Primary colors R 0 G 39 B 118 R 0 G 161 B 222 R 60 G 138 B 46 R 114 G 199 B 231 R 201 G 221 B 3 R 146 G 212 B 0 August 11, 2014 Michael J. de Leon, FCA, ASA, EA, MAAA 2014 NASACT Annual Conference Concurrent Session #3 – Implementing and Auditing GASB’s New Pension Standards

© 2014 Deloitte Touche Tohmatsu “The objective of this Statement is to establish standards of accounting and financial reporting for pensions. [GASB] concluded that it is not within the scope of its activities to set standards that establish a specific method of financing pensions (that being a policy decision for government officials or other responsible authorities to make) or to regulate a government’s compliance with the financing policy or method it adopts.” –GASB 68, Par 159 GASB’s other stated goals ‒ Provide decision-useful information ‒ Support assessments of accountability ‒ Support assessments of interperiod equity ‒ Create additional transparency Overview

© 2014 Deloitte Touche Tohmatsu Net pension liability will appear on the balance sheet ‒ Currently only the funding shortfall appears ‒ Biggest impact to employers in a cost-sharing plan Recognition of gains and losses accelerated or immediate New discount rate setting methodology ‒ Unfunded plans — use municipal bond index ‒ Funded plans — use blend of Expected Return on Assets and municipal bond index Required attribution method – entry age normal (level % of pay) New timing requirements for valuation and measurement New disclosure requirements for both financial statements and RSI Overview

© 2014 Deloitte Touche Tohmatsu Valuation and Measurement Timing Example 6/30/15 Employer FYE Actuarial Valuation Date 12/31/14 Plan FYE Measurement Date 12/31/13 12/31/14 12/31/136/30/146/30/13 30 months + 1 day 12/31/12 Update Prior FYE

© 2014 Deloitte Touche Tohmatsu Types of Pension Plans Single-employer pension plans – pensions are provided to the employees of only one employer (for purposes of this classification, the primary government and its component units are considered to be one employer) Agent multiple-employer pension plans (agent pension plans) – plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer’s share of the pooled assets is legally available to pay the benefits of only its employees Cost-sharing multiple-employer pension plans (cost- sharing pension plans) – pension obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan. The type of plan or being administered determines the specific requirements to implement and audit the new standards 5

© 2014 Deloitte Touche Tohmatsu Challenges Limitations with the plan’s audited statements ‒ Under GASB 67 the agent plans do not provide the specific pension amounts the employers have to report ‒ Fiduciary net position only required to be reported for the plan as a whole Verifying completeness and accuracy of census data ‒ Plan prepares the census data file for the actuary ‒ Records of retirees and other inactive participants are maintained by the plan ‒ Plan accumulates active data from participating employers AICPA Whitepaper – Agent Plans

© 2014 Deloitte Touche Tohmatsu Solutions Plan actuary issues separate valuation reports specific to each employer ‒ Address actuarial certification (opinion) to employer management ‒ Provide amounts required to be disclosed under GASB 68 ‒ Consider appropriateness of assumptions/methods for each individual employer Plan auditor opines on controls over census data maintained by the plan ‒ Plan auditor issues a SOC 1 Type 2 report on controls over census data, or ‒ Plan auditor performs examination over management’s assertions on census data Plan prepares schedule of changes in fiduciary net position by employer Plan auditor opines on the schedule ‒ Plan auditor opines on the schedule as a whole and issues SOC 1 Type 2 report on controls over calculation/allocation of additions/deductions to employer accounts, or ‒ Plan auditor provides an opinion on each employer column in the schedule AICPA Whitepaper – Agent Plans

© 2014 Deloitte Touche Tohmatsu Solutions Employer responsibilities ‒ Management must support the assumptions specific to the employer with appropriate, reliable, and verifiable information ‒ Have processes and controls related to providing complete and accurate active participant census data to the plan Employer’s auditor responsibilities ‒ Evaluate whether the plan auditor has the necessary competence and independence ‒ Evaluate (with auditor’s specialist) the actuarial valuation for appropriateness, consistency with GASB 68 requirements, and reasonableness of assumptions ‒ Evaluate accuracy and completeness of data including sampling of active members from the census data provided to the plan ‒ Evaluate employer specific amounts in schedule of changes in fiduciary net position AICPA Whitepaper – Agent Plans

© 2014 Deloitte Touche Tohmatsu Purpose of SOC 1 Type 2 for Agent Multiple-Employer Plans ‒ Attestation on internal controls for the plan ‒ Addresses operating effectiveness of controls over an audit period ‒ Relied upon by participating employers for their financial audits ‒ Will reduce need for employers to conduct audits of the pension plan Readiness Engagement ‒ Determine control objectives and activities ‒ Identify gaps with current controls and remediation ‒ Understand how controls are designed and performed and confirm that they are “auditable” for testing purposes ‒ Identify user entities controls Attestation ‒ Test operating effectiveness on a sample basis of all control activities ‒ Evidence of control performance is required (verbal confirmation is insufficient) SOC 1 Type 2 Report – Overview

