Texas Municipal Retirement System GASB Examples.pdf · Big Picture ¥There will be a liability on the employers’ books that is larger than ever seen before yIt will encompass all

Copyright © 2013 GRS – All rights reserved.

Texas Municipal Retirement System

GASB Examples

October 9, 2013

Joseph Newton Mark Randall

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Today’s Agenda

GASB at 30,000 feet Impact on Discount Rate Impact of EAN on disclosed liabilities Other considerations

What has GASB done? The Statements change current pension accounting and financial reporting standards for state and local governments

Disconnect pension accounting from pension funding Total Pension Liability (TPL) code for Actuarial Accrued Liability Require employers to recognize the Net Pension Liability (NPL) on their balance sheets (where NPL is code for the Unfunded Accrued Liability based on Market Value of Assets) Require employers to recognize a new measure of the Pension Expense (PE) on their income statements, which would be different from their actuarially determined contributions (ARC) Replace most of the current note disclosures and required supplementary information with information based on the new measures

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Timing

GASB No. 67 Plan Reporting Effective for fiscal years beginning after June 15, 2013 For TMRS, December 31, 2014 financial statements

GASB No. 68 Employer Reporting Effective for fiscal years beginning after June 15, 2014 For TMRS member cities: fiscal years ending in June 30, 2015 through May 31, 2016 financial statements

Includes TMRS as an employer Local employers could vary depending upon their fiscal year end

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Big Picture

There will be a liability on the employers’ books that is larger than ever seen before

It will encompass all systems This will be a “bumpy” liability; changing each year with a new blended discount rate and change in market value of assets, if applicable

There will be an expense on the employers’ books that is a larger expense than ever seen before

The shorter amortization period will accelerate recognition of pension cost

The changes only impact the accounting rules, but …..

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The Before and After

GASB 25/27 GASB 67/68

Liability Up to six allowable actuarial cost methods, plus variants of each

Only Individual Entry Age allowed

Asset Various asset smoothing methods allowed Fair market value

Expense Various amortization periods and methods allowed

Rigid rules for Pension Expense components

LTeROR (Discount Rate)

Flexible on plan’s return assumption

Still flexible on plan’s return assumption to the extent assets are available to cover liabilities

LTeROR – Long Term Return Assumption, also the discount rate

The “new” Pension Expense

Pension Expense: Under Statement 27, pension expense represented the annual required contribution (ARC) needed to pay future benefits Under Statement 68, pension expense largely represents the change in the Net Pension Liability from the prior year, with provisions for deferring certain items

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Items immediately recognized in pension expense include:

Service cost (additive) Interest on TPL (additive) Projected investment earnings (subtractive) Actual member contributions (subtractive) Administrative costs (additive) Changes in TPL due to changes in benefits

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Certain other changes are treated as “deferred outflows of resources” and “deferred inflows of resources”

Changes in the plan’s fiduciary net position due to differences between projected investment earnings and actual investment earnings

Recognized over a closed 5-year period Changes in total pension liability due to (1) changes in assumptions or (2) differences between assumed and actual actuarial experience

Recognized over a closed period reflecting average remaining service life of all members (active, inactive, and retirees)

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Determining the Discount Rate Discount rate used in determining the Total Pension Liability (TPL) is a blend of two rates:

Long-term expected rate of return on plan investmentsThis rate is generally consistent with the funding valuation 7.00% for TMRS

Yield or index rate for a 20-year, tax-exempt general obligation municipal bond

Will vary ~4.0%

Weight given to the long-term rate is based on a closed group projection

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Determining the Discount Rate

The premise… The pension plan is primarily responsible for paying pension benefits to the extent the plan has sufficient assets

Assets invested with long-term investment horizon The employer is primarily responsible for paying benefits to the extent the plan does not have sufficient assets

From the general fund or bond revenues

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Illustration – Other Client

$0$20$40$60$80

$100$120$140$160

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

In $

Billi

ons

Governmental Entity ABC - Field Test Projection of Plan's Fiduciary Net Position (Plan Assets)

Plan Assets Current Member Benefits

Present value of benefits paid prior to cross-over date, using LTeROR

Present value of benefits paid after cross-over date, using muni rate

Cross-over date (during year 33)

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Using a 4% muni rate – The blended discount rate in this example would be approximately 6.00% We expect all TMRS administered plans to pass this test and be able to use 7.00%. However, as always with 850 cities, anomalies may exist

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Cost Method All TMRS cities will disclose the Net Pension Liability (NPL) on their balance sheets based on the EAN cost method

PUC is currently used for determining contribution requirements and for disclosures

Since PUC is a back-loaded funding policy and EAN accrues higher liabilities early in a member’s career, the TPL (AAL in current terms) will always be higher under EAN than PUC

Most cities will disclose a higher NPL (UAAL) and a lower funded ratio than previous disclosures

In addition, any benefit that is determined to be substantially part of the expected benefit package, must be valued as if it will continue in perpetuity

Ad hoc COLAs or USCs granted on a regular basis must be valued as repeating With the current catch up feature of the TMRS benefit provisions, there is minimal difference between assuming ad hoc colas every year, every fourth year, etc.

