1
THE NEW PENSION
ACCOUNTING AND ITS
IMPACT ON FUNDING
CSFMO
Oakland, California
February 21, 2013
2
GASB STATEMENT NO. 68
Summary of changes
3
Our focus
• Employers in single employer and agent multiple-
employer defined benefit plans
• Employers in cost-sharing plans
4
SINGLE-EMPLOYER AND
AGENT PLANS
Changes for employers
5
Preliminary
• Only relevant for economic resources measurement focus
and accrual basis of accounting
• No effect on governmental funds
• Report expenditures rather than expense
• No effect on fund balance
6
Key changes
1. Employer liability
2. Employer expense
3. Discount rate
4. Actuarial method
5. Amortization
6. Timing
7
1. Employer liability
• Now:
Less:
Annual required contribution (ARC)
Actual contributions
Net pension obligation (NPO)
• Future:
Less:
Total pension liability (TPL)
Fiduciary net position (FNP)
Net pension liability (NPL)
8
Employer liability - Illustration
9
2. Employer expense
• Now:
• Calculation tied to funding
• ARC adjusted for the cumulative effect of prior differences between
required contributions and actual contributions
• Future:
• Calculation tied to cost
• Changes in the net pension liability (NPL)
10
Components of expense
• Annual service cost
• Interest on the net pension liability
• Projected earnings on plan investments
• The full effect of any changes in benefit terms
• Amortization of deferred outflows/inflows of resources
11
3. Discount rate
• Now:
• Estimated long-term investment yield for the plan, with
consideration given to the nature and mix of current and expected
plan investments
• Future:
• Modification necessary if it is expected that FNP will not be
sufficient to pay benefits to active employees and retirees
• Single blended rate
12
Discount rate – single blended rate
• Single rate equivalent to the combined effect of using the
following rates:
• For projected cash flows up to the point the FNP will be sufficient
• Long-term expected rate of return on plan investments
• For projected cash flows beyond that point
• A yield or index rate on tax-exempt 20-year, Aa-or-higher rated
municipal bonds.
13
4. Actuarial method
• Now:
• Whatever actuarial method is used for funding
• Six acceptable methods
• Must be applied within parameters defined by GASB
• Future:
• No tie to actuarial method used for funding
• All employers will use the entry age method for accounting and financial
reporting purposes (with service cost determined as a percentage of
pay)
14
5. Amortization
• Background
• Circumstances that could affect the net pension liability (NPL)
A. Changes in benefit terms
B. Changes in economic and demographic assumptions
C. Differences between economic and demographic assumptions and
actual experience (other than investment returns)
D. Differences between expected and actual investment returns
• Now:
• Effect amortized over a period not to exceed 30 years
• Future:
• Effect to be amortized over a much shorter period
• Different periods, depending on the circumstances
15
Future amortization periods
A. Changes in benefit terms
• Immediate recognition
B. Changes in economic and demographic assumptions
• Closed period equal to average remaining service period of plan
members (average remaining service period of retirees = 0 years)
C. Differences between economic and demographic
assumptions and actual experience (other than
investment returns)
• Closed period equal to average remaining service period of plan
members (average remaining service period of retirees = 0 years)
D. Differences between expected and actual investment
returns
• Closed 5-year period (including current period)
16
6. Timing
• Now:
• Timing of actuarial valuation
• Within 24 months of start of valuation period
• Future:
• Measurement date for assets and TPL
• No earlier than 1 year + 1 day prior to reporting date
• Actuarial valuation date
• Up to 30 months before employer reporting date
• Update to “roll forward” to measurement date
17
COST-SHARING PLANS
Changes for employers
18
Key changes
1. Employer liability
2. Employer expense
19
1. Employer liability (cost-sharing)
• Now:
• Liability only if employer contribution is less than the contractually
required amount
• Future:
• Liability equal to the employer’s proportionate share of the total
NPL of all participating employers
20
2. Employer expense (cost-sharing)
• Now:
• Expense = contractually required contribution
• Future:
• Expense = employer’s proportionate share of total pension
expense of all participating employers
21
EFFECTIVE DATE
Employers
22
Effective date of GASB Statement No. 68
• Implementation first required
• Fiscal year ending 6/30/15
• Earlier application encouraged
• Requires cooperation of the pension plan
23
FUNDING CHALLENGE
Accounting v. funding
24
Background: Historic contribution of
GASB Statement No. 27
• Set parameters to ensure reasonable application of actuarial
methods
• Displayed whether employers were meeting the goal of
systematic and rational funding each period
• Highlighted the cumulative financial impact of underfunded
contributions
• Information on funding progress also provided
• Notes
• Required supplementary information (RSI).
