1. GASB Pension Reporting Update Minnesota Society of CPAs: School District Audit Conference June 2, 2014 Presented by: Dave DeJonge, Assistant Executive Director, PERA John Wicklund, Assistant Executive Director, TRA

2. 2 On the doorstep of implementation GASB 67: Pension Plan Reporting  PERA and TRA will implement for their CAFRs for the period ending June 30, 2014. GASB 68: Accounting and Financial Reporting for Pensions  School districts will implement for CAFRs for the period ending June 30, 2015.

3. Major reporting changes: Statement of net position  Adds net pension liability (NPL) – similar to the unfunded liability PERA and TRA report today (government-wide financial statements).  Pension expense for school district is the difference between beginning NPL and ending NPL.  Deferred inflows and deferred outflows retained from GASB 63. Affects timing of expenses. Example: Investment gains or losses smoothed over five years. 3

4. Schedule of the Net Pension Liability: Ten year schedule presenting:  Employer’s percentage and amount of NPL  Employer’s covered employee payroll  Employer’s NPL as percentage of covered employee payroll  Pension plan’s FNP as a percentage of TPL Required supplementary information 4

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6. Schedule of Employer Contributions Ten-year schedule presenting:  Statutorily required employer contribution  Actual contributions paid by employer  Difference between required contributions and paid contributions  Amount of contributions paid in relation to required contributions as a percentage of the employer’s covered- employee payroll Required supplementary information 6

7. 7 Schedule of Employer Contributions

8. Notes to the financial statements  Adds more extensive note disclosures, including sensitivity analysis of investment return assumption  Requires employer to track annual balances of deferred outflows of resources and inflows of resources.  Must describe significant assumptions and other inputs used to measure total pension liability.  PERA/TRA to provide suggested footnotes 8

9. 9 Measurement period Actuarial valuation measurement date Release of 7/1/14 actuarial valuation results School districts use 7/1/14 actuarial valuation results School district CAFRs w/GASB 68 published Retirement systems transmit results to school districts July 1, 2013 June 30, 2014Dec. 1, 2014 June 30, 2015Late 2015  Key point: There will be a one-year lag in school district reporting of GASB 68 results. Example: School districts, in their FY 2015 reporting, will use FY 2014 actuarial valuation results from PERA and TRA. GASB 67-68 timeline: Measurement dates for school districts

10. GASB 68 implementation guide  Released January 2014. www.gasb.org  272 Q&A (questions 121-217): Cost-sharing employers.  Appendix 3 (PERA and TRA are multi-employer cost- sharing plans).  Illustration 3a, 3b are helpful. 10

11. PERA – TRA plan level  Perform annual actuarial valuations to determine funded status and liabilities  Require plan actuary to calculate collective amount of items requiring deferred treatment  Engage external auditor to audit actuarial census data and schedule of employer’s proportionate share  Communicate results to the school districts  Provide RSI and suggested footnotes 11

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13. Determination of employer proportionate share 13  Allocation based on employer contributions for fiscal year  Time lag – schools will use FY14 results and data for their FY15 CAFR  PERA/TRA to provide GASB 68 allocations to each employer based on plan totals calculated by actuary  Allocation policy is in progress

14. GASB 71  Amends paragraph 137 of Statement 68  Contributions after the measurement date prior to fiscal year end  Booked to deferred outflows rather than pension expense  At the beginning of the period in which the provisions of Statement 68 are adopted the government should recognize a beginning deferred outflow of resources only for its pension contributions 14

15. GASB 71 15 December 31, 2014 June 30, 2015 December 31, 2015 June 30, 2014 Measurement Date Employer’s Fiscal Year EndPrior Fiscal Year End Prior Measurement Date Measurement Period Example cities/counties Reduce NPLDef Outflows

16. 16 Example A: Determination of employer proportionate share Schedule of employer allocations (6/30/20X5) EmployerActual Employer ContributionsEmployer Allocation Percentage Employer 1$2,143,84236.376 Employer 2268,4254.554 Employer 3322,1425.466 Employer 4483,2558.199 Employer 5633,12510.742 Employer 6144,2882.448 Employer 795,3651.618 Employer 894,2381.599 Employer 9795,36513.495 Employer 10267,4684.538 Employer 11403,5276.847 Employer 12165,8862.815 Employer 1368,4541.161 Employer 146,2400.106 Employer 152,1440.036 Total$5,893,764100.000

