Pension Reporting Where Do These Numbers Come From and What Do They Mean? New Hampshire Retirement System Fall

Contents  NHRS Overview  GASB Overview  So, What Really Changes?  New Concepts: TPL, FNP & NPL  Employer Proportionate Share  Employer Pension Expense 2  Required Disclosures  What NHRS Will Provide  Timelines  Audit Issues  What’s Next?  Communicating the Changes  Key Takeaways

 NHRS is a contributory, defined benefit plan established in 1967  Once members attain eligibility, they receive a guaranteed lifetime pension funded through employee and employer contributions and the growth of the trust fund assets  Investment returns have historically provided the bulk of funding for pension benefits  Member contributions are set by statute; employer contributions are actuarially determined on a biennial basis NHRS Overview 3

 NH Legislature: Plan Sponsor  RSA 100-A serves as plan document  NHRS staff implements RSA 100-A  NH Constitution Art. 36-a protects fund ‘for the exclusive purpose’ of providing benefits  Subject to Internal Revenue Code provisions  NHRS Board of Trustees and Independent Investment Committee members are fiduciaries NHRS Overview 4

 Participating Employers: 475+  Membership at 6/30/14:  NHRS paid out more than $650 million in benefits in FY 2014 to 31,000 retirees and beneficiaries  Average annual benefit: $19,407 * Political Subdivision members make up more than 75% of NHRS members EmployeesTeachersPoliceFireTotal Active Members24,54517,9864,1661,61048,307* Retirees/Beneficiaries15,31410,9653,2821,49331,054 Vested Terminated ,297 NHRS Overview 5

 Trust fund was approximately $7.41 billion as of 6/30/14  Unfunded Actuarial Accrued Liability (UAAL) was $4.6 billion at the close of FY 2013, a funded ratio of 56.7%  UAAL is the result of artificially low employer contributions coupled with transfer of ‘excess’ investment earnings to Special Account over an extended period that was exacerbated by market downturn of past decade 6

 Method is in place to amortize UAAL over a closed, 25-year period through employer contribution rates  UAAL does not impact the short-term fiscal stability of NHRS  A Constitutional obligation (Article 36-a) NHRS Overview 7

 Does GASB 67/68 affect or change anything listed on the previous slides? NHRS Overview 8

 Does GASB 67/68 affect or change anything listed on the previous slides? NO! NHRS Overview 9

 GASB 67/68 Timeline  10-year GASB Pronouncement update cycle  GASB Board approved final statements amending pension accounting and financial reporting requirements in June 2012  GASB Statement 67 replaces GASB Statement 25 (Financial Reporting for Pension Plans) effective for fiscal years commencing after June 15, 2013  GASB Statement 68 replaces GASB Statement 27 (Accounting for Pensions by Employers) effective for fiscal years commencing after June 15, 2014 GASB Overview 10

 GASB 67/68 Highlights  GASB Rationale: Consistent, transparent, comparable financial reporting  Funding accounting is divorced from financial reporting accounting  For cost-sharing plans such as NHRS, the GASB pension liability will be allocated to participating employers  Financial statements of employers will reflect a portion of liability and pension expense  Putting liability on the balance sheet will add a large and volatile element to an employer’s net financial position on its basic financial statements GASB Overview 11

 GASB 67/68 Highlights  Changes do not alter the statutory funding methodology  Timing and scope of new reporting will require greater coordination between plan and employers, as well as between auditor and actuary  Does not include OPEB (Medical Subsidy) GASB Overview 12

 Common Questions  Will it impact property tax rates? No  Will it change NHRS employer contribution rates? No  Will it impact credit rating/bonding? Uncertain  Will it impact audits? Yes; AICPA task force has developed industry-wide best practices  Will it cause confusion? Yes; Like anything new and different, policymakers and the public may be confused by the new disconnect between pension accounting and pension funding  Can employers pay off their share of liability early? No So, What Really Changes? 13

 Total Pension Liability (TPL) – What’s Owed  Reports the total employer’s financial responsibility for future lifetime pension benefits as of a given measurement date  Must use Entry Age Normal cost method (same as NHRS’ statutory actuarial method)  Discount rate: Either the Plan assumed rate of return or a blended rate using the assumed rate of return and the 20-year municipal bond rate 14 TPL, FNP & NPL

 Fiduciary Net Position (FNP) – What’s Owned  Replaces the current ‘Net Assets Held in Trust’ for pensions  Includes a new concept: Deferred inflow and outflow components  FNP is based on market value of assets, which may lead to greater year-to-year volatility TPL, FNP & NPL 15

16 TPL, FNP & NPL

 Net Pension Liability (NPL) – Unfunded  TPL less FNP (i.e. total reported future obligation minus current market value of assets net of liabilities)  Similar to, but not the same as, unfunded actuarial accrued liability (UAAL)  Unlike most liabilities, NPL is not immediately payable 17 TPL, FNP & NPL

