1. Public Employees Retirement Association of Minnesota GASB 68—The New World of Employer Pension Accounting and Reporting December 17, 2013 Presenter: Dave DeJonge, PERA Moderator: Gary Carlson, LMC

2. Public Employees Retirement Association of Minnesota Agenda Background Summary of Provisions Net Pension Liability Pension Expense Footnotes RSI Schedules What PERA Will Provide Audit Issues Next Steps

3. Public Employees Retirement Association of Minnesota Background GASB 68 applies to pension plans (DB and DC) administered through a trust in which:  Contributions from employers and non-employer contributing entities are irrevocable;  Plan assets are dedicated to providing pensions to plan members; and  Plan assets are protected from creditors of employers, the plan administrator, and plan members.

4. Public Employees Retirement Association of Minnesota Background There are several reasons GASB made changes to pension accounting and reporting standards:  GASB 34 required employers to develop full accrual government-wide financial statements;  GASB concept statement 4 defined liabilities that need to be shown on the face of the financial statements;  Users of financial statements requested more information about unfunded pension liabilities; and  GASB’s emphasis is on comparability between reporting entities and the use of similar accounting standards with the international/corporate community

5. Public Employees Retirement Association of Minnesota Background “The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations. Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.” Former GASB Chairman Robert Attmore

6. Public Employees Retirement Association of Minnesota Effective Dates GASB 67, Financial Reporting for Pension Plans, is effective 6/30/14 for PERA GASB 68, Accounting and Financial Reporting for Pensions, is effective for fiscal years beginning after 6/15/14 Cities: Effective Date 12/31/2015 School Districts: Effective Date 6/30/15

7. Public Employees Retirement Association of Minnesota Current Standards Pension costs are directly related to funding. Pension Expense is equal to an employer’s contributions paid to PERA. A Pension Liability is only booked if the employer’s required contributions were not fully paid. PERA’s unfunded liability is disclosed in PERA’s footnotes. Footnote disclosures are limited to a description of benefits and contribution amounts for 3 years.

8. Public Employees Retirement Association of Minnesota Summary of Provisions The Net Pension Liability (NPL) replaces the Unfunded Actuarial Accrued Liability (UAAL). The NPL is calculated differently than how we calculate the UAAL. The annual change in the NPL is recognized as Pension Expense or Deferred Inflows/Outflows of Resources, depending on the nature of the change. GASB assumes the employer is ultimately responsible for paying off any unfunded liability.

9. Public Employees Retirement Association of Minnesota Summary of Provisions Employers include their proportional share of the NPL and Pension Expense on the face of their government-wide financial statements. Each employer’s proportional share will be determined based on contributions paid to PERA during the measurement period. New extensive footnote disclosures will be required. Two new RSI schedules will be required.

10. Public Employees Retirement Association of Minnesota Net Pension Liability (NPL) Equal to the Total Pension Liability (TPL) minus PERA’s Fiduciary Net Position. Similar to Unfunded Liability calculation except: Unfunded LiabilityNPL Discount RateLong-term rate of investment return Long-term rate of return and possibly a 20-year municipal bond index rate combination Asset ValuationSmoothed actuarial value of assets Fair (market) value of assets Actuarial cost methodUse one of 6 possible methods Entry Age Normal

11. Public Employees Retirement Association of Minnesota Net Pension Liability (NPL) The NPL will be allocated to all of PERA’s employers and included as a liability on the government-wide financial statements. The allocation method will be based on employer’s contributions paid to PERA in relationship to all employer contributions received. Employer Contributions Paid to PERA PERA’s Total ER Contrib. Proportionate Share (%) Total NPL Proportionate Share of NPL ($) City A$830,387$375,000,0000.221%$4.5 Billion$9,945,000 City B$ 62,590$375,000,0000.017%$4.5 Billion$765,000

12. Public Employees Retirement Association of Minnesota Net Pension Liability (NPL) Calculated as of a “Measurement Date” which will always be June 30, PERA’s fiscal year end. Measurement Date must be no earlier than the end of the employer’s prior fiscal year. December 31, 2014 June 30, 2015 December 31, 2015 June 30, 2014 Measurement Date Employer’s Fiscal Year EndPrior Fiscal Year End

13. Public Employees Retirement Association of Minnesota Net Pension Liability (NPL) Estimate of NPL for General Plan: 2013 PERA Contribution / $375,000,000 x $4.5 Billion Estimate of NPL for Police & Fire Plan: 2013 PERA Contribution / $126,000,000 x $1 Billion

14. Public Employees Retirement Association of Minnesota Pension Expense (PE) No longer tied to funding (contributions) Directly tied to changes in the NPL from one year to the next Must be calculated by PERA’s actuary Will likely be very volatile May be a negative expense (revenue)

