IMPLEMENTING GASB 68 Nashville Electric Service Mark Weber, Controller Brian Covington, Accounting Supervisor

OUTLINE  Key components of GASB 68  Get ready  Implementation process  Lessons from implementation

KEY COMPONENTS OF GASB 68  Checking account method versus “debt” with interest – and other costs  One permitted method of measuring the liability versus six  Measurement date considerations  Deferred expenses and revenues  Discount rate based on funding  Expanded disclosures

CHECKING ACCOUNT VERSUS DEBT ▪ The annual required contribution was recognized as expense. The cash funding was intended to cover service cost, interest expense net of investment income, and “catch up funding” ▪ GASB 68 disconnects the funding from the costs and trust income associated with the plan ▪ Expense will likely be lower than funding over a long horizon if the plan is underfunded P&L Comparison ARCGASB 68 ARC26 Service cost5 Interest expense 40 Interest income (25) Total Expense2620 Amounts paid to Trust 26

PRESENTATION OF NET PENSION OBLIGATION Resulted in reduction to net unrestricted position

ENTRY AGE ACTUARIAL COST METHOD ▪ The actuarial present value of projected benefit payments is required to be attributed to periods of employee service using the entry age actuarial cost method with each period’s service cost determined as a level percentage of pay. ▪ The actuarial present value is required to be attributed for each employee individually, from the period when the employee first accrues pensions through the period when the employee retires. ▪ NOTE: If using a new actuarial measurement method, remeasuring all period may not be feasible or practical. This changes disclosure and adoption method: Opening balance sheet has no deferred amounts.

MEASURMENT DATE CONSIDERATIONS ▪ Valuation Date - Date that actuarial valuation is performed. Likely tied to the plan’s year end ▪ Measurement date – Date that the Net Pension Liability is determined. (Total Pension Liability less Fair Value of Plan assets in trust) ▪ Reporting date – Plan’s fiscal year end OR Sponsor’s fiscal year end. ▪ Total Pension Liability should be determined either as of the plan’s fiscal year end or using an update or roll-forward date of no more than 24 months earlier than the Sponsor’s fiscal year end. ▪ If Valuation date/Measurement date is not the same as the Reporting Date, special rules apply to deferred assets/liabilities.

DEFERRED ACTUARIAL AND PLAN INVESTMENT RESULTS ▪ Plan experience gains/losses, assumption changes and difference between projected and actual earning on investments are recognized in expense over a period of years. Amounts not recognized are deferred inflows and outflows. ▪ 1/5 of differences on investment earnings are recognized in the current year, and the remaining 4/5 are amortized over the next four years. ▪ Actuarial experience differences are recognized over the expected service lives of active employees, with 1/x recognized in current year. Thus if expected service life is 8 years, 1/8 of difference is recognized in current year and remainder over next seven years. ▪ NOTE: This could result in a big change in pension expense in last month of the year.

DISCOUNT RATE/EXPECTED RATE OF INVESTMENT RETURNS ▪ The depletion date of assets is computed to determine if the future plan assets are projected to be insufficient to pay the benefits. ▪ If yes, discount rate is computed as a single rate using the expected investment rate of return until depletion date, and then discount rate is a 30 year tax-free municipal bond yield or index. ▪ If no, then discount rate is expected investment rate of return for all periods. ▪ NOTE: Keep in mind the recent legislation that requires funding to be completed within XY years.

NEW AND EXPANDED DISCLOSURES ▪ If information is available, some data is required for ten years. ▪ Some disclosures are similar to old pension rules ▪ Expanded discussion about sensitive estimates ▪ Immediate recognition of impacts of pension plan amendments

GETTING READY TO IMPLEMENT GASB 68  Policy elections  Information required for actuary and sponsor  Timing of implementation  Internal / External Resources & Roles of participants  Disclosure considerations

POLICY CONSIDERATIONS ▪ Plan measurement date, valuation date, reporting date, roll forward considerations. ▪ How many periods are re-measured, if actuarial method is changing. ▪ Preparation of management’s assessment of key assumptions such as long term rate of return on investments, and discount rate. ▪ When to begin amortizing differences between projected earnings and actual investment earnings.

INFORMATION REQUIRED FOR ACTUARY AND SPONSOR ▪ Data required will depend on nature of plan (sole employer versus a state managed plan) ▪ Expect to need monthly investment and expense information ▪ For sole employer plans, more information will be available in-house, such as investment classes, and participant data

TIMING OF IMPLEMENTATION & INTERNAL / EXTERNAL RESOURCES ▪ Coordinate how and when you get information. Plan dates for recording journal entries, testing of participant data, etc. ▪ Will require coordination with actuary, external auditor, state agencies, investment trustees ▪ Plan to spend some time getting familiar with all of the data points, and planning the future vision of how these activities will be recorded on a regular basis.

