2. 2

5. The miracle just got bigger!! 5

6. Everything you never wanted to know about Pension Accounting and Auditing and never intended to ask but are forced to listen to again because of the serious reality of GASB’s new Pension Standards, and to get CPE. 6

7. Financial statement recognition and disclosures don’t create pension obligations; instead, they simply make existing obligations more transparent. Collectively, the changes in Statements 67, 68, and 71, represent major improvements in public pension reporting, and will make pensions more understandable and comparable. 7

8. Definition of a Liability under GASB Concept Statement # 4. – Assets are resources with present service capacity that the government presently controls. – Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid. (i.e. Social, Legal, or Moral Obligation) – A deferred outflow of resources is a consumption of net assets by the government that is applicable to a future reporting period. – A deferred inflow of resources is an acquisition of net assets by the government that is applicable to a future reporting period. 8

9. Best Practices for Implementation

10. 10 Tennessee Funded at about 90%+

11. Plans – GASB 67 - Fiscal years beginning after June 15, 2013 (i.e. June 30, 2014) Employers – GASB 68 - Fiscal years beginning after June 15, 2014 (i.e. June 30, 2015) 11

12. 44 states enacted significant revisions to at least one retirement plan since 2009. 28 states enacted increases in employee contributions from 2009-2011. 28 states increased retirement age and service requirements. 18 states reduced post-retirement benefit increases. 12

13. How does Local Government Audit propose to get this done for Local Governments? 13

14. The Issues for local governments and their auditors boil down to one question? Where…. do we get the information? 14

15. Cooperation TCRSState Audit Local Government Audit CPA Firms Local Governments 15

16. Cost-sharing Cost-sharing census data Agent – Defined Benefit Interpretations for Both Cost-sharing and Agent – Defined Benefit Plans 16

17. AICPA whitepapers and Interpretations are posted at: http://www.aicpa.org/interestareas/governmental auditquality/resources/gasbmatters/pages/gasbpe nsionsissues.aspx 17

18. Short answer = YES! Ramifications - It is unlikely that employer auditors will be able to accumulate sufficient appropriate audit evidence necessary to provide unmodified opinions on the opinion units of the government financial reporting entity that have material pension amounts. 18

19. In cooperation with TCRS, its Actuary, the Division of State Audit, Division of Local Government Audit and CPA Firms, we have developed a plan. Local Government Letter Local Government Letter 19

20. 402562 80 1) Project Benefit Payments 2) Discount Future Payments Present Value of Payments 3) Attribute to Employee Service Periods 20 For Active and Inactive Employees TPL How much money would I need to invest today to cover all the expected Retirement Benefits for this employee?

21. = December 31st 21 MD VD RD Tennessee Employer Approach RD = reporting date VD = actuarial valuation date MD = measurement date June 30, 2014 June 30, 2013June 30, 2015 Actuary Finishes, November 2014 Actuary Issues Reports, April-May 2015 Contributions?

22. Issue # 1 22

23. Net Pension Liability (NPL) – Total pension liability (TPL) minus plan assets at market value (“plan net position”) TPL uses new “blended” discount rate and “Entry age” cost method – Similar to Unfunded Actuarial Accrued Liability (UAAL) but using market assets, not “smoothed” assets NPL must be reported on the employer’s statement of net position – Currently, UAAL is reported in the Required Supplementary Information (RSI) – Currently, only the Net Pension Obligation (NPO) is reported on the balance sheet Cumulative difference between annual required contribution (ARC) and actual contributions 23

24. A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the net pension liability of all the employers in the cost-sharing plan. Approach uses as a basis for allocation, the proportionate share of the total based on the employer’s contribution effort relative to that of all contributors. 24

25. Example that follows is for TCRS Plans. The entries would be made at the Government-Wide level for Governmental Activities, and at the Fund Level for Enterprise Funds. These Summary Entries would need to be further allocated to Departments/Functions and/or Enterprise Operations. The information for these entries comes directly from the actuarial report and TCRS. 25

26. Your Government will need to make adjustments for: – Net Pension Liability (PPA) – Contribution Deferrals (GASB 71) (Current) – Pension Expense (Current) – Other Deferrals (Current) P.S. Who is going to maintain all these deferral amortization schedules??? Hundreds! 26

27. Your Government will need to make adjustments for: – New Account Numbers in Chart of Accounts (e.g. Deferred Outflows and Inflows) 27

28. Summary Prior Period Restatement DR. CR. Prior Period Restatement – Net Position$ 11,405,647 Net Pension Liability (NPL) 11,405,647 To adjust net position for the effects of unrecorded pension liability – (GASB 68). Deferred Outflows - Beg. Contributions 375,000 Prior Period Restatement - Net Position 375,000 To record beginning deferred contributions 6/30/13. 28

29. Summary Journal Entry DR. CR. Pension Expense$ 972,839 Deferred Outflows - Contributions 25,000 Deferred Inflows – Experience Gains (1) 47,190 Deferred Inflows – Assumption Changes (2) 244,694 Deferred Inflows – Plan Investment Gain (3) 265,433 Pension Expense - Contributions 400,000 Net Pension Liability (NPL) 40,522 The record pension expense and ending deferrals (GASB 68 and 71) (1) Amort. Over Avg. Remaining Service Life (2) Amort. Over Avg. Remaining Service Life (3) Amort. Over 5 years 29

