Transcript PUBLIC PENSIONS: PERFORMANCE AUDITING AND THE …

PUBLIC PENSIONS: PERFORMANCE
AUDITING AND THE NEW ACCOUNTING
RULES
Sharon Winslow Erickson
Amanda Noble
Learning Objectives
 Understand the context of current pension
reforms
 Consider how changes in pension
accounting rules could affect your
jurisdiction
 Consider the role of local government
performance auditors in pension reforms
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A Widening Gap in Cities:
Shortfalls in Funding for Pensions and Retiree
Health Care (Pew Charitible Trusts, 2013)
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Underfunding: Why It Matters
 Budget stress posed by increasing pension costs
 Ratio annual recommended contribution compared to
covered payroll:
 10% of payroll in Charlotte, Seattle, Memphis, San
Francisco, Wichita
 30% of payroll in Chicago, Omaha, Portland, Wilmington
 50% of payroll in Charleston
 Cut to city services or tax increases
 Reductions to benefits
 Loss of investment opportunities
Source: A Widening Gap in Cities, www.pewstates.org
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What Caused the Problem?
1. Fiscal discipline
 Chronic underpayments
 Borrowing to shore up pension funds
2. Accuracy of assumptions
 Investment returns
 Demographic and economic assumptions
3. Decisions about workers’ benefits
 Unfunded benefit increases
 Pension spiking
Source: A Widening Gap in Cities, www.pewstates.org
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Moving Forward: Reforms
 Changes to plans for new employees are most
common
 Reforms include:
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Plan design – defined benefit vs defined
contribution plans; health care package redesign
Funding – raising taxes; increasing employee
contributions; increasing city contributions
Benefits – limiting cost-of-living increases; increasing
retirement ages; addressing pension spiking;
reducing or eliminating retiree health benefits
Organization and management – pension board
makeup; transparency and oversight
Source: A Widening Gap in Cities, www.pewstates.org
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What’s Next?
 Lack of consensus about the urgency and need for
reform
“While Pew acknowledges the factors behind the underfunded
pension systems, to suggest modifications that punish public
employees is irresponsible and uncalled for.”
National Public Pension Coalition, January 2013
 Half-truths and myths
“The pension mess was caused by greedy people, not us… There’s
no crisis. The stock market will recover and then there is no
problem… Experts consider 80 percent to be a healthy pension
funding ratio… The average public pension is $23,000… The
$100,000 pension club…”
Girard Miller, January 2012
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Update on Changes to Pension
Accounting Standards
 Effective for employer fiscal
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years beginning after June
15, 2014
Change in focus of financial
reporting for pensions
Measurement and
recognition of net pension
liability
Discount rate
Timing and frequency of
actuarial valuations
Cost-sharing plans
Change in Focus of Financial Reporting
for Pensions
 Pensions are a form of compensation, like salaries,
which governments provide to their employees in
return for work. Consequently, like salaries, the
costs and obligations associated with pensions
should be recorded as they are earned by the
employees, rather than when contributions are
made by the government to a pension plan or when
benefit payments are made to retirees.
 New standard separates accounting and financial
reporting from funding determination.
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Measurement and Recognition of Net
Pension Liability
Net pension liability =
Present value of projected benefit payments to
current active and inactive employees
attributable to past periods of service
Less
The amount of the pension plan’s fiduciary net
position
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Discount Rate
The discount rate should be a single rate that
produces a present value of total projected benefit
payments equivalent to that obtained by discounting
projected benefits payments using (1) the long-term
expected rate of return on plan investments to the
extent that current and expected future plan net
position available for pension benefits are projected to
be sufficient to make benefit payments and to
continue investing using the investment strategy
selected for the long term and (2) a high-quality
municipal bond index rate for those payments that are
projected to be made beyond that point.
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Timing and Frequency of Actuarial
Valuations
 Perform actuarial valuations of the total pension
liability at least every two years
 For valuations not current “as of the measurement
date,” roll forward amounts from an earlier actuarial
valuation performed no more than 30 months and 1
day prior to the employer’s most recent year end.
