1. GASB Standards on Pensions
Presented by: Mark Thomas
KPMG LLP

2. Agenda GASB Pension Standards
Issues Related to Cost-Sharing Multiple- Employer Plans
Other Observations

3. GASB Standards on Pensions
GASB Statement No. 68, Accounting and Financial Reporting for Pensions, Issued June 2012
GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date (amendment of GASB Statement No. 68), Issued November 2013
GASB Statement No. 67, Financial Reporting for Pension Plans, Issued June 2012

4. Statement No. 68
GASB Statement No. 68, Accounting and Financial Reporting for Pensions
Issued June 2012
Effective for periods beginning after June 15, 2014 (effective June 30, 2015)
Replaces the requirements of Statement No.27, Accounting for Pensions by State and Local Government Employers and No. 50, Pension Disclosures
Addresses accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts (see related scope for Statement No. 67)
Establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expenses/expenditures. Employers should report in their financial statements a net pension liabilities determined as of a date (measurement date) no earlier than the end of the employer’s prior fiscal year.

5. Employer Reporting
The following amounts for a defined benefit pension plan must be determined as of a date no earlier than the end of the employer’s prior fiscal year (i.e., measurement date):
– Net pension liability (asset)
– Pension expense
– Pension deferred outflows of resources and deferred inflows of resources
Employers participating in single-employer or agent multiple-employer plans recognize 100 percent of the above amounts for each plan
Employers participating in cost-sharing multiple-employer plans recognize their proportionate share of the collective amounts for the plan as a whole.

6. Net Pension Liability
Net Pension Liability = Total pension liability less fiduciary net position
Total pension liability is the actuarial present value of projected benefit payments attributed to past employee service.
Fiduciary net position is determined using the same valuation methods as used for plan’s GAAP financial reporting.
Measurement of the total pension liability is determine through:
An actuarial valuation performed as of the measurement date, or
The use of update procedures to roll forward amounts from an actuarial valuation as of a date no more than 30 months and 1 day earlier than the employer’s yearend
Use professional judgment in determining extent of update procedures when changes in plan occur between last valuation date and the measurement date (Consider whether new actuarial valuation is needed)
Required actuarial valuations at least every two years (more frequent actuarial valuations are encouraged)

7. Total Pension Liability
Projecting
A single blended rate should be used to discount projected future benefit payments, based on:
The long-term expected rate of return on plan investments (net of investment expenses) that are expected to be used to finance the payment of pension benefits to the extent that the plan’s fiduciary net position is projected to be sufficient to make projected benefit payments and is expected to be invested, using a strategy to achieve that return; and
A yield or index rate for 20-year, tax-exempt general obligation (municipal) bonds with average rating of AA or higher, to the extent that the conditions above are not met.
Discounting
Attributing

8. Total Pension Liability
To determine extent that projected plan fiduciary net position is expected to be available for the payment of pension benefits, a comparison should be made between:
The amount of benefit payments projected to occur in each future period, and
The plan’s projected fiduciary net position at the beginning of the future period:
Consider all employer contributions intended to fund benefits of current and former employees and all contributions from current employees
Consider projected investment earnings on projected plan fiduciary net position
Consider projected benefit payments and administrative expenses
Do not consider employer contributions intended to fund service costs of future employees or contributions of future employees, unless those contributions are projected to exceed service costs for those employees

9. Total Pension Liability
To project future employer contributions when they are (a) established by statute or contract, or (b) determined under a formal written policy:
Apply professional judgment, considering:
Employer’s most recent five-year contribution history as a key indicator of future contributions
All other known events and conditions potentially impacting contribution amounts
To project future employer contributions in other circumstances:
Contribution amounts should be limited to an average of employer contributions over most recent five-year period, potentially modified based on consideration of subsequent events
Basis for average should be matter of professional judgment
Percentage of covered payroll contributed
Percentage of actuarially-determined contributions made

10. Pension Expense
Generally, the changes in Net Pension Liability should be included in pension expense immediately.
Employers participating in single-employer or agent multiple-employer plans will recognize 100% of the pension expense and deferred amounts for each plan
Employers participating in cost-sharing plans will recognize their proportionate share of the collective pension expense and deferred amounts determined for the plan as a whole.
Changes in net pension liability immediately recognized as pension expense:
Changes in the total pension liability - Current period service cost, Interest on the beginning total pension liability and Impact of changes in benefit terms
Changes in plan’s fiduciary net position - Projected earnings on plan investments and Changes in plan fiduciary net position other than employer contributions and benefit payments (e.g., employee contributions, admin costs)

11. Deferred Outflows/Inflows of Resources
Changes in net pension liability resulting in deferred inflows/outflows of resources.
Changes in the total pension liability
Effects of actuarial differences and changes in assumptions related to economic or demographic factors attributable to active and inactive employees, including retirees --- amortize over a closed period equal to the average of the expected remaining service lives of all employees
Changes in plan’s fiduciary net position
Differences between actual and projected earnings on plan investments --- amortize over a closed five-year period (report amounts from multiple years, net)
Employer contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer’s fiscal year should be recognized as deferred outflow of resources.

