Proposed GASB 45 Changes, What's All the Fuss About

1. Proposed GASB 45 Changes What’s all the fuss about?
MASBO Fall Conference
Mark Schulte, FSA, EA, MAAA
November 14, 2014

2. What we’re going to cover today
1
Introduction and GASB 45 review
2
Why are things changing?
3
What’s being proposed?
4
What can I do to prepare?
5
Recap / questions
1

3. Financial reporting of pensions and other post-employment benefits (OPEB) have changed substantially in the past decade
Have had to comply with GASB 45 since at least 2008
Have a liability “on the books” (balance sheet Net OPEB Obligation)
Record annual accounting expense (based on the ARC)
GASB 67/68 substantially change how pensions are reported
May 28, 2014: GASB approves exposure draft which revamps OPEB accounting rules similar to pensions
1. Introduction and GASB 45 review
2

4. 1. Introduction and GASB 45 review
Basic Principle: Post-retirement benefits are a form of compensation, and those promises should be recognized on financial statements in the period when they are earned.
Includes: Retiree medical, vision, dental, life insurance
Previously accounted for on a cash basis; now have to account for on an accrual basis … but very slowly
3

5. Financial reporting example – UNFUNDED PLAN:
Actuarial Accrued Liability (AAL) = $ 10M
Trust assets = $ 0
Normal cost = $ 0.5M
Annual payments = $ 0.4M
1. Introduction and GASB 45 review
Annual Expense
Balance sheet liability reconciliation
Normal Cost
$ 0.5
Net OPEB Obligation - BOY
$ 0.0
Amortization of unfunded AAL
0.6
Annual OPEB Cost
1.1
Total ARC
$ 1.1
Benefit payments or trust contributions
(0.4)
Net change in NOO
0.7
Net OPEB Obligation - EOY
$ 0.7
4

6. Financial reporting example – FUNDED PLAN:
Actuarial Accrued Liability (AAL) = $ 10M
Trust assets = $ 8M
Normal cost = $ 0.5M
Annual payments = $ 0.4M
1. Introduction and GASB 45 review
Annual Expense
Balance sheet liability reconciliation
Normal Cost
$ 0.5
Net OPEB Obligation - BOY
$ 0.0
Amortization of unfunded AAL
0.6
Annual OPEB Cost
1.1
Total ARC
$ 1.1
Benefit payments or trust contributions
(8.0)
Net change in NOO
(6.9)
Net OPEB Obligation - EOY
$ (6.9)
5

7. Financial reporting example – FRONT-LOADED PLAN:
Actuarial Accrued Liability (AAL) = $ 10M
Trust assets = $ 0
Normal cost = $ 0.1M
Annual payments = $ 1.0M
1. Introduction and GASB 45 review
Annual Expense
Balance sheet liability reconciliation
Normal Cost
$ 0.1
Net OPEB Obligation - BOY
$ 0.0
Amortization of unfunded AAL
0.6
Annual OPEB Cost
0.7
Total ARC
$ 0.7
Benefit payments or trust contributions
(1.0)
Net change in NOO
(0.3)
Net OPEB Obligation - EOY
$ (0.3)
6

8. 2. Why are things changing?
“School districts struggle to pay retirees' health benefits”
“Retiree Health Care: The Brick That Broke Municipalities’ Backs”
“The Retiree Medical Benefit Crisis”
“The next retirement time bomb”
“Taxpayers on the hook for billions in hidden government-worker healthcare costs”
“Taming the OPEB Beast”
“Slaying the OPEB Dragon”
“District is stretching out OPEB burden”
OPEB!
OPEB in the Media
7

9. 2. Why are things changing?
Criticisms of GASB 45 accounting
Amortization options are too generous – up to 30 years open basis
Net OPEB Obligation is an inaccurate measure of employer’s liability
Too much variation in liability calculation methods
Discount rate determination not appropriate
8

10. 3. What’s being proposed?
New terminology
GASB 45
OPEB Exposure Draft
Actuarial Accrued Liability (AAL)
Total OPEB Liability
Plan assets
Fiduciary Net Position
UAAL
Net OPEB Liability
Annual Required Contribution (ARC)
Actuarially Determined Contribution (ADC)
N/A
Deferred inflows/outflows of resources
Annual OPEB Cost; Net OPEB Oblig.
N/A
9

11. 3. What’s being proposed?
Move unfunded liability to the balance sheet
Actuarial Accrued Liability (AAL) = $ 10M
Trust assets = $ 0
Normal cost = $ 0.5M
Annual payments = $ 0.4M
10

12. 3. What’s being proposed?
OPEB expense will become more complex
Change in Net OPEB Liability (balance sheet) recognized quickly
Immediate recognition
Service cost
Interest on liability
Expected asset return
Plan changes
Deferred recognition (deferred inflows/outflows of resources)
Assumption changes
Demographic and (some) economic experience
Asset returns
11

13. 3. What’s being proposed?
More measurements/information to disclose
Enhanced disclosure of historical contributions and funded status
Explain basis for selecting assumptions [ASOPs and GASB]
Disclosure of Net OPEB Liability’s sensitivity to changes in:
Medical trend +/- 1%
Discount rate +/- 1%
Combinations thereof (9 total)
Biennial actuarial valuations required for all plans (even if <200 members)
12

14. 3. What’s being proposed?
Discount rate changes
13

15. 3. What’s being proposed?
Actuarially Determined Contribution (ADC)
Most MN Districts either unfunded or prefunded substantial portion of UAAL
Proposed 10-year disclosure of actual contribution compared to ADC
Unclear what to disclose if don’t have a funding policy, but it’s not $0
14

16. 3. What’s being proposed?
Impact on small plans
3-year actuarial reporting option eliminated if < 200 members
Must have new report at least every two years
AMM is preserved!
A bit more complex than the current GASB 45 service allocation model
Apply Entry Age Normal method in a spreadsheet
15

17. 3. What’s being proposed?
Other technical adjustments
Actuarial costs must now be calculated as a percent of pay
Many plans use a service allocation method now
Unclear what the effect on the accrued liability will be
Odd to allocate non-pay related benefits ... based on pay
Keeping track of deferred inflows/outflows of resources for many years
Document basis for selecting assumptions
16

18. 3. What’s being proposed?
Timing Issues
Lots of dates to keep track of:
Valuation Date: when liabilities are calculated (census date)
Measurement Date: when liabilities and assets are measured for financial reporting
Reporting Date: Fiscal year-end
“Full” actuarial valuation of liabilities (at least) every two years
Assets must be re-measured every year
17
Valuation Date
Reporting Date
Measurement Date
“Roll” liabilities
Measure assets
Calculate liabilities
Net amount reported at FYE

19. 4. What can I do to prepare?
Exposure draft (May 2014)
Comments due (August 2014)
Final rules
(June 2015)
Effective for FY beginning after 12/15/2016
Implementation timeline
Lots of time to prepare, but it will be here fast!
Now is the time to create a plan and set expectations
18

20. 4. What can I do to prepare?
There have been several technical objections to parts of the new rules – but nothing substantial
Estimate impact to your balance sheet
For funded plans: reconsider investments and discount rate analysis
19

21. 5. Recap / questions
Questions?
20

22. Contact Information
Mark Schulte, FSA, EA, MAAA
marks@vaniwaarden.com
612.596.5971
Van Iwaarden Associates
10 South Fifth Street, Suite 840
Minneapolis, MN 55402-1010
21