Public Employees Retirement Association of Minnesota
GASB 68—The New World of Employer
Pension Accounting and Reporting
December 17, 2013
Presenter: Dave DeJonge, PERA
Moderator: Gary Carlson, LMC
Public Employees Retirement Association of Minnesota
Agenda
 Background
 Summary of Provisions
 Net Pension Liability
 Pension Expense
 Footnotes
 RSI Schedules
 What PERA Will Provide
 Audit Issues
 Next Steps
Public Employees Retirement Association of Minnesota
Background
 GASB 68 applies to pension plans (DB and DC)
administered through a trust in which:
 Contributions from employers and non-employer
contributing entities are irrevocable;
 Plan assets are dedicated to providing pensions to
plan members; and
 Plan assets are protected from creditors of employers,
the plan administrator, and plan members.
Public Employees Retirement Association of Minnesota
Background
 There are several reasons GASB made changes to
pension accounting and reporting standards:
 GASB 34 required employers to develop full accrual
government-wide financial statements;
 GASB concept statement 4 defined liabilities that need
to be shown on the face of the financial statements;
 Users of financial statements requested more
information about unfunded pension liabilities; and
 GASB’s emphasis is on comparability between
reporting entities and the use of similar accounting
standards with the international/corporate community
Public Employees Retirement Association of Minnesota
Background
“The new standards will improve the way state and
local governments report their pension liabilities and
expenses, resulting in a more faithful representation of
the full impact of these obligations. Among other
improvements, net pension liabilities will be reported
on the balance sheet, providing citizens and other
users of these financial reports with a clearer picture of
the size and nature of the financial obligations to
current and former employees for past services
rendered.”
Former GASB Chairman Robert Attmore
Public Employees Retirement Association of Minnesota
Effective Dates
 GASB 67, Financial Reporting for Pension Plans, is
effective 6/30/14 for PERA
 GASB 68, Accounting and Financial Reporting for
Pensions, is effective for fiscal years beginning after
6/15/14
 Cities: Effective Date 12/31/2015
 School Districts: Effective Date 6/30/15
Public Employees Retirement Association of Minnesota
Current Standards
 Pension costs are directly related to funding.
 Pension Expense is equal to an employer’s
contributions paid to PERA.
 A Pension Liability is only booked if the employer’s
required contributions were not fully paid.
 PERA’s unfunded liability is disclosed in PERA’s
footnotes.
 Footnote disclosures are limited to a description of
benefits and contribution amounts for 3 years.
Public Employees Retirement Association of Minnesota
Summary of Provisions
 The Net Pension Liability (NPL) replaces the
Unfunded Actuarial Accrued Liability (UAAL).
 The NPL is calculated differently than how we
calculate the UAAL.
 The annual change in the NPL is recognized as
Pension Expense or Deferred Inflows/Outflows of
Resources, depending on the nature of the change.
 GASB assumes the employer is ultimately
responsible for paying off any unfunded liability.
Public Employees Retirement Association of Minnesota
Summary of Provisions
 Employers include their proportional share of the
NPL and Pension Expense on the face of their
government-wide financial statements.
 Each employer’s proportional share will be
determined based on contributions paid to PERA
during the measurement period.
 New extensive footnote disclosures will be required.
 Two new RSI schedules will be required.
Public Employees Retirement Association of Minnesota
Net Pension Liability (NPL)
 Equal to the Total Pension Liability (TPL) minus
PERA’s Fiduciary Net Position.
 Similar to Unfunded Liability calculation except:
Unfunded Liability
NPL
Discount Rate
Long-term rate of
investment return
Long-term rate of return
and possibly a 20-year
municipal bond index
rate combination
Asset Valuation
Smoothed actuarial
value of assets
Fair (market) value of
assets
Actuarial cost method Use one of 6 possible Entry Age Normal
methods
Public Employees Retirement Association of Minnesota
Net Pension Liability (NPL)
 The NPL will be allocated to all of PERA’s employers
and included as a liability on the government-wide
financial statements.
 The allocation method will be based on employer’s
contributions paid to PERA in relationship to all
employer contributions received.
Employer
Contributions
Paid to PERA
PERA’s Total
ER Contrib.