30. EFFECTIVE DATE AND TRANSITION 137. To the extent practical, in the first period that this Statement is applied, changes made to comply with this Statement should be reported as an adjustment of prior periods (generic use), and financial statements presented for the periods affected should be restated. 30

31. Must allocate net pension liability, pension expense, and deferrals to Enterprise Funds and Departments or Functions as applicable. Recommend using “contributions” as a allocation measure but GASB does not specify how to do the allocation so you can use any logical method (e.g. covered payroll). 31

32. What about a 9/30 Year End? – For example - Utilities What about Component Units? – Use Cost Sharing Notes if the Component makes contributions through the Primary Government?? What about a 9/30 Year End? – For example - Utilities What about Component Units? – Use Cost Sharing Notes if the Component makes contributions through the Primary Government?? 32

33. GASB 68 requires employer to recognize NPL as of the measurement date no earlier than the prior fiscal year end Contributions made during the period after measurement date but before reporting date are required to be deferred Transition to new standards – If not practical to determine all deferred positions at transition, then start at zero. – BUT – contributions deferred! – Contradiction??…(GASB 71) 33

34. State contributions to Schools to pay for Retirement benefits do not constitute a “Special Funding Situation”. 34

35. Issue # 2 - Auditing 35

36. Whitepaper Implementation: – Cost Sharing Plans (Done this year) – Agent Plans 36

37. If you have a Pension Plan, your auditors will be testing Census Data. (especially agent plan employers) Why have we not done this before? – Funding 100% – Knew the Value of Assets – Knew the Amount of Contributions – Not reported on Statement of Net Position – Reported in RSI, No Opinion Required. 37

38. Cost Sharing Defined Benefit Test Census Data for Both 38 Schools

39. Key census data – Date of birth – Gender (male or female) – Date of hire or years of service/service credits – Date of termination or retirement – City/County Code – Department Code – Marital status – Spouse date of birth – Eligible compensation – Employment status 39 The auditor must test the reliability and completeness of the census data provided to the actuary.

40. Actuary Census Data to Employer Census Data Completeness Test, Employer records to Actuary Census Data 40 Two Tests HOW?

41. Information in Employee Files: – Internal Controls over Census Data Social Security Number Government Issue ID (DOB, Sex) Department Code City/County Code Service Credits Calculation Salary/Wages Reported DOB M or F Print Screen of Input Data? 41

42. What will happen if your auditor cannot test your Census Data?? Could (probably will) mean a Disclaimer or Adverse Opinion!!! (even if it is a net pension asset!) Could (probably will) mean a Disclaimer or Adverse Opinion!!! (even if it is a net pension asset!) 42

43. Agent Plan Whitepaper – Interpretation 3.34- 36 Can use plan auditor opinion on Changes in Net Fiduciary Position Not a Group Audit Situation 43

44. 44 Final Design might be 5 years and average to comply with GASB-67 White Papers give guidance about auditing actuarial census data

45. 45 White Papers give guidance about Auditing Actuarial Census Data

46. Legend for next exercise: A = Actuary T = Treasury (TCRS) SA = State Audit LGA = Local Government Audit and CPA Firms 46

47. Actuarial Certification Letter Actuarial Valuation Report as of the Measurement Date Notes to the Financial Statements and RSI Amortization Schedules for Deferred Outflows and Inflows Examination Engagement Opinion related to Census Data for Inactive and Retired TCRS Members 47

48. Census Data Sample of Census Data: – Accuracy Test – Completeness Test Workpaper for Using the Actuarial Specialist Workpaper that Demonstrates Actuarial Data Agrees with Data in the Concord System 48

49. Journal Entries Contributions between Measurement Date and Report Date Calculation of Allocations to Component Units, Funds, and Departments. Memo Regarding Employer Responsibilities 49

50. Opinion on the Schedule of Changes in Fiduciary Net Position 50

51. Notes to the Financial Statements and RSI Schedule of Pension Allocations Opinion on the Pension Allocations Schedule of Pension Amounts by Employer from Actuary Opinion on the Pension Amounts by Employer 51

52. Examination Engagement Opinion related to Census Data for Inactive and Retired TCRS Members Sample of Selected Census Data: – Accuracy Test – Completeness Test – Cost Sharing Selected Governments: Shelby County, City of Alcoa, Benton County, Campbell County, Hamblen County, Hardeman County, Hardin County, Hawkins County, Stewart County, Sumner County, White County, and Williamson County. 52

53. Other Issues 53

54. Letter from TCRS – Agent Plans Letter from TCRS – LEA Plans 54

55. OPEB is coming!!!!!!! The liabilities will be much larger than the Pension Liabilities. 55

56. Non-TCRS Pension Plans: – Much Planning Needed – Past Time! – Non-TCRS 100% funding law – Very Important. Public Chapter 990, Acts of 2014 Section 8-37-310, & 9-3-501-507, TCA Required Funding Policy by June 30, 2016 100% Funding by June 30, 2020 State Shared Taxes can be withheld. 56

57. More work for everyone, but much better reporting. Be preparing for OPEB! Discussion should begin now. Together, we will make it through this implementation process, and in a few years this will no longer seem as difficult or painful. 57

58. Jerry E. Durham, CPA, CGFM, CFE Comptroller of the Treasury TN Division of Local Government Audit Assistant Director Phone: (615) 401-7951 Email: Jerry.Durham@cot.tn.govJerry.Durham@cot.tn.gov Questions ? 58