1. GASB Pension Reporting Update Minnesota Association of School Business Officials (MASBO) Presented by: Dave DeJonge, Assistant Executive Director, PERA John Wicklund, Assistant Executive Director, TRA November 14, 2014

2. 2 On the doorstep of implementation GASB 67: Pension Plan Reporting  PERA and TRA will implement for their CAFRs for the period ending June 30, 2014. GASB 68: Accounting and Financial Reporting for Pensions  School districts will implement for CAFRs for the period ending June 30, 2015.

3.  Replaces current Statement of Plan Net Assets with Statement of Fiduciary Net Position (GASB 63).  Replaces current Statement of Changes in Plan Net Assets with Statement of Changes in Fiduciary Net Position (GASB 63).  Revisions to Notes to the Financial Statements.  Required Supplementary Information (RSI): Ten-year Funding Trends.  Required Supplementary Information (RSI) Schedule of the Net Pension Liability. Conclusion: Little impact on employer units. 3 GASB Statement 67 (Effective for FY 2014 PERA and TRA CAFRs released December 2014)

4. GASB Statement 68 impact on employer units (FY2015)  Government-wide financial statements, not fund-level statements.  PERA/TRA perform with actuarial valuation reports every 6/30/xx. Results done 12/1/xx.  PERA/TRA calculate proportionate share assigned to each employer unit (based on employer contributions).  PERA/TRA transmits assets, liabilities, disclosure data, Required Supplementary Information to each employer.  Large unfunded actuarial liabilities exist (now called Net Pension Liability). Result:  Many employers will experience sticker shock at their share of the net pension liability, higher than net assets reported. (Remember: Liabilities paid over decades.) 4

5.  Adds net pension liability (NPL) – similar to the unfunded liability PERA and TRA report today (government-wide financial statements).  Pension expense for school district is the difference between beginning NPL and ending NPL.  Deferred inflows and deferred outflows retained from GASB 63 and 65. Affects timing of expenses. Example: Investment gains or losses smoothed over five years. 5 Major reporting changes: Statement of net position (GASB 68)

6. Schedule of the Net Pension Liability: Ten year schedule presenting:  Employer’s percentage and amount of NPL  Employer’s covered employee payroll  Employer’s NPL as percentage of covered employee payroll  Pension plan’s Fiduciary Net Position (FNP) as a percentage of TPL Required supplementary information 6

7. 7

8. Schedule of Employer Contributions Ten-year schedule presenting:  Statutorily required employer contribution  Actual contributions paid by employer  Difference between required contributions and paid contributions  Amount of contributions paid in relation to required contributions as a percentage of the employer’s covered- employee payroll Required supplementary information 8

9. 9 Schedule of Employer Contributions

10. Notes to the financial statements  Adds more extensive note disclosures, including sensitivity analysis of investment return assumption  Requires employer to track annual balances of deferred outflows of resources and inflows of resources.  Must describe significant assumptions and other inputs used to measure total pension liability.  PERA/TRA to provide suggested footnotes 10

11. 11 Measurement period Actuarial valuation measurement date Release of 7/1/14 actuarial valuation results School districts use 7/1/14 actuarial valuation results School district CAFRs w/GASB 68 published Retirement systems transmit results to school districts July 1, 2013 June 30, 2014Dec. 1, 2014 June 30, 2015Late 2015  Key point: There will be a one-year lag in school district reporting of GASB 68 results. Example: School districts, in their FY 2015 reporting, will use FY 2014 actuarial valuation results from PERA and TRA. GASB 67-68 timeline: Measurement dates for school districts

12. GASB 68 implementation guide  Released January 2014. www.gasb.org  272 Q&A (questions 121-217): Cost-sharing employers.  Appendix 3 (PERA and TRA are multi-employer cost- sharing plans).  Illustration 3a, 3b are helpful. 12

13. PERA – TRA plan level  Perform annual actuarial valuations to determine funded status and liabilities  Require plan actuary to calculate collective amount of items requiring deferred treatment  Engage external auditor (unknown at present) to audit actuarial census data and schedule of employer’s proportionate share  Communicate results to the school districts  Provide RSI and suggested footnotes 13

14. Determination of employer proportionate share 14  Allocation based on employer contributions for fiscal year  Time lag – schools will use FY14 results and data for their FY15 CAFR  PERA/TRA to provide GASB 68 allocations to each employer based on plan totals calculated by actuary  Allocation policy is in progress

15. Determination of employer proportionate share--PERA 15  Allocation based on employer contributions for fiscal year, but not all contributions reflect future contribution effort, so some will be excluded from the allocation.

16. 16 GASB Statement No. 68 (Paragraphs 48-51) Statement of net position for FY ended June 30, 2015: Cost-sharing employers Change from old GASB Total Assets$x,xxx,xxx Liabilities Accounts payable$xx,xxx Salaries payable$xx,xxx Total pension liability$x,xxx,xxx (New) Total Liabilities$x,xxx,xxx Net PositionPossibly negative  Remember: Pension liability is paid over decades of time and could be very volatile based on conditions of the pension fund at the state level.

