GASB Pension Accounting and Financial Reporting Changes

GASB Pension Accounting and
Financial Reporting Changes
Presented by:
Frederick G. Lantz, CPA
Partner-in-Charge, Government Services
Sikich LLP
1415 W. Diehl Road, Suite 400
Naperville, IL 60563
(630) 566-8557
flantz@sikich.com

SIKICH LLP
Welcome to our webinar on GASB Pension Fund Accounting and
Financial Reporting Changes.

• Over 100 participants
• Illinois
• Wisconsin
• Missouri
• Copy of the slides
• Ask questions

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©2013 Sikich LLP. All Rights Reserved.

SIKICH LLP
GASB Pension Fund Accounting and Financial Reporting Changes –
the next big bang in state and local government.

• Two primary issues that are being addressed:
• Employers accounting for the costs of pensions
• Significant changes will occur for most
• Cost sharing plans have the most significant changes
• Accounting and reporting by the Pension Plan
• Not many substantive changes will occur

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GASB PENSION PROJECT
• Where we have been
• GASB Statement No. 4 (1986)
• Don’t apply FASB S-87
• Required the use of projected unit credit (PUC) actuarial cost
method for accounting and reporting
• Also required disclosure of entry age normal (EAN) if used
for funding
• Will the real funded status please stand up!
• Required Supplementary Information (RSI)
• 10 years
• Revenues and expenses

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• GASB Statement No. 25, Financial Reporting for Defined Benefit
Pension Plans and Note Disclosures for Defined Contribution
Plans (1994)
• GASB Statement No. 27, Accounting for Pensions by State and
Local Governmental Employers (1994)
• Both still effective today

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• GASB Statement No. 25 and No. 27
• Allowed the use of 5 different actuarial cost methods
• Amortization over at most 30 years (after initial 10 years)
• Assets generally at fair value
• Asset or liability on face of the statement of position
• Net Pension Obligation/Net Pension Asset (NPO/NPA)
• Annual Required Contribution (ARC) versus funded
• ARC > funding= NPO; ARC<funding= NPA
• Actuarial Accrued Liability (AAL) in RSI
• No RSI for cost sharing plans
Moved 1 year of AAL into the notes

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• Problem with GASB Statement No. 27
• Budget friendly, modified accrual basis
• Not in accordance with accrual basis of accounting
• Liability when earned by employee, regardless of funding
• Lack of comparability due to choices of actuarial valuation
methods and assumptions
• Not recognizing pension spikes, cost of retro benefits or true
cost of pensions and any changes
• Does not measure interperiod or intergenerational equity

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• Where are we now
• Current pension project
• Research agenda in January 2006
• Five roundtable discussions in 2007
• Current project agenda in April 2008
• Invitation to Comment (ITC) March 2009
• Preliminary Views (PV) June 2010
• Exposure Draft (ED) July 2011
• Final Pronouncements June 2012

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• Where are we are heading
• “The final statements relate to accounting and financial reporting,
not to how governments approach the funding of their pension
plans. Pension funding is a policy decision made by government
officials”
• GASB has “divorced” accounting from funding
• The new pronouncements do not:
• Set funding guidelines
• Lower discount rates used for funding

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PENSION FUNDING POLICY
• GASB Statement No. 27 was based on funding
• Many governments used this statement to develop their funding
policy/philosophy
• No longer true under revised standards
• Every government should adopt a pension funding policy
• Define your annual required contribution (ARC) methodology
• Actuarial cost method
• Adopted by the entity legally required to make the employer
contribution to the plan
• Government Finance Officers Association best practice
• gfoa.org
• IGFOA samples
• Village of North Aurora, Illinois
• IMRF funding policy
• MO LAGERs funding policy
• WRS funding policy 10