25
Changes resulting from GASB Statement
No. 68
• Elimination of GASB parameters
• Compromises the usefulness of the actuarially determined
contribution (ADC) for other purposes by eliminating
standardization
• No automatic requirement to provide information on
funding progress
• Required only if an ADC is calculated or contribution is statutorily
mandated
26
DEVELOPMENT OF PENSION
FUNDING GUIDELINES
Response to GASB Statement No. 68
27
Objective
• Provide guidance on funding in the wake of GASB
Statement No. 68
• Take advantage of the fact that GASB Statement No. 68
requires the presentation of funding data if an ADC is
used for funding purposes
28
Task force
• Convening organization – Center for State and Local
Government Excellence
• Membership
• “Big seven”
• Other organizations invited to participate
29
“Big seven”
• National Governors Association (NGA)
• National Conference of State Legislatures (NCSL)
• Council of State Governments (CSG)
• National Association of Counties (NACo)
• National League of Cities (NLC)
• U.S. Conference of Mayors (USCM)
• International City/County Management Association
(ICMA)
30
Other participating organizations
• National Association of State Auditors, Comptrollers and
Treasurers (NASACT)
• Government Finance Officers Association (GFOA)
• National Association of State Retirement Administrators
(NASRA)
• National Council on Teacher Retirement (NCTR)
31
Approach
• Closely modeled on the work of the California Actuarial
Advisory Panel
32
Structure
• Five policy objectives
• Starting point = funding based upon an actuarially determined ARC
• Application of policy objectives to three core elements
• Actuarial costs
• Asset smoothing
• Amortization policy
• Recognition that employers may need to adopt a
transition plan to phase in the new practices over a period
of years.
33
General policy objectives
• Actuarially Determined Contributions
• Funding Discipline
• Intergenerational equity
• Contributions as a stable percentage of payroll
• Accountability and transparency
34
Actuarially determined contributions
• A pension funding plan should be based upon an
actuarially determined annual required contribution (ARC)
that incorporates both the cost of benefits in the current
year and the amortization of the plan’s unfunded actuarial
accrued liability.
35
Funding discipline
• A commitment to make timely, actuarially determined
contributions to the retirement system is needed to ensure
that sufficient assets are available for all current and
future retirees.
36
Intergenerational equity
• Annual contributions should be reasonably related to the
expected and actual cost of each year of service.
37
Contributions as a stable
percentage of payroll
• Contributions should be managed so that employer costs
remain consistent as a percentage of payroll over time.
38
Accountability and transparency
• Clear reporting of pension funding should include an
assessment of whether, how, and when the plan sponsor
will meet the funding requirements of the plan.
39
NEXT STEPS FOR GFOA
Best Practices
40
Overall best practice
• “Guidelines for Funding Defined Benefit Pensions”
• Every state and local government that offers defined benefit
pensions should formally adopt a funding policy that provides
reasonable assurance that the cost of those benefits will be funded
in an equitable and sustainable manner.
• Such a funding policy should incorporate each of the four principles
and objectives
1. Obtain ADC
2. Balance stable contributions and equitable allocation
3. Commit to funding full amount (with transition period, if needed)
4. Provide information needed to assess funding progress
41
1. Obtain ADC
• Every government employer that offers defined benefit
pensions should continue to obtain no less than biennially
an actuarially determined contribution (ADC) to serve as
the basis for its contributions
42
2. Balance contributions/allocation
• The ADC should be calculated in a manner that fully funds
the long-term costs of promised benefits, while balancing
the goals of 1) keeping contributions relatively stable and
2) equitably allocating the costs over the employees’
period of active service
43
3. Commit to funding full amount
• Every government employer that offers defined benefit
pensions should make a commitment to fund the full
amount of the ADC each period. For some government
employers, a reasonable transition period will be
necessary before this objective can be accomplished
44
4. Transparency
• Every government employer that offers defined benefit
pensions should demonstrate accountability and
transparency by communicating all of the information
necessary for assessing the government’s progress
toward meeting its pension funding objectives
45
Future best practices
• The GFOA intends to develop additional best practices
that will provide specific guidance on the practical
application of these principles and objectives to each of
the three core elements of a comprehensive pension
funding policy
1.
2.
3.
Actuarial cost method
Asset smoothing
Amortization.
46
AUDITING CHALLENGE
Participants in multiple-employer plans
47
Cost-sharing plans
• Issues:
• Who should calculate the allocation percentages?
• Who should calculate the allocated pension amounts?
