session 604 gasb statements 67 and 68 update · 2014 enrolled actuaries meeting 39 years of joint...

Jointly sponsored by the American Academy of ActuariesAnd the Conference of Consulting Actuaries

In cooperation with the Society of Actuaries

All sessions of the sponsoring organizations will be conducted in compliance with Federal and State antitrust laws and any discussion of anticompetitive activities among participants is strictly prohibited.

The views expressed here are those of the presenter(s), and not necessarily those of the Conference or the Academy. Nothing in this presentation is intended to be an interpretation of actuarial standards of practice by the sponsoring organizations.

Copyright © 2014 Conference of Consulting Actuaries

All rights reserved by the Conference of Consulting Actuaries. Permission is granted to make limited copies of items for personal, internal, classroom or other instructional use, on the condition that the foregoing copyright notice is used to give reasonable notice of the Conference’s copyright.

Session 604

GASB Statements 67 and 68 Update

Michelle CzerkawskiGASB

Bill HallmarkCheiron, Inc.

March 25, 2014

2

2014 ENROLLED ACTUARIES MEETING 39 YEARS OF JOINT SPONSORSHIP

Agenda Introduction

Measurement Timing

Discount Rate

Net Pension Liability, Deferred Outflows and Inflows of Resources, and Pension Expense

Cost-Sharing and Agent Multiple-Employer Plans

Questions

3


Introduction Effective Dates Statement 67: Fiscal years beginning after June 15, 2013 Statement 68: Fiscal years beginning after June 15, 2014

Beginning deferred outflows/inflows of resources balances all or nothing at initial implementation—exception, contributions after measurement date

RSI schedules prospective if information not initially available

Implementation Guides Statement 67 – Issued June 2013 Statement 68 – Issued January 2014

4


Introduction Financial reporting is based on: Individual entry age cost method Valuation of all benefits, including gain-sharing and substantively

automatic ad hoc COLAs Discount rate Expected return to extent assets and contributions fund

expected benefits Municipal bond rate to extent assets and contributions do not

fund expected benefits Market value of assets

Net pension liability reported on employer’s balance sheet

Pension expense might be volatile

5


Key Initial Determinations Timing Reporting and Measurement dates Valuation date and calculation of the TPL

Discount rate Do I need to perform a crossover test? Should I change my contribution policy? Municipal Bond Index

Type of plan and reporting requirements Single, agent, or cost-sharing Nonemployer contributing entities/special funding situations

Allocation of responsibility for disclosure items

6


Measurement Date Considerations Measurement date Plan = plan FYE Employer = prior FYE or later

Actuarial valuation date Plan = within 24 months of FYE Employer = within 30 months of FYE

Updates permitted from valuation date to measurement date

Plan/employer(s) required to use same assumptions for similar or related information

7


Measurement Timing—Example

12/31/13 12/31/14 6/30/15

Measurement Date

Actuarial Valuation DatePlan FYEEmployer FYE

Prior FYE

6/30/146/30/1312/31/12

12/31/1412/31/1312/31/12

8


Measurement Timing—Example

12/31/13 12/31/14 6/30/15

Measurement Date

Actuarial Valuation DatePlan FYEEmployer FYE

6/30/146/30/1312/31/12

12/31/1412/31/1312/31/12

30 months + 1 day

24 months + 1 day

Update

9


Discount Rate Determination Single discount rate Long-term expected rate of return on pension plan

investments (net of investment expenses, but not administrative expenses), to the extent that plan assets are: Projected to be sufficient to pay projected benefits Expected to be invested using a strategy to achieve that

return Yield or index rate for 20-year, tax-exempt general

obligation municipal bond rate to extent that conditions for long-term expected rate of return are not met

10


Discount Rate Determination If the answer to all of the following questions is “Yes,”

the discount rate for GASB purposes should be the expected long-term return on assets, and you may not have to perform the full crossover test Are contribution amounts actuarially determined? Is the actuarial cost method a traditional individual method? Is the amortization period closed and of reasonable length? Are all benefits valued, including gain-sharing and

substantively automatic COLAs? Is the asset smoothing method non-asymptotic? Does the auditor agree?