 Intended to accommodate concerns of agent multiple
employer plans
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Cost-Sharing Plans
Net pension liability =
Proportionate share of plan’s net pension
liability
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Implications of Reporting a Large
“New” Liability on the Balance Sheet
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Role of Government Performance
Auditors?
 How can we prepare decision makers in our
jurisdictions for what will probably be sticker shock?
 Clarify reasons for the reporting change
 Analyze the extent to which different factors
contributed to the gap
 Evaluate overall compensation strategy
 Assess the impact of proposed changes
 Evaluate sustainability
 Review governance structure
 Assess actuarial assumptions
 Audit transactions
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Analyzing Factors That Contributed to
Pension Gap
Source: Review of the FY 2008 General Fund Budget, City Auditor’s Office, Atlanta GA
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Audit of Pension Sustainability
Rising pension costs threaten the city’s ability to
maintain service levels – alternatives for a sustainable
future
 Did costs really skyrocket? Yes. Benefit payments grew;
city and employee contributions grew; unfunded liability $4
billion, or about 9 times annual covered payroll.
 How does that happen? Investment returns not achieved;
investment losses in 2008-2009; retroactive benefit
enhancements; longer lives; declining ratio of employees to
retirees.
 What’s the impact of the cost increases? Significant
reductions to city services.
San Jose City Auditor’s Office (September 2010)
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Audit of Pensionable Earnings and
Time Reporting
 Errors resulted in higher pensions
 Time reporting codes were unclear and duplicative
 Some pensioners benefited from the city’s definition
of earnable income and highest salary
San Jose City Auditor’s Office (December 2009)
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Audit of Disability Retirement: A
Program in Need of Reform
 Rate of disability retirements among San Jose’s
sworn employees is unacceptably high
 Some disabled retirees have already been
compensated for their work-related injuries
San Jose City Auditor’s Office (April 2011)
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Audit of San Jose’s Deferred
Compensation Program
 The city can improve controls to ensure employee
contributions and credits are accurate
 The city can provide savings to participants through
administrative efficiencies and reduced fees
San Jose City Auditor’s Office (February 2013)
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Auditors’ Role in Pension Reform
 Pension reform ballot measures in San Diego and
San Jose passed by wide margins in June 2012
 San Jose – previously issued audit
recommendations were incorporated into reform
package
 San Diego – auditor conducted analysis of potential
savings attributed to pension reform package
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Questions raised on pension funding in Monticello
The News-Gazette, Tue, 03/12/2013 - 8:14pm
MONTICELLO — The topic of pension funding came before the city council this
week when a resident accused the city of underfunding police and city Illinois
Municipal Retirement Fund pension accounts.
Maureen Holtz said the city's 2012 auditor's report showed the underfunded
actuarial accrued liability for city employees is over $500,000, while the police
pensions are only 28 percent funded and $1.8 million short.
Mayor Chris Corrie said after the meeting that the issue dates back several
years ago when there was a switch to state IMRF plans and that auditors told
him the city is on a 30-year path to fully fund local pensions.
But to Holtz, the long-term plan is jargon for "put it on a tab for future
generations to deal with."
Corrie said city auditors will be on hand at the March 26 meeting to answer
questions on the pension funds.
"He (the auditor) says communities statewide are behind on their pension
funds, and a lot of was due to the changeover they made from different
agencies to the IMRF," said Corrie.
Holtz countered that employees still have to pay 100 percent of their
contribution to local pensions each year, and felt the city should consider
doing the same.
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Other Jurisdictions
 Oakland City Auditor: Review of Pension Funding
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Options (October 2010)
Berkeley: Employee Benefits – Tough Decisions
Ahead (November 2010)
Sacramento: Audit of Employee Health and Pension
Benefits (April 2011)
Portland: Fire and Police Disability and Retirement
– Improvements results from 2006 Charter reforms,
but significant fiscal challenges remain (June 2011)
Jacksonville: Retirement System Audit (March
2013)
CONCLUSION
 Context of current pension reforms
 Outlook for local government pension and retiree
healthcare liabilities
 Changes in pension accounting rules as they affect
your jurisdiction
 Role of local government performance auditors and
topics for future audits
Questions?
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