pension trends & understanding changes to gasb 68
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Pension Trends &
Understanding Changes to GASB 68 Presented by
Betsy Waldofsky, Finance Director &
Leon Hank, Chief Finance Officer
About MERS• MERS is a nonprofit organization,
independent from the State, that provides retirement plans for municipal employees
• We listen and work in partnership with our members to deliver a superior value that meets their needs
• We provide one-stop access to shared professional retirement services
• MERS administers over 2,000 plans represented by 800 Michigan municipal employers and more than 100,000 participants
38,000 +Number of MERS participants
retired from or working for county governments or road
commissions
90% + Percentage of MERS 26,000+
retirees that remain in the state
23,000 +Number of MERS participants
retired from or working for city governments
$18,000 +Average annual pension
payment
3
Trends in Retirement
Baby Boomers • The first Baby Boomer
reached age 65 January 1, 2011
• 77.3 Million Baby Boomers in the US • Currently makes up
25% of the entire US population
Longer Lives • Average lifespan is
78.7 years old • Normal retirement age
can change in the future
Preparing for Retirement• Auto Enrollment for
Defined Contribution Plans
• Employers and other nonprofits are promoting financial literacy programs
• MERS is working to help prepare municipal workers for retirement
4
Trends in Plans
Defined Benefit • Portfolio structure• Act 314 updates,
focusing on strengthening governance of plans
• Focus on Unfunded Accrued Liability
Defined Contribution• Investment Menu• Focus on fee
transparency
Hybrid Plan • Combination of
both Defined Benefit Plan and Defined Contribution Plan
• Can reduce liability for municipalities moving forward
Strategy Description Municipal Adoptions Impact
Cost Sharing for Existing Employees
Employees contribute to help fund the overall cost of the plan
• Reduces the employer cost, but does not affect total cost, or the plan’s unfunded liability
Lower Benefit for New Hires
New hires receive a lower tier of Defined Benefit provisions
• Existing employees are not affected
• Reduces the liability for new hires
Bridged Benefits for Existing Employees
Benefits are offered in parts to existing employees
Multiplier is then lowered on a going-forward basis
• Leaves earned benefits unchanged
• Reduces the liability for new hires and existing employees
Hybrid for New Hires
New hires receive a Hybrid Plan
• Existing employees are not affected
• Reduces the liability for new hires
Defined Contribution for New Hires
New hires receive a Defined Contribution Plan
• Existing employees are not affected
• Eliminates the liability for new hires
109176 149
245
3
61 65
40
2
1417
11
314
61
25
4
19 1823
2010 2011 2012 2013, as of Q3
Pension Trends – Plan Design Changes
6
MERS Defined Benefit Plan• Our Defined Benefit Plan is a multiple-employer plan
meaning that assets are pooled for investment purposes but separate trusts are maintained for each individual employer– Each municipality is responsible for their own plan liabilities; we do
not borrow from one municipality’s account to pay for another
– This is in contrast to a single-employer plan run by a municipality or a cost-sharing multiple-employer plan run by the State
• MERS does not have a “funded status” (each municipality has its own funded level)– 67% of all MERS’ 711 defined benefit and hybrid municipalities are
funded over 70%
– 108 municipalities are more than 100% funded
Distribution of Funded Percentage
Under 50%
50 - 59% 60 - 69% 70 - 79% 80 -89% 90 - 99% Over 100%
38
58
136
178
125
68
108
What is Unfunded Liability?
• Unfunded liability is simply the difference between a pension or OPEB plan’s estimated benefits and assets that have been set aside to pay for them– The dollar value of the benefits is actuarially
determined each year
– Assets are held in a trust and are professionally managed
Why Do Unfunded Liabilities Occur?
• Benefit improvements adopted • When municipalities don’t make et the
minimal required contributions as determined by the actuary
• Experience of the plan (investment experience and demographic experience)– This is the difference between what actually
happens in the plan compared to the actuarial assumptions
Economic Vitality Incentive Program (EVIP)
EVIP (for eligible cities, villages or townships) and CIP (for eligible counties) are revenue sharing packages for municipalities.
