Transcript GASB 67 & 68 - Florida Government Finance Officers Association

BP PA RT NER S
B O LTO N
1
GASB 67 & 68
Presented by:
Thomas Lowman FSA, MAAA, EA
Jeff DeLisle, Senior Consultant
Hosted by: Florida GFOA
BOLTON
BP PARTNERS
June 26, 2013
@BoltonPartners
Copyright © 2013
Presenters
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Thomas Lowman, Chief Actuary
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Tom has over thirty-five years of pension actuarial
experience. He is a Fellow of the Society of Actuaries
(1982), an Enrolled Actuary (1981), a member of the
American Academy of Actuaries (1982), and a Fellow of
the Conference of Consulting Actuaries (2009). Tom is also
a member of the Conference of Consulting Actuaries
Public Plans Steering Committee.
Jeff DeLisle, Senior Consultant

Works in collaboration with actuaries and other specialized
consultants to review, audit, assess and to offer timely and
appropriate recommendation(s) to pension plan trustees,
labor organizations and management. Bolton Partners has
35 public sector clients in Florida. As our senior Florida
consultant, Jeff is involved with all of them and provides
important prospective.
Agenda
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GASB’s purposes
Overview of changes
Application and timing of new GASB 68 standard
Cost-sharing multiple employer plans
Funding under GASB 68
Moody’s adjustments
Florida 175/185 money
Related BP Newsletters
4
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GASB 68: More Than a
Number Change
Public Pension Funding
GASB’s Purposes
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Transparency
Accountability
Inter-period equity
Decision- usefulness
We will not debate whether GASB68
achieves these goals better than GASB27.
Overview of Changes
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Covers funded DB and DC plans
Extended to cover volunteers (LOSAP)
Does not cover unfunded plans
 Will be handled later with OPEB changes
GASB 68 is about employer accounting
GASB 67 is about plan accounting
Our focus is GASB 68 for employers
Overview of Changes
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If you heard two things about the new accounting
rules they probably were:
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1.Unfunded Actuarial Liability(UAL) is moved from
the footnote to the Statement of Net Financial
Position
Overview of Changes
8
If you heard two things about the new accounting
rules they probably were:
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2. The Cash funding requirement is no longer the
expense
Funding Under GASB 68 – More Later
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GASB 27 focus was on budgeting, the ARC was a
funding benchmark
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GASB 68 – is not intended to be used for funding
“
…it is not within the scope of the
Board’s activities to set
standards that establish specific
method of financing the benefits
(that being a policy decision for
government officials…. to make.)
”
.
Contribution
Calculation
Model - Basic
Actuarially
Accrued
Liability
Actuarial
Value Assets
Unfunded
Actuarial
Liability
Accumulation
of Normal Cost
Smoothing
method
Volatile
Market
Returns
Market Value
of Assets
Amortization
method
Normal Cost
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(Credit to Richard Harris)
Amortization
of Unfunded
Liability
Total
Required
Contribution
GASB68
Expense
Calculation
Model - Basic
Actuarially
Accrued
Liability
C
V
Market Value
Assets
Unfunded
Actuarial
Liability
Accumulation
of Normal
Cost
C
V
C
V
Unfunded
Actuarial
Liability
Prior Year
Contributions
Normal Cost
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GASB
C
V
Deferred
Inflows/
Outflows
Expense
Volatile
Market
Returns
Smoothing
method
Market Value
of Assets
GASB 68
Balance Sheet
Calculation
Model - Basic
Actuarially
Accrued
Liability
Market Value
Assets
Unfunded
Actuarial
Liability
Accumulation
of normal cost
Volatile
Market
Returns
Market Value
of Assets
Normal Cost
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Balance
Sheet
Deferred
Inflows/
Outflows
Other Changes GASB 27 vs. GASB 68
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There is no longer an Annual Required Contribution
(ARC) or a Net Pension Obligation (NPO)
The annual expense is equal to the change in UAL
from the previous year – with some of the change
deferred to future years (deferred inflows and
outflows)
Increased disclosure requirements
Cost-sharing multiple employer plans treated like
agent and single employer plans – with each
employer reporting its share of the UAL and
expense
Other Changes GASB 27 vs. GASB 68
Method/Assumption Possible Differences
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Accounting method must be EAN under GASB68
Only one version of EAN under GASB68
Discount rate must be net rate
No real amortization
Timing/roll forward new for most plans
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Assets not at valuation date
Gain sharing or DROP treatment specified
Contribution made after measurement date now
ignored
Effective Date
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GASB 67 – Plan Accounting –
effective for fiscal years
beginning after 6/15/2013 –
would be 9/30/2014 statement
for most in Florida
GASB 67 – replaces GASB 25
GASB 68 – Employer Accounting – effective for
fiscal years beginning after 6/15/2014 – would be
9/30/2015 statement for most in Florida
GASB 68 – replaces (amends) GASB 27
Our Sample Plan Example
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Single employer plan
ARC has been contributed every year (NPO=0)
No employee contributions
The valuation date is 12 months before the fiscal
year start date (24 months before FYE)
Actuarial assets are determined using 5 year
smoothing
The expense and funding is determined using a 20
year open amortization of the unfunded liability
The current ARC calculation is used as funding
policy after GASB 68 is effective
Current Valuation Schedule
Pre-GASB 67/68
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Valuation
Date
FY Expense
(budget)
Disclosure
Liabilities1
Disclosure
Assets1
Asset Method
10/1/2012
2014
10/1/2012
10/1/2012
Smoothed
10/1/2013
2015
10/1/2013
10/1/2013
Smoothed
10/1/2014
2016
10/1/2014
10/1/2014
Smoothed
10/1/2015
2017
10/1/2015
10/1/2015
Smoothed
10/1/2016
2018
10/1/2016
10/1/2016
Smoothed
The CAFR disclosure typically includes the liabilities and assets for the most recently completed
actuarial valuation. For example, the FY2015 CAFR may include the 10/1/2014 and 10/1/2015 valuation
results.
