1. NC Office of the State Controller: University Update Fayetteville Fort Bragg

2. Megan E. Wallace, CPA, MACIS

3. Agenda: GASB 68 Template Updates GASB 72 GASB 73 GASB 76 GASB 79 GASB 72 Examples

4. GASB 68 Template – FY 2015 FY 2015 was the year of implementation for employers You entered one number  2015 employer contributions Template generated your net 13 th period journal entry Included a restatement Amounts in the entry were the ending balances for pension deferrals and the net pension liability as well as current year pension expense With one exception, the beginning balance of the pension deferrals was zero. Template generated your disclosures

6. 2015 Employer Contributions From NCSU 2015 Financial Statement Notes:

8. 2015 Journal Entry

9. 2015 TSERS Schedule

10. 2015 Disclosures

14. GASB 68 implementation in FY 2015 was a success!

15. GASB 68 Template – FY 2016 FY 2016 is the 2nd year for employers You will enter two numbers  2015 & 2016 employer contributions Template generates your net 13 th period journal entry Includes a potential reclassification to miscellaneous rev/exp Amounts in the entry represent the changes in pension deferrals and in the net pension liability as well as current year pension expense Useful for analysis Template generates your disclosures

18. ABC University: FY 2015 Employer Contributions: 6,296,076 per Actuary (automatically populates) 6,270,000 per University (get this # from your PY notes) 26,076 Difference* *The template reclassifies this difference to miscellaneous income/expense.

20. Notes: The template assumes that this difference is immaterial to your entity and therefore reclassifies the amount as a miscellaneous income/expense. If this difference is material to your entity, you will need to prepare a prior year restatement. Remember that you retain ultimate responsibility for the accuracy of your financial reporting. The template is a helpful tool to assist you.

23. 2016 Journal Entry

24. 2016 Disclosures

25. A Note About Investment Returns… The actuary assumes a 7.25% rate of return on TSERS pension plan investments When the actual rate of return is higher, we have a deferred inflow When the actual rate of return is lower, we have a deferred outflow

26. 1)Note that the years shown are intentionally one year “behind”. The actuarial valuation is performed as of 6/30 of the prior fiscal year. 2)Actual rates of return were obtained from the FY 2015 and FY 2014 State CAFRs

27. 1)Note that the years shown are intentionally one year “behind”. The actuarial valuation is performed as of 6/30 of the prior fiscal year. 2)Actual rates of return were obtained from the FY 2015 and FY 2014 State CAFRs

28. More about investment returns… Last year’s deferred inflow is larger than this year’s deferred outflow. Therefore, we have a net deferred inflow. “Collective deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual pension plan investment earnings in different measurement periods should be aggregated and included as a net collective deferred outflow of resources related to pensions or a net collective deferred inflow of resources related to pensions.” – GASB 68, paragraph 71b and 80h(3)

29. More about investment returns… In conformance with GASB 68, the template discloses the net deferred inflow related to the difference between projected and actual earnings on pension plan investments. However, the draft TSERS schedule of employer allocations and pension amounts reports both a deferred inflow and a deferred outflow related to earnings on pension plan investments. Keep this in mind when you are comparing your balances per the template to your balances per the TSERS schedule.

30. NPL vs. Pension Expense The collective net pension liability is much larger this year. Therefore, expect your share of the net pension liability to be much larger this year. However, this does not necessarily mean that your pension expense will be larger. For most if not all of you, your pension expense will be lower this year. According to preliminary figures, collective pension expense decreased this year.

31. Collective Net Pension Liability Source: 2015 State CAFR: Required Supplementary Information for Pension Plans

32. Components of Pension Expense Source: GASB 68 Implementation Guide, Illustration 2b

33. Examples of Changes in Pension Expense

34. 2016 Disclosures

37. 2016 Entry

38. 2016 Disclosures

39. GASB 68 Takeaways: You must enter two amounts this year Journal entry will report the change in balances There is an adjustment to the balance of your beginning deferred outflows related to FY 15 employer contributions, which will generally result in a reclassification to miscellaneous revenue/expense

40. CAFR W/S 605: New in FY 2016 Pension expense at the bottom of w/s 605 will automatically calculate as the difference between employer contributions and forfeitures.

