State Auditor`s Training Conference

Report
November 19, 2014
GASB Pension Reporting Update
Office of the State Auditor Local
Government Training Conference
Presented by:
Dave DeJonge, Assistant Executive Director, PERA
John Wicklund, Assistant Executive Director, TRA
On the doorstep of implementation
GASB 67: Pension Plan Reporting
 PERA and TRA will implement for their CAFRs for the
period ending June 30, 2014.
GASB 68: Accounting and Financial Reporting for Pensions
 School districts will implement for CAFRs for the period
ending June 30, 2015.
 Local governments will implement Dec. 31, 2015.
2
PERA/TRA Actuarial Valuation Reports:
December 2014
Two reports
1. Accounting valuation
TRA/PERA Annual
Financial (GASB 67-68)
Report for financial
reporting, not funding
determinations.
2. Funding Valuation Report
Prepared with statutory
assumptions and
requirements determined
by Minnesota Legislature.
Two reports – different assumptions and methodologies.
3
GASB Statement 68
impact on employer units (FY2015)
 Government-wide financial statements, not fund-level
statements.
 PERA/TRA perform actuarial valuation reports every 6/30/xx.
Results done 12/1/xx.
 PERA/TRA calculate proportionate share assigned to each
employer unit (based on employer contributions).
 PERA/TRA transmits assets, liabilities, disclosure data,
Required Supplementary Information to each employer.
 Large unfunded actuarial liabilities exist (now called Net
Pension Liability).
Result:
 Many employers will experience sticker shock at their share
of the net pension liability, higher than net assets reported.
(Remember: Liabilities paid over decades.)
4
Major reporting changes:
Statement of net position (GASB 68)

Adds net pension liability (NPL) – similar to the unfunded
liability PERA and TRA report today (government-wide
financial statements).

The difference between beginning NPL and ending NPL is
expensed, excluding employer contributions.

Deferred inflows and deferred outflows retained from GASB
63 and 65. Affects timing of expenses. Example: Investment
gains or losses smoothed over five years.
5
Notes to the financial statements

Adds more extensive note disclosures, including
sensitivity analysis of investment return assumption

Requires employer to track annual balances of deferred
outflows of resources and inflows of resources.

Must describe significant assumptions and other inputs
used to measure total pension liability.

PERA/TRA to provide suggested footnotes
6
Required supplementary information
Schedule of proportionate share of the Net Pension Liability:
Ten-year schedule presenting:
 Employer’s percentage and amount of NPL
 Employer’s covered employee payroll
 Employer’s NPL as percentage of covered employee
payroll
 Pension plan’s Fiduciary Net Position (FNP) as a
percentage of TPL
7
Required supplementary information
Schedule of the district’s proportionate share of the
net pension liability
Teachers Pension Plan
Last 10 fiscal years
(Dollar amounts in thousands)
20x9
20x8
20x7
20x6
District’s proportion of the net pension
liability (asset)
0.20%
0.19%
0.19%
0.19%
District’s proportionate share of the net
pension liability (asset)
$14,910
$11,738
$12,972
$13,495
District’s covered-employee payroll
$11,512
$10,412
$ 9,715
$ 9,553
District’s proportionate share of the net
pension liability (asset) as a percentage
of its covered-employee payroll
129.52%
112.74%
133.53%
141.26%
Plan fiduciary net position as a
percentage of the total pension liability
81.39%
83.20%
80.41%
78.53%
8
Required supplementary information
Schedule of Employer Contributions
Ten-year schedule presenting:
 Statutorily required employer contribution
 Actual contributions paid by employer
 Difference between required contributions and paid
contributions
 Amount of contributions paid in relation to required
contributions as a percentage of the employer’s coveredemployee payroll
9
Required supplementary information
Schedule of Employer Contributions
10
GASB 67-68 timeline:
Measurement dates for school districts
Actuarial
valuation
measurement
date
Measurement period
July 1, 2013
June 30, 2014
Release of
7/1/14
actuarial
valuation
results
School
districts use
7/1/14 actuarial
valuation
results
School district
CAFRs
w/GASB 68
published
Retirement systems
transmit results to
school districts
Dec. 1, 2014
June 30, 2015
Late 2015
 Key point: There will be a one-year lag in school district reporting of GASB 68
results. Example: School districts, in their FY 2015 reporting, will use FY 2014
actuarial valuation results from PERA and TRA.
11
GASB 68 implementation guide

Released January 2014. www.gasb.org

272 Q&A (questions 121-217): Cost-sharing
employers.

Appendix 3 (PERA and TRA are multi-employer costsharing plans).

