1. Pension Accounting GASB Pension Accounting and Financial Reporting - Overview SAAABA Annual Business Seminar– April 18, 2012 Cindy Peters – Accountant Manager, Dept. of Technology, Management & Budget Financial Services, Fiscal Management Division

2. Agenda Summary of Exposure Draft provisions – Pension Reporting Project Plan for Exposure Draft – Other Postemployment Benefit (OPEB) Reporting Overview of Preliminary View – Economic Condition Reporting News Release – Statements No. 65 and No. 66 Questions 2

3. Summary of Exposure Draft provisions – Pension Reporting Project Objective: ◦ Improve accounting and financial reporting by state and local governments whose employees are provided with pensions to create additional transparency.  Establish procedures for measuring and recognizing the obligations associated with pensions.  Identify the methods and assumptions that would be used to project pension payments, discount projected payments to their present values, and attribute those present values to periods of employee service. 3

4. Pension Reporting – continued Details the recognition and disclosure requirements for employers with liabilities to a pension plan administered through a qualified trust including: ◦ Single employers ◦ Agent employers ◦ Cost-sharing employers 4

5. Pension Reporting – continued Key Components of employer exposure draft ◦ Conceptual shift in reporting pension liabilities and expenses from a “funding” approach to an “earnings” approach:  Currently - no liability is reported if government fully funds its annual required contribution  Under proposed approach:  Pension liability will be reported as employees earn their pension benefits by providing services  Changes in pension liability will be immediately recognized as pension expense or reported as deferred outflows/inflows of resources 5

6. Pension Reporting – continued Substantial changes to methods and assumptions used to determine actuarial information for GAAP reporting ◦ The actuarial methods and assumptions allowable under current standards may continue to be used to determine funding amounts Defined benefit pension plans will be required to determine the following as of the employer’s fiscal year: ◦ Net pension liability (asset) ◦ Pension expense ◦ Pension deferred outflows and inflows of resources 6

7. Pension Reporting – continued Employers participating in single-employer or agent multiple-employer plans will recognize 100 percent of the amounts identified above for each plan. Employers participating in cost-sharing, multiple-employer plans will recognize their proportionate share of the collective amounts for the plan as a whole. 7

8. Pension Reporting – continued Timing, frequency and measurement of total pension liability: ◦ Measurement – should be determined as of the employer’s fiscal year end  Through an actuarial valuation, or  The use of update procedures to roll forward amounts from an actuarial valuation to the employer’s year-end  Actuarial valuation of total pension liability should be performed at least biennially  Use professional judgment to determine the extent of update procedures 8

9. Pension Reporting – continued Plan Net Position: ◦ Measurement – should be as of the employer’s fiscal year end  Use same valuation methods as used for Plan’s GAAP financial reporting  If the plan and employer year-ends are different, procedures to roll forward (or backward) the plan financial statement amounts to the employer’s year-end will be required  Would require measurement as of the year-end of each employer participating in a cost-sharing plan 9

10. Pension Reporting – continued Determine pension expense and deferred outflows/inflows of resources: ◦ Certain aspects of the change in net pension liability should be recognized as pension expense and others should be recognized as deferred outflows/inflows and amortized into pension expense over time ◦ Employers participating in single- or agent multiple- employer plans will recognize 100 percent of the pension expenses and deferrals ◦ Employers participating in cost-sharing multiple- employer plans will recognize their proportionate share of the collective pension expenses and deferrals of the plan as a whole 10

11. Pension Reporting – continued Net Pension Liability: ◦ Total pension liability (actuarially calculated), less any plan net position changes ◦ Total pension liability is calculated by: ◦ Projecting future benefits ◦ Discounting projected benefits to actuarial present value ◦ Attributing the present value to past and future years 11

12. Pension Reporting – continued Projecting future benefits: ◦ Based on actuarial assumptions: ◦ Number of employees expected to receive benefits ◦ How long employees are expected to work ◦ What salaries will be and how fast they will grow ◦ Life expectancy after retirement (how many years benefits will be paid) ◦ What (if any) cost of living adjustments (COLA) will be made to retirement benefits 12

13. Pension Reporting – continued Discounting projected payments: ◦ Based on discount rate: ◦ If the Annual Required Contribution (ARC) is being fully funded, use the expected long-term rate of return on plan assets ◦ If not fully funded, use the proposed rate of return (tax- exempt, high-quality 30-year municipal bond index) ◦ If the ARC is being partially funded, the two rates should be blended 13

14. Pension Reporting – continued Attribute present value to specific periods: ◦ Based on actuarial methods: ◦ Specified by the GASB to be ◦ Entry age normal ◦ Level percent of payroll ◦ If differ from funding method, would require separate valuations for the different purposes ◦ Must be as of the government’s/employer’s fiscal year end ◦ If differ from government/employer’s fiscal year, update procedures will be required 14

15. Pension Reporting – continued Recognition of changes in total pension liability: ◦ Immediately recognized as pension expense:  Current year – value of benefits earned  Interest on any outstanding pension liability  Changes in total pension liability caused by changes in terms of pension benefits  Changes in plan assets caused by projected earnings on plan investments  Amortization of deferred outflows/inflows  Effects of actuarial differences and changes in assumptions inactive/retired employees 15