17. Example A: Net pension liability (employer 2)  Employer proportionate share4.554%  TRA unfunded liability$4 billion  Employer 2 initial liability on July 1, 2014$182,160,000 17

18. Pension expense 18 NPL Components immediately recognized in PE: ItemEffect on PE Service Cost (Normal Cost)Increase Interest on the TPLIncrease Projected Investment EarningsDecrease Member ContributionsDecrease Administrative CostsIncrease Benefit Provision ChangesIncrease or Decrease

19. 19 Pension expense Components deferred and recognized later include : Deferred portions are accumulated as “deferred outflows of resources” or “deferred inflows of resources” and recognized as PE in future years ItemAmortization Period Difference between actual and projected earnings on investments 5 Years Changes in actuarial assumptions (mortality, disability, salary growth, inflation, payroll growth, etc.) Closed period equal to the average of the expected remaining service lives of all employees (active, inactive, and retirees) Difference between actual and assumed actuarial experience

20. Pension expense 20 ItemPension Expense Deferred Outflows Deferred Inflows Service Cost$20,000 Interest on TPL$10,000 Projected Investment Earnings$ (8,000) Member Contributions$ (1,000) Admin Expenses$ 100 Change in Benefit Provisions$ (200) Change in Assumptions (8 years)$ 100 $ 1,000$ 300 Diff. Between Assumed and Actual Experience (8 years) $ (50)$ 150$ 500 Diff. Between Actual & Projected Investment Earnings (5 Years) $ (100)$ 400 Total$20,850$ 1,150$1,200

21. 21 Example B: Schedule of collective pension amounts

22. 22 Example B: Schedule of pension amounts by employer

23. 23 Auditing of GASB 67-68 results External auditor for the statewide retirement systems: Minnesota Office of the Legislative Auditor (OLA) Two AICPA white papers (February 2014)  Governmental employer participation in cost-sharing multiple-employer plans: Issues related to information for employer reporting  Single-employer and cost-sharing multiple-employer plans: Issues associated with testing census data in an audit of financial statements Three auditing standards AICPA (April 2014)  AU-C Section 9500: Audit evidence  AU-C Section 9600: Audit of group financial statements  AU-C Section 9805: Audits of single financial statements and specific elements, accounts or items

24. Auditing of census data  PERA and TRA annually compile a data file of demographic and payroll information about all members, active and retired.  Source file for the annual actuarial valuation supporting GASB 67-68 reporting.  Met with external auditor on audit responsibilities and scope.  Vision is for the audit work to be performed centrally at the retirement system.  Example: Birthdate, years of service credit, employer unit, salary for fiscal year. 24

25. Recognizing proportionate shares of collective pension amounts.  Statement 68 does not specify which party (retirement systems or school districts) are responsible for calculating the allocation percentages.  Retirement systems planning to provide a schedule of employer allocations of pension amounts and method used. (slide 16)  GASB 68 does not specify any one methodology to determine the allocation.  Retirement systems likely to use most recent fiscal year employer contributions. 25 Auditing issues related to information for employer reporting

26. What PERA and TRA are doing  Working on GASB 67 implementation for FY 2014 CAFRs  Developing “Employer Proportionate Share” methodology  Developing framework for deferred inflows and outflows. No retroactivity required  Revising actuarial services contracts to reflect expended deliverables required from actuary  Negotiating audit scope and responsibilities with TRA’s external auditor (Office of the Legislative Auditor)  Establishing communications plan with employers and other stakeholders 26

27. Key messages  GASB 68 divorces funding and accounting (Your GASB 68 pension expense will not match what the employer actually contribute to the plan.)  Unfunded pension liabilities exist today (GASB 68 changes who reports them)  Unfunded pension liabilities may be very large to the employer (liabilities represent pension payments due over decades of time)  Governing boards will still need to develop a funding policy to pay off the liabilities (No different than today) 27

28. 28 Visit the “Employer” tab on PERA’s and TRA’s websites.  www.mnpera.org www.mnpera.org  www.minnesotatra.org/employerinfo/gasb www.minnesotatra.org/employerinfo/gasb You’ll find:  Links to GASB publications.  Links to AICPA audit guidance.  Toolkit of informational guides/articles.  Frequently asked questions.  News and developments on implementation. Questions? E-mail Dave Dejonge (PERA) dave.dejonge@mnpera.org, or John Wicklund (TRA) jwicklund@minnesotatra.org. dave.dejonge@mnpera.org jwicklund@minnesotatra.org PERA-TRA resources