41. GASB 68 Resources at OSC Virginia Sisson (919) 707-0530 Virginia.Sisson@osc.nc.gov Clayton Murphy (919) 707-0525 clayton.murphy@osc.nc.gov Megan Wallace (919) 707-0590 megan.wallace@osc.nc.gov

42. Quiz: The total net position of the State of North Carolina (i.e., primary government) is $46 billion. Compared to the size of the primary government, roughly how large are component units (including the UNC System)? A) 30 % B) 50 % C)70 % Source: 2015 State CAFR, Exhibit A-1

43. Answer: B) 50 % While the total net position of the primary government is $46 billion, the total net position of component units is $23 billion.

44. Quiz: The total net position of all component units is $23 billion. Roughly what percentage of this total comes from the UNC System? A) 30 % B) 50 % C) 70 % Source: 2015 State CAFR, Note 18: Component Units Financial Information

45. Answer: C) 70 % The UNC System accounts for roughly $16 billion of the $23 billion total net position of all component units in the State.

46. Quiz Takeaway: Component units are roughly half as big as the primary government itself and the UNC System is by far the largest component unit.

47. GASB 72

48. GASB 72 Overview: Effective FY 2016 Will impact universities New definition of investments Applies to assets & liabilities currently measured at FV Applies to certain investments not currently measured at FV Changes to valuation of donated capital assets Significant impact on note disclosures

49. Before GASB 72: Fair Value Investments (with some exceptions per GASB 31) Derivatives Donated capital assets, works of art, historical treasures Capital assets received in a service concession arrangement

50. After GASB 72: Fair Value Investments (with some exceptions per GASB 72) Derivatives Donated capital assets, works of art, historical treasures Capital assets received in a service concession arrangement Acquisition Value Donated capital assets, works of art, historical treasures Capital assets received in a service concession arrangement

51. Acquisition Value: “The price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the acquisition date, or the amount at which a liability could be liquidated with the counterparty at the acquisition date.” – GASB 72 Applied prospectively to: Donated Capital Assets, works of art, historical treasures Capital Assets received in a service concession arrangement

52. New Definition of Investment: “An investment is a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.” – GASB 72 image: www.usatoday.com image: www.vtc.vt.eduimage: www.recreation.gov

53. Fair Value: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” – GASB 72 FV is determined with various approaches FV is determined with various techniques

54. Fair Value Approaches: Market Approach Cost Approach Income Approach

55. Market Approach: The market approach uses information (e.g. prices) obtained from market transactions involving similar or identical assets/liabilities. Examples of valuation techniques consistent with the market approach: Quoted market prices Market multiples technique Matrix pricing technique Image: www.apple-stock-news.com

56. Cost Approach: The cost approach reflects the amount that would be required currently to replace the present service capacity of an asset. Examples of valuation techniques consistent with the cost approach: Replacement cost Depreciated replacement cost image: www.vtnews.vt.edu

57. Income Approach: The income approach reflects current market expectations about future amounts by converting future amounts (e.g. cash flows) to a single current amount. Examples of valuation techniques consistent with the income approach: Present value technique Option pricing models Multi-period excess earnings image: www.aaii.com

58. Fair Value Leveling Universities must disclose the level of the fair value hierarchy (i.e. Level 1, 2, or 3) within which the fair value measurement is categorized. The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. If inputs from more than one level are used to value an asset or liability, report the lowest priority level that is significant to the entire measurement. (Remember that Level 3 is the lowest priority measurement.)