Illustration 3a, 3b are helpful.
12
GASB Statement No. 68
(Paragraphs 48-51)
Statement of net position for FY ended
June 30, 2015: Cost-sharing employers
Total Assets
Change from
old GASB
$x,xxx,xxx
Liabilities
Accounts payable
$xx,xxx
Salaries payable
$xx,xxx
Total pension liability
$x,xxx,xxx (New)
Total Liabilities
Net Position
$x,xxx,xxx
Possibly
negative
 Remember: Pension liability is paid over decades of time
and could be very volatile based on conditions of the
pension fund at the state level.
13
GASB 71
14
GASB 71
 Amends transition provisions found in paragraph 137 of
Statement 68
 Allows all deferred inflows and outflows related to
pensions to start at 0 – except employer contributions.
 Employer contributions included in initial measurement
period but already expensed (closed to net position)
are to be reclassified.
 Adjusts deferred outflows and net position.
15
GASB 71: Local government employer
 Employer contributions already expensed during initial
measurement period are reclassified.
Measurement Period
Employer’s Prior
Fiscal Year End
Measurement
Date
Measurement
Date
Employer’s Fiscal
Year End
(Reporting Date)
ER
contrib.
June 30, 2014
December 31, 2014
June 30, 2015
December 31, 2015
16
Transition year journal entries
 Employer contributions already expensed during initial
measurement period are reclassified.
Measurement Period
Measurement
Date
NPL: $2,500,000
Employer’s Prior
Fiscal Year End
Measurement
Date
NPL: $2,650,000
Employer’s Fiscal
Year End
(Reporting Date)
June 30, 2015
December 31, 2015
$45,000
June 30, 2014
December 31, 2014
17
Transition year journal entries
1) To record beginning net pension liability (6/30/14)
Net position
Net pension liability
$2,500,000
$2,500,000
2) To record ER contributions expensed in previous year
but fall within measurement period
Deferred outflow
Net position
$
45,000
$ 45,000
18
PERA – TRA : For Employer Units

Perform annual actuarial valuations to determine funded status
and liabilities.

Require plan actuary to calculate collective amount of items
requiring deferred treatment.

Engage external auditor to audit GASB 68-related schedules
and actuarial census data.

Communicate results to the school districts and local
government units.

Provide RSI and suggested footnotes.
19
Schedule of pension amounts –
For Gov’t Wide Financials
COST SHARING PENSION PLAN
Schedule of Pension Amounts by Employer
As of and for the year ended 6/30/2015
Deferred Outflows of Resources
Deferred Inflows of
Resources
Difference
Between
Projected and
Differences
Actual
Between Expected Investment
Changes in
and Actual
Earnings on
Actuarial
Experience
Investments Assumptions
(9 year amtz.)
(5 year amtz.) (9 year amtz.)
Differences
Between
Expected and Changes in
Actual
Actuarial
Experience Assumptions
(9 year amtz.) (9 year amtz.)
Employer
Net
Pension
Liability
(NPL)
1234-00
$2,000,000
$8,000
$8,000
$720
$4,000
$0
$10,000
1245-00
$1,000,000
$4,000
$4,000
$360
$2,000
$0
$5,000
1350-00
$750,000
$3,000
$3,000
$270
$1,500
$0
$3,750
Pension
Expense
20
Pension expense
NPL Components immediately recognized in PE:
Item
Effect on PE
Service Cost (Normal Cost)
Increase
Interest on the TPL
Increase
Projected Investment Earnings
Decrease
Member Contributions
Decrease
Administrative Costs
Increase
Benefit Provision Changes
Increase or Decrease
21
Pension expense
:
Components deferred and recognized later include
Item
Amortization Period
Difference between actual and projected earnings
on investments
5 Years
Changes in actuarial assumptions (mortality,
disability, salary growth, inflation, payroll growth,
etc.)
Closed period equal to the
average of the expected
remaining service lives of all
employees (active, inactive,
and retirees)
Difference between actual and assumed actuarial
experience
Deferred portions are accumulated as “deferred outflows of
resources” or “deferred inflows of resources” and recognized as
PE in future years
22
Pension expense
Item
Pension
Expense
Service Cost
$20,000
Interest on TPL
$10,000
Projected Investment Earnings
$ (8,000)
Member Contributions
$ (1,000)
Admin Expenses
$
Deferred Deferred
Outflows Inflows
100
Change in Benefit Provisions
$
(200)
Change in Assumptions (8 years)
$
100
$ 1,000
$ 300
Diff. Between Assumed and Actual
Experience (8 years)
$
(50)
$
$ 500
Diff. Between Actual & Projected
Investment Earnings (5 Years)
$
(100)
Total
$20,850
150
$ 400
$ 1,150
23
$1,200
Pension expense
Actuary-Determined Impact 8-Year Allocation
Current
Deferred
Change in
assumption
+1,142 loss
$142
$1,000
(outflow – loss)
Change in
assumption
+342 gain
($42)
_____
$300
(inflow – gain)
Current year pension expense
$100
Difference in
assumed
Actual experience
+171 loss
$21
+571 gain
($71)
_____
Current year pension expense
($50)
Investment
experience
($100)
+500 gain
$150
(outflow – loss)
$500
(inflow – gain)
$400
(inflow – gain)
24
PERA Fire Relief Associations
Office of the State Auditor’s June 2014
Pension Division Newsletter
 Cities that prepare financial
statements in accordance with
GAAP need to include the NPL
and pension expense of the affiliated relief association
o If amounts are material
o If the fire department is a city fire department (not an
independent non-profit firefighting corporation)
 Alternative to costly actuarial valuation—accept liability
amounts calculated using State Auditor’s annual Schedule
Form if difference is not significant
25
PERA Fire Relief Associations