• Include three categories of eligibility, each with its own set of requirements and deadlines, and
• Offering 1/3 of the total available incentive revenue
EVIP Category 3 addresses unfunded accrued liabilities Requires local units of governments with unfunded accrued liabilities in pensions or other post employment benefits to submit a plan to lower liabilities
11
Unfunded Accrued Liability Resources Web Resources
EVIP Template
Strategic Partnerships• Michigan Municipal League• Department of Treasury • Michigan Local Government
Management Association
GASB 68 Resources• GFOA Resources• Webinars• Fact sheets• Glossary of Terms• How to
communicate changes with your board
Understanding Changes to GASB
New Pension Reporting Standards
The Governmental Accounting Standards Board (GASB) issued two new standards that will substantially change the accounting and financial reporting of public employee pensions
Statement No. 67 - Financial Reporting for
Pension Plans• Revises existing
guidance for the financial reports of most pension plans
Statement No. 68 - Accounting and Financial Reporting for Pensions
• Revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits
Key Changes for 2015
• Net Pension Liability (NPL)• Net Pension Expense• Deferred Outflows and Inflows• Discount Rate
What is Net Pension Liability?
Total Pension Liability
Actuarial Value of Assets
Unfunded Accrued Liability
Total Pension Liability
Market Value of Assets
Net Pension Liability
Today:
Future:
16
Net Pension Expense
• Today– Annual Required Contribution (ARC) and
Pension Expense are the SAME
• Future– Annual Required Contribution (ARC) and
Pension Expense are DIFFERENT
17
Deferred Outflows and Inflows
• Differences between projected and actual experience
• Changes in assumptions• Difference between projected and actual
earnings
• Similar to depreciation, spread out over future years
18
Discount Rate
• Today– Public pension plans use the rate of return they
expect on their investments (8% typically)
• Future– Severely underfunded plans that do not make
contributions must use a lower rate for some of their obligations
What will municipalities actually see?
The Bottom Line
• If pension is well-funded (95%), the liability is likely small
• If plan is less well-funded (60%), the new liability could be the largest number on your balance sheet
• These new rules may make local governments appear weaker
NPL Effects at 94% FundingAssets 2012 2012 with GASB
Cash and Equivalents $ 1,320,000 $ 1,320,000 Receivables, net 10,114,000 10,114,000Capital Assets 27,442,000 27,442,000Total assets 38,876,000 38,876,000
LiabilitiesAccounts Payable/Accrued Liabilities 552,000 552,000Long Term Debt 19,630,000 19,630,000Net pension liability 1,178,000Total liabilities 20,182,000 21,360,000
Net PositionInvested in capital assets, net of debt 10,003,000 10,003,000Unrestricted 8,691,000 7,513,000
Total Net Position $ 18,694,000 $ 17,516,000
NPL Effects at 79% Funding
Assets 2012 2012 with GASBCash and Equivalents $ 6,711,000 $ 6,711,000 Receivables, net 25,870,000 25,870,000Capital Assets, net 18,240,000 18,240,000Total assets 50,821,000 50,821,000
LiabilitiesAccounts Payable/Accrued Liabilities 8,433,000 8,433,000Unearned revenue 6,171,000 6,171,000Long Term Debt 12,342,000 12,342,000Net pension liability 14,792,000Total liabilities 26,946,000 41,738,000
Net PositionInvested in capital assets, net of debt 5,690,000 5,690,000Unrestricted 18,185,000 3,393,000
Total Net Position $ 23,875,000 $ 9,083,000
NPL Effects at 63% Funding
Assets 2012 2012 with GASBCash and Equivalents $ 9,900,200 $ 9,900,200 Receivables, net 24,300,000 24,300,000Capital Assets, net 14,970,000 14,970,000Total assets 49,170,200 49,170,200
LiabilitiesAccounts Payable/Accrued Liabilities 5,590,000 5,590,000Unearned revenue 5,011,000 5,011,000Long Term Debt 26,380,000 26,380,000Net pension liability 35,444,000Total liabilities 36,981,000 72,425,000
Net PositionInvested in capital assets, net of debt 5,690,000 5,690,000Unrestricted 6,499,200 -28,944,800
Total Net Position $ 12,189,200 $ (23,254,800)
24
GASB Next Steps
Communications • Municipalities need to find out what this
means for them • Help explain reporting changes to
board/council, media, and citizens to help them understand
• Talk about long-term changes• Use resources
– MERS
– GFOA
Contacting MERS
MERS of Michigan
1134 Municipal Way
Lansing, MI 48917
Phone: 800.767.6377Fax: 517.703.9707 www.mersofmich.com
This presentation contains a summary description of MERS benefits, policies or procedures. MERS has made every effort to ensure that the information provided is accurate and up to date. Where the publication conflicts with the relevant Plan Document, the Plan Document controls.
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