1. Pension System and Accounting for It Presented by: Kevin Worley, CFO November 19, 2014 Division of Retirement & Benefits AGFOA – Anchorage, AK

2. DISCLAIMER The views expressed in this presentation are those of Kevin Worley and do not represent the opinions of the Administration, Division, Legislature, or the Governor Certain assumptions and interpretations were made in this presentation which, if changed, could result in a different answer GASB No. 68, the implementation guide, and your auditors are your primary resources with assistance from the Division

3. Dynamic Duo

6. TOPICS OF DISCUSSION AICPA SLG Census Data – employer impact GASB #68 – NPL allocation report What is DRB going to provide? What we know and don’t know Special funding situations If there is time: OPEB – future reporting

7. AICPA State & Local Government Expert Panel (SLGEP) Testing Census Data on Plan Financial Statements and Participating Employer Impact

8. AICPA Guidance Surprise, surprise! With the issuance of GASB No. 67, there were questions related to the Total Pension Liability (TPL), contribution revenues, and contribution receivables The Plan Auditor needs to assert that the above are complete and accurate, and in order to assert that, more audit work had to be done on census data Census Data

9. AICPA Guidance Some significant elements of census data include: 1.Date of birth 2.Date or hire / years of service 3.Marital status 4.Eligible compensation 5.Class of employee 6.Gender 7.Date of termination Census Data

10. AICPA Guidance Plan auditors must review plan processes for the census data of active employees of the plan and include procedures to verify the underlying payroll records of participating employers to determine that the information is accurate and complete June 30, 2014 audit report will not be issued until all June 30, 2013 census data work by external auditor is completed Census Data

12. AICPA Guidance Frequency and extent of verification is based on participating employer size, percent of contributions, and impact on TPL Plan auditor identifies and assesses risk of material misstatement of elements Plan auditor selects representative group of contributing employers each year as well as individually important employers Every year, as well as 5 and 10 year cycles Census Data

13. AICPA Guidance SLGEP Pension Whitepaper on Employer and Related Auditor Issues: Cost-Sharing Plans SLGEP Pension Whitepaper on Census Data Related to Cost-Sharing Plans Search for “SLGEP Pension Whitepaper Series” for these two reports Meeting with Plan Auditor to discuss next round of census data audit and earlier notification to affected employers White Papers and Audit Interpretations

15. GASBS No. 68 Accounting and Financial Reporting for Pensions – An Amendment of GASB Statement #27

16. GASB No. 68 “These proposed pension expense reporting changes will have the biggest effect on governments of any GASB pronouncement issued since the inception of the GASB.” ~ David R. Bean, GASB Director of Research and Technical Activities Accounting & Financial Reporting for Pensions

17. GASB No. 68 In June 2012, the GASB issued two new standards changing the accounting and financial reporting requirements for pensions The intent of the standards is to enhance the pension-related information in financial reports by providing greater transparency and to standardize the valuation practices from entity to entity Accounting & Financial Reporting for Pensions

18. GASB No. 68 Governments will be required to report its proportionate share of unfunded pension obligations on the financial statements Pension expense is the change in Net Pension Obligation Increased note disclosures and schedules Measurement is accounting-based, not funding-based Accounting & Financial Reporting for Pensions

19. GASB No. 68 These are new accounting and financial standards for reporting purposes, and will not impact your funding requirements Under Alaska law, the current employer funding requirement is the statutorily required contributions Accounting & Financial Reporting for Pensions

20. GASB No. 68 The Division is working to help ensure that our participating employers are positioned to implement these standards The Division will use every outreach outlet available to us including participating in conferences, group meetings, and more Accounting & Financial Reporting for Pensions

21. GASB No. 68 GASB No. 68 Implementation Guide is available on-line Valuable resource to download and add to your library Links available from: http://doa.alaska.gov/drb/employer/resources/gasb.html Accounting & Financial Reporting for Pensions

22. What is the Division of Retirement & Benefits Going to Provide to Employers?

23. What is being provided? Employers will recognize proportionate share of cost-shared pension amounts (allocation of NPL) Challenges relate to each participating employer obtaining the necessary support of NPL, deferred inflows/outflows of resources, and pension expense SLGEP recommended that the cost-sharing plans calculate each employer’s allocation and collective pension expense What do participating employers need?

