Your Presenter

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GASB Standards

•

The miracle just got bigger!!

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Today’s Presentation

•

Everything you never wanted to know about Pension Accounting and Auditing and never intended to ask but are forced to listen to again because of the serious reality of GASB’s new Pension Standards, and to get CPE.

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GASB Opening Thoughts

• • Financial statement recognition and disclosures don’t create pension obligations; instead, they simply make existing obligations more transparent.

Collectively, the changes in Statements 67, 68, and 71, represent major improvements in public pension reporting, and will make pensions more understandable and comparable.

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Some Basic Definitions

•

Definition of a Liability under GASB Concept Statement # 4.

–

Assets are resources with present service capacity that the government presently controls.

–

Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid. (i.e. Social, Legal, or Moral Obligation)

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A deferred outflow of resources is a consumption of net assets by the government that is applicable to a future reporting period.

–

A deferred inflow of resources is an acquisition of net assets by the government that is applicable to a future reporting period.

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How do we get this done?

Best Practices for Implementation

Tennessee Funded at about 90%+ 10

Effective Dates

• • Plans – GASB 67 - Fiscal years beginning after June 15, 2013 (i.e. June 30, 2014) Employers – GASB 68 - Fiscal years beginning after June 15, 2014 (i.e. June 30, 2015) 11

Pension and Retirement Plan Changes

• • • • 44 states enacted significant revisions to at least one retirement plan since 2009.

28 states enacted increases in employee contributions from 2009-2011.

28 states increased retirement age and service requirements.

18 states reduced post-retirement benefit increases.

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How does Local Government Audit propose to get this done for Local Governments?

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Four Implementation Issues

• The Issues for local governments and their auditors boil down to one question?

• • Where….

do we get the information?

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TCRS Local Governments

Cooperation

State Audit CPA Firms Local Government Audit 15

AICPA Pension White Papers

• • • • Cost-sharing Cost-sharing census data Agent – Defined Benefit Interpretations for Both Cost-sharing and Agent – Defined Benefit Plans 16

Single / Agent Plan Issues

• AICPA whitepapers and Interpretations are posted at: http://www.aicpa.org/interestareas/governmental auditquality/resources/gasbmatters/pages/gasbpe nsionsissues.aspx

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Do I have to follow the Whitepapers?

• Short answer = YES!

• Ramifications - It is unlikely that employer auditors will be able to accumulate sufficient appropriate audit evidence necessary to provide unmodified opinions on the opinion units of the government financial reporting entity that have material pension amounts.

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AICPA Pension White Papers

• In cooperation with TCRS, its Actuary, the Division of State Audit, Division of Local Government Audit and CPA Firms, we have developed a plan.

• Local Government Letter 19

The Basic Three-Step Approach for Defined Benefit Pensions For Active and Inactive Employees

1) Project Benefit Payments 25 40 62 80 2) Discount Future Payments Present Value of Payments

TPL

3) Attribute to Employee Service Periods

How much money would I need to invest today to cover all the expected Retirement Benefits for this employee?

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Timing and Frequency—GASB 68

Tennessee Employer Approach

= December 31st

June 30, 2013 June 30, 2014

MD VD

RD = reporting date VD = actuarial valuation date MD = measurement date

June 30, 2015

RD

Contributions?

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Issue # 1

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Issue #1 – The Main Issue Net Pension Liability Reported on the Statement of Net Position (Balance Sheet)

• • Net Pension Liability (NPL) – Total pension liability (TPL) minus plan assets at market value (“plan net position”) • TPL uses new “blended” discount rate and “Entry age” cost method – Similar to Unfunded Actuarial Accrued Liability (UAAL) but using market assets, not “smoothed” assets NPL must be reported on the employer’s statement of net position – Currently, UAAL is reported in the Required Supplementary Information (RSI) – Currently, only the Net Pension Obligation (NPO) is reported on the balance sheet • Cumulative difference between annual required contribution (ARC) and actual contributions 23

• •

Issue #1 Cost-Sharing Employers – Huge Change

A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the net pension liability of all the employers in the cost-sharing plan.

Approach uses as a basis for allocation, the proportionate share of the total based on the employer’s contribution effort relative to that of all contributors.

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Issue #1 Journal Entry

• Example that follows is for TCRS Plans.

• The entries would be made at the Government-Wide level for Governmental Activities, and at the Fund Level for Enterprise Funds .

• These Summary Entries would need to be further allocated to Departments/Functions and/or Enterprise Operations.