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Current Valuation Schedule
Pre-GASB 67/68
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Valuation
Date
FY Expense
(budget)
Disclosure
Liabilities1
Disclosure
Assets1
Asset Method
10/1/2012
2014
10/1/2012
10/1/2012
Smoothed
10/1/2013
2015
10/1/2013
10/1/2013
Smoothed
10/1/2014
2016
10/1/2014
10/1/2014
Smoothed
10/1/2015
2017
10/1/2015
10/1/2015
Smoothed
10/1/2016
2018
10/1/2016
10/1/2016
Smoothed
The CAFR disclosure typically includes the liabilities and assets for the most recently completed
actuarial valuation. For example, the FY2015 CAFR may include the 10/1/2014 and 10/1/2015 valuation
results.
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GASB68 Valuation Schedule
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Valuation
Date
FY Expense
Disclosure
Liabilities
Disclosure
Assets
Asset
Method
10/1/2012
Smoothed
GASB27 – Current Standard
10/1/2012
2014
10/1/2012
GASB68 – New Standard
Measurement
Date*
Pension
Liability
Fiduciary Net
Position
10/1/2013
9/30/2014
2015
9/30/2014
9/30/2014
Market
10/1/2014
9/30/2015
2016
9/30/2015
9/30/2015
Market
10/1/2015
9/30/2016
2017
9/30/2016
9/30/2016
Market
10/1/2016
9/30/2017
2018
9/30/2017
9/30/2017
Market
* The measurement date could be any time within a year of the FYE. We have assumed it is the last day of
the year prior to the fiscal year.
Alternative 1
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Alternative 2
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Alternative 3
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FRS Cost Sharing Plan Option
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Determination of FY2015 Liabilities and
Assets as of Measurement Date
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Valuation date 10/1/2013
Roll forward liabilities to 9/30/2014 measurement date
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Actuarial liability 10/1/2013
Plus service cost
Plus interest
Minus benefit payments
Actuarial liability 9/30/2014
$110,000
5,200
7,900
(8,500)
$114,600
The actuarial liability as of 9/30/2014 is the pension
liability
The pension liability minus the market value of assets at
the measurement date is the net pension liability (NPL)
Assets would not include FY2015 contribution
FY2015 NPL (all values at 9/30/2014)
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Pension liability
$114,600
Minus market value of assets* $62,000
Net pension liability (NPL)
$52,600
The NPL is an adjustment to net position in the
employer’s government-wide financial statements
* GASB‘s formal term for the market value of assets is the “plan’s fiduciary net position” (PFNP)
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We will get to the
2015 EXPENSE
But first we need to
reconcile the FY14
Assets.
Reconciliation of Assets
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Contributions
7,100
Expected return on assets
5,400
Asset gain (Loss)
(10,000)
Total Return on Assets
(4,600)
Benefit payments
(8,500)
Assets prior measurement date*
68,000
Assets current measurement date
62,000
* For the first year we are using assets one year prior to the measurement
date
2015 Expense Determination
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Item
Amount
Service cost
5,200
Interest on liability
7,900
Expected return
Recognized liability losses (gains)
(5,400)
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Comments
For 12-month period prior to
measurement date
Based on market value of assets
at valuation date
No previous valuation for
comparison
Recognized asset losses (gains)
2,000
Investment loss for 12-month
period prior to measurement
date, divided by 5
Total
9,700
ARC would have been 8,200*
* The expense is higher in this example than the ARC because the previous year had a large investment loss,
one fifth of which is recognized in the GASB 68 expense. If there had been a gain, the relationship would
have been reversed. This illustrates the increased volatility in the new standard.