12. Recognition (Amortization) of Deferred Outflows/inflows
Recognition (amortization) of deferrals attributable to changes in total pension liability should be based on “systematic and rational” method over a closed period equal to the average of the expected service lives of all employees that are provided pensions through the pension plan (active and inactive employees) service beginning with the year in which the difference occurred
Results in the creation of “layers”, which are amortized over closed period
The number of “layers” established for each year is based on whether deferral are equally attributable to all plan participants
Recognition (amortization) of deferrals attributable to differences between projected and actual earnings on plan investments should be based on a “systematic and rational” method over five years beginning with the year in which the difference occurred

13. Participation in Cost-Sharing Multiple-Employer Plans
An employer should recognize its proportionate share of the collective net pension liability, pension expense, and deferred inflows/outflows of a cost-sharing plan as of the employer’s measurement date (no earlier than employer’s prior year-end)
Basis for proportion should be consistent with manner in which required
contributions are determined
- Use of projected long-term contribution effort of the employer(s) and nonemployer contributing entities is encouraged
- If different contribution rates are assessed based on separate relationships (i.e., different tiers or classes of employees), calculation of proportion should reflect the separate relationships
- Employer’s proportion established as of measurement date, unless actuarially determined, in which case actuarial valuation date should be used
Cost-sharing Multiple-Employer plans – those in which the pension obligations to the employees of more than one employer are pooled (plan assets can be used to pay the benefit of the employees of any employer)

14. Participation in Cost-Sharing Multiple-Employer Plans
As a practical matter, it is not anticipated the calculation of proportion will be performed by the plan for all participating employers, based on either required contributions or covered payroll
Application of this proportionate share concept results in two types of
potential changes in employer net pension liability unique to cost-sharing
multiple-employer plans:
a. Net effect of a change in the employer’s proportion of the plan’s collective net pension liability and deferred outflows/inflows of resources
- Measured as the difference between the plan’s collective balances as of the beginning of the employer’s measurement period, multiplied by: (1) employer’s proportion assumed in the prior period, and (2) employer’s proportion assumed in the current period.
- Recognized as deferred inflow/outflow in the period of change
- Recognized as part of pension expense, beginning in the period of the change over a closed period, using a systematic and rational method.

15. Participation in Cost-Sharing Multiple-Employer Plans
b. Difference during the measurement period between actual plan contributions made by the employer and the amount of 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 equal to the average of the expected remaining service lives of all employees (active, inactive, and retirees)
- This deferred outflow/inflow of resources may be reported on a net basis with that resulting from a change in the employer’s proportion of collective plan

16. Relevant Employer Note Disclosures
Balances of deferred pension outflows/inflows of resources as of employer’s fiscal year-end classified as follows:
Net difference between projected and actual earnings on plan investments
Differences between expected and actual experience
Changes of assumptions
Changes in employer’s proportion and effect of certain employer contributions on net pension liability
Employer contributions made subsequent to measurement date
Schedule presenting for each of subsequent five years and in aggregate thereafter:
Net amount of deferred pension outflows/inflows of resources that will be recognized in pension expense
Amount that will be recognized as a reduction of employer’s net pension liability

17. Relevant Employer Note Disclosures (Cost-Sharing Multiple-Employer Plans)
The employers’ proportionate share (amount) of the net pension liability
The employer’s proportion of the net pension liability including:
Basis on which its proportion was determined
Changes, if any, in proportion since prior measurement date

18. Statement No. 71
GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date (amendment of GASB Statement No. 68)
Issued November 2013
Effective date: Simultaneously with Statement No. 68 (effective June 30, 2015)
Amendment of Statement No. 68:
par. 137……It may not be practical for some governments to determine the amounts of all deferred inflows of resources and deferred outflows of resources related to pensions, as applicable, at the beginning of the period when the provisions of this Statement are adopted. In such circumstances, beginning balances for deferred inflows of resources and deferred outflows of resources related to pensions should not be reported.”