• The information for these entries comes directly from the actuarial report and TCRS.

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Issue #1 Journal Entry

• • Your Government adjustments for: will need to – Net Pension Liability (PPA) – Contribution Deferrals (GASB 71) (Current) – Pension Expense (Current) – Other Deferrals (Current) make P.S.

Who is going to maintain all these deferral amortization schedules??? Hundreds!

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Issue #1 Journal Entry

• Your Government adjustments for: will need to make – New Account Numbers in Chart of Accounts (e.g.

Deferred Outflows and Inflows) 27

Issue # 1 - PPA

Summary Prior Period Restatement

Prior Period Restatement – Net Position Net Pension Liability (NPL) To adjust net position for the effects of unrecorded pension liability – (GASB 68).

Deferred Outflows - Beg. Contributions Prior Period Restatement - Net Position To record beginning deferred contributions 6/30/13. $

DR.

11,405,647

CR.

11,405,647 375,000 375,000 28

Issue # 1 - Journal Entry

Summary Journal Entry

Pension Expense Deferred Outflows - Contributions Deferred Inflows – Experience Gains (1) Deferred Inflows – Assumption Changes (2) Deferred Inflows – Plan Investment Gain (3) Pension Expense - Contributions Net Pension Liability (NPL) The record pension expense and ending deferrals (GASB 68 and 71)

(1) Amort. Over Avg. Remaining Service Life (2) Amort. Over Avg. Remaining Service Life (3) Amort. Over 5 years

$

DR.

972,839 25,000

CR.

47,190 244,694 265,433 400,000 40,522 29

Issue # 1 - GASB 68

• •

EFFECTIVE DATE AND TRANSITION

137 . To the extent practical, in the first period that this Statement is applied, changes made to comply with this Statement should be reported as an adjustment of prior periods (generic use), and financial statements presented for the periods affected should be restated .

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Issue # 1 - Allocations

• • Must allocate net pension liability, pension expense, and deferrals to Enterprise Funds and Departments or Functions as applicable.

Recommend using “contributions” as a allocation measure but GASB does not specify how to do the allocation so you can use any logical method (e.g. covered payroll).

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Issue #1 Journal Entry

• What about a 9/30 Year End?

– For example - Utilities • What about Component Units?

– Use Cost Sharing Notes if the Component makes contributions through the Primary Government??

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Issue # 1 - Implementation Issue

• • • GASB 68 requires employer to recognize NPL as of the measurement date no earlier than the prior fiscal year end Contributions made during the period after measurement date but before reporting date are required to be deferred Transition to new standards – If not practical to determine all deferred positions at transition, then start at zero.

– BUT – contributions deferred!

– Contradiction??…(GASB 71) 33

Issue # 1 - Cost-Sharing Employers – Huge Change

• State contributions to Schools to pay for Retirement benefits do

not

constitute a “Special Funding Situation”.

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Issue # 2 - Auditing

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Issue # 2 Auditing

• Whitepaper Implementation: – Cost Sharing Plans (Done this year) – Agent Plans 36

Issue # 2 Testing Census Data

• • If you have a Pension Plan, your auditors will be testing Census Data. (especially agent plan employers) Why have we not done this before?

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Funding 100%

–

Knew the Value of Assets

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Knew the Amount of Contributions

– –

Not reported on Statement of Net Position Reported in RSI, No Opinion Required.

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Cost Sharing

Schools

Test Census Data for Both

Defined Benefit 38

Issue # 2 - Census Data

• Key census data – Date of birth – Gender (male or female) – Date of hire or years of service/service credits – Date of termination or retirement – – City/County Code Department Code – Marital status – Spouse date of birth – Eligible compensation – Employment status The auditor must test the reliability and completeness of the census data provided to the actuary.

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Two Tests Actuary Census Data to Employer Census Data HOW?

Completeness Test, Employer records to Actuary Census Data 40

•

Issue # 2 Testing Census Data

Information in Employee Files: – Internal Controls over Census Data •

Social Security Number

•

Government Issue ID (DOB, Sex)

•

Department Code

•

City/County Code

•

Service Credits Calculation

•

Salary/Wages Reported

•

DOB

•

M or F

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Print Screen of Input Data?

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Issue # 2 Testing Census Data

• What will happen if your auditor cannot test your Census Data??

•

Could (probably will) mean a Disclaimer or Adverse Opinion!!! (even if it is a net pension asset!)