Deferred Outflow for FY14 Investment
Loss
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Asset loss
$10,000
Minus amount recognized in 2015 $2,000
Deferred outflow
$8,000
The deferred outflow is also an adjustment to net
position in the employer’s government-wide
financial statements
The net impact of the standard on the balance
sheet is the NPL of $52,600 minus the deferred
outflow of $8,000 or $44,600
Equations of Balance
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Change in
Balance Sheet
=
GASB 68 Employer
Expense
less
Employer
Contributions
Change in NPL +
Change in
Deferred Inflows
and Outflows
=
GASB 68 Employer
Expense
less
Employer
Contributions
Change in NPL
=
(EAN Liability (MD*) –
MVA (MD*))
less
(EAN Liability (MD-1)
– MVA (MD-1))
* MD – Measurement Date
Notes to Financial Statements I
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Item
1) Description of the plan
2) Assumptions - increased disclosure about how discount rate was selected
3) Fiduciary net position
4) Change in the net pension liability
5) Valuation and measurement dates
6) Effect on the NPL of plus or minus 1% change in discount rate
7) Describe changes in assumptions – if applicable
8) Describe changes in plan – if applicable
9) The pension expense
10) Balances of deferred inflows and outflows – this refers to deferred gains
and losses or changes due to revised assumptions – contributions between
the measurement date and FYE are also called deferred inflows
Notes to Financial Statements II
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Item
11) 5 year schedule of deferred inflows and outflows recognition in expense
12) 10 year schedule of changes in pension liability
13) 10 year schedule comparing actual contributions to actuarially
determined contribution
Investment Return Assumption
Disclosure
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The long term rate of return on plan investments was determined using the
building block method, in which the best estimates of expected future rates of
return are developed for each asset class. These rates are combined to produce
the long term rate of return by weighting the expected rates of return by the
target allocation percentage. The target allocation and best estimate for each
major asset class are summarized below. The assumption is the arithmetic
average.
Asset Class
Target Allocation
Long Term Expected Real
Rate of Return
Fixed income
40%
5.0%
Domestic equity
47%
8.5%
International equity
10%
9.5%
Cash
3%
2.0%
Total
100%
7.0%
Net Amount of Deferred Outflows and Inflows that will be
Recognized in Pension Expense (FY2017 Disclosure)
Subsequent 5 Years
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Amounts reported as deferred outflows and inflows of
resources related to pensions will Be recognized in
pension expense as follows
FY2018
700
FY2019
700
FY2020
(1,200)
FY2021
100
FY2022
(400)
2015 CAFR Valuation Schedule
FY 2015 CAFR Preparation Timeline
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Action
Timing
Determine funding policy
Fall 2013
Determine measurement date
Fall 2013
Prepare 2013 actuarial valuation
March 2014
Determine FY2015 NPL and expense
March 2015
Prepare FY2015 pension disclosure
March 2015
Finalize FY2015 CAFR
April 2016
Funding Policy vs. Accounting
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Common GASB 27
Funding Policy
GASB 68
Expense
5 year smoothed
Market value
6 allowable methods
Specific EAN
Amortization
/Recognition
Up to 30 years
Asset experience 5
year
Other over 5-10 years
Discount rate
Expected return
Maybe Expected
Return
Treated as employee
or retiree
Treated as retiree
Asset value
Funding method
DROP
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FY2016
FY2016 Preparation Under GASB 68
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Valuation date 10/1/2014
Roll forward liabilities to 9/30/2015 measurement date
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Actuarial liability 10/1/2014
Plus service cost
Plus interest
Minus benefit payments
Actuarial liability 9/30/2015
$120,000
5,400
8,700
(8,600)
$125,500
The actuarial liability as of 9/30/2015 is the pension
liability
The pension liability minus the market value of assets at
the measurement date is the net pension liability (NPL)
FY2016 NPL
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Pension liability
$125,500
Minus market value of assets
$75,000
Net pension liability (NPL)
$50,500
The NPL is an adjustment to net position in the
employer’s government-wide financial statements
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We will get to the
2016 EXPENSE
But first we need to
reconcile the
PENSION LIABILITY.
Reconciliation of 2016 Pension Liability
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Service cost
5,500
Interest on net pension liability
8,300
Experience losses (gains)
5,700
Change due to new assumptions
-
Change due to plan amendments
-
Benefit payments
(8,600)
Pension liability prior measurement date
114,600
Pension liability current measurement date
125,500
Experience loss is recognized in the expense over the expected future
working lifetime for employees and retirees, probably 5-10 years. We are
assuming 6 years for these illustrations.
