Transcript Presentation - The Joint Accounting Conference

UFOs,
Greased
Pigs,
and
Pensions
Joint
Accountants
Meeting
May 15, 2014
Show of hands…
• Do you currently participate in a defined benefit
pension plan?
• Has your utility made significant changes to the
pension plan in the last several years or is considering
changing it soon?
2
Goals
1. Basic Pension Concepts
2. Awareness of New Rules for Recording Pensions
3. General Update on Other Pension Stuff (Tennessee
Law, PBGC, Funding)
Presented in no particular order
3
Defined Benefit Pension Plans
• Why have a Pension Plan?
• 1. Incentivize workers to not leave until retirement age
• 2. Incentivize workers to leave at retirement age
• Types of Plans:
-Single Employer
-Multiple Employer – group of employers treated as one plan
-Multiple Employer - Agent: grouped for administration but separated
actuarially
4
Multiple Employer Plan Examples
Cooperatives:
NRECA
CSA
Municipals:
TCRS - Tennessee
RSA – Alabama
PERS - Mississippi
CERS – Kentucky
ERSGA – Georgia
NCRS – North Carolina
VRS – Virginia
CSA
5
The worst and best funded…
Market Valued Liability vs Actuarial Assets
Statebudgetsolutions.org
Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers
by Cory Eucalitto | September 3, 2013
Currently most utilities account for pensions as …
- Pay the required contribution and report it as
expense
- Add a footnote to their financials (that no one really
understands)
Why the Analogy to
UFO’s and Greased Pigs?
UFO - Unidentified Flying Objects -
Pensions - Undeterminable Financial Obligations
Greased Pig
When you think you have it in your grasps it wiggles
loose and sends you chasing after it again
9
• How much has your employer recorded as a liability for the
service that you have accrued?
• How much SHOULD it accrue?
10
Calculate your cost….
+ Benefits Paid
+ Expenses
– Investment Return
Net Cost of Pension
Susie Sample:
$50,000
X
25 years service
X
2% multiplier
=
Retirement Benefit of $25,000 at age 65
Susie is currently 50 years old.
HOW MUCH SHOULD THE UTILITY HAVE ACCRUED FOR SUSIE TODAY?
Accounting for the PAST is so much simpler than
accounting for the FUTURE.
13
How much liability should be
accrued today for Susie?
Depends on who you ask….
Cooperative
NON-Governmental
• FASB (GAAP)
• ERISA
• GASB
Municipal
Governmental
• PBGC
• IRS
• Bond underwriters, Banks, and lenders
• TVA
• Public Service Commissioners
• U.S. Congress
• State and local governments
• Bond underwriters, Banks, and
lenders
• TVA
• Public Service Commissioners
• U.S. Congress
• State and local governments
14
The Society of Enrolled Actuaries
We enhance the ability of actuaries to be
trusted financial and business advisors on
problems involving uncertain future events.
- 24,000 Enrolled Actuaries
15
An actuary is someone who wanted to be an accountant,
but didn't have the personality for it.
Actuaries are accountants who couldn't stand the
excitement.
After collecting hundreds of obituaries, an actuary
concludes that on any given day, people die in
alphabetical order!
Source: www.actuarialjokes.com
16
How much liability should be
accrued today for Susie?
• ESTIMATED present value of the expected benefits payable at the normal retirement
date adjusted for
• probable mortality and disability occurrences,
• anticipated raises,
• likelihood of termination or early or late retirement (healthcare cost?),
• assumed investment rate,
• projected overtime pay in the final five years,
• projected sick leave added to service
• Only two things are certain:
1. her name is Susie
2. the cost that the actuary projects will be wrong
17
How much liability should be
accrued today for Susie?
Present Value of Current Accrued Benefits
or
Present Value of Future Benefits?
Current
At age 50
$50,000 Salary
x 25 years
_____x2%_____
$25,000
At age 65
At age 50 with
projected salary
$65,000 Salary
x 25 years
_____x2%_____
$32,500
At age 65
Future
At age 65
$65,000 Salary
x 40 years
_____x2%_____
$52,000
At age 65
18
How much liability should be
accrued today for Susie?
• ASSUME an actuary determines Susie’s accrued service (25)
with projected salary ($65,000) will be $32,500.
• The present value of Susie’s benefit today is $600,000*.
• Susie’s cost is added to all the other employees to come up
with the total amount of pension liability….say $6,000,000*
* Note that there are numerous methods and assumptions required to
be used by various regulators that can significantly change this.
19
Susie’s Employer does not have
$6,000,000 put aside in the plan.
They only have $4,000,000 in Plan
Asset.