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Opinion on Fiduciary Net Position

• • • Agent Plan Whitepaper – Interpretation 3.34 36 Can use plan auditor opinion on Changes in Net Fiduciary Position Not a Group Audit Situation 43

Example Schedule of Cost Sharing Proportion

EXAMPLE COST SHARING PENSION PLAN

Schedule of Employer Allocations June 30, 2015

Employer/ Nonmployer (special funding situation) 2015 Actual Employer Employer Allocation Contributions Percentage

$

%

State of Example Employer 1 Employer 2 Employer 3 2,143,842 268,425 322,142 483,255 38.9

4.9

5.8

8.8

Employer 4 Employer 5 Employer 6 Employer 7 Employer 8 Employer 9 Employer 10 633,125 144,288 95,365 94,238 795,365 267,468 267,128 11.5

2.6

1.7

1.7

14.4

4.9

4.8

Final Design might be 5 years and average to comply with GASB-67

White Papers give guidance about auditing actuarial census data

Total 100.0

$ 5,514,641 44

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

Example Schedule of Employer Pension Amounts Allocated by Cost Sharing Plan 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 1,102,928

Deferred Outflow of Resources EXAMPLE COST SHARING PENSION PLAN

Schedule of Pension Amounts June 30, 2015

Deferred Inflows of Resources 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

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

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 5,294,055 3,860,249 1,939,406 978,435 2,735,105

Pension Expense Changes of Assumptions

– – – – – – – – – – –

Changes in Employer Proportion and Differences Between Contributions and Proportionate Share of Pension Expense

584,365 125,325 245,386 125,632 386,325 42,358 24,325 125,325 152,005 87,325 41,035

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

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 – 1,939,406 4,832,655 –

White Papers give guidance about Auditing Actuarial Census Data

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• Legend for next exercise: • • • • A T = Actuary = Treasury (TCRS) SA = State Audit LGA = Local Government Audit and CPA Firms 46

Workpapers Agent Plan Employers

• • • • •

Actuarial Certification Letter Actuarial Valuation Report as of the Measurement Date Notes to the Financial Statements and RSI Amortization Schedules for Deferred Outflows and Inflows Examination Engagement Opinion related to Census Data for Inactive and Retired TCRS Members

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Workpapers – Agent Plan Employers

• • • •

Census Data Sample of Census Data:

– –

Accuracy Test Completeness Test Workpaper for Using the Actuarial Specialist Workpaper that Demonstrates Actuarial Data Agrees with Data in the Concord System

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Workpapers – Agent Plan Employers

• • • •

Journal Entries Contributions between Measurement Date and Report Date Calculation of Allocations to Component Units, Funds, and Departments.

Memo Regarding Employer Responsibilities

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Workpapers – Agent Plan Employers

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Opinion on the Schedule of Changes in Fiduciary Net Position

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Workpapers –

Cost

Sharing Plan Employers

• • • • •

Notes to the Financial Statements and RSI Schedule of Pension Allocations Opinion on the Pension Allocations Schedule of Pension Amounts by Employer from Actuary Opinion on the Pension Amounts by Employer

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• •

Workpapers –

Cost

Sharing Plan Employers

Examination Engagement Opinion related to Census Data for Inactive and Retired TCRS Members Sample of Selected Census Data:

– – –

Accuracy Test Completeness Test Cost Sharing Selected Governments: Shelby County, City of Alcoa, Benton County, Campbell County, Hamblen County, Hardeman County, Hardin County, Hawkins County, Stewart County, Sumner County, White County, and Williamson County.

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Other Issues

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Other Issues - Communication

• Letter from TCRS – Agent Plans • Letter from TCRS – LEA Plans 54

Other

• OPEB is coming!!!!!!! The liabilities will be much larger than the Pension Liabilities.

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Other Issues

• Non-TCRS Pension Plans: – Much Planning Needed – Past Time!

– Non-TCRS 100% funding law – Important .

Very • Public Chapter 990, Acts of 2014 • Section 8-37-310, & 9-3-501-507, TCA • Required Funding Policy by June 30, 2016 • 100% Funding by June 30, 2020 • State Shared Taxes can be withheld.

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Solutions and Conclusions

• • • More work for everyone, but much better reporting.

Be preparing for OPEB!

begin now.

Discussion should Together, we will make it through this implementation process, and in a few years this will no longer seem as difficult or painful.

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Questions

?

Jerry E. Durham, CPA, CGFM, CFE Comptroller of the Treasury TN Division of Local Government Audit Assistant Director Phone: (615) 401-7951 Email: [email protected]

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