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