League of Minnesota Cities
Fiscal Futures Policy Committee
August 28, 2013
Presented by:
Dave DeJonge, Assistant Executive Director, PERA
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 governmentwide 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.
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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
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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.
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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.)
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GASB Statement 68
Impact 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.
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How GASB 68 Affects Employers
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.
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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:
Large City
Medium City
Small City
$2.9 million
$400,000
$42,000
No Idea
No Idea
No Idea
Employer portion of PERA
unfunded liability
$74 million
$12 million
$570,000
City’s net position (2012)
$1.1 billion
$63 million
$10 million
Old GASB
PERA annual contributions
(Annual expense)
New GASB
Employer portion of pension
expenses for the year
NOTE: Allocation of unfunded liability is estimated.
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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
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GASB Statement No. 68
Required 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.
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GASB 67-68 Timeline:
Measurement Date for Cities
Actuarial
valuation
measurement
date
Release of
6/30/15
actuarial
valuation
results
Cities use
6/30/15
actuarial
valuation
results
PERA
publishes
results
Measurement Period
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.
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What is PERA Working On in 2013?
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
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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.
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Next Steps
 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
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