Most relief associations are overfunded, so NPL
will be a Net Pension Asset.

Work with relief associations and cities now!

Cities/Townships whose fire departments have
joined PERA’s Statewide Volunteer Firefighter
Retirement Plan will be provided with GASB 68
schedules
26
Determination of employer
proportionate share
 Allocation based on employer contributions for fiscal
year.
 Time lag – schools will use FY14 results and data for
their FY15 CAFR. There will be a six-month time lag for
local government units.
 PERA/TRA to provide GASB 68 allocations to each
employer based on plan totals calculated by actuary.
 Allocation policy is in progress.
27
Proportionate share
Schedule of Employer Allocations
As of June 30, 2014
Unit ID
Employer Name
Contributions
Allocation
0002-00
0006-00
0008-01
0010-00
0012-00
0014-00
0016-00
0018-00
0020-00
0022-00
0022-09
0024-00
0026-00
0027-00
0028-00
0030-00
0032-00
9115-00
AITKIN COUNTY
ANOKA COUNTY
BECKER COUNTY
BELTRAMI COUNTY
BENTON COUNTY REVENUE
BIG STONE COUNTY
BLUE EARTH COUNTY
BROWN COUNTY
CARLTON COUNTY
CARVER COUNTY
CARVER COUNTY HISTORICAL SOCIETY
CASS COUNTY
CHIPPEWA COUNTY
CHIPPEWA COUNTY SWCD
CHIPPEWA COUNTY HOSPITAL
CHISAGO COUNTY
CLAY COUNTY
CLAY COUNTY SWCD
…
598,539.73
6,113,109.91
814,665.35
932,224.26
672,278.56
186,633.81
1,333,635.98
683,226.74
1,020,241.27
2,114,587.95
9,978.97
849,624.34
353,070.32
9,983.35
980,099.65
1,013,041.90
1,075,596.37
17,500.39
0.16045%
1.63871%
0.21838%
0.24990%
0.18021%
0.05003%
0.35750%
0.18315%
0.27349%
0.56685%
0.00268%
0.22776%
0.09465%
0.00268%
0.26273%
0.27156%
0.28833%
0.00469%
…
…
375,000,000.00
…
100.00000%
28
Determination of employer
proportionate share—PERA and TRA
 Allocation based on employer contributions for fiscal
year, but not all contributions reflect future contribution
effort, so some will be excluded from the allocation.
29
Determination of employer
proportionate share
Schedule of employer allocations (6/30/20X5)
Employer
Actual Employer Contributions
Employer Allocation Percentage
Employer 1
$2,143,842
36.376
Employer 2
268,425
4.554
Employer 3
322,142
5.466
Employer 4
483,255
8.199
Employer 5
633,125
10.742
Employer 6
144,288
2.448
Employer 7
95,365
1.618
Employer 8
94,238
1.599
Employer 9
795,365
13.495
Employer 10
267,468
4.538
Employer 11
403,527
6.847
Employer 12
165,886
2.815
Employer 13
68,454
1.161
Employer 14
6,240
0.106
Employer 15
2,144
0.036
$5,893,764
30
100.000
Total
Example A: Net pension liability
(employer 2)
 Employer proportionate share
4.554%
 TRA net pension liability (estimated) $5 billion
 Employer 2 initial liability on
July 1, 2014
$227.7 million
31
Determination of employer
proportionate share
 Allocation based on employer contributions for fiscal year.
 Each employer unit (school district/city) will have a percentage of
TRA and/or PERA’s results.
 The percentage will be recalculated every year.
 TRA has a “special funding situation” impacting the calculation.
32
Special funding situation
GASB 68 requires allocation of TRA net pension liability and
other financial results to employer units.
 Allocation based on annual employer contributions.
 Based on the Minneapolis and Duluth teacher mergers, TRA
receives $16 million/year for Minneapolis and $14 million for
Duluth.
 Question: How do direct state aid payments impact the
allocation of TRA results?
 GASB 68 paragraph 15 defines a “special funding situation.”