GASB STATEMENT NO. 67
• Pension Plan Reporting
• Defines a pension plan
• Administered through an irrevocable trust
• Retains current basic financial statements
• Statement of plan net position
• Statement of changes in plan net position
• Accrual basis of accounting
• Economic resources measurement focus
• Notes greatly expanded
• RSI greatly expanded
• Can reduce disclosures in employers report
• Multi-employer plan reports generally do not contain
information by individual employer
11

• Pension Plan Reporting
• Effective for plan periods beginning after June 15, 2013
• Fiscal years ending June 30, 2014 and thereafter
• One year before GASB Statement 68 and employer reporting
is effective

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• Issued June 2012
• Accounting and financial reporting for defined benefit pensions and
defined contribution pensions provided to employees and volunteers
of state and local government employers plans
• Employer reporting
• Special funding non-employer situations
• Illinois Teachers Retirement System (TRS)

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• Covers pension plans administered through trusts or similar
arrangements if:
• Contributions to the plan are irrevocable
• Plan assets dedicated to providing pensions to plan members
• Plan assets are protected from creditors and plan administrator
• Otherwise continue to follow GASB S-27, S-50

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• Effective for fiscal periods beginning after June 15, 2014
• Fiscal year ending June 30, 2015 and thereafter
• September 30, 2015
• December 31, 2015
• April 30, 2016
• May 31, 2016
• Early implementation allowed and encouraged
• May depend on others such as MO LAGERs, IMRF, WRS,
SURS, TRS
• Does not cover other post employment benefits other than pensions
(OPEB)
• Continue to follow GASB S-45
• Probable change in the future
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• Defines two types of pensions
• Defined contribution
• Individual account for each employee
• Contribution employer makes is defined
• Benefits received based on balance in employee’s account
• Employee bears market risk of investments
• Defined benefit
• Income or other benefits to be received by employee are
defined by the benefit terms
• Employer bears market risk of investments

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• Defines types of defined benefit plans
• Single employer
• Police and Fire Pension plans in Illinois
• Multiple employer
• Agent
• IMRF
• Cost-sharing
• IMRF, MO LAGERS, WRS, TRS, SURS
• May also apply to component unit reports issued
separately from the primary government
• Village Libraries in Illinois

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• Special Funding Situations
• Non-employer entity is legally required to be responsible for
making contributions directly to a pension plan that provides
pensions to employees of another entity or entities and either
• Amount of non-employer contributions not dependent on
occurrence of a future event unrelated to pensions, or
• The non-employer entity is the only one legally required to
contribute to the plan
• TRS, SURS

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• Liabilities for defined benefit pensions
• Current
• Liabilities for payments to a defined benefit pension plan
• Net Pension Obligation
• Future
• Liabilities to employees for pension benefits as earned by the
employee
• Total pension liability

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• Accrual basis, economic resources measurement focus financial
statements (Entity-wide, enterprise funds)
• Recognize and record a net pension liability
• Actuarial present value of projected benefit payments
• Less pension plans net position (net assets)
• Measured as of employers fiscal year end
• No more than one year old
• Apply consistently

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• Recognize and record a net pension liability
• Measured as of employers fiscal year end or 1 year old,
consistently
• Timing of multiple employer plans
• Same or different than employer
• Timing of single employer plans Police and Fire
• Funding versus accounting/reporting
• Not as of employer year end
• Interim contributions are deferred outflows
• Actuarial valuations performed at least biennially
• Annually if significant changes in plan benefits or
demographics

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• Measuring the total pension liability
• Projected benefit payments
• Assumptions – Actuarial Standards of Practice
• Future salary increases (if part of the formula for
benefits)
• COLAs
• Projected service credits
• Investment rate of return (IRR)
• Supported by expected IRR by asset class

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• Measuring the total pension liability
• Projected benefit payments
• Assumptions – Actuarial Standards of Practice
• Discount rate – single rate that reflects
• Long-term expected rate of return on plan
investments to the extent that the plan’s net position
is sufficient to make projected benefit payments,
assuming assets are invested to achieve that return
• Yield or index rate for 20 year, tax exempt GO
municipal bond rated AA/aa or higher
• Blended rate