DISCLOSURE CONSIDERATIONS ▪ Gain an understanding of what the new footnote will look like. ▪ Consider other aspects of financials: Net assets, Liabilities, Cash flow statement ▪ Think beyond the annual audited financials of the sponsor – who are other constituents that will want to know the impacts: ▪ TVA, Bond holders, Customers ▪ Collective bargaining units ▪ Board members ▪ Plan participants ▪ Other departments in the organization such as budget and rates, CFO ▪ Evaluate your position on historical deferred inflows and outflows

IMPLEMENTATION PROCESS  Internal team tasks and considerations  External audit coordination  Reality versus planning – how we did it

INTERNAL TEAM CONSIDERATIONS ▪ What is the vision of how you will record entries in the future? Decide this as a basis of developing measurements and journal entries. ▪ Determine new G/L accounts – Deferral account considerations, Recording net, versus recording the liability and a contra liability for the assets ▪ Tracking the investment accounts – The difference between projected and actual income. Timing of statements, computing the adjustments. ▪ Impacts on overhead allocations to capital projects, clearing rates ▪ Impacts on rate making, bond covenants, MD&A ▪ Create a roadmap with milestones

EXTERNAL AUDIT CONSIDERATIONS ▪ Review outcomes of meeting with actuary ▪ Review internal roadmap ▪ Discuss/review draft of management’s memo on significant assumptions ▪ Discuss timing of when actuarial information is expected to be ready and expected timing of auditor’s review ▪ Discuss testing of participant information if not previously performed for period under measurement ▪ If applicable, discuss auditor’s approach for obtaining and working with information from audits for jointly managed plans and information flow from that plan to your auditor.

REALITY VERSUS PLANNING – HOW WE DID IT. ▪ Read, read, read. Several resources including the GASB and Q&A, your own actuary will have some information ▪ Why we chose to roll forward from March 31 Measurement to June 30 Reporting Date ▪ Nature of actuarial computations ▪ Considerations of long term rate of return and market fluctuations ▪ Frozen plan, little change in actuarial assumptions in 90 day window ▪ Eliminate the Deferral of 4 th quarter contributions to the Trust ▪ Management assumptions memo

HOW WE DID IT - CONTINUED ▪ Actuary agreed to get us information on a go forward basis in time for June 30 year end close. ▪ Decided to book into G/L so that comparable financials in the future will be available on a month by month basis. Developed spreadsheet of journal entries on month by month basis. ▪ Several meetings and calls with actuaries and auditors to make sure we were on track ▪ Four accountants and two IT personnel for 9 hours to open up prior periods, record entries, perform internal control checks on efficacy of journal entries.

HOW WE DID IT - CONCLUDED ▪ Several adjustments to accounts due to process of tracking reallocation of overhead ▪ Accounting convention for overhead – contra asset accounts and manual depreciation ▪ Master form developed to create monthly journal entry that takes into consideration all aspects of the entry ▪ All Pension activity is now in discreet G/L Accounts in Sponsor books, allowing for creation of financials statements from ledger. Internal Control improved by integrating data analysis into monthly close.

LESSONS FROM IMPLEMENTATION  Impact on other departments  Impact on external reporting  In hindsight & Observations

IMPACT ON OTHER DEPARTMENTS ▪ Budget and Rates – Starting 2016 budget process and working on rate increase. Biggest surprise was the amount of change in P&L impact caused by plan asset earnings much better than projected ▪ HR uses information about cost of benefits. Evaluating whether to stick to expense or use actuarial cash flow for the model

IMPACT ON EXTERNAL REPORTING ▪ Several discussions with TVA including some “shock” analysis about deferred investment inflows. Still evaluating whether or not the Deferred Inflows/Outflows need to be approved regulatory assets ▪ Discussions with CFO and Board members requires high level and executive statement summaries to get people focused on the key points of GASB 68: Avoid the temptation to get into the details. ▪ Cash flows took time due to long term considerations and nature of chart of accounts. Continuing discussions about whether to use spreadsheets or G/L accounts to track Deferred Layers.

IN HINDSIGHT & OBSERVATIONS ▪ Surprised at the amount of volatility of trust assets – 5% swing between some months ▪ Glad that we opened up prior periods and booked to the ledger: Creating comparative financials has been very easy and reliable compared to a “top side” spreadsheet approach. ▪ Realized that we need a month by month analysis comparing ▪ Prior year ARC versus GASB 68, monthly and cumulative ▪ Current year ARC versus GASB 68, monthly and cumulative ▪ Current year budget versus GASB 68, monthly and cumulative ▪ Current year GASB 68 versus prior year GASB 68, monthly and cumulative

IN HINDSIGHT & OBSERVATIONS CONCLUDED ▪ Glad that we implemented early – Set the stage for ▪ 2016 Budgeting ▪ Less to do at the time of the year end audit ▪ Advanced notice to Board and City of Nashville ▪ Time to work with the JE’s before year end internal control evaluation ▪ Now working on last part of disclosures ▪ Bond offering considerations