 After a conference call with GASB and MMB, TRA will treat
the State of Minnesota as an employer unit in the allocation
of pension liability and expense.
33
GASB 67-68 Actuarial Valuation Results
Actuary will deliver the collective:
 Net Pension Liability
 Deferred outflows of resources by category
 Deferred inflows of resources by category
 Pension expense
Results
allocated and
shared among
2,000 employer
units
PERA
Results
allocated and
shared among
590 employer
units
TRA
34
Audit issues: Actuarial Valuation Results
 Actuarial valuation results consists of a plethora of payroll and
demographic data on each member
 Plan auditor selects which actuarial assumptions and
employers and member data should be tested each year.
 Plan auditor may engage local government auditors in
accordance with AT (Attest) Section 101 to provide opinion on
accuracy of census data reported to plan.
 Who audits the Employer Proportionate Share calculation?
35
Audit solution
PERA and TRA prepare the “Schedule of Employer Allocations,”
for which plan auditor is engaged to provide opinion.
 Schedule includes the following elements for each employer:
o Net Pension Liability
o Deferred outflows of resources by category
o Deferred inflows of resources by category
o Pension expense
For the GASB 68 allocation schedule – TRA has engaged the
Office of the State Auditor to verify the schedules distributed to the
employer units.
PERA has engaged an outside auditor to audit the GASB 68related schedules.
36
Audit issues: Census data
 Auditing white paper guidance prescribes auditor must assess
risks with member census data.
 Example census data includes date of birth, years of service,
pay
 TRA is currently working with the Office of the State Auditor
(OSA) on site visits to sample employer units.
 Sample will be a risk-based approach by OSA.
 Other risk factors may include:
o Past errors or control deficiencies
o New employer
o Length of time since last audit
o Media stories
37
PERA/TRA: Communication
of GASB 68 results
 Financial statement
 Required supplementary information
 Notes to the financial statements
 Reports anticipated to be released by PERA and TRA
(separately) in spring 2015
o Attestation letter from the Office of the State Auditor (TRA)
o Auditor Certification Letter will be provided along with
PERA’s GASB 68 schedules.

Exact mode for communication of report yet to be determined
38
Key messages

GASB 68 divorces funding and accounting
(Your GASB 68 pension expense will not match what the
employer actually contribute to the plan.)

Unfunded pension liabilities exist today
(GASB 68 changes who reports them)

Unfunded pension liabilities may be very large to the employer
(liabilities represent pension payments due over decades of
time)

Governing boards will still need to develop a funding policy to
pay off the liabilities
(No different than today)
39
Resources
40
PERA-TRA resources
Visit the “Employer” tab on PERA’s and TRA’s websites.
 www.mnpera.org
 www.minnesotatra.org/employerinfo/gasb
You’ll find:
 Links to GASB publications and AICPA audit guidance.
 Toolkit of informational guides/articles/videos.
 Frequently asked questions.
 News and developments on implementation.
Questions? E-mail Dave Dejonge (PERA)
[email protected], or John Wicklund (TRA)
[email protected]
41

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