 Every employer must report its proportionate share of the NPL on its balance sheet  NHRS will annually determine proportionate shares based on employer contributions to the pension plan  Does not include Medical Subsidy contribution Employer Proportionate Share 18

 Reported on employer income statement  Old: The amount of the contribution check you wrote to NHRS  New: The change in NPL from year to year, as well as deferred inflows and outflows for:  Actuarial gains and losses (i.e. the difference between actual and expected economic and member demographic factors)  Changes in actuarial assumptions  Difference between projected and actual investment earnings  The effect of the change in employer proportion from one measurement date to the next  Difference between actual employer contributions and the proportionate share value for the measurement period  Different amortization schedules for different components Employer Pension Expense 19

 Note Disclosure  Plan description  Information about employer’s Proportionate Share of the collective Net Pension Liability  Assumptions and other inputs  Fiduciary net position  Required Supplementary Information  10-year schedules  Funding progress  Employer contributions Required Disclosures 20

 Calculation of aggregate NPL  Calculation of aggregate pension expense  Determination of proportionate shares  Aggregate amortization schedules for deferred inflows and outflows  Pro-forma suggested language for required disclosures What NHRS Will Provide 21

What NHRS will provide 22 Schedule of Employer Allocations20XX ActualEmployer Allocation EmployerContributionsPercentage Employer 1$2,143, % Employer 2268, Employer 3322, Employer 4483, Employer 5633, Employer 6144, Employer 795, Employer 894, Employer 9795, Employer 10267, Employer 11403, Employer 12165, Employer 1368, Employer 146, Employer 152, Total$5,893, %

23 Pension Expense Net Amortization of Deferred Amounts from Changes in Net DifferenceProportion Betweenand Differences ProjectedBetween Differencesand ActualEmployerTotalDifferencesEmployerTotalProportionateEmployer BetweenInvestmentContributionsDeferredBetweenContributionsDeferredShare ofContributionsTotal ExpectedEarnings onand ProportionateOutflowsExpectedand ProportionateInflowsPlanand ProportionateEmployer Net Pensionand ActualPension PlanChanges ofShare ofofand ActualChanges ofShare ofofPensionShare ofPension EntityLiabilityExperienceInvestmentsAssumptionsContributionsResourcesExperienceAssumptionsContributionsResourcesExpenseContributionsExpense Employer 1$45,224,620438,8591,569,8471,404,206695,4264,108,338355,917–726,4251,082,3421,907,28312,3751,919,658 Employer 25,661,78054,942196,533175,79684,231511,50244,558–74,326118,884238,777(1,793)236,984 Employer 36,795,62865,945235,892211,001117,354630,19253,481–98,465151,946286,596(8,088)278,508 Employer 410,193,44298,917353,838316,502161,215930,47280,222–165,453245,675429,8943,021432,915 Employer 513,355,038129,597463,584414,668199,8451,207,694105,103–197,645302,748563,229(9,900)553,329 Employer 63,043,48729,534105,64694,49953,453283,13223,952–48,45372,405128, ,954 Employer 72,011,58519,52069,82762,45933,458185,26415,831–35,34551,17684, ,461 Employer 81,987,96419,29169,00761,72535,425185,44815,645–16,45332,09883,839(5,712)78,127 Employer 916,777,717162,811582,393520,941248,3561,514,501132,040– 284,543416,583707,5768,405715,981 Employer 105,641,88854,749195,843175,17895,465521,23544,401–44,35688,757237,938(1,188)236,750 Employer 118,512,56282,606295,490264,312136,453778,86166,993–148,543215,536359,0051,254360,259 Employer 123,499,76133,962121,485108,66652,145316,25827,543–64,35491,897147, ,050 Employer 131,443,41814,00750,10444,81823,156132,08511,360–33,45344,81360,874(205)60,669 Employer 14131,7851,2794,5754,0921,96811,9141,037–8941,9315, ,705 Employer 1544, ,5541,3901,4564,834352–6981,0501,88871,895 Total for All Entities $124,325,4321,206,4534,315,6183,860,2531,939,40611,321,730978,435–1,939,4062,917,8415,243,245– Deferred Outflows of ResourcesDeferred Inflows of Resources EXAMPLE COST-SHARING PENSION PLAN: SCHEDULE OF PENSION AMOUNTS BY EMPLOYER What NHRS Will Provide

 GASB 67 Timeline  June 30, 2014: Effective date of NHRS implementation of GASB 67 Financial statement changes: Net assets to net position Footnote and RSI additions: Disclosure of TPL, FNP, and NPL; build 10-year comparison schedules  GASB 68 Timeline  Employers with Fiscal Year end of June 30, 2015: Use measurement as of 6/30/14  Employers with Fiscal Year end of Dec. 31, 2015: Use measurement as of 6/30/15 Separate report with audited proportionate shares of NPL and pension expense is expected to be available to employers in Spring of 2015 Timelines 24