23

• Discount rate calculation
• Projected cash inflows
• Employer and employee contributions related to current
employees, active and inactive
• Based on five year history
• Pension funding policy
• Should have adopted 2 years ago
• Payments to existing retirees and future retirees (currently
active or inactive)
• Net position > benefit payments – IRR
• Otherwise blended rate impacted by borrowing rate
• Calculation of the Discount Rate > see Illustration 1 at the end of
this document

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• Measuring the net pension liability
• Entry age actuarial cost method is required, regardless of
actuarial cost method used for funding
• Attribution made on individual employee basis
• Each employees service cost level as a percentage of
projected pay
• Inflation rate if no projected pay (e.g., volunteers)
• Start as of date employees service credits begin to accrue

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• Report net pension liability (NPL) in all accrual based financial
statements
• Generally offset is to unrestricted net position
• Many governments will report a deficit unrestricted net position
• Changes in the NPL recognized as pension expenses in the current
period except for:
• Difference between projected and actual investment rate of
return
• Amortize over closed 5 years
• Differences between expected and actual economic or
demographic assumptions and/or changes in these
assumptions
• Amortize over a closed period reflecting remaining service
lives
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• Difference not reported as pension expense of the current period are
reported as deferred outflows or deferred inflows of resources
related to pensions
• As defined in GASB Statement No. 63

27

• Modified accrual basis/current financial resources measurement
focus financial statements (e.g., general fund)
• Net pension liability to the extent liquidated with available
spendable resources (unlikely)
• Pension expenditure =
• Amounts paid by the employer to the pension plan
• Change in NPL to the extent liquidated with available
spendable resources
• Unpaid matured benefits (no plan assets)

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• Notes to financial statements
• Total of all
• Pension liabilities
• Pension assets
• Deferred inflows/outflows of resources related to pensions
• Pension expense/expenditure for the period
• Unless fully disclosed on face of financial statements
• May be if you participate in only one pension plan for all
your employees

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• Separate disclosures for each plan you participate in
• Separate primary government from discretely presented
component units for disclosures
• Difficult if you participate in a multiple employer plan
• Information usually provided only for employer as a
whole
• Plan description
• Name
• Type of plan
• Benefit terms
• Classes of employees covered
• Types of benefits
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• Plan description (continued)
• Key elements of benefit formula
• Benefit changes
• COLAs
• Authority for establishing and amending benefit changes
• Number of employees covered
• Inactive receiving benefits
• Inactive not receiving benefits
• Active employees

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• Contribution Requirements
• Employee
• Employer
• Authority for changing
• Basis for determining employer contributions
• Contribution $ amount or % of covered payroll
• Reference to pension plan separate financial statements
• And how to obtain separate report
• Multi-employer plans do not include data by employer
• Do not reference something that does not exist

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• Information about the net pension liability
• Assumptions
• Inflation
• Salary changes
• COLAs
• Mortality assumptions and table
• Dates of experience studies
• Discount rate
• Change from prior period
• Cash flow assumptions
• Long-term expected rate of return

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• Discount rate (continued)
• Bond index rate incorporated, if applicable
• Period of projected benefit payments each rate applies to
• Assumed asset allocation of the portfolio
• Long-term expected real rate of return for each asset class
• RRR Arithmetic or geometric means
• Impact on net pension liability of 1% swing higher and lower in
discount rate

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• Pension Plans Fiduciary Net Position
• Reference to separately issued plan report
• Otherwise disclose summary plan financial information in
notes for each plan
• Required for multi-employer plans

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• Schedule of changes in net pension liability for each pension
plan the employer participates in
• Beginning balance of total pension liability, the plans fiduciary
net assets and the net pension liability
• Service cost
• Former “normal” cost
• Interest on total pension liability
• Changes of benefit terms
• Differences between actual and expected experience
• Changes in assumptions or other inputs
• Contributions from employer/non-employer contributor
• Contributions from employees
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• Schedule of changes in net pension liability
• Plan net investment income
• Benefit payments
• Refunds
• Administrative expenses
• Other changes in net pension liability, disclosed separately
• Spikes
• Retroactive benefits
• Early retirement incentives
• Ending balance of total pension liability, plan fiduciary net
position and net pension liability

