Governmental Accounting Pensions and Other Postemployment Benefits Local Government Corporation

Pensions and Other Postemployment Benefits Certified Continuing Professional Education Class 1-hour credit Must remain for the entirety of the class to receive CPE credit Must sign in and sign out to receive CPE credit Certificates of attendance will be ed for CPE credit

Pensions and Other Postemployment Benefits Governmental Accounting Standards Board Requirements for Defined Benefit Pension and OPEB Plans Calculation of ARC Parameters for Actuarial Calculations, Including ARC

Pensions and Other Postemployment Benefits Net Pension or OPEB Obligation Recording Pension and OPEB Related Assets, Liabilities, and Expenditures/Expenses Pension and OPEB Disclosures Employers with Defined Contribution Plans

Pensions and Other Postemployment Benefits Governmental Accounting Standards Board

GOVERNMENTAL ACCOUNTING STANDARDS BOARD What is Generally Accepted Accounting Principles? Who is GASB? GASB Statements Specific to Revenues from Nonexchange Transactions

What is GAAP? Proper accounting Decades of accounting practice No authoritative book

What is GAAP? Does not account for every situation Make the best choice Rule makers leave room for options

What is GAAP? The grey area of materiality Qualitative aspects Quantitative aspects

Who Sets Up GAAP? GASB sets the GAAP rules GASB provides: ◦ Accounting principles ◦ Interpretations ◦ Guidance for implementation GASB Statement No. 76 ◦ “The Hierarchy of GAAP for State and Local Governments”

GASB Statement No. 76 Category A ◦ GASB Statements Category B ◦ GASB Technical Bulletins ◦ GASB Implementation Guides ◦ American Institute of Certified Public Accountants (AICPA) literature cleared by GASB

GASB Statement No. 76 If not Specified in Category A or B ◦ GASB Concepts Statements ◦ Pronouncements and literature from the following:  Financial Accounting Standards Board (FASB)  Federal Accounting Standards Advisory Board (FASAB)  International Accounting Standards Board (IASB)

GASB Statement No. 76 If not Specified in Category A or B ◦ AICPA literature not cleared by the GASB ◦ Practices widely practiced by state and local government agencies ◦ Literature from professional organizations, regulatory agencies, and authoritative accounting texts

Pensions and Other Postemployment Benefits Attempt to do these two things Match the cost of providing an employee’s postemployment benefit to the time period that the employee works for the government Provide disclosures about the pension and OPEB plans themselves so that statement readers can see how well funded it is to be able to pay benefits in the future

Other Postemployment Benefits OPEB’s is literally other than pension benefits Health-care insurance for retirees Dental coverage Eyeglass coverage Legal representation Gym membership reimbursements

GASBS 45 GASBS 45 “Accounting and Financial Reporting by Employers for OPEB’s” Liabilities now determined and reported in the financial statements Most governments were “paying as they go” instead of funding OPEB’s Resulted in some governments contributing to trust funds to fund OPEB’s

GASBS 57 GASBS 57 “OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans” Permits an agent employer that has an individual-employer OPEB plan with fewer than 100 total plan members to use the alternative measurement method

Pensions Pensions Obtain assets from two primary sources Contributions to the plan by the employer and, in some cases, the employees Investment earnings on the assets of the pension plans

Pension Contributions Determined by an actuarial calculations Actuarial estimates the investment earnings for future years

Defined Benefit Pensions Generally governments pay employees less than what’s offered in the private sector Offer pensions and OPEB benefits to younger retirees

GASBS 27 GASBS 27 “Accounting for Pensions by State and Local Government Employers” Amended in GASBS 68 when using a trust Mostly discusses defined benefit plans Some guidance for contribution plans

GASBS 27 GASBS 27 Defined Contribution Plan GASBS 27 defines as “a pension plan having terms that specify how contributions to a plan member’s account are to be determined, rather than the amount of retirement income the member is to receive” The amount of the contribution is specified

GASBS 27 GASBS 27 Defined Benefit Plan GASBS 27 defines as “a pension having terms that specify the amount of pension benefits to be provided at a future date or after a certain period of time…” The amount of the benefit is specified Function of age, years of service, and level of compensation

GASBS 45 GASBS 45 OPEB Plans Has several forms, such as, flat dollar amounts provided for health-care insurance Type or level, such as, drug coverage or percentage of health insurance premiums

Pensions and Other Postemployment Benefits Requirements for Defined Benefit Pension and OPEB Plans

REQUIREMENTS FOR DEFINED BENEFIT PENSION AND OPEB PLANS Measurement of annual pension and OPEB cost and its recognition by the employer Measuring annual pension or OPEB cost, single-employer and agent plans

Measurement of annual pension and OPEB cost and its recognition by the employer Single-employer or agent multiemployer plans Cost-sharing multiemployer plans

Single-employer or agent multiemployer plans Covers the current and former employees of only one employer Example: members are all police officers Aggregated agent plans separate each government in the pool Each plan has an actuarial valuation

Cost-sharing multiemployer plans Cost sharing between multiple employers pooling together Risk shared by all members of the plan One actuarial valuation for all plan members

Measuring annual pension or OPEB cost, single- employer and agent plans Annual pension cost = annual required contribution (ARC) to the plan for the year