 AICPA Recommendations: Plan data  Plan prepares schedule of allocations for which plan auditor is engaged to provide opinion  Plan prepares schedule of pension amounts for which plan auditor is engaged to provide opinion Schedule includes the following elements: net pension liability; deferred outflows of resources by category; deferred inflows of resources by category; pension expense Audit Issues 25

 AICPA Recommendations: Census audits  Risk-based approach by plan auditor to select employers to test Individually important employers (e.g. > 20% of plan) tested annually Plan auditor performs risk assessment on remaining employers using tiered approach Employers between 5% and 20% tested to approximate a 5-year cycle Employers less than 5% tested to approximate a 10-year cycle Many small employers will never be tested (e.g. 400 employers represent 2% in aggregate of plan) Audit Issues 26

 AICPA Recommendations: Census audits  Conducted every fall beginning in 2014  Done this year by NHRS in conjunction with internal and external auditors  20 audits conducted this year Audit Issues 27

 Complete employer census audits  Complete NHRS CAFR  Release audited GASB 68 report  Outreach to plan/employer auditors  Continue to work with pilot group What’s next? 28

 The three B’s  Budgets: Determining the appropriate annual contribution to the retirement system for sound funding (Statute/NH Constitution)  Books: Computing an annual position regarding pensions for financial statement purposes (GASB)  Bonds: Calculating how -- in their opinion -- pension obligations affect a government’s creditworthiness (rating agencies) 29 Communicating the Changes

 Be ready for this question  ‘How can we afford a new fire truck/teacher contract/road bond if we are in the red under these new accounting standards?’  The answers Reporting the Net Pension Liability under GASB 68 doesn’t directly impact property tax rates or NHRS contribution rates The pension liability is not new; it has always existed, but it had been reported in NHRS footnotes Rating agencies have always been aware of pension liabilities The pension liability is not immediately due in any single year Communicating the Changes 30

 Bottom Line  New reporting deals with financial accounting, not funding  GASB has made NHRS your financial reporting partner  No direct impact on contributions or property taxes  Having two different numbers out there – one for funding and one for accounting – will present a communications challenge Key Takeaways 31

Online: GASBReportingChanges.aspx Contact: Jack Dianis, NHRS GASB Resources 32

The New Hampshire Retirement System (NHRS) is governed by New Hampshire RSA 100-A, rules, regulations, and Federal laws including the Internal Revenue Code. NHRS also implements policies adopted by the Board of Trustees. These laws, rules, regulations, and policies are subject to change. Even though the goal of NHRS is to provide information that is current, correct, and complete, NHRS does not make any representation or warranty as to the current applicability, accuracy, or completeness of any information provided. The information herein is intended to provide general information only, and should not be construed as a legal opinion or as legal advice. Members are encouraged to address specific questions regarding NHRS with an NHRS representative. In the event of any conflict between the information herein and the laws, rules, and regulations which govern NHRS, the laws, rules, and regulations shall prevail. 33

NHMA Annual Conference Pension Reporting: Where do the Numbers Come From and What Do They Mean? November 12, 2014 Barbara T. Reid, Government Finance Advisor NEW HAMPSHIRE MUNICIPAL ASSOCIATION

Other Post-Employment Benefits (OPEB) a.k.a NHRS Medical Subsidy Monthly subsidy towards the cost of health insurance » 1-Person…$375 » 2-Person…$751 » 1-Person Medicare Supplement…$237 » 2-Person Medicare Supplement…$474 Group I (employees and teachers): eligible at 7/1/08 to retire and actually retired by 7/1/09, plus 20 years. Group II (police and fire): eligible if hired by 6/30/ ,059 out of 79,678 = 20% of NHRS members. 35

Other Post-Employment Benefits (OPEB) a.k.a NHRS Medical Subsidy Employer Rates Effective 7/1/15 – 6/30/17 PensionMedical Total Subsidy Group I: Employees10.86%.31%11.17% Teachers12.72%2.95%15.67% Group II: Police22.54%3.84%26.38% Firefighters25.32%3.84%29.16% 36

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GASB Exposure Draft Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Proposed effective date: fiscal years beginning after December 15, Earlier application is encouraged! Replaces GASB Statement 45. Proposes the same approach for OPEB as required for pensions: for cost-sharing plans such as NHRS, allocating a portion of the unfunded liability to participating employers for inclusion in their financial statements. 38

Concerns Like the pension liability reporting, OPEB liability will only be on the government-wide financial statements, therefore no impact to fund balance or tax rate setting. Every school district, and some towns, will show and NHRS OPEB liability, even though none of their current employees will ever receive the medical subsidy benefit. 39

Concerns May have your own OPEB liability in addition to the NHRS liability to report. What happens to the implicit rate subsidy? RSA 100-A:50 – retirees are included in the rating for medical premium purposes, and can stay on the plan employers offer to active employees. Not clear if or how this “hidden subsidy” plays out under the proposed standard. 40

Questions GASB OPEB Webpage Quick Links – Proposals Discuss with Auditors and Actuaries