19. Statement No. 71 Amendment to Statement No. 68 (par. 137)
Recognize a beginning deferred outflow of resources only for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability, but before the start of the government’s fiscal year.
No beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions should be recognized

20. Statement No. 67
GASB Statement No. 67, Financial Reporting for Pension Plans
Issued June 2012
Effective for periods beginning after June 15, 2013 (effective June 30, 2014)
Replaces the requirements of Statement No.25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans and No. 50, Pension Disclosures
Scope: Pension plans (defined benefit and defined contribution) that are administered through trusts or equivalent arrangements, in which:
Contributions from employers and nonemployer contributing entities to the pension plan and earnings on those contributions are irrevocable
Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms
Pension plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the pension plan administrator. For defined benefit pension plan, plan assets also are legally protected from creditors of the plan members

21. Statement No. 67 The term pensions ---
Include: retirement income, postemployment benefits* (i.e. death benefits, life insurance and disability benefits)
Exclude: postemployment healthcare benefits, termination benefits
* If separately provided from a pension plan, they are classified as OPEB (and should be accounted for and reported as OPEB plans)

22. Statement No. 67 Defined Benefit Pension Plans ---
are pensions for which the income or other benefits that the plan member will receive at or after separation from employment are defined by the benefit terms.
Defined Contribution Pension Plans --- are pensions having terms that:
Provide an individual account for each plan member
Define the contributions that an employer is required to make
Provide that the pensions a plan member will receive will depend only on the contributions to the plan member’s account, actual earnings on investments of those contributions, and the effects of forfeitures of contributions made for other plan members, as well as pension plan administrative costs, that are allocated to the plan member's account
Majority of public pensions are defined benefit pensions

23. Statement No. 67
Defined Benefit Pension Plans --- Measurement and disclosures are made regarding the particular requirements depending upon the type of pension plan administered as follows: a. Single-employer – those in which pensions are provided to the employees of one employer b. Agent multiple-employer (agent pension plans) – those in which plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer (each employer’s share of the pooled assets is legally available to pay the benefits) c. Cost-sharing multiple-employer (cost-sharing pension plans) – those in which the pension obligations to the employees of more than one employer are pooled (plan assets can be used to pay the benefits of the employees of any employer)

24. Statement No. 67
A defined benefit pension plan should present the following, prepared on the accrual basis of accounting:
A statement of fiduciary net position
assets, deferred outflow of resources, liabilities, deferred inflows of resources, and fiduciary net position
A statement of changes in fiduciary net position
Additions (i.e. contributions), deductions (benefit payments and administrative expense), and net increase (decrease) in fiduciary net position

25. Summary of Plan Provisions
Recognition, measurement and presentation of financial statement amounts generally similar to current guidance with exception of receivables for contributions.
Receivables for contributions recognized only for contributions due pursuant to legal requirements
Note disclosures and required supplementary information:
Similar to nature of disclosures for employers with the addition of information on investment policies and actual rates of return on plan assets
Certain information only required for single-employer and cost-sharing plans
No actuarial-related disclosures for agent multiple-employer plans
Requirements regarding the measurement of net pension liability (asset) are similar to the requirements for employers:
Net pension liability (asset) not recognized by pension plans

26. Summary of Plan Provisions
Disclosures, cont’d. ---
Single Employer and Cost-sharing Plans:
Portion of actuarial present value of projected benefit payments
Pension plan’s fiduciary net position
Net pension liability
Pension plan’s fiduciary net position as a % of the total pension liability
Significant assumptions and other inputs to calculate pension liability
Required supplementary information for each of the 10 most recent fiscal years about employer/nonemployer contributing entity obligations for pensions provided through the pension plan.
Agent Pension Plans:
10-year schedule presenting for each fiscal year the annual weighted rate of return on pension plan investments

27. Issues Related to Cost-Sharing Multiple-Employer Plans

28. Cost-Sharing Multiple-Employer Plans (AICPA Proposed Recommendations)
Issues
White Papers
Government Employer Participation in Cost-Sharing Multiple Employer Plans: Issues Related to Information for Employer Reporting
Information for Employer Reporting
Single-Employer and Cost-Sharing Multiple-Employer Plans: Issues Associated with Testing Census Data
Substantially finalized
Census Data
Four Auditing Interpretations (expected to be released: end of March)

29. Cost-Sharing Multiple-Employer Plans Issues
Audited financial statements of the plan only include disclosure of the collective net pension liability for the plan as a whole. They do NOT include:
Deferred outflows/inflows of resources by category
Pension expense
Each participating employer’s share of collective pension amounts
Issues over allocations:
Standard is silent on who (plan or each individual participating employer) should calculate allocation percentages
Audited financial statements of the plan may not include necessary information to calculate allocation percentages
Standard provides flexibility in approach to determine allocations
Standard encourages an allocation method would be extremely difficult to audit as it is based on projected future contributions