15. Public Employees Retirement Association of Minnesota Pension Expense (PE) Calculated during the “Measurement Period” ending on the Measurement Date, always 6/30/20xx 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

16. Public Employees Retirement Association of Minnesota Pension Expense (PE) 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

17. Public Employees Retirement Association of Minnesota Pension Expense (PE) 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

18. Public Employees Retirement Association of Minnesota Example ItemPension ExpenseDeferred OutflowsDeferred 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

19. Public Employees Retirement Association of Minnesota Employer Contributions During the measurement period  Directly reduce NPL (no expense impact) Subsequent to measurement date  Deferred outflow of resources related to pensions  Directly reduce NPL in next reporting period

20. Public Employees Retirement Association of Minnesota Employer Contributions Booking ER Contrib. during the Employer’s fiscal year 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

21. Public Employees Retirement Association of Minnesota Footnote Disclosures DisclosureReferenceSource of Info Total of employer’s pension liabilities, pension assets, deferred outflows/inflows related to pensions, and pension expense for the period (if not identifiable in financials) 74 PERA Name of pension plan(s), type of plan, entity that administers the plan76.a. PERA or Employer Description of benefit terms, including types of employees covered, types of benefits, pension formulas, COLAs, and authority under which benefit terms are established 76.b. PERA or Employer Description of contribution requirements, including how contributions are determined, how rates are changed, actual contribution rates, and the amount of contributions recognized by the pension plan for that period. 76.c. PERA or Employer How to obtain PERA’s CAFR76.d. PERA or Employer Significant assumptions/inputs used to measure the total pension liability, including: inflation, salary changes, COLAs, mortality, and dates of experience studies on which assumptions are based. 77 PERA Discount rate applied when measuring the TPL and change in the discount rate since the prior measurement date, if any. 78.a. PERA Assumptions made about projected cash flows when calculating the discount rate. 78.b. PERA

22. Public Employees Retirement Association of Minnesota Footnote Disclosures DisclosureReferenceSource of Info Long-term expected rate of return and how it was determined, including significant methods and assumptions used for that purpose. 78.c.PERA If the discount rate incorporates a municipal bond rate, the bond rate used and source of that rate. 78.d.PERA Periods of projected benefit payments to which long-term ROR is used and municipal bond rate is used when determining the discount rate. 78.e.PERA Assumed asset allocation of portfolio, long-term expected real ROR for each asset class, whether ROR is presented as arithmetic or geometric. 78.f.PERA Employer’s NPL calculated using discount rates that are 1% higher and 1% lower than the actual discount rate used to calculate the TPL. 78.g.PERA The fiduciary net position used to calculate the NPL has been determined on the same bases used by PERA, and a brief description of PERA’s basis of accounting, including policies regarding benefit payments and the valuation of plan investments. 79PERA Employer’s proportionate share (amount) of the collective NPL80.a.PERA Employer’s percentage share of the collective NPL, the basis on which its proportion was determined, and any change in its proportion since the prior measurement date. 80.b.PERA

23. Public Employees Retirement Association of Minnesota Footnote Disclosures DisclosureReferenceSource of Info Measurement date of NPL and date of actuarial valuation on which the TPL is based. 80.c.PERA Assumption changes or other inputs that affected measurement of the TPL since the prior measurement date 80.d.PERA Changes of benefit provisions that affected measurement of the TPL since the prior measurement date 80.e.PERA Nature of changes between the measurement date of the NPL and the employer’s reporting date—if they are expected to have a significant effect on the employer’s share of the NPL in the future. 80.f.PERA/Employer Amount of Pension Expense recognized by the employer in the reporting period. 80.g.PERA/Employer Amount of revenue recognized for the support provided by a non-employer contributing entity, if any. 80.j.Employer

24. Public Employees Retirement Association of Minnesota Footnote Disclosures DisclosureReferenceSource of Info Employer’s balances of deferred outflows/inflows of resources related to pensions, classified in 5 categories 80.h.PERA/Employer Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual experience$ 2,657$ 142 Change of actuarial assumptions 1,714 130 Net difference between projected and actual earnings on investments 2,188 Changes in proportionate share 747 153 City’s contributions subsequent to measurement date 1,065 0 Totals$ 6,183$ 2,613