The unfunded $2,000,000 balance is amortized
over a set period of time.
Here is where the “IT DEPENDS ON WHO YOU ASK” gets really tricky…
How much liability should be
accrued today for Susie?
“It Depends on who you ask”…
amortize the $2,000,000 unfunded over a set period of time….
• GASB – up to 30 years
• FASB ( GAAP) – average working life of participants
• ERISA – 7 years (Pension Protection Act of 2006)
• PBGC – the shorter the better for less risk exposure
• IRS – the longer the better so there is less tax deductions
• Bond underwriters, Banks, and Lenders -reasonable for business cash flow
• TVA - Protection of the current rate payers (Maybe Distributors should be asking about TVA’s unfunded
pensions)
• U.S. Congress – whatever will appease the squeaky wheels, improve the economy, and protect the
growing national debt
• State and local governments –???
(Each of the above typically has differing methods of determining discount rates, costing methods,
mortality tables, retirement assumptions, etc., etc., etc.)
21
How much liability should be
accrued today?
It really depends on who you ask
Let’s see what the Governmental Accounting Standards
Board (GASB) has to say about it….
22
GASB 68
Accounting and Financial Reporting for Pensions
• Who – Governmental organizations with pensions (includes Multiple
and Single employer plans)
(Coops don’t go to sleep…it does not apply YET, but it could be coming …)
• What – Record net pension liability on books and changes
footnotes.
• When – Fiscal years beginning after June 15, 2014.
• Where – On the Statement of Net Assets, Statement of Revenue
and Expenses, and footnotes.
• Why – Better presentation of financial position
• How - ??? (GASB issued guidance January 30, 2014) www.gasb.org
23
GASB 68 is for Governmental Employers
Does NOT require employers to
contribute more to their pension plans!
24
Before
Current Rules –
GASB 25 & 27
• Pension expense =
contributions required to be
paid during the year
• Unfunded pension
liability recorded in the
footnotes
After
New Rules –
GASB 67 & 68
• Pension expense = change
in Net Pension Liability from
one year to the next
• Unfunded pension
liability is now recorded on
the financial statements.
25
Concerns about GASB 67 & 68
• Increase contributions? – No, not directly… may
increase political pressure
• Bond, ratings, and lenders: Will it cause non-compliance
with covenants?
• TVA – what about the cash ratio policy?
• City Government – are the liabilities accurately separated
from the City and other utility departments?
• Media – (Think it is hard enough for accountants to
understand… just let a local reporter try to do an article on
the local utility’s unfunded pension obligations)
• Comparative financial statements – should you show
restated prior year impact or just try to get by with just
showing non-comparative statements?
26
Where to get specific unfunded info for your group?
• Your Plan’s Actuary or the Plan Administrator
• Your Auditor
Don’t wait until you start closing books for
June 30, 2015 to look at this.
Could be a shocker for your board.
27
Tennessee Public Employee Defined Benefit
Financial Security Act of 2014
• Approved by Tennessee Senate and House – April 2014
• Main emphasis is to require employers to pay the minimum Actuarially
Required Contributions (which some large underfunded employers
were not doing)
• Will require governing boards to officially adopt a funding policy by
June 15, 2015 and submit a copy to the State Treasurer
• Funding requirements include up to 30 year amortization and rates
that are similar to the TCRS assumptions.
• Modifies the enforceable right precedence.
28
Tennessee Public Employee Defined Benefit
Financial Security Act of 2014
Tennessee Enforceable Right Precedence
9-3-506.
9-3-507.
(a) The following provisions shall apply to all political
subdivisions subject to this act:
(1) For political subdivision employees hired on or
after the later of effective date of the political
subdivision’s chief legislative body by resolution, the
political subdivision may freeze, suspend or
modify benefits, employee contributions, plan
terms and design on a prospective basis; and
(2) For any pension plan that is funded below sixty
percent (60%), the political subdivision shall not
establish benefit enhancements.
(b) For all political subdivision employees hired on or
after the effective date of this act, the accrued
benefits earned prior to any adjustment pursuant
to subsection
(a)(1) above shall remain an enforceable right
and may not be reduced without the
written consent of the employee.
(a) In the event the political subdivision shall fail to
fund the ADC according to
the percentages established in § 9-3-505, the
commissioner of finance and
administration, at the direction of the comptroller of
the treasury, is authorized to
withhold such amount or part of such amount
from any state-shared taxes that are
otherwise apportioned to such political subdivision.
The money withheld from state shared
taxes shall be paid to the political subdivision’s
pension plan.