16. Pension Reporting – continued Recognition of changes in plan net position: ◦ Recognize as deferred outflow/inflow and amortize:  Effects of actuarial differences and changes in assumptions active employees  Changes in the amount of plan assets due to differences between projected and actual investment earnings (amortized over 5 years) ◦ All other changes in plan net position should be included in pension expense in the period of the change 16

17. Pension Reporting – continued Participation in cost-sharing multi-employer plans: ◦ An employer’s proportion of a cost-sharing multi- employer plan should be:  A measure of the employer’s expected long-term contribution effort to the plan as compared to the total of all expected long-term contributions of the employers  Established at the actuarial valuation date and may be used to roll forward pension amounts to the employer’s fiscal year- end assuming no significant changes to the employer’s expected proportion 17

18. Pension Reporting – continued ◦ Application of this proportionate share concept results in two types of potential changes in the employer net pension liability unique to cost-sharing multi-employer plans:  Net effect of a change in the employer’s proportion of the plan  Difference between actual employer contributions and the employer’s proportionate share of collective employer contributions 18

19. Pension Reporting – continued ◦ Difference between actual employer contributions and the employer’s proportionate share of collective employer contributions:  Recognized by the employer as a deferred outflow/inflow of resources in the period of the difference  Recognized as part of pension expense beginning in the period of the difference over a closed period using a systematic and rational method  Closed period is representative of employees’ expected remaining service lives  Use the same period as that used for differences between expected and actual experience related to economic or demographic factors 19

20. Pension Reporting – continued Note Disclosures – all plans ◦ Most of the note disclosures remain the same. Below are a few of the new disclosures required by the exposure draft:  Assumptions used to measure total pension liability  Detailed disclosure requirements for the discount rate – which have changed  Brief description of changes in benefit terms and assumptions that affect the measurement of the total pension liability  Date of actuarial valuation on which the recognized information is based and whether update procedures were used to roll forward measurements to the employer’s fiscal year-end. 20

21. Pension Reporting – continued Note Disclosures – single or agent multi- employer plan ◦ Below are a few of the new disclosures required by the exposure draft:  Detail of changes in net position liability (asset)  Information about components of pension expense  Reconciliation of beginning and ending balances of deferred pension outflows and inflows, with separate identification of applicable categories of changes 21

22. Pension Reporting – continued Note Disclosures – cost-sharing multi-employer plan ◦ Below are a few of the new disclosures required by the exposure draft:  Employer’s portion of the collective plan  Amounts of the net pension liability, deferred outflows and inflows, and pension expense recognized in the financial statements  The effect of net pension liability (asset), deferred outflows and inflows, and pension expense recognized by the employer attributable to:  Changes in the employer’s proportion of the collective plan  Difference between actual employer contributions and employer’s proportionate share of collective employer contributions 22

23. Pension Reporting – continued Required Supplementary Information (RSI) – new ◦ Single and agent multi-employer plan  Notes to RSI, factors that significantly affect the identification of trends in the amounts reported ◦ Cost-sharing multi-employer plan  RSI – similar to single and agent multi-employer plans as they relate to the collective plan  RSI – as it relates to the employer’s proportion of the plan  Notes to RSI as appropriate Other aspects of the Employer ED  Special funding situations  Liabilities to a defined benefit pension plan  Insured pension benefits  Defined contribution benefits 23

24. Pension Reporting – continued What is the impact of these changes: ◦ Government (Employer) financial statements  A significant liability will be brought onto the face of the financial statements  May cause deficits  May distort other information  May require two actuarial valuations or require significant effort to develop update procedures  Increased cost / effort  Result in increased audit effort 24

25. Pension Plan Financial Statements Key Components of plan financial statement exposure draft ◦ Recognition, measurement and presentation of financial statement amounts generally similar to current guidance  Note disclosures and RSI:  Similar to disclosures for employers with addition of information on investment policies and actual rates of return on plan assets  Requirements regarding measurement of net pension liability (asset) are similar to those for employers:  Net pension liability (asset) not recognized by pension plans 25

26. Pension Plan Financial Statements – cont’d Plans should present on the accrual basis of accounting: ◦ Statement of Plan Net Position ◦ Statement of Changes in Net Position Statement of Plan Net Position: ◦ Plan assets subdivided by major category and principal components of receivables and investments ◦ Investments generally reported at fair value ◦ Liabilities such as benefits and refunds recognized when due ◦ Equity reported as net position restricted for pensions Statement of Changes in Plan Net Position: ◦ Separate display of contributions from employers, employees, and non- employer contributing entities ◦ Separate display of components of net investment income ◦ Separate display of benefits and refunds paid to plan members and administrative expenses ◦ Report net increase/decrease in plan net position 26