24. What is being provided? From Page 5 of 9 – SLGEP Pension Whitepaper Series on Information for Employer Reporting Schedule of Employer Allocations

25. What is being provided? From Page 7 of 9 – SLGEP Pension Whitepaper Series on Information for Employer Reporting Schedule of Pension Amounts by Employer

27. What we know and don’t know

28. What we know…….. The Division will be working with our Plan auditor and Plan actuary to develop the timeline from preparation of allocation report by Plan actuary to the audit by Plan auditor The Division will share with employers via the web page Notification via email alerts and Employers’ Edge

29. What we know…….. This is a whole lot of work for everyone! The Division will be providing the detailed schedules with the necessary information and have it audited by the Plan auditor

30. What we don’t know…….. The final allocation process is still being determined, but will be based on the contribution amounts Timeline is still in the works Special funding situation(?) and non- or seldom contributing employers

31. Special Funding Situations

32. Paragraph 15 defines circumstances in which a nonemployer entity is legally responsible for making contributions directly to a pension plan that is used to provide pensions to the employees of another entity or entities and either of the following conditions exist: GASB 68 Definition

33. Special Funding Situations (1) the amount of the contributions for which the nonemployer entity legally is responsible is not dependent upon one or more events or circumstances unrelated to pensions (2) the nonemployer entity is the only entity with a legal obligation to make contributions directly to a pension plan GASB 68 Definition

34. Special Funding Situations Special funding situations do not include circumstances in which resources are provided to the employer, regardless of the purpose for which those resources are provided GASB 68 Definition

35. Special Funding Situations Dedicated Funds The proceeds of any state tax or license shall not be dedicated to any special purpose, except as provided in section 15 of this article or when required by the federal government for state participation in federal programs. This provision shall not prohibit the continuance of any dedication for special purposes existing upon the date of ratification of this section by the people of Alaska. [Amended 1976] Alaska Constitution, Article IX, Section 7

36. Special Funding Situations Once the determination is finalized, the Division will notify all parties Determination must be made in order to properly allocate the Net Pension Liability

37. Future GASB Other Post-Employment Benefits (OPEB)

38. Future GASB These benefits are provided by both the PERS and TRS defined benefit plans as well as the defined contribution plans Benefits involve health care benefits, but also may include life insurance, disability, legal, and other services (though not necessarily provided by PERS and TRS) OPEB Related

39. Future GASB In May 2014, the GASB approved two proposed statements that are designed to improve the usefulness of information about OPEB 1.Financial Reporting for Postemployment Benefit Plans Other than Pension Plan (PLAN) 2.Accounting and Financial Reporting for Postemployment Benefits Other than Pensions (EMPLOYER) OPEB Related

40. Future GASB These are very similar to the pension standards (GASB 67 and 68) 1.OPEB is part of the employment exchange and should be recognized as incurred, not funded 2.The government-wide and full accrual statements will report a “Net OPEB Liability” 3.Change in Net OPEB Liability will be immediately recognized in expense OPEB Related

41. Future GASB Like the pension statements before it, the OPEB proposal is designed to improve the information reported on OPEB for decision- making and accountability purposes, comparability across governments, and transparency OPEB Related

42. Future GASB Intended to lead to fundamental changes in how OPEB is accounted for and reported Accounted for in a trust with specific criteria where contributions are irrevocable, assets are dedicated to providing OPEB to plan members, and plan assets are legally protected Provide a more comprehensive picture of what state and local governments have promised and the actual associated costs OPEB Related

43. Future GASB Addresses a number of issues: Affects how the long-term obligation and the annual costs of OPEB are measured Recognize the net OPEB liability on the face of the financial statements Present more extensive note disclosures and related schedules OPEB Related

44. Future GASB Measurement date (PLAN): Measured as of the plan’s year end The actuarial valuation may be performed earlier (within 24 months) and then rolled forward to the PLAN’s fiscal year end reporting date FORMULA is TOTAL OPEB LIABILITY – OPEB Plan Net Position = Net OPEB Liability OPEB Related

45. Future GASB Note and RSI Changes (EMPLOYER): Significant footnote disclosures – like pension RSI requirements – 10 years 1.Schedule of proportionate share of Net OPEB liability 2.Schedule of contributions 3.Notes to RSI OPEB Related

46. Future GASB Plan – Years beginning AFTER December 15, 2015 Employer – Years beginning AFTER December 15, 2016 Final statements anticipated for June 2015 Effective Dates - Proposed

47. What do you want to know more about? E-mail: Kevin.Worley@alaska.gov