17. GASB 71  Amends paragraph 137 of Statement 68  Contributions after the measurement date prior to fiscal year end  Booked to deferred outflows rather than pension expense (GASB 63)  At the beginning of the period in which the provisions of Statement 68 are adopted the government should recognize a beginning deferred outflow of resources only for its pension contributions (with an offset to Net Position). 17

18. GASB 71 18 June 30, 2014 June 30, 2015 June 30, 2013 Begin New Measurement Date Employer’s Fiscal Year End Prior Measurement Date Measurement Period Def Outflows

19. 19 Determination of employer proportionate share Schedule of employer allocations (6/30/20X5) EmployerActual Employer ContributionsEmployer Allocation Percentage Employer 1$2,143,84236.376 Employer 2268,4254.554 Employer 3322,1425.466 Employer 4483,2558.199 Employer 5633,12510.742 Employer 6144,2882.448 Employer 795,3651.618 Employer 894,2381.599 Employer 9795,36513.495 Employer 10267,4684.538 Employer 11403,5276.847 Employer 12165,8862.815 Employer 1368,4541.161 Employer 146,2400.106 Employer 152,1440.036 Total$5,893,764100.000

20. Example A: Net pension liability (employer 2)  Employer proportionate share4.554%  TRA net pension liability (estimated) $4 billion  Employer 2 initial liability on July 1, 2014$182,160,000 20

21. Pension expense 21 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

22. 22 Pension expense 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

23. Pension expense 23 ItemPension Expense Deferred Outflows Deferred 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

24. Pension expense 24 Actuary-Determined Impact8-Year Allocation CurrentDeferred Change in assumption +1,142 loss$142$1,000 (outflow – loss) Change in assumption +342 gain($42) _____ $300 (inflow – gain) Current year pension expense$100 Difference in assumed Actual experience +171 loss +571 gain $21 ($71) _____ $150 (outflow – loss) $500 (inflow – gain) Current year pension expense($50) Investment experience +500 gain($100)$400 (inflow – gain)

25. Two reports 1.Accounting valuationTRA Annual Financial (GASB 67-68)Report for financial reporting, not funding determinations. 2. Funding Valuation ReportPrepared with statutory assumptions and requirements determined by Minnesota Legislature. Two reports – different assumptions and methodologies. TRA Actuarial Valuation Reports: December 2014 25

26. TRA’s actuary will deliver the collective:  Net Pension Liability  Deferred outflows of resources by category  Deferred inflows of resources by category  Pension expense 26 GASB 67-68 Actuarial Valuation Results TRA Results allocated and shared among 590 employer units

27.  Allocation based on employer contributions for fiscal year  Each employer unit (school district) will have a percentage of TRA’s results  The percentage will be recalculated every year  TRA has a “special funding situation” impacting the calculation 27 Determination of employer proportionate share

28. 28 Special funding situation GASB 68 requires allocation of TRA net pension liability and other financial results to employer units.  Allocation based on annual employer contributions.  Based on the Minneapolis and Duluth teacher mergers, TRA receives $16 million/year for Minneapolis and $14 million for Duluth.  Question: How do direct state aid payments impact the allocation of TRA results?  GASB 68 paragraph 15 defines a “special funding situation.”  After a conference call with GASB and MMB, TRA will treat the State of Minnesota as an employer unit in the allocation of pension liability and expense.

29. 29 Audit issues – TRA  Audited financial statements of the plan only include disclosure of the collective net pension liability for the TRA plan as a whole.  Does not include specific employer detail for: o Deferred outflows/inflows of resources by category o Pension expense o Each participating employer’s share of collective pension amounts Problem:  Audited financial statements of the plan may not include necessary information to calculate allocation percentages. Lack of audit evidence for external auditor.

30. 30 Audit solution TRA prepares “Schedule of Employer Allocations,” for which plan auditor is engaged to provide opinion.  Schedule includes the following elements for each employer: o Net Pension Liability o Deferred outflows of resources by category o Deferred inflows of resources by category o Pension expense For the GASB 68 allocation schedule – TRA has engaged the Office of the State Auditor to verify the schedules distributed to the employer units.

31. 31 Audit issues: Census data  Auditing white paper guidance prescribes auditor must test member census data.  Example census data includes date of birth, years of service, pay  TRA is currently working with the Office of the State Auditor (OSA) on site visits to sample employer units.  Sample will be a risk-based approach by OSA.  Other risk factors may include: o Past errors or control deficiencies o New employer o Length of time since last audit o Media stories

32. 32 TRA: Communication of GASB 68 results  Financial statement  Required supplementary information  Notes to the financial statements  Report anticipated to be released by TRA in spring 2015 o Attestation letter from the Office of the State Auditor  Exact mode for communication of report yet to be determined

33. Key messages  GASB 68 divorces funding and accounting (Your GASB 68 pension expense will not match what the employer actually contribute to the plan.)  Unfunded pension liabilities exist today (GASB 68 changes who reports them)  Unfunded pension liabilities may be very large to the employer (liabilities represent pension payments due over decades of time)  Governing boards will still need to develop a funding policy to pay off the liabilities (No different than today) 33

34. Resources 34

35. 35 Visit the “Employer” tab on PERA’s and TRA’s websites.  www.mnpera.org www.mnpera.org  www.minnesotatra.org/employerinfo/gasb www.minnesotatra.org/employerinfo/gasb You’ll find:  Links to GASB publications.  Links to AICPA audit guidance.  Toolkit of informational guides/articles.  Frequently asked questions.  News and developments on implementation. Questions? E-mail Dave Dejonge (PERA) dave.dejonge@mnpera.org, or John Wicklund (TRA) jwicklund@minnesotatra.org. dave.dejonge@mnpera.org jwicklund@minnesotatra.org PERA-TRA resources