25. Public Employees Retirement Association of Minnesota Footnote Disclosures DisclosureReferenceSource of Info Schedule showing net amount of balances of deferred outflows/inflows that will be recognized in the employer’s pension expense and recognized as a reduction in the NPL in the future. 80.h.PERA/Employer Year ended Dec. 31: 20Y0 $ (269) 20Y1 161 20Y2 217 20Y3 545 20Y4 551 Thereafter 1,300 $1,065, reported as deferred outflows of resources related to pensions resulting from the City’s contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, 20Y0. Other amounts reported as deferred outflows/inflows of resources related to pensions will be recognized in pension expense as follows:

26. Public Employees Retirement Association of Minnesota Required Supplementary Information (RSI) Two 10-year schedules May be built prospectively Separate schedules for each pension plan  PERA’s General Employees Retirement Fund  PERA’s Police & Fire Fund  MERF Notes to RSI will include significant changes in actuarial assumptions, benefit provisions, etc. that affect the identification of trends in RSI schedules

27. Public Employees Retirement Association of Minnesota Required Supplementary Information (RSI) 6/30. CITY’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY PERA General Employees Retirement Fund Last 10 Fiscal Years* (Dollar amounts in thousands)

28. Public Employees Retirement Association of Minnesota Required Supplementary Information (RSI) PERA General Employees Retirement Fund Last 10 Fiscal Years (Dollar amounts in thousands)

29. Public Employees Retirement Association of Minnesota What Will PERA Provide? Total Pension Liability (Collective Level) PERA’s Fiduciary Net Position Total Net Pension Liability Total Pension Expense/Deferred Inflows & Outflows Proportionate Share for Each Employer Employer Contributions (Individual and Collective) Footnote Disclosure Information

30. Public Employees Retirement Association of Minnesota Audit Issues The Net Pension Liability, Pension Expense, and other pension costs will come from PERA Allocation of employer proportional shares is not a schedule that is required to be audited by PERA’s auditor as part of the financial statements How does an employer get comfortable that these amounts as of the measurement date are accurate and verifiable?

31. Public Employees Retirement Association of Minnesota Audit Issues AICPA Audit Standards & Recommendations are being developed (Guidance within 30 days) Employer Allocation, NPL, Pension Expense numbers from PERA will be audited by the Legislative Auditor’s Office Will the City’s auditor need anything additional in order to issue an unqualified opinion?

32. Public Employees Retirement Association of Minnesota Summary GASB 25-27GASB 67-68IMPLICATIONS Pension expense is equal to employer contributions sent to PERA Pension expense is related to the change in net pension liability each year. Pension expense will be volatile. Cannot be calculated by the employer. Pension systems’ unfunded liability does not impact individual employer financial statements. Employer must show proportionate share of the Net Pension Liability (unfunded liability) on balance sheet. Employers, who previously did not have a pension liability, now have a large liability shown on the balance sheet. Long-term rate of return used to discount future benefits, which determines liabilities. Discount rate is long term rate of return while assets exist and municipal bond rate after that. Potential for higher liabilities if assets are projected to be depleted in the future. Accounting numbers linked to funding numbers. De facto standard for contributions. Decoupling of accounting and funding numbers. Two sets of numbers confusing and hard to explain, and may cause “panic” by citizens and governing bodies. Unfunded liability can be amortized over maximum 30 years regardless of source of UAL (plan amendment, assumption change, gain/loss). Shorter amortization. Plan changes, change in assumptions and gain/loss on retiree experience recognized immediately. Gain/loss on active liability recognized over average working lifetime. Higher pension expense and more volatility.

33. Public Employees Retirement Association of Minnesota Summary New accounting numbers are unrelated to funding Contribution rates still set in MN State Statute Three ways to measure pension fund status:  Books—GASB 67-68 for CAFR publication  Budget—GASB 25 actuarial reports for funding  Bonds—Moody’s: 5.5% investment assumption, 17 year amortization period

34. Public Employees Retirement Association of Minnesota Next Steps GASB 68 Toolbox  “How To” Videos o Basic Concepts o Calculating Pension Costs o Determining Proportionate Shares o Deferred Inflows/Outflows of Resources o Pension Accounting Journal Entries o Transition Year Transactions o Footnote Disclosures o Accounting for Changes in Proportionate Share

35. Public Employees Retirement Association of Minnesota Next Steps GASB 68 Toolbox (Contd.)  Spreadsheets/Templates o Calculating Pension Expense o Calculating Deferred Inflows/Outflows of Resources o Maintaining Deferred Inflow/Outflow Balances o Calculating Employer’s Share of the NPL o Contribution Reconciliation  Implementation Guide for Employers  Talking Points for Governing Boards

36. Public Employees Retirement Association of Minnesota More Information GASB Website—Educational Resources  Podcasts  Fact Sheets PERA’s Website—Employer tab  GASB 68 Toolkit Contact Dave DeJonge dave.dejonge@mnpera.org