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Proposed gasb 45 changes
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
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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
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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
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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
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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)
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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)
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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Valuation Date Reporting DateMeasurement Date
“Roll” liabilities
Measure assetsCalculate 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
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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
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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
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