2016 Expense Determination
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Item
Amount
Service cost
5,500
Interest on liability
8,300
Expected return
(5,000)
Comments
From prior year valuation roll
forward from last year’s
measurement date to this year’s
measurement date
Based on market value of assets
Recognized liability losses (gains)
1,000
5,700 loss recognized over 6 years
(rounded). 4,700 deferred to next 5
years
Prior year’s recognized asset
losses (gains)
2,000
Same as in 2015 will be included in
this line through FY2019
This year’s recognized asset
losses (gains)
(1,700)
Investment gain divided by 5
Total
10,100
ARC would have been 9,900
2017 Expense Determination
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Item
Amount
Comments
Service cost
5,700
Interest on liability
8,300
From prior year valuation roll forward from
last year’s measurement date to this year’s
measurement date
Expected return
(6,000)
Based on market value of assets
Prior year’s recognized liability losses
(gains)
1,000
Same as prior year
This year’s recognized liability losses
(gains)
(700)
Liability gain of 3,900 being recognized
over 6 years (rounded)
Prior years’ recognized asset losses
(gains)
300
Sum of prior 2 years recognized amounts
This year’s recognized asset losses
(gains)
100
Investment loss divided by 5
8,700
ARC would have been 9,600
Total
Cost-Sharing Plans
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Examples
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Florida Retirement System – participating employers
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Virginia State Retirement System Schools
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Maryland State Retirement and Pension System Maryland
Municipal Corporations
Some governments with smaller participating entities (e.g.
libraries, colleges, wastewater, nursing homes)
Will have similar requirements as single and
agent plans
The aggregate NPL and expense is
determined as in single and agent plans
Cost-Sharing Plans
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Similar disclosures as single employer plans
The aggregate NPL and expense will be
allocated to each employer according to the
“projected long term contribution effort of the
employer” compared to the projected long
term contribution effort of all employers
If there is a change in the proportion
allocated to the employer, the increase in
NPL allocated to the employer is treated like
an experience loss and recognized over the
expected future service life of all employees
(active and inactive)
Cost-Sharing Example
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2015
2016
1,000,000
1,050,000
Assets
800,000
850,000
Net pension liability (NPL)
200,000
200,000
Expense
40,000
40,000
2%
3%
4,000
6,000
800
1,500*
Total plan
Liability
Participating employer calculation
% of projected long term effort
NPL
Expense
* 3 percent of the expense plus one sixth of the increase in NPL due to the change in proportion of long
term effort (6,000 minus 4,000)
Unresolved Issues
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Who will pay for preparation of increased disclosure
requirements (in particular for cost-sharing plans)
How exactly to determine proportionate share on
long term contribution effort for allocation of NPL
and expense for cost-sharing employers
Beyond GASB
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Funding/Moody’s/175-185 money
See our newsletters on GASB68 and Funding
Funding Policy
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Each government will have to develop its own
funding policy
Could use current ARC calculation as the funding
policy but could look at alternative funding policies
In our illustration we assumed that the funding
policy is unchanged and is based on the old ARC
calculation
California and others are developing funding
models
http://www.sco.ca.gov/caap_resources.html
CAAP Model Practice chart for Amortization periods
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Source
Period
Active Plan Amendments
Demographic, or up to 15
Inactive Plan Amendments
Demographic, or up to 15
Experience Gain/Loss
15 to 20
Assumption or Method Changes
15 to 25
Early Retirement Incentives
5 or less
CAAP, CCA and Big 7 are similar
Moody’s request for comments on “Adjustments to US
State and Local Government Reported Pension Data”
(no OPEB Adjustment)
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Three Key Changes:
1. Accrued actuarial liabilities will be adjusted based
on a high-grade long-term corporate bond index
discount rate (5.5% for 2010 and 2011)
2. Asset smoothing will be replaced with reported
market or fair value as of the actuarial reporting
date
3. Annual pension contributions for states (not local
governments) will be adjusted to reflect bond rates
and 17-year level amount amortization
Moody’s In Perspective
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The proposed adjustments nearly triple reported
unfunded actuarial accrued liability to $2.2 trillion
from $766 billion
It’s only money – will it impact bond ratings?
Moody’s says not for States, maybe for some local
governments
This is about bond ratings and not funding or
accounting
Changes in Local 175/185 Money Uses
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DMS Letter to City of Naples August 14,
2012
Allows use of “excess” money to cover
minimum benefits
Waited to see if legislature changed
“Naples” letter and it did not
DMS can not change rules, can make
interpretations
What does this mean?
Questions
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