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Actuarial Accrued Liability accrues over the entire career of a sample employee

0%

200%

400%

600%

800%

25 28 31 34 37 40 43 46 49 52

% o

f Pay

roll

New Employee: Entry Age 25

PVB AAL EAN AAL PUC

Example Group 1 City – Underfunded (1:1 match, no repeating COLAs)

Note: the below variance in funded ratios is due to differences between AVA (“smoothed” value of assets) and MVA (market value of assets); currently, MVA exceeds AVA (deferred gains)

Current Valuation

(PUC, AVA)

Estimated EAN Results

(EAN, AVA)

Estimated GASB 68 Results

(EAN, MVA)

Actuarial Accrued Liability / Total Pension Liability

$19,380 $21,297 $21,297

Actuarial Value of Assets / Net Position

12,559 12,559 12,964

Unfunded Actuarial Accrued Liability / Net Pension Liability

$6,821 $8,738 $8,333

Funded Ratio / Plan Fiduciary Net Position as a Percentage of Total Pension Liability

64.8% 59.0% 60.9%

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$ amounts shown above are in thousands

Example Group 1 City – Overfunded (1:1 match, no repeating COLAs)


Current Valuation

(PUC, AVA)

Estimated EAN Results (EAN, AVA)


(EAN, MVA)


$1,565 $1,633 $1,633


1,952 1,952 2,029


($387) ($319) ($396)


124.7% 119.5% 124.3%

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Example Group 3 City – Underfunded (2:1 match, no repeating COLAs)


Current Valuation

(PUC, AVA)

Estimated EAN Results (EAN, AVA)


(EAN, MVA)


$86,732 $93,153 $93,153


84,206 84,206 87,284


$2,526 $8,947 $5,869


97.1% 90.4% 93.7%

17 $ amounts shown above are in thousands

Example Group 3 City – Underfunded with annual Ad hoc COLAs & USCs (2:1 match, no repeating COLAs)


Current Valuation

(PUC, AVA)

EAN, AVA with 0% COLA &

USC assumption

EAN, AVA with

repeating 70% COLA

& 100% USC assumption

Estimated GASB 68 Results (EAN, MVA)


$359,377 $386,798 $480,753 $480,753


343,956 343,956 343,956 356,735


$15,421 $42,842 $136,797 $124,018


95.7% 88.9% 71.5% 74.2%


Example Group 3 City – Overfunded with repeating USC and annual Ad hoc COLA (2:1 match, no repeating COLAs)


Current Valuation

(PUC, AVA)

EAN, AVA with 0% COLA

assumption

EAN, AVA with

repeating 70% COLA assumption

Estimated GASB 68 Results (EAN, MVA)


$94,731 $99,887 $119,248 $119,248


94,884 94,884 94,884 98,354


($153) $5,003 $24,364 $20,894


100.2% 95.0% 79.6% 82.5%


Example Group 6 City – Underfunded (2:1 match, repeating COLAs)


Current Valuation

(PUC, AVA)

Estimated EAN (EAN, AVA)


(EAN, MVA)


$393,548 $420,223 $420,223


357,883 357,883 370,917


$35,665 $62,340 $49,360


90.9% 85.2% 88.3%

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Funded Ratio Scatter Chart – Valuation Compared to EAN

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50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150% Comparison of Funded Ratios

Valuation EAN (AVA)

Funded Ratio Scatter Chart – Valuation Compared to GASB67/68 Est.

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50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150% Comparison of Funded Ratios

Valuation EAN (MVA)

Funding vs. Disclosures

By funding under PUC, but disclosing under EAN, cities with an NPL today are never expected to fully amortize the NPL, because the current funding policy (PUC) is not targeting this higher amount

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Typical Employer - Projection of Contribution Rate

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

2012 2017 2022 2027 2032 2037

PUC EAN

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Typical Employer - Projection of GASB NPL

- 20 40 60 80

100 120 140 160 180 200

2012 2017 2022 2027 2032 2037 2042

PUC EAN

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Overfunded Employer - Projection of GASB NPL

-

2

4

6

8

10

12

14

16

2012 2017 2022 2027 2032

PUC EAN

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Communication Challenges

Explaining: • When did things change and why? • All of the new nomenclature • The new very large liability on the balance sheet • The annual changes in liability and pension expense, e.g.,

explaining why the pension expense number is actually pension income in some years

• Why accounting numbers do not equal funding numbers; which ones are right?

• Increased administrative costs

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Lots More Work

By preparers of plan CAFRs

By preparers of employer CAFRs

By actuaries

By auditors

QUESTIONS ??

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Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor. This presentation shall not be construed to provide tax advice, legal advice or investment advice. Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation. This presentation does not necessarily express the views of the sponsoring organization, or of Gabriel, Roeder, Smith & Company, and may not even express the views of the speakers.

Disclaimers

Documents

Texas Municipal Retirement System GASB Examples.pdf · Big Picture ¥There will be a liability on the employers’ books that is larger than ever seen before yIt will encompass all