11


Discount Rate Determination—Basic Steps Project benefit payments for all current active and

inactive members Include projected automatic COLAs, substantively automatic

benefit changes, projected salary increases and projected service

Project assets of the plan Include projected benefit payments determined above and

projected administrative expenses Include all projected contributions based on plan’s

contribution policy intended to finance the benefits of current plan members (i.e., exclude total normal cost for future plan members)

12


Discount Rate Determination—Basic Steps (continued) Discount projected benefit payments: Using long-term rate of return for projected benefit

payments prior to the crossover date (i.e., the date assets are projected to reach $0)

Using municipal bond rate after the crossover date Note that the crossover date is not the date the plan is

expected to run out of money. It is just the date assets reach $0 in this test

Solve for single equivalent discount rate that produces the same present value as applying the two rates above

13


Discount Rate Determination

Plans that may have a crossover date Sponsors don’t make required contribution Statutory contribution rates Rolling amortization methods Plans that don’t value gain-sharing or other “substantively

automatic” benefit changes Asymptotic asset smoothing (very minor impact, if any)

14


Discount Rate Determination What is the actual contribution policy? Statutory rates are straightforward Retirement board sets rate which is actually contributed by

the sponsors Use retirement board’s contribution policy If it isn’t clear, may want to make it clear

Legislature determines contribution amount which sometimes equals actuary’s or retirement board’s recommendation and sometimes does not Consider history Use professional judgment

15


Discount Rate Determination Discount rates for funding purposes are generally based

on the long-term expected return on assets

ASOP 27 now requires the actuary to disclose any margin for adverse deviation used in developing the discount rate

If you employ a margin for adverse deviation for funding purposes, for GASB purposes should you use the long-term expected return unadjusted for the margin?

16


Discount Rate Disclosures Discount rate and change in rate since prior

measurement

Projected cash flow assumptions, including contributions from employers, nonemployer contributing entities, and members

Long-term expected rate of return and a description of how it was determined

Municipal bond rate (if used) and source for rate

Periods of projected benefit payments to which long-term return is applied and periods to which municipal bond rate is applied

17


Discount Rate Disclosures

Asset Class Target Allocation Arithmetic Long-Term Real Rate of Return

Domestic Equity 46% 5.4%

International Equity 21% 5.5%

Fixed Income 26% 1.3%

Real Estate 6% 4.5%

Cash 1% 0.0%

Assumed asset allocation, the long-term expected real rate of return for each major asset class, and whether the rates are arithmetic or geometric

18


Discount Rate Disclosures

Discount Rate 1% Decrease(6.75%)

Current Discount Rate

(7.75%)

1% Increase(8.75%)

Net Pension Liability $1,050,638 $751,753 $393,091

Measures of the NPL calculated using a discount rate 100 basis points higher and 100 basis points lower than the discount rate

19


Note Disclosure IllustrationChanges in NPL by Source

Total Pension Liability

(a)

Plan Fiduciary Net Position

(b)

Net Pension Liability(a) – (b)

2,853,455$ 2,052,589$ 800,866$

73,034 73,034

219,345 219,345

(37,539) (37,539)

79,713 (79,713)

31,451 (31,451)

196,154 (196,154)

(119,434) (119,434) ‐ (3,373) 3,373

8 (8)

Net changes 135,406 184,519 (49,113)

2,988,861$ 2,237,108$ 751,753$

Differences between expected and actual experience

Increase (Decrease)

Balances at 6/30/X8

Changes for the year: Service cost

Interest

Balances at 6/30/X9

Contributions—employer

Contributions—employee

Net investment income

Benefit payments, including refunds of employee contributionsAdministrative expense

Other changes

20


Recognition of Changes in NPL Recognize most changes as expense in full in reporting

period of change

Exceptions: Differences between expected and actual experience (TPL) Changes of assumptions (TPL) Difference between projected and actual earnings on

pension plan investments Employer contributions

21


Recognition of Changes in TPL Expense recognized over average of expected remaining

service lives of all employees (active and inactive) Systematic and rational method

Portion not recognized in expense = deferred outflow of resources/deferred inflow of resources related to pensions

Year

Differences between

Expected and Actual Experience

Recogition Period (Years) 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6

20X0 35,780$ 8.3 1,292$

20X1 30,981 8.3 3,733 1,117$

20X2 13,464 8.3 1,622 1,622 488$

20X3 34,335 8.3 4,137 4,137 4,137 1,239$

20X4 (28,228) 8.2 (3,442) (3,442) (3,442) (3,442) (692)$

20X5 19,927 8.2 2,430 2,430 2,430 2,430 2,430 487$

20X6 38,438 8.2 4,688 4,688 4,688 4,688 4,688 4,688 934$

20X7 (3,562) 8.0 (445) (445) (445) (445) (445) (445) (447)