59. Level 1 Inputs “Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that a government can access at the measurement date.” – GASB 72 Examples: Equity securities traded on an open market Actively traded mutual funds US Treasuries

60. Level 2 Inputs “Level 2 inputs are inputs – other than quoted prices included within Level 1 – that are observable for an asset or liability, either directly or indirectly.” – GASB 72 Examples: A bond valued using market corroborated inputs such as yield curves A bond valued using matrix pricing An interest rate swap valued using the LIBOR swap rate observed at commonly quoted intervals for the full term of the swap

61. Level 3 Inputs “Level 3 inputs are unobservable inputs for an asset or liability.” – GASB 72 Examples: Commercial real estate valued using a forecast of cash flows based on a university’s own data An interest rate swap valued using data that is neither directly observable nor corroborated by observable market data

63. Net Asset Value May use Net Asset Value (NAV) per share for an investment in a nongovernmental entity that does not have a readily determinable fair value The NAV per share must be calculated as of the government’s measurement date (i.e. 6/30) in a manner consistent with FASB’s measurement principles for investment companies. If the NAV provided is not as of 6/30, you must adjust it to 6/30.

64. Net Asset Value Unless your NAV investments meet the requirements of GASB 72, paragraph 71, you must provide leveling disclosures. Regardless of whether your NAV investments meet the requirements of paragraph 71, you must provide NAV disclosures.

65. Derivatives OSC plans to solicit the valuation technique and fair value level for hedging and investment derivatives on the 7XX series. Make sure your valuation methodology is consistent with GASB 72. (Universities can no longer rely on the settlement value provided by the counterparty.) CAFR Worksheets 340/341/342 will basically stay the same.

66. Valuation Techniques A CAFR worksheet in the 7XX series will solicit a description of your valuation techniques. OSC plans to provide a list of common valuation techniques with the option to select “other”. If you select “other”, you will be required to provide additional details in a narrative.

67. New Narrative Disclosure Additional information on “other” valuation techniques Significant changes in valuation techniques Nonrecurring adjustments to fair value (e.g. impairment of capital asset)

68. More Specific Investment Types? A greater degree of uncertainty and subjectivity suggests that the number of investment types may need to be greater. For example, investments categorized as Level 3 may need greater disaggregation. Investment TypeTotalLevel 1Level 2Level 3 Commercial Mortgage Backed Securities$30,000,000$0$25,000,000$5,000,000 Residential Mortgage Backed Securities$30,000,000$0$5,000,000$25,000,000 Investment TypeTotalLevel 1Level 2Level 3 Mortgage Backed Securities$60,000,000$0$30,000,000 VS.

69. More Specific Investment Types? OSC currently plans to offer the same investment type captions on the CAFR 7XX series as in the prior year. Contact Joy Darden if you believe you will need additional investment captions. Joy Darden (919) 707-0520 joy.darden@osc.nc.gov

70. UNC Investment Fund: Participants in the UNC Investment Fund will be impacted by GASB 72 The Office of the State Controller is still in the process of working with the Office of the State Auditor and UNC Chapel Hill to obtain information on how external participants should disclose their investments in the Fund.

71. GASB 72 Takeaways: Begin now. Promptly contact your investment accountants, investment custodians, derivative valuation specialists, etc., to ensure you will have the data you need when you need it. Remember that you are responsible for evaluating the data you receive. Consider what internal controls you may need to establish or update and document this review process. Check the CAFR instructions (word document) for guidance on completing the revised 7XX worksheets. Be on the lookout for surveys and respond by their due dates.

72. GASB 72 Takeaways: Ask questions during your planning conferences. Keep an eye on the GASB 72 Financial Reporting Update posted on OSC’s website. Any updates to the FRU are also sent via email. Your stand alone financial statements may require more detailed disclosures than those reported in the CAFR package.

73. GASB 72 Resource at OSC: Joy Darden (919) 707-0520 joy.darden@osc.nc.gov

74. Quiz: From the perspective of the State’s financial reporting entity, how many entities comprise the UNC System? A) 18 B) 19 C)20 Source: 2015 State CAFR, Note 1: Summary of Significant Accounting Policies

75. Answer: C)20 For purposes of the State CAFR, the UNC System includes 16 universities NCSSM UNC General Administration UNC Health Care System Gateway University Research Park, Inc.