27. Pension Plan Financial Statements – cont’d Note disclosures are similar to employer disclosures Effective date of Employer and Plan EDs ◦ In general the ED proposes the future standard be effective for financial statements with a fiscal year beginning after June 15, 2012 ◦ Criteria are provided in the ED related to size and type of government or plans that would impact the effective date ◦ Earlier application of the standard is encouraged 27

28. Project Plan for Exposure Draft – Other Postemployment Benefit (OPEB) Reporting As a result of the staffing requirements associated with the pension project, further Board deliberations on this project will not be conducted until July 2012 The Board will continue deliberations related to differences between pensions and OPEB and determine the overall approach to OPEB standards – July – November 2012 Issue Exposure Drafts on employer and plan OPEB accounting and financial reporting issues – August 2013 Comment period – September to November 2013 Public hearing – December 2013 Issue Statements – June 2014 28

29. Overview of Preliminary View – Economic Condition Reporting – Financial Projections Project focus: ◦ Forward-looking information that would provide users of governmental financial reports with information they need to assess a government’s current financial health and its ability to meet its commitments going forward Project objective: ◦ To better enable taxpayers, bond holders, and other interested parties to assess a government’s financial health 29

30. Economic Condition Reporting – continued The Big Picture: ◦ Improve the communication of decision- useful information about a governmental entity’s overall economic condition, defined in terms of:  financial position  fiscal capacity  and service capacity 30

31. Economic Condition Reporting – continued Financial position: ◦ The status of assets, liabilities, deferred outflows and inflows of resources, and net position, as of a point in time Fiscal capacity: ◦ The ability and willingness to meet financial obligations as they come due on an ongoing basis Service capacity: ◦ The ability and willingness to meet commitments and provide services on an ongoing basis 31

32. Economic Condition Reporting – continued Fiscal sustainability: ◦ The ability and willingness to generate inflows of resources necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits  This last component has been described by the Board as being the forward-looking aspect of economic condition reporting 32

33. Economic Condition Reporting – continued Five components of information necessary to assess a governmental entity’s fiscal sustainability: ◦ Projections of total cash inflows and major individual cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations ◦ Projections of the total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of the fluctuations 33

34. Economic Condition Reporting – continued Five components - continued o Projections of total financial obligations and major individual financial obligations, including bonds, pensions, other postemployment benefits, and long- term contracts, with explanations of the known causes of fluctuations in financial obligations o Projections of annual debt service payments (principal and interest) o A narrative discussion of major existing inter- governmental service interdependencies and their nature NOTE: Projections would use historical and known information and extrapolate that information into the future. Accompanying narrative discussions would provide context to better understand why the changes are expected. 34

35. Economic Condition Reporting – continued All components of fiscal sustainability, in the Board’s view, would be required to be included the RSI of all governmental entities’ comprehensive annual financial reports and annual financial reports With the exception of projections for outstanding debt service payments (required currently), all of the components are new components of fiscal sustainability information 35

36. Economic Condition Reporting – continued Projections of outflows and inflows of resources are essential to assessing interperiod equity, or a government’s ability to meet annual spending needs with current-period resources, rather than delaying to the future or consuming accumulated resources 36

37. Economic Condition Reporting – continued Projections – how they would be calculated Based on current policy, informed by historical information, and adjusted for known events and conditions that affect the projection periods Outflows and inflows – projected on a cash basis of accounting to assess fiscal sustainability Financial obligations – projected on an accrual basis of accounting for more complete projected information on obligations incurred than the cash basis Assumptions – would not be prescribed, but would be 1) consistent with each other and the information used as the basis of the assumptions and 2) comprehensive by considering significant trends, events and conditions 37

38. Economic Condition Reporting – continued Disclosures – requirements Disclosures of assumptions would be required in order to help users understand how the financial projections were made and assess how reasonable they are Financial projections – made for a minimum of five individual years beyond the reporting period for external reporting purposes Components of fiscal sustainability information – reported for the primary government, including both governmental activities and business- type activities, with net subtotals (inflows less outflows) Cautionary notice – should precede the financial projections and related narrative discussion to provide context and inform readers that the projections do not represent a forecast or prediction of the most likely outcome and that actual future financial results may differ significantly from those reported 38

39. Economic Condition Reporting – continued Next Steps in the process ◦ When the GASB has reviewed the comments they will, if there is sufficient agreement to proceed, publish an exposure draft 39

40. News Release – 04/02/12 GASB Issues Statements No. 65 and No. 66 ◦ Statement 65, Items Previously Reported as Assets and Liabilities ◦ Clarifies the appropriate reporting of deferred outflows of resources and deferred inflows of resources to ensure consistency in financial reporting ◦ Statement 66, Technical Corrections - 2012 ◦ Enhances the usefulness of financial reports by resolving conflicting accounting and financial reporting guidelines that could diminish the consistency of financial reporting ◦ Effective dates ◦ The provisions for both Statements are effective for periods beginning after December 15, 2012, and would be applied on a prospective basis 40

41. Thank you! Questions? Email: petersc2@michigan.govpetersc2@michigan.gov Phone: 517-241-5042 More information can be found at: www.gasb.org www.gfoa.org 41