20X8 (15,211) 8.0 (1,901) (1,901) (1,901) (1,901) (1,901) (1,901) (1,901) (1,904)$

20X9 (37,539) 7.9 (4,752) (4,752) (4,752) (4,752) (4,752) (4,752) (4,752) (4,275)$

12,114$ 3,454$ 1,203$ (2,183)$ (672)$ (1,923)$ (6,166)$ (6,656)$ (4,275)$

of the Effects of Differences between Expected and Actual Experience

Net increase (decrease) in pension expense

Increase (Decrease) in Pension Expense Arising from the Recognition

22


Recognition of Investment Gains/Losses Expense recognized over 5 years - Systematic and rational method

Portion not recognized in expense = deferred outflow of resources/deferred inflow of resources related to pensions

Report net deferred outflow of resources/deferred inflow of resources from this source

Increase (Decrease) in Pension Expense Arising from the Recognition of

Year

Differences between

Projected and Actual Earnings on Pension Plan

Investments

Recogition Period (Years) 20X8 20X9 20Y0 20Y1 20Y2 20Y3

20X4 (29,336) 5 (5,868)$

20X5 (43,058) 5 (8,612) (8,610)$

20X6 (159,517) 5 (31,903) (31,903) (31,905)$

20X7 179,327 5 35,865 35,865 35,865 35,867$

20X8 206,546 5 41,309 41,309 41,309 41,309 41,310$

20X9 (37,529) 5 (7,506) (7,506) (7,506) (7,506) (7,505)$

30,791$ 29,155$ 37,763$ 69,670$ 33,804$ (7,505)$ Net increase (decrease) in pension expense

Differences between Projected and Actual Earnings on Pension Plan Investments

23


Recognition of Employer Contributions During the measurement period

Directly reduce NPL (no expense impact)

Subsequent to measurement date Deferred outflow of resources related to pensions Directly reduce NPL in next reporting period (no expense

impact)

24


Schedule of Deferred ItemsDeferred Outflows

of ResourcesDeferred Inflows

of Resources

33,327$ 53,999$

62,953 -

133,732 -

230,012$ 53,999$

Differences between expected and actual experience

Changes of assumptions

Net difference between projected and actual earnings on pension plan investments

Total

Year ended June 30:

20Y0 57,872$

20Y1 86,393

20Y2 43,018

20Y3 (1,802)

20Y4 1,463

Thereafter (10,931)

Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:

25


Calculation of Pension Expense—Two Approaches

Sum of components of recognized changes in NPL

Change in balance sheet items excluding changes due to employer contributionsDescription Amount

Service cost 73,034$ Employee contributions (31,451) Pension plan administrative expense 3,373

Interest on the total pension liability 219,345 Projected earnings on pension plan investments (158,625)

Differences between expected and actual experience 3,454 Changes of assumptions 20,101 Differences between projected and actual earnings on plan investments 29,155 Other changes in fiduciary net position (8)

Total pension expense 158,378$

Description Amount

Change in Net Pension Liability (49,113)$

Change in deferred outflows 100,779

Change in deferred inflows 26,999

Employer contributions 79,713

Total pension expense 158,378$

26


Cost-Sharing Employers Recognize proportionate shares of collective NPL,

pension expense, deferred outflows of resources/ deferred inflows of resources

Proportion (%) Relationship of the employer to the total of all contributing

entities Use of relative long-term projected contribution effort

encouraged

Two additional deferred items Change in proportion Difference between employer contributions and

proportionate share of collective contributions

27


Nonemployer Contributing Entities Legal requirement to contribute directly to the pension plan Special funding situations

Contribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contribute

Similar to cost-sharing accounting Nonemployer expense classified in same manner as similar grants to

other entities Employer recognizes additional expense and revenue = nonemployer

contributing entity’s proportionate share of collective expense (portion related to the employer)

Not special funding Employer Follows applicable requirements for single, agent, or cost-sharing

employer Recognizes revenue equal to change in NPL from contributions from

nonemployer contributing entities Nonemployer entity classifies expense for contributions in same manner as

similar grants to other entities

28


Information for Cost-Sharing Employers Plan actuaries will be providing information to the Plan

for its financial reporting under GASB 67

Plan actuaries will also likely be asked to provide additional information to cost-sharing employers Collective information Net pension liability Deferred outflows and inflows by category Pension expense Average expected remaining service life

Each employer’s proportionate share Potential interaction with employer’s auditor

29


Information for Agent Employers Plan actuary will likely have to provide each employer a

fair amount of information specific for that employer

Discount rate is determined separately for each employer

Employers will need: Net pension liability Deferred outflows and inflows by category Pension expense Average expected remaining service life Actuarial certification letter

Not clear how employer amounts will be audited (Plan auditor vs. each employer auditor)

30


Questions

session 604 gasb statements 67 and 68 update · 2014 enrolled actuaries meeting 39 years of joint...

Documents