76. GASB 73

77. GASB 68 vs. GASB 73 GASB 68 applies to pension plans that are administered through trusts. GASB 73 applies to pension plans that are not administered through trusts.

78. GASB 73 Time Frame: FY 2016 Requirements impacting assets accumulated for providing pensions not administered through trusts (most likely n/a for universities) Minor amendments to GASB 67 and 68 FY 2017 Requirements impacting employers, such as universities, with pensions that are not administered through trusts

79. Special Separation Allowance GASB 73 applies to the special separation allowance (SSA) provided to law enforcement officers (LEOs) employed by universities and other state agencies and institutions. Refer to North Carolina General Statute 143-166.41 for specifics on the SSA. Participating LEOs receive the allowance once they retire until they reach the age of 62.

80. Special Separation Allowance Disclaimer The following example is meant to give a rough illustration of how quickly the SSA can “add up” to encourage serious consideration of its potential impact on a university. It is not meant to be a precise, technical guide to calculating the SSA. Be sure to reference the general statute and appropriate human resources and actuarial specialists to calculate an actual SSA.

81. Special Separation Allowance Annual Base Compensation X Creditable Years of Service X 0.0085. Annual Allowance Example: An officer retires on his 52 nd birthday with 30 years of service. His eligible annual base compensation is $55,000. $55,000 X 30 X 0.0085. $14,025 per year Formula obtained from North Carolina General Statute 143-166.41

82. Special Separation Allowance: Example Continued: Because the officer retired on his 52 nd birthday, he will be eligible to receive the allowance for 10 years. $14,025 x 10 years = $140,250 before discounting and other actuarial adjustments Note that this amount is for one LEO.

83. Special Separation Allowance: Both active and inactive LEOs generate a liability. Unlike TSERS, there are no qualifying assets eligible to reduce the liability; i.e., there is a total liability not a net liability. GASB 73 requires the liability to be discounted using a yield or index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher.

84. Actuarial Valuations: OSC will obtain an actuarial valuation for the primary government. This valuation will be calculated as of 12/31/2015 and rolled forward to 6/30/2016 in order to report the liability in the FY 2017 State CAFR. Universities are responsible for evaluating the potential impact of GASB 73 and determining whether to obtain actuarial valuations for their entities.

85. GASB 73 Takeaways: GASB 73 will impact any university with law enforcement officers (active and/or inactive). If you decide to seek a valuation, remember to act early. Beginning Balance = 6/30/15 Ending Balance = 6/30/16 Reported in FY 2017

86. GASB 73 Resource at OSC: Virginia Sisson (919) 707-0530 Virginia.Sisson@osc.nc.gov

87. GASB 76

88. GASB 76 Overview: Simplifies the GAAP hierarchy – four levels reduced to two levels GASB Implementation Guides become authoritative GASB Implementation Guides will be incorporated into the GASB Codification Should be applied retroactively

89. GASB 76 Resource at OSC: Clayton Murphy (919) 707-0525 clayton.murphy@osc.nc.gov

90. GASB 79

91. GASB 79 Overview: Applies to external investment pools and pool participants Part is effective in FY 2016 and part in FY 2017 Includes requirements for whether an external investment pool may report investments at amortized cost If the external investment pool elects amortized cost, pool participants must report their investment at a share price based on amortized cost

92. GASB 79 Overview: To apply the standard, a government must measure all of its investments in a qualifying external investment pool at amortized cost Requires additional note disclosures for both qualifying pools and pool participants that elect amortized cost treatment

93. Impact on CAFR: OSC sent out a survey to better assess the potential impact of GASB 79 on the UNC System. Be sure to return the survey by its due date of March 16. OSC plans to add a simple worksheet for universities to indicate whether GASB 79 applies – this worksheet will be similar to the survey. If you check “yes”, you will be directed to complete a narrative.

94. GASB 79 Resource at OSC: Joy Darden (919) 707-0520 joy.darden@osc.nc.gov

95. GASB 72 Examples To request the GASB 72 example slides, email Megan Wallace after the presentation Megan Wallace (919) 707-0590 megan.wallace@osc.nc.gov