November 19 2014 GASB Pension Reporting Update Office

November 19, 2014 GASB Pension Reporting Update Office of the State Auditor Local Government Training Conference Presented by: Dave De. Jonge, 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 (FY 2015) § 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) 20 x 9 District’s proportion of the net pension liability (asset) 20 x 8 20 x 7 20 x 6 0. 20% 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 3 a, 3 b 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 Liabilities Accounts payable $xx, xxx Salaries payable $xx, xxx Total pension liability $x, xxx (New) Total Liabilities Net Position $x, 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 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) To record ER contributions expensed in previous year but fall within measurement period Deferred outflow Net position $ 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 Employer Difference Between Differences Projected and Differences Actual Between Net Changes in Between Expected Investment Expected and Changes in Pension and Actual Earnings on Actuarial Liability Experience Investments Assumptions Experience Assumptions Pension (NPL) (9 year amtz. ) (5 year amtz. ) (9 year amtz. ) Expense 1234 -00 $2, 000 $8, 000 $720 $4, 000 $10, 000 1245 -00 $1, 000 $4, 000 $360 $2, 000 $5, 000 1350 -00 $750, 000 $3, 000 $270 $1, 500 $3, 750 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 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 FY 14 results and data for their FY 15 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 -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 HISTORICAL SOCIETY CASS COUNTY CHIPPEWA COUNTY SWCD CHIPPEWA COUNTY HOSPITAL CHISAGO 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. 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 (6/30/20 X 5) 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 68 related 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) dave. dejonge@mnpera. org, or John Wicklund (TRA) jwicklund@minnesotatra. org. 41