Proportionate
Share (%)
Total
NPL
Proportionate
Share of NPL ($)
City A
$830,387
$375,000,000
0.221%
$4.5 Billion
$9,945,000
City B
$ 62,590
$375,000,000
0.017%
$4.5 Billion
$765,000
Public Employees Retirement Association of Minnesota
Net Pension Liability (NPL)
 Calculated as of a “Measurement Date” which will
always be June 30, PERA’s fiscal year end.
 Measurement Date must be no earlier than the end
of the employer’s prior fiscal year.
Prior Fiscal Year End
Employer’s Fiscal Year End
Measurement
Date
June 30, 2014
December 31, 2014
June 30, 2015
December 31, 2015
Public Employees Retirement Association of Minnesota
Net Pension Liability (NPL)
 Estimate of NPL for General Plan:
2013 PERA Contribution / $375,000,000 x $4.5 Billion
 Estimate of NPL for Police & Fire Plan:
2013 PERA Contribution / $126,000,000 x $1 Billion
Public Employees Retirement Association of Minnesota
Pension Expense (PE)
 No longer tied to funding (contributions)
 Directly tied to changes in the NPL from one year to
the next
 Must be calculated by PERA’s actuary
 Will likely be very volatile
 May be a negative expense (revenue)
Public Employees Retirement Association of Minnesota
Pension Expense (PE)
 Calculated during the “Measurement Period” ending
on the Measurement Date, always 6/30/20xx
Measurement Period
Prior
Measurement
Date
June 30, 2014
Prior Fiscal Year End
Employer’s Fiscal Year End
Measurement
Date
December 31, 2014
June 30, 2015
December 31, 2015
Public Employees Retirement Association of Minnesota
Pension Expense (PE)
 NPL Components immediately recognized in PE:
Item
Effect on PE
Service Cost (Normal Cost)
Increase
Interest on the TPL
Increase
Projected Investment Earnings
Decrease
Member Contributions
Decrease
Administrative Costs
Increase
Benefit Provision Changes
Increase or Decrease
Public Employees Retirement Association of Minnesota
Pension Expense (PE)
Components deferred and recognized later include:
Item
Amortization Period
Difference between actual and projected
earnings on investments
5 Years
Changes in actuarial assumptions (mortality,
disability, salary growth, inflation, payroll
growth, etc.)
Closed period equal to the
average of the expected
remaining service lives of
all employees (active,
inactive, and retirees)
Difference between actual and assumed
actuarial experience
Deferred portions are accumulated as “deferred outflows of
resources” or “deferred inflows of resources” and
recognized as PE in future years.
Public Employees Retirement Association of Minnesota
Example
Item
Pension Expense
Deferred Outflows
Deferred Inflows
Service Cost
$20,000
Interest on TPL
$10,000
Projected Investment Earnings
$ (8,000)
Member Contributions
$ (1,000)
Admin Expenses
$
100
Change in Benefit Provisions
$
(200)
Change in Assumptions (8 years)
$
100
$ 1,000
$ 300
Diff. Between Assumed and Actual
Experience (8 years)
$
(50)
$
$ 500
Diff. Between Actual & Projected
Investment Earnings (5 Years)
$
(100)
Total
$20,850
150
$ 400
$ 1,150
$1,200
Public Employees Retirement Association of Minnesota
Employer Contributions
 During the measurement period
 Directly reduce NPL (no expense impact)
 Subsequent to measurement date
 Deferred outflow of resources related to pensions
 Directly reduce NPL in next reporting period
Public Employees Retirement Association of Minnesota
Employer Contributions
 Booking ER Contrib. during the Employer’s fiscal year
Measurement Period
Prior
Measurement
Date
Prior Fiscal Year End
Employer’s Fiscal Year End
Measurement
Date
Reduce NPL
June 30, 2014
December 31, 2014
Def Outflows
June 30, 2015
December 31, 2015
Public Employees Retirement Association of Minnesota
Footnote Disclosures
Disclosure
Reference Source of Info
Total of employer’s pension liabilities, pension assets, deferred
outflows/inflows related to pensions, and pension expense for the period (if
not identifiable in financials)
74
PERA
Name of pension plan(s), type of plan, entity that administers the plan
76.a.