30. Cost-Sharing Multiple-Employer Plans Issues (AICPA Proposed Recommendations)
Plan prepares the following for which plan auditor is engaged to provide opinion:
Schedule of employer allocations
Use allocation method based on covered payroll or required (actual) contributions depending on whether resulting allocations are expected to be representative of future contributions
Projected future contributions could be used if necessary
Schedule of pension amounts by employer
Includes the following elements: net pension liability, deferred outflows of resources by category, deferred inflows of resources by category and pension expense
Alternative: Prepare a “schedule of collective pension amounts” (excluding employer specific deferrals) for the plan as a whole
Information for Employer Reporting

31. Cost-Sharing Multiple-Employer Plans Issues (AICPA Proposed Recommendations)

32. Cost-Sharing Multiple-Employer Plans Issues (AICPA Proposed Recommendations)

33. Cost-Sharing Multiple-Employer Plans Issues (AICPA Proposed Recommendations)
Plan auditor issues opinion on the employer allocations and on the total of each of the four “elements” in accordance with AU-C 805
Net pension liability, total deferred outflows of resources, total deferred inflows of resources, and total pension expense for the sum of all participating entities
Restriction on use to appropriate parties
Plan auditor needs to consider the appropriateness of the materiality used in the audit of plan financial statements
For audit of a public employee retirement system (PERS) plan financial statements, the audit opinion is provided on the system as a whole
Audit of the plan financial statements effectively has to be performed at a lower level consistent with the “allocation” pool
Information for Employer Reporting (Plan Auditor)

34. Verify and recalculate
Cost-Sharing Multiple-Employer Plans Issues (Employer Responsibilities)
Report
Complete and accurate data to plan
Evaluate
Appropriateness of information used to record financial statement amounts
Whether plan auditor’s report on schedules are adequate and appropriate for employer purposes
Verify and recalculate
Amounts in schedules specific to employer
Employer amount used in allocation percentage (numerator)
Recalculate allocation percentage of employer
Recalculate allocation of pension amounts based on allocation percentage of employer

35. Verify and recalculate
Cost-Sharing Multiple-Employer Plans Issues (Employer Auditor Responsibilities)
Determine
Sufficiency and appropriateness of audit evidence
Evaluate
Whether plan auditor’s report on schedules are adequate and appropriate for auditor purposes (i.e. evidence)
Review plan auditor’s report and any related modifications
Evaluate whether the plan auditor has necessary competence and independence
Determine whether named as specified user
Verify and recalculate
Amounts in schedules specific to employer
Employer amount used in allocation percentage (numerator)
Recalculate allocation percentage of employer
Recalculate allocation of pension amounts based on allocation percentage of employer
Test
Census data submitted to plan

36. Cost-Sharing Multiple-Employer Plans Issues (Census Data)
Example risk factors to consider for selecting employers to test
Size of employer in relation to the plan
Past errors or control deficiencies of an employer
Length of time since procedures last performed for employer
Whether there have been significant changes in workforce
Results of internal analysis (analytical procedures) of employer information
New or terminating employer
Whether employer financial statement are audited have received unmodified opinions
Testing Underlying Census Data for Active Employees
Absence of effective management procedures and controls by plan to verify census data is considered a control deficiency and will impact the level of auditor testing.

37. Cost-Sharing Multiple-Employer Plans Issues (Census Data)
Employer auditor may perform procedures under examination engagement in accordance with AT (Attest) Section 101
Employer auditor engaged to provide opinion on relevant assertions related to census data reported to plan during period
Consider the actuarial valuation date in determining which period to be covered by opinion
Most plans will likely be using beginning of year actuarial valuation date
Relevant census data for actuarial valuation will be prior year information reported to plan
Relevant census data for contributions and benefit payments will be current year information reported to the plan.

38. Other Observations
AICPA guidance on agent-multiple employer plans and pension chapter still to come
Significant education will need to occur to successfully implement new pension standards
Special funding situations continues to be problematic
Effective communication between plans and participating employers is essential
There likely will be more issues that will surface as plans and employers implement the standards
Action by GASB may be necessary

39. Next Steps Plan to develop a comprehensive implementation plan
Evaluate auditor relationships and scope of work
Working with constituent group
Monitor progress of implementation
Evaluate need to request extension from GASB
Communicate implementation progress to constituent groups

40. Q&A