1. Not Your Bosss GASB Update Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts National Association of State Auditors Comptrollers and Treasurers Joint Middle Management Conference April 10, 2006

2. How to implement GASB the New Standards (and yes quick reviews) Implementing NOW Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries Statement 44 – Economic Condition Reporting Statement 46 - Net Assets Restricted by Enabling Legislation Statement 47 – Accounting for Termination Benefits On the Horizon Statements 43 and 45 – Post Employment Benefits

3. Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries Not just infrastructure Physical damage Legal or environmental changes Technological development or obsolescence Change in manner or duration of use Construction stoppages

4. Key Factors in Decision Tree: Is event significant? Is decline in utilization unexpected? IF YES to BOTH above 2, impairment is present. IF impairment is present, is impairment temporary? IF NO – disclosure about idle assets needed Will asset continue to be used? IF NO – write down to lower of basis or FMV Recoveries – separate transaction Other financing source or extraordinary item Can also be recoveries of non-capital items Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

5. Brainstorm risks of impairment and outcomes Departments / stakeholders involved What is the average age of fixed assets? What is significant? Hint – its not material Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

6. Develop / Confirm policy – new policy should address Who makes impairment decision Must be able to gauge five factors explained before Must judge if temporary or permanent Must be involved in deciding fair market values or service units Who is in charge of disclosure Also address insurance recoveries & embezzlement Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

7. Statement 44 – Economic Condition Reporting States if part of GFOA CAFR program are 95% there – already doing Financial trends Revenue Debt Demographic / Economic Operations

8. Key for states to focus on OPERATING INFORMATION – why? Focus on information that is Verifiable Replicable Tells the story that should be told Statement 44 – Economic Condition Reporting

9. OPERATING INFORMATION – basic requirements: By GASB 34 Activity category: Number of government employees Indicators (e.g. performance measures) of the demand of level of service Indicators of capital asset usage In other words YIKES!

10. Pitfalls to watch out for as a middle manager recommending courses of action to a decision maker Not getting consensus on what an employee is or what is the employees home agency Not agreeing with policymakers up front as to what the key indicators should be for operations What do you think key indicators should be for your state? Statement 44 – Economic Condition Reporting

11. Statement 46 – Net Assets Restricted by Enabling Legislation Clarifies restrictions Cant be removed by Government easily External – legal constraints Can be imposed by public interest groups or citizens in judicial finding

12. Statement 46 – Net Assets Restricted by Enabling Legislation Succeeding in implementing 46 Review all current restrictions Special revenue funds are not necessarily restricted revenue Beware of earmarking Work with legal staff Watch out for higher education endowments Create a database / spreadsheet of restrictions

13. Statement 46 – Net Assets Restricted by Enabling Legislation Statement 46 database or spreadsheet Fund Account Legal cite or source of restriction Internal or external restriction Type of activity

14. Statement 46 – Net Assets Restricted by Enabling Legislation Statement 46 database or spreadsheet Amount of net assets (%) that could be restricted How can restriction be identified (for future decision making) Revenue source codes that are tied to restriction Have any net assets been used for other than this purpose? What and why Treatment for statutory restrictions if different than GAAP

15. Statement 47 – Accounting for Termination Benefits Key points Must be involuntary Plan has to be communicated to employees and committed to by government Numbers have to be known and accruals recognized May change OPEB / Pensions

16. Statement 47 – Accounting for Termination Benefits Keys for managerial success Establish a line of communication with HR decision makers to Quantify population Calculate benefits due Understand timing Health care costs related to early retirement (ERIP) will increase pensions and OPEB Work with actuary to make sure changes are done

17. On the Horizon – Statements 43 and 45 - OPEB Misunderstood and feared statements – why? Big dollars potentially Deals with healthcare and benefits Need for specialized help to accomplish

18. Statements 43 and 45 – OPEB – calm your fears! For most governments, obligation is large No budgetary effect if its not funded It is not a liability unless ARC is not made

19. Statements 43 and 45 – OPEB – calm your fears! Key talking points Statement 43 applies to PLANS – separately audited entities that manage benefits Implementation is one year sooner (FY07) Statement 45 applies to employers Component Units need to undoubtedly have separate valuations Need to implement when parent does If you understand pensions, you understand OPEB Same standard, different components

20. Statements 43 and 45 – OPEB – calm your fears! Dont Do This!!

21. Beware of the Headlines The Trillion - Dollar Pothole – Barrons Magazine 3/13/2006 The great state health-care giveaway – Fortune Magazine 5/2/2005 Our health plan is in a death spiral, and the lawmakers are under- funding it – State Employees Assn. of North Carolina Statements 43 and 45 – OPEB – calm your fears!

22. Statements 43 and 45 – OPEB – calm your fears through planning Answer the Ws Who is in my census? What information is available and what do I need? Where is the information located? When does it need to be done? Who can I get to help?

23. Statements 43 and 45 – OPEB – calm your fears! Keys to success Agree on a census of covered employees / retirees BEFORE you engage an actuary Turn over all the rocks you can NOW and document decisions Align data to that of your pension valuation Document all plans, rates, groups, sources of data

24. Keys to success (continued) Work with your budget / treasury people early Funding for actuarial study Assumptions for interest rates – drives amortization SEC is getting very active on bond disclosure of OPEB liability DO NOT disclose the unknown or draft Brainstorm on funding possibilities Statements 43 and 45 – OPEB – calm your fears!

25. Keys to success (continued) External issues abound so be careful Legal issues Political issues Labor issues Federal issues Finance issues Be logical and methodical Rationalize all decisions and their effects on the valuation Statements 43 and 45 – OPEB – calm your fears!

26. Questions?