(b) The deduction shall be made as a first charge
against any moneys payable
to such political subdivision regardless of the source
of such payment and regardless of
the purpose or contemplated use of such funds.
http://www.capitol.tn.gov/Bills/108/Bill/SB2079.pdf
29
Pension Benefit Guarantee Corporation
• The Pension Benefit Guaranty Corporation (PBGC) protects
the retirement incomes of more than 40 million American
workers in more than 26,000 private-sector defined benefit
pension plans.
• PBGC is not funded by general tax revenues. PBGC collects
insurance premiums from employers that sponsor insured
pension plans
• The maximum pension benefit guaranteed by PBGC is set
by law and adjusted yearly. For plans that end in 2014, the
maximum guarantee for workers who retire at age 65 is
$59,318.16 yearly ($4,943.18 monthly).
• What plans are “insured” by the PBGC?
• Private non-governmental defined benefit pension
plans.
• PBGC does NOT insure any governmental pension plans
30
Recap Goals
1. Basic Pension Concepts
2. Awareness of New Rules for Recording Pensions
3. General Update on Other Pension Stuff (Tennessee
Law, PBGC, Funding)
31
Polling questions:
How much will GASB 68 require employers to increase
contributions to their Pension Plans?
• a.
50%
• b.
25%
• c.
10%
• d.
0%
32
Polling questions:
Which type of Pension Plans are insured by the Pension
Benefit Guaranty Corporation?
• a. All Pension Plans
• b. Only U.S. Government Employees
• c. Non-governmental Private Employer Plans, including
Cooperatives
• d. State and Local governmental Plans, including
Municipal Utilities
33
Questions, comments, or appropriate
humor?
34
Scott Blassingame, CPA, CPE
Secretary Treasurer
Central Service Association
[email protected]
Central Service
Association
P.O. Box 3480
Tupelo, MS 38803-3480
662-842-5962
www.csa1.com
After eight years in public accounting, Scott joined Central
Service Association in 1997 as its Secretary-Treasurer. In
addition to reporting as Secretary to the CSA Board of
Directors, he serves as CSA’s Chief Financial Officer. He also
serves as the Plan Administrator for CSA’s employee benefit
programs offered to CSA Members. These programs
include: Governmental and Non-Governmental multipleemployer Defined Benefit Pension Plans (15+ utilities,
1,000+ participants, $190+ million in assets); 401k & 457
Defined Contribution Plans ( 35+ utilities, 1,200+
participants, $40+ million in assets); and Life, Dental, LTD,
and Retiree Medical Insurance Programs (60+ utilities,
1500+ participants, $2+ million annual premiums).
To be added to the weekly CSA Money Minute
newsletter email [email protected]
36
CSA Employee Benefits
For over 65 years, CSA has provided pooled purchasing and administration of
Employee Benefit programs that benefits CSA Members and CSA employees.
It is the intent that CSA will not create any unreasonable financial gain from
sponsoring benefit plans nor will it create a significant financial drain on resource
in other areas of the Association.
37
GASB S-65 ITEMS PREVIOUSLY REPORTED AS
ASSETS AND LIABILITIES
GASB Concepts Statement No. 4, Elements of
Financial Statements
Assets-resources with present service capacity that
the institution presently controls (BS)
Liabilities-present obligations to sacrifice resources
that the institution has little or no discretion to avoid
(BS)
Outflow of resources is a consumption of net assets
by the institution that is applicable to the reporting
period (IS)
Inflow of resources is an acquisition of net assets by
the institution that is applicable to the reporting period
(IS)
GASB S-65 ITEMS PREVIOUSLY REPORTED AS
ASSETS AND LIABILITIES
 GASB Statement No. 63, Financial Reporting of
Deferred Outflows of Resources, Deferred Inflows of
Resources, and Net Position
A deferred outflow of resources is a consumption of
net position by the institution that is applicable to a
future reporting period (BS)
A deferred inflow of resources is an acquisition of net
position by the institution that is applicable to a future
reporting period (BS)
Net position is the residual of all other elements
presented in a statement of financial position (BS/IS)

How much will GASB 68 require employers to
increase contributions to their pension plans?
Text a KEYWORD to 22333 or Submit responses at PollEv.com
ANSWERS
KEYWORD
a. 50%
297516
b. 25%
297519
c. 10%
297520
d. 0%
297521
Which type of Pension Plans are insured by
the Pension Benefit Guaranty Corporation?
Text a KEYWORD to 22333 or Submit responses at PollEv.com
ANSWERS
KEYWORD
a. All pension plans
297680
b. Only U.S. Government
employees
297689
c. Private Employer Plans,
including Cooperative Utilities
297691
d. State and Local Government
plans, including Municipal
Utilities
297697