/2014 and MVA as of 6/30/2014
– GASB 68 – For 6/30/2015
• Could use same valuation liabilities and MVA as GASB 67 in
prior year!
Basic Terminology Changes
• Employers recognize the Net Pension Liability (NPL) on their
balance sheets (where NPL is code for the Unfunded Accrued
Liability based on Market Value of Assets)
– This replaces the Net Pension Obligation (NPO) that is being recorded
currently
– Remember, the NPO is the cumulative difference between what is
actuarially required and what is contributed
• Employers recognize a new measure of the Pension Expense (PE) on
their income statements, which would be different from their
actuarially determined contributions (ARC)
– Replaces most of the current note disclosures and required
supplementary information with information based on the new
measures
Old—GASB 25/27
• Calculations based upon methods and
assumptions blessed by GASB
– 6 allowable actuarial cost methods
– Long term expected rate of return on assets is the
discount rate
– Amortizations of any kind (gains/losses,
assumption changes, benefit changes, etc.) over a
maximum of 30 years
• Cost Sharing plans could basically ignore GASB
25/27
New—GASB 67/68
New—GASB 67/68
• Total Pension Liability (TPL)– Like the Actuarial
Accrued Liability (AAL) except:
– Must use Entry Age Normal Cost Method
– Must use blended discount rate (between long-term
expected rate of return and municipal bond rate)
• Net Pension Liability (NPL)—Equals the TPL less
the Market Value of Assets!
– Must also report NPL using a discount rate +/- 1%
– Cost Sharing plans are on the hook for “proportionate
share”
New—GASB 67/68
• Pension Expense (PE)
– Also based upon blended discount rate and Entry
Age Normal
– Shorter amortization periods (no longer up to 30)
• 5 yrs for investment gains/losses
• Avg Future Working Lifetime for other gains/losses or
assumption changes
• Immediate recognition of benefit changes
– Cost Sharing plans are on the hook for
“proportionate share”
Life as we know it
• Results of Actuarial Valuation
Funding Results
Accounting
(GASB 25)
Results
Actuarial Accrued Liability
$2,100,000
$2,100,000
Actuarial Value of Assets
$1,500,000
$1,500,000
$600,000
$600,000
Funded Ratio
71%
71%
Employer’s 30-Year ARC
14%
14%
Unfunded Liability
• One set of valuation results based on Board-adopted
assumptions
• Look familiar?
16
Life as we know it
• Highlights of basic case study
– Only one benefit structure
– Assuming 7.5% return on assets
– Actuarial valuation based on individual entry age
normal method
17
Overnight, the world changes
• Results of the valuation based on the Board’s
adopted assumptions (the “funding valuation”) are
unchanged
• GASB 67 liability (“accounting valuation”) requires a
few more steps
– Must project fund balance using projected contributions
and benefit payments
– If the fund is projected to be depleted, based on GASB’s
procedures, the plan has a dreaded “crossover date” !
18
Expanding the case study
• Two similar retirement plans
–
–
–
–
–
Same benefits
Same assumptions
Same funded status based on Board’s assumptions
Same investment policy
Different employer contribution policy
• Under GASB 25, the plan liabilities would the same
• Under GASB 67, the plan liabilities will be different
due to the blended discount rate
19
Best Case –
City of Responsiblefundingville
• Employer is committed to contributing 17%
– 30-year “ARC” is 14%
– Projected to be fully funded in 15 years
• Fund will not be projected to run out of money
– …even using the GASB procedures
– No “crossover date”!
– Will not have to blend long term rate of return (7.50%) with
a much lower bond rate
– GASB 67 AAL = Funding AAL
20
Less than Best Case –
Town of Shortarmsdeeppockets
• Employer is contributing 10%
• Fund is projected to run out of money
– “Crossover date” in year 27
• Must calculate liability based on blended rate
– Benefit payments before crossover date discounted at long
term rate of return (7.50%)
– Benefit payments after crossover date discounted at bond
rate (4.00%)
– Effective discount rate for accounting purposes is 6.20%
– GASB 67 AAL >> Funding AAL
21
Crossing Over
$4,000,000
$3,500,000
Projected Benefit Payments
$3,000,000
Trust Balance for Advance Funding*
Trust Balance for Under Funding*
$2,500,000
$2,000,000
This portion of projected
benefit payments discounted
using bond rate
$1,500,000
$1,000,000
Crossover Date
$500,000
$0
1
22
3
5
7
9
11
13
15
17
19
21
23
25
* Using GASB specified methodology for determining crossover date
27
29
31
33
35
37
39
A Look at the Numbers
Funding Valuation/
GASB 25
City of
Responsiblefundingville
Town of
Shortarmsdeeppockets
Actuarial Accrued Liability
$2,100,000
$2,100,000
Actuarial Value of Assets
$1,500,000
$1,500,000
$600,000
$600,000
71%
71%
Total Pension Liability
$2,100,000
$3,300,000
Plan Fiduciary Net Position (MVA!)
$1,400,000
$1,400,000
$700,000
$1,900,000
67%
42%
Unfunded Accrued Liability
Funded Ratio
GASB 67
Plan Net Pension Liability
Plan Fiduciary Net Position as a percentage of
the Total Pension Liability
23
A Look at the Numbers
Funding Valuation/
GASB 27
City of
Responsiblefundingville
Town of
Shortarmsdeeppockets
Annual Pension Cost
$200,000
$200,000
Contributions Made
$242,000
$142,000
Increase in Net Pension Obligation (NPO)
($42,000)
$58,000
($1,000,000)
$1,000,000
Net Pension Obligation (NPO)
GASB 68
Total Pension Liability
$2,100,000
$3,300,000
Plan Fiduciary Net Position (MVA!)
$1,400,000
$1,400,000
$700,000
$1,900,000
Plan Net Pension Liability (NPL)
24
Download
Related flashcards

Finance

14 cards

Banking

21 cards

Finance

16 cards

Banks of Germany

43 cards

Banks of Russia

30 cards

Create Flashcards