PERA or Employer
Description of benefit terms, including types of employees covered, types
of benefits, pension formulas, COLAs, and authority under which benefit
terms are established
76.b.
PERA or Employer
Description of contribution requirements, including how contributions are
determined, how rates are changed, actual contribution rates, and the
amount of contributions recognized by the pension plan for that period.
76.c.
PERA or Employer
How to obtain PERA’s CAFR
76.d.
PERA or Employer
Significant assumptions/inputs used to measure the total pension liability,
including: inflation, salary changes, COLAs, mortality, and dates of
experience studies on which assumptions are based.
77
PERA
Discount rate applied when measuring the TPL and change in the discount
rate since the prior measurement date, if any.
78.a.
PERA
Assumptions made about projected cash flows when calculating the
discount rate.
78.b.
PERA
Public Employees Retirement Association of Minnesota
Footnote Disclosures
Disclosure
Reference Source of Info
Long-term expected rate of return and how it was determined, including
significant methods and assumptions used for that purpose.
78.c.
PERA
If the discount rate incorporates a municipal bond rate, the bond rate used
and source of that rate.
78.d.
PERA
Periods of projected benefit payments to which long-term ROR is used and
municipal bond rate is used when determining the discount rate.
78.e.
PERA
Assumed asset allocation of portfolio, long-term expected real ROR for
each asset class, whether ROR is presented as arithmetic or geometric.
78.f.
PERA
Employer’s NPL calculated using discount rates that are 1% higher and 1%
lower than the actual discount rate used to calculate the TPL.
78.g.
PERA
The fiduciary net position used to calculate the NPL has been determined
on the same bases used by PERA, and a brief description of PERA’s basis
of accounting, including policies regarding benefit payments and the
valuation of plan investments.
79
PERA
Employer’s proportionate share (amount) of the collective NPL
80.a.
PERA
Employer’s percentage share of the collective NPL, the basis on which its
proportion was determined, and any change in its proportion since the prior
measurement date.
80.b.
PERA
Public Employees Retirement Association of Minnesota
Footnote Disclosures
Disclosure
Reference Source of Info
Measurement date of NPL and date of actuarial valuation on which the TPL
is based.
80.c.
PERA
Assumption changes or other inputs that affected measurement of the TPL
since the prior measurement date
80.d.
PERA
Changes of benefit provisions that affected measurement of the TPL since
the prior measurement date
80.e.
PERA
Nature of changes between the measurement date of the NPL and the
employer’s reporting date—if they are expected to have a significant effect
on the employer’s share of the NPL in the future.
80.f.
PERA/Employer
Amount of Pension Expense recognized by the employer in the reporting
period.
80.g.
PERA/Employer
Amount of revenue recognized for the support provided by a non-employer
contributing entity, if any.
80.j.
Employer
Public Employees Retirement Association of Minnesota
Footnote Disclosures
Disclosure
Reference Source of Info
Employer’s balances of deferred outflows/inflows of resources related to
pensions, classified in 5 categories
80.h.
Difference between expected and actual experience
PERA/Employer
Deferred Outflows
of Resources
Deferred Inflows
of Resources
$
$
Change of actuarial assumptions
2,657
1,714
130
Net difference between projected and actual earnings on
investments
2,188
Changes in proportionate share
City’s contributions subsequent to measurement date
Totals
142
$
747
153
1,065
0
6,183
$
2,613
Public Employees Retirement Association of Minnesota
Footnote Disclosures
Disclosure
Reference Source of Info
Schedule showing net amount of balances of deferred outflows/inflows that
will be recognized in the employer’s pension expense and recognized as a
reduction in the NPL in the future.
80.h.