© 2014 Deloitte Touche Tohmatsu Content of Report ‒ Auditor’s opinion ‒ Management assertion letter ‒ Narrative description of controls ‒ Auditor’s control matrix Control objectives Control activities Results and exceptions ‒ Outside the scope items – provided by the pension plan (e.g., management response to audit exceptions) Potential Control Areas to Test ‒ Census management– Benefit payments ‒ Contributions– Refunds ‒ Investment transactions– Administrative payments ‒ Asset valuation– Actuarial Estimate of Net Pension Liability SOC 1 Type 2 Report – Overview

© 2014 Deloitte Touche Tohmatsu Census Data Plan management’s responsibility for completeness and accuracy of data ‒ Design, implement, and maintain internal controls around census data ‒ Include procedures to verify the underlying payroll records of participating employers Plan auditor’s responsibility for testing completeness and accuracy ‒ Understand the processes and controls used by the plan’s management ‒ Consider the likelihood of misstatement and the magnitude ‒ Test individually important employers onsite annually; remaining on rotating basis ‒ Qualitative factors to consider when selecting other employers to test: Size of the employer in relation to a plan Past errors or control deficiencies of an employer Length of time since procedures under this section were last performed at an employer Whether there have been significant changes in the workforce of an employer Results of internal analysis (analytical procedures) of employer information New or terminating employer Whether the financial statements of participating employers have received unmodified opinions AICPA Whitepaper – Cost-Sharing Plans

© 2014 Deloitte Touche Tohmatsu Census Data AICPA illustration of risk-based approach for selecting which employers to test completeness and accuracy of census data Auditor should use professional judgment in determining which employers to test AICPA Whitepaper – Cost-Sharing Plans Type of Employer % of covered payroll Number of Employers Testing Frequency Individually Important >20%1Annually Medium Employers >5% but <20%6 Five Year Cycle Small Employers <5%2,593 Ten Year Cycle Very Small Employers Aggregate <2%400Never

© 2014 Deloitte Touche Tohmatsu Recognizing Proportionate Share of Collective Pension Amounts AICPA Recommendations ‒ Plan, not employer, determines collective pension amounts and the allocation percentage used to derive an employer’s proportionate share of those amounts Employers may not have necessary data to calculate the pension amounts or the allocation Additionally, individual employers may use different basis to determine the allocation ‒ Plan prepares a schedule of employer allocations and a schedule of pension amounts Display the proportionate relationship of each employer to all employers and each employer’s allocation percentage Plan auditor would form an opinion and report on the schedule of employer allocations Plan auditor would form an opinion and report on the pension amounts in total ‒ Example bases allocation percentage on actual employer contributions for the year Employer auditor responsibilities ‒ Evaluate whether the plan auditor has the necessary competence and independence ‒ Verify and recalculate allocation percentage (numerator of the calculation) and pension amounts based on the allocation percentage AICPA Whitepaper – Cost-Sharing Plans

© 2014 Deloitte Touche Tohmatsu Using the Work of a Specialist AICPA SAS 73 Specialist must possess the necessary knowledge in particular field ‒ Ensure proper designations or licenses have been attained ‒ Reputation and standing of the Specialist ‒ Experience in performing the work

© 2014 Deloitte Touche Tohmatsu AICPA SAS 73 The auditor should obtain an understanding of the nature of the work performed by the Specialist and should cover the following: ‒ The objectives and scope of the Specialist's work ‒ The Specialist's relationship to the client ‒ The methods or assumptions used ‒ A comparison of the methods or assumptions used with those used in the preceding period ‒ The appropriateness of using the Specialist's work for the intended purpose ‒ The form and content of the Specialist's findings In using the findings of the specialist, the auditor should: ‒ Make appropriate tests of the data provided to the Specialist ‒ Evaluate whether the Specialists findings support the related assertions in the financial statement Using the Work of a Specialist

© 2014 Deloitte Touche Tohmatsu In General ‒ Should use the same assumptions as used to calculate funding contribution except for the discount rate, which may differ depending on projected plan assets ‒ Same assumptions should be used for plan financials (GASB 67) and employer financials (GASB 68) for same or related information ‒ Actual experience should be used if credible, but experience must by analyzed for anomalies and reasonableness ‒ Reasonableness of each assumption should be independently assessed (each one should each be reasonable on its own) ‒ Each assumption should also be consistent with other assumptions (e.g., underlying inflation component of discount rate and salary increase assumptions) Actuarial Assumptions

© 2014 Deloitte Touche Tohmatsu Demographic Assumptions (“likelihood” of receiving benefits) ‒ Termination, disability, retirement: Actuary will look to the experience of the employer and the benefits available In employer-specific experience is not available, actuary may look to experience of large public employers in the same geography Special rates may apply to “first responders” ‒ Death Except for the largest employers, mortality experience in not credible As a result, actuaries would look to the most recent tables published by the Society of Actuaries – e.g., the RP 2014 table and its derivatives are state of the art. For the largest employers, actuary may look to experience of large public employers in the same geography Special rates may apply to “first responders” Actuarial Assumptions

© 2014 Deloitte Touche Tohmatsu Discount Rate Determination

© 2014 Deloitte Touche Tohmatsu Discount Rate Support – Contribution Development

© 2014 Deloitte Touche Tohmatsu Discount Rate Support – Projection of Plan Net Position

© 2014 Deloitte Touche Tohmatsu Discount Rate Support – Development of Blended Discount Rate

© 2014 Deloitte Touche Tohmatsu pages/gasbpensionsissues.aspx Whitepapers Auditing Interpretations Other resources on pensions Additional Resources

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