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• Measurement date of net pension liability, date of actuarial
valuation used to calculate total pension liability, and if roll
forward procedures were used
• Brief description of changes in assumptions
• Description of changes in benefit terms
• Pension expense recognized in the period
• Deferred inflows/outflows related to pensions

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• Deferred inflows/outflows related to pensions
• Changes due to expected/actual experience
• Changes in assumptions or other inputs
• Net difference between projected and actual investment
experience
• Employer contributions to the plan subsequent to the
measurement date of the net pension liability (if not the
employer’s fiscal year end)

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• Schedule of deferred inflows/outflows related to pensions by
year for 5 years and in the aggregate thereafter that will be
recognized in pension expenses
• Schedule that will be recognized as a reduction of the net
pension liability
• Greatly expanded disclosures
• Note Disclosures and Required Supplementary Information for a
Single Employer > see Illustration 2 at the end of this document

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• Required Supplementary Information
• Separate for each plan
• 10 years of information (prospective)
• Schedule of changes in net pension liability, as of measurement
date
• Same information required for notes to financial statements

41

• Schedule reporting
• Plans fiduciary net position
• Net pension liability
• Plan fiduciary net position as a % of total pension liability
• Used to be funded status
• Covered payroll
• Net pension liability as a % of covered payroll

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• If employer contributions are actuarially determined, a schedule
reporting
• A-Actuarially determined contribution
• B-Actual contributions
• C-A-B
• D-Covered payroll
• E-B/A as a % of D

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• If employer contributions are not actuarially determined
• A-Statutory or contractually required contribution
• B-Actual contributions
• C-A-B
• D-Covered payroll
• E-B/A as a % of D

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• Notes to Required Supplementary Information
• Significant methods and assumptions used each year
• Factors that significantly impact trends

45

• Cost sharing plans
• Most significant changes relate to participation in cost sharing plans
• Employer recognizes proportionate share of collective net pension
liability in accrual basis financial statements
• Your employer contribution as a % of total employer contributions
• Record as previously discussed
• Proportionate share of pension expense and deferred
inflows/outflows related to pensions calculated using the same
methodology
• Change in proportionate share
• Recognize in expense using a systematic and rational method
• Closed period reflecting average remaining service lives
• Contributions after measurement date but before year end
• Deferred outflow 46

• Cost sharing plans
• Timing of measurement date
• No later than 30 months and 1 day before employer fiscal year end
• Modified accrual basis/current financial resources measurement focus
financial statements (e.g., general fund)
• Proportionate share of net pension liability to the extent liquidated with
available spendable resources (unlikely)
• Pension expenditure =
• Amounts paid by the employer to the pension plan
• Change in NPL to the extent liquidated with available spendable
resources
• Similar to agent/single employer plans
• Additional disclosures related to proportionate share calculation
• Again similar to agent/single employer, except report employers
proportionate share
• Note Disclosures and Required Supplementary Information for a Cost-
Sharing Employer > see Illustration 3 at the end of this document47

GASB PENSION REPORTING
• Communication between employer and plan administrators is critical
for timing
• Required actuarial information greatly expanded
• More time for preparation
• Separate actuarial valuations for accounting versus funding
versus state minimum mandate or contractual minimum

48

QUESTIONS?
Call or E-mail:
Frederick G. Lantz, CPA
Partner-in-Charge, Government Services
Sikich LLP
1415 W. Diehl Road, Suite 400
Naperville, IL 60563
(630) 566-8557
flantz@sikich.com

49

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52

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GASB Pension Accounting and Financial Reporting Changes

GASB Pension Accounting and Financial Reporting Changes

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