PERA/Employer
$1,065, reported as deferred outflows of resources related to pensions resulting from the City’s contributions
subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year
ended December 31, 20Y0. Other amounts reported as deferred outflows/inflows of resources related to
pensions will be recognized in pension expense as follows:
Year ended Dec. 31:
20Y0
$
(269)
20Y1
161
20Y2
217
20Y3
545
20Y4
551
Thereafter
1,300
Public Employees Retirement Association of Minnesota
Required Supplementary Information (RSI)
 Two 10-year schedules
 May be built prospectively
 Separate schedules for each pension plan
 PERA’s General Employees Retirement Fund
 PERA’s Police & Fire Fund
 MERF
 Notes to RSI will include significant changes in
actuarial assumptions, benefit provisions, etc. that
affect the identification of trends in RSI schedules
Public Employees Retirement Association of Minnesota
Required Supplementary Information (RSI)
CITY’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY
PERA General Employees Retirement Fund
Last 10 Fiscal Years* (Dollar amounts in thousands)
6/30.
Public Employees Retirement Association of Minnesota
Required Supplementary Information (RSI)
PERA General Employees Retirement Fund
Last 10 Fiscal Years
(Dollar amounts in thousands)
Public Employees Retirement Association of Minnesota
What Will PERA Provide?
 Total Pension Liability (Collective Level)
 PERA’s Fiduciary Net Position
 Total Net Pension Liability
 Total Pension Expense/Deferred Inflows & Outflows
 Proportionate Share for Each Employer
 Employer Contributions (Individual and Collective)
 Footnote Disclosure Information
Public Employees Retirement Association of Minnesota
Audit Issues
 The Net Pension Liability, Pension Expense, and
other pension costs will come from PERA
 Allocation of employer proportional shares is not a
schedule that is required to be audited by PERA’s
auditor as part of the financial statements
 How does an employer get comfortable that these
amounts as of the measurement date are accurate
and verifiable?
Public Employees Retirement Association of Minnesota
Audit Issues
 AICPA Audit Standards & Recommendations are
being developed (Guidance within 30 days)
 Employer Allocation, NPL, Pension Expense
numbers from PERA will be audited by the
Legislative Auditor’s Office
 Will the City’s auditor need anything additional in
order to issue an unqualified opinion?
Public Employees Retirement Association of Minnesota
Summary
GASB 25-27
GASB 67-68
IMPLICATIONS
Pension expense is equal to employer
contributions sent to PERA
Pension expense is related to the change
in net pension liability each year.
Pension expense will be volatile. Cannot
be calculated by the employer.
Pension systems’ unfunded liability does
not impact individual employer financial
statements.
Employer must show proportionate share
of the Net Pension Liability (unfunded
liability) on balance sheet.
Employers, who previously did not have a
pension liability, now have a large liability
shown on the balance sheet.
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.
Accounting numbers linked to funding
numbers. De facto standard for
contributions.
Decoupling of accounting and funding
numbers.
Two sets of numbers confusing and hard
to explain, and may cause “panic” by
citizens and governing bodies.
Unfunded liability can be amortized over
maximum 30 years regardless of source of
UAL (plan amendment, assumption
change, gain/loss).
Shorter amortization. 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.
Public Employees Retirement Association of Minnesota
Summary
 New accounting numbers are unrelated to funding
 Contribution rates still set in MN State Statute
 Three ways to measure pension fund status:
 Books—GASB 67-68 for CAFR publication
 Budget—GASB 25 actuarial reports for funding
 Bonds—Moody’s: 5.5% investment assumption, 17
year amortization period
Public Employees Retirement Association of Minnesota
Next Steps
 GASB 68 Toolbox
 “How To” Videos
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Basic Concepts
Calculating Pension Costs
Determining Proportionate Shares
Deferred Inflows/Outflows of Resources
Pension Accounting Journal Entries
Transition Year Transactions
Footnote Disclosures
Accounting for Changes in Proportionate Share
Public Employees Retirement Association of Minnesota
Next Steps
 GASB 68 Toolbox (Contd.)
 Spreadsheets/Templates
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Calculating Pension Expense
Calculating Deferred Inflows/Outflows of Resources
Maintaining Deferred Inflow/Outflow Balances
Calculating Employer’s Share of the NPL
Contribution Reconciliation
 Implementation Guide for Employers
 Talking Points for Governing Boards
Public Employees Retirement Association of Minnesota
More Information
 GASB Website—Educational Resources
 Podcasts
 Fact Sheets
 PERA’s Website—Employer tab
 GASB 68 Toolkit
 Contact Dave DeJonge
dave.dejonge@mnpera.org