Pensions and Other Postemployment Benefits Calculations of the ARC

Actuarial valuation performed for the plan for financial reporting purposes Generally performed at the beginning of the fiscal year to determine value of plan assets and liabilities Evaluations performed every 2-3 years depending on size of membership

Pensions and Other Postemployment Benefits Parameters for actuarial calculations, including the ARC

Parameters for Actuarial Calculations, Including the ARC Parameters defined: “a set of requirements for calculating actuarially determined pension and OPEB information included in the financial reports”

Parameters for Actuarial Calculations, Including the ARC Actuarial methods and assumptions used in the financial reporting is the same used in determining plan funding Example: 6% investment return assumption and ARC/disclosures Defined benefit pension or OPEB same rules Example: 6% for actuary’s calculations needed for the plan’s financial statements and employer’s too

PARAMETERS FOR ACTUARIAL CALCULATIONS, INCLUDING THE ARC Benefits to be included Actuarial assumptions Economic assumptions Actuarial cost method

PARAMETERS FOR ACTUARIAL CALCULATIONS, INCLUDING THE ARC Actuarial value of assets Employer’s annual required contribution-ARC Contribution deficiencies and excess contributions

Benefits to be included Estimated amount of benefits that are owed to employees and retirees Discounted to be stated in today’s dollars (concept of present value)

Actuarial assumptions Relates to future events affecting the pension costs Mortality Withdrawal Disablement Retirement Changes in compensation Rates of investment earnings

Actuarial assumptions Actuaries required to select assumptions according to the Actuarial Standards of Practice Use long-term trends, not recent Health care is a good example because the actuary may use 3-5% inflation rate when recently it has been over 10%

Economic assumptions Investment return assumption (or discount rate) The projected salary increase assumption

Investment return assumption Rate used to adjust a series of future payments to reflect the time value of money Rate based on estimated long-term investment yield for the plan

The projected salary increase assumption Actuary assumption with respect to future increases in salaries of active plan members Inflation Enhanced productivity Employee merit Seniority Higher pay means higher pension benefits

Actuarial cost method The actuarial value of pension and OPEB plan benefits Determines the normal cost and the actuarial accrued liability used in ARC

Actuarial cost method ◦ Entry age ◦ Frozen entry age ◦ Attained age ◦ Frozen attained age ◦ Projected unit credit ◦ Aggregate method

Actuarial value of assets Not necessarily the same as the value of the assets reported in the pension plan’s or OPEB plan or trust’s financial statements Government trusts report assets at fair value Actual or estimated market value, typically over last 3-5 years

Employer’s annual required contribution-ARC Component 1 ◦ Normal cost Component 2 ◦ Amortization of the total unfunded actuarial accrued liability

Normal cost The portion of the actuarial present value of pension and OPEB plan benefits and expenses allocated to a particular year Uses the actuarial cost method mentioned earlier

Amortization of the total unfunded actuarial accrued liability Where actuarial accrued liability for the plan benefits exceeds the actuarial value of the assets of the plan Represents the actuarial present value of the pension and OPEB benefits and expenses not provided for by future normal cost

Amortization of the total unfunded actuarial accrued liability The unfunded actuarial liability will not be paid by normal cost It is amortized and paid over a reasonable time period, generally up to 30 years Level dollar amortization method Level percentage of projected payroll amortization method

Pensions and Other Postemployment Benefits Net pension or OPEB obligation

Net Pension or OPEB Obligation Cumulative amount by which an employer has not actually contributed the ARC to the pension plan or OPEB trust The employer needs to increase its contributions over the long term

Pensions and Other Postemployment Benefits Recording pension and OPEB related assets, liabilities, and expenditures/expenses

RECORDING PENSION AND OPEB RELATED ASSETS, LIABILITIES, AND EXPENDITURES/EXPENSE S Single employer Cost-sharing multiemployer plans

Single-employer or Agent Multiemployer Plans Pension and OPEB governmental fund expenditures recognized on the modified accrual basis The pension and OPEB obligations in comparison to the ARC causes it to go up or down accordingly in the government- wide financial statements

Single-employer or Agent Multiemployer Plans Positive year-end balance in the net pension or OPEB obligation results in a liability Goal is to have expense recognition to equal ARC Proprietary funds recognize on accrual basis Expense equal to the ARC

Cost-sharing Multiemployer Plans Record expense equal to their contractually required contributions to the plan Liability occurs when contributions made is less than required

Pensions and Other Postemployment Benefits Pension and OPEB disclosures

Pension and OPEB Disclosures Designed to inform the financial statement reader about the funded status of the plans Compares the actuarial value of the assets to the plan’s actuarial determined liabilities Has the government contributed equal to the actuarial determined amounts

Pensions and Other Postemployment Benefits Employers with defined contribution plans

Employers with Defined Contribution Plans Recognize annual pension or OPEB expenditures or expenses equal to their required contributions according to the terms of the plan The difference between contributions required and made determines the pension and OPEB liabilities and assets

Pensions and Other Postemployment Benefits Basic understanding of accounting for pensions and OPEB GASB designed for governments GASB ever-changing model Enhance existing skills

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