48
Potential solution 1
• Opinion from plan auditor on
1. Supplemental schedule of employer allocations in plan financial
statements
2. Either:
a. Supplemental schedule of plan pension amounts
• Net pension liability
• Deferred outflows
• Deferred inflows
• Pension expense
b. Supplemental schedule of employer pension amounts
49
Example
EXAMPLE COST SHARING PENSION PLAN
Schedule of Employer Allocations
June 30, 2015
Employer/
2015
Nonmployer
Actual
Employer
(special funding
Employer
Allocation
situation)
Contributions Percentage
State of Example
$ 2,143,842
38.9 %
Employer 1
268,425
4.9
Employer 2
322,142
5.8
Employer 3
483,255
8.8
Employer 4
633,125
11.5
Employer 5
144,288
2.6
Employer 6
95,365
1.7
Employer 7
94,238
1.7
Employer 8
795,365
14.4
Employer 9
267,468
4.9
Employer 10
267,128
4.8
Total
$
5,514,641
100.0
50
Example
EXAMPLE COST SHARING PENSION PLAN
Schedule of Pension Amounts
June 30, 2015
Deferred Outflow of Resources
Deferred Inflows of Resources
Employer/
Nonmployer
(special funding
situation)
State of Example
Employer 1
Employer 2
Employer 3
Employer 4
Employer 5
Employer 6
Employer 7
Employer 8
Employer 9
Employer 10
Total
Net Pension
Liability
$
38,589,135
4,831,647
5,798,553
8,698,585
11,396,244
2,597,183
1,716,569
1,696,283
14,316,562
4,814,421
4,808,301
$
99,263,485
Differences
Between
Expected
and Actual
Economic
Experience
428,768
53,685
64,428
96,651
126,625
28,858
19,073
18,848
159,073
53,494
53,426
Differences
Between
Projected
and Actual
Investment
Earnings
2,058,088
257,688
309,256
463,925
607,800
138,516
91,550
90,468
763,550
256,769
256,443
Changes of
Assumptions
1,500,690
187,898
225,499
338,279
443,188
101,002
66,756
65,967
556,756
187,228
186,990
1,102,928
5,294,055
3,860,249
Changes in
Employer
Proportion
and Differences
Between
Contributions
and Proportionate
Share of
Pension
Expense
782,365
96,633
115,971
173,972
227,925
51,944
34,331
33,926
286,486
68,325
67,528
1,939,406
Differences
Between
Expected
and Actual
Economic
Experience
380,371
47,625
57,156
85,742
112,332
25,600
16,920
16,720
141,118
47,456
47,395
Differences
Between
Actual and
Projected
Investment
Earnings
1,063,285
133,131
159,773
239,681
314,012
71,563
47,298
46,739
394,478
132,657
132,488
978,435
2,735,105
Pension Expense
Changes in
Employer
Proportion
and Differences
Between
Contributions
and Proportionate
Share of
Changes of
Pension
Assumptions
Expense
–
584,365
–
125,325
–
245,386
–
125,632
–
386,325
–
42,358
–
24,325
–
125,325
–
152,005
–
87,325
–
41,035
–
1,939,406
Proportionate
Share of
Plan
Pension
Expense
1,878,717
235,229
282,303
423,492
554,828
126,444
83,571
82,584
697,004
234,391
234,093
4,832,655
Net
Amortization
of Deferred
Amounts from
Changes in
Propotion and
Proportionate
Share of
Pension
Expense
12,375
(1,793)
(8,088)
3,021
(9,900)
599
625
(5,712)
8,405
(1,188)
1,656
–
51
Agent multiple-employer plans
• Issue:
• Employer assurance regarding the following amounts as of
measurement date
• Total pension liability - fiduciary net position = net pension liability
• Deferred outflows/inflows
• Investment experience
• Changes in assumptions
• Actuarial gains and losses
• Pension expense
52
Potential solution – fiduciary net position
• Potential solution – fiduciary net position
• Opinion from plan auditor on
• Supplemental condensed schedule of changes in fiduciary position (by
employer)
• SOC 1 (type 2) report from plan auditor on
• Allocation of plan inflows to individual employer accounts
• Contributions
• Investment income
• Allocation of plan outflows to individual employer accounts
• Benefit payments
• Administrative expenses
53
Example
Example Agent Multiple-Employer PERS
Combining Schedule of Changes in Fiduciary Net Position
Year ended June 30, 2015
Employer 1
Additions:
Contributions:
Employer
Member
Investment income:
Total additions
Deductions:
Pension benefits, including refunds
Administrative expenses
Total deductions
Net increase (decrease)
Net position restricted for pension benefits:
Beginning of year
End of year
$
Employer 2
Employer 3
Total
86,252,000
32,662,000
80,965,000
199,879,000
34,500,000
13,065,000
20,347,000
67,912,000
51,751,000
19,597,000
37,112,000
108,460,000
172,503,000
65,324,000
138,424,000
376,251,000
384,635,000
4,716,000
389,351,000
(189,472,000)
184,352,000
1,886,000
186,238,000
(118,326,000)
228,356,000
2,829,000
231,185,000
(122,725,000)
797,343,000
9,431,000
806,774,000
(430,523,000)
5,843,645,000
5,654,173,000
1,468,538,000
1,350,212,000
2,678,595,000
2,555,870,000
9,990,778,000
9,560,255,000
54
Potential solution – other amounts
• Plan auditor
• Engaged to issue SOC 1 (type 2) report on census data controlled by
plan (retired employees)
• Plan actuary
• Issues separate actuarial report for each participating employer which
includes net pension liability, deferred outflows/inflows by type and
year, pension expense, and discount rate calculation
• Employer auditor
• tests census data of active employees and confirms actuarial
information used by actuary
• Employer and employer auditor
• Responsible for validating deferred outflows/inflows and pension
expense related to individual employer