Gasb 16, 27, 45, & 47 masbo


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  • Welcome My name and I am an actuary at VIA in Minneapolis. Given speech topic by MASBO, fairly vague on what was meant by “dealing” with GASB statements.
  • What our collective experience has been; what we’ve learned; what we can do better – process oriented. Know your enemy and understand what they are thinking. Context and expectations. Scope; how similar; how different; how to know when each applies; go over examples. Would like to be definitive, but is my interpretation and auditors are all different. How we can work within the GASB framework to make sure that valuations are as accurate as possible; don’t overestimate liabilities.
  • Questions: How many are phase 2 (FY08),3? Second round? Bonded? Utilized actuarial report for purpose other than just completing accounting disclosures? Never knew so much about retiree bft programs – that’s a good thing! As discuss GASB disclosures are one facet of financial transparency expected in today’s world. Understand of both statements and the benefit plans have improved. See it most in severance benefits. Actuaries, auditors (and plan sponsors) are not perfect: constant refining. What “levers” are at our disposal for “improving” liability results? What changes need to make everyone aware of? Trusts? Utilize knowledge in negotiations. Was timing convenient for all parties? Acceleration make things run more smoothly?
  • Many headlines about OPEB since GASB 45 was announced. Pensions have taken the brunt of criticism recently. Recession depleted funding levels, but OPEB was generally not prefunded anyways. Good time to start? More malleable than pensions.
  • Fair to have race to the bottom? What is reasonable and fair? Promises made, and its fair to force measurement of those promises. Example: Subsidy = $300 per month + 50% of increase in premiums. Difficult to know how expensive premium increases are: Estimate may be dependent upon current experience. Everything has a maintenance cost.
  • Established (spreadsheet) methods may be perfectly adequate. GASB 16 doesn’t say you can’t use actuarial methodology.
  • May not be used to dealing with GASB 27 since is for “DB pension plans” and TRA/PERA/MSRS usually takes care of this. GASB 27 has been around for years, but some auditors are just starting to force Districts to use it for things such as severance benefits. May have used GASB 16 for years, but now forcing to update.
  • Inclusive an exclusive classification rules.
  • Retirement income/unrestricted payment vs. enhancement to retiree medical plan. Contract split benefits between insurance and severance, but GASB thinks in terms of pension vs. OPEB vs. compensated absence. GASB 47 utilizes calculation methods of other statements, but requires at least a footnote disclosure explanation of effect of termination benefit.
  • What if cash payment? Payment to HCSP? Use “already doing GASB 45 reporting” instead?
  • Modified accrual basis accounting for governments
  • Modified accrual basis accounting for governments
  • Modified accrual basis accounting for governments
  • Modified accrual basis accounting for governments
  • Modified accrual basis accounting for governments
  • Gasb 16, 27, 45, & 47 masbo

    1. 1. GASB 16, 27, 45, and 47: How to Deal With Them MASBO Fall Conference November 13, 2009 Mark Schulte, FSA, EA, MAAA
    2. 2. Outline <ul><li>Quick recap of initial GASB implementation experience </li></ul><ul><li>Understand background of GASB statements </li></ul><ul><li>Comparison of statements 16, 27, 45, and 47 </li></ul><ul><li>Discuss ways to “deal” with the GASB requirements </li></ul><ul><ul><li>Valuation assumptions </li></ul></ul><ul><ul><li>Valuation process </li></ul></ul><ul><ul><li>Plan benefits & funding </li></ul></ul>
    3. 3. Recap of GASB Implementation <ul><li>Many districts have completed 1 st round of GASB implementation </li></ul><ul><ul><li>“ Opportunity” to refamiliarize with retiree benefit programs </li></ul></ul><ul><ul><li>Now preparing for round 2 </li></ul></ul><ul><li>Interpretive Refinements </li></ul><ul><ul><li>Auditors, Districts, and Actuaries have had time and experience to develop their interpretations of GASB statements </li></ul></ul><ul><ul><li>Better benefit plan classification and refined calculations </li></ul></ul><ul><li>Benefit and Process Adjustments </li></ul><ul><ul><li>Any changes to assumptions, benefits, or assets? </li></ul></ul><ul><ul><li>Ability to streamline/simplify benefits? </li></ul></ul><ul><ul><li>Adjust timing of valuation? </li></ul></ul>
    4. 4. Background of GASB Statements <ul><li>OPEB in the Media </li></ul><ul><ul><li>“ School districts struggle to pay retirees' health benefits” </li></ul></ul><ul><ul><li>“ The next retirement time bomb” </li></ul></ul><ul><ul><li>“ Officials continue to grapple with liability issue” </li></ul></ul><ul><ul><li>“ District is stretching out OPEB burden” </li></ul></ul>
    5. 5. <ul><li>Transparency and accountability are expected in today’s world </li></ul><ul><ul><li>Costs of public pensions and OPEB obligations are becoming more visible in media </li></ul></ul><ul><ul><li>Recession has highlighted benefit costs, public/private disparities </li></ul></ul><ul><li>Require reasonable accounting of benefit promises </li></ul><ul><li>Some promises are clear, while others are not </li></ul><ul><ul><li>More likely to incorrectly value cost if not easily quantifiable </li></ul></ul><ul><ul><li>May be poorly written, unwritten, or administered differently </li></ul></ul><ul><ul><li>GASB requires effort to prepare best estimate of benefit value </li></ul></ul>Background of GASB Statements
    6. 6. <ul><li>GASB 16 : Accounting for Compensated Absences </li></ul><ul><ul><ul><li>Unused sick leave </li></ul></ul></ul><ul><ul><ul><li>Unused vacation </li></ul></ul></ul>Comparison of Statements 16, 27, 45, and 47 <ul><li>GASB 27 : Accounting for Pensions by State and Local Governmental Employers </li></ul><ul><ul><ul><li>Defined benefit pensions </li></ul></ul></ul><ul><ul><ul><li>Other benefits provided through the pension plan </li></ul></ul></ul><ul><li>GASB 47 : Accounting for Termination Benefits </li></ul><ul><li>GASB 45 : Accounting and Financial Reporting by Employers </li></ul><ul><ul><li>for Postemployment Benefits Other Than Pensions </li></ul></ul><ul><ul><ul><li>OPEB grab bag </li></ul></ul></ul><ul><ul><ul><li>Health-related benefits from other plans </li></ul></ul></ul>
    7. 7. GASB 16: Compensated Absences <ul><li>Calculations: </li></ul><ul><li>Accrued liability </li></ul><ul><li>Actuarial calculations not necessarily needed </li></ul><ul><li>Other details: </li></ul><ul><li>Use current pay rates (i.e., no projections) </li></ul><ul><li>Also accrue liability for secondary salary-related payments </li></ul><ul><ul><li>Social Security/Medicare Taxes </li></ul></ul><ul><ul><li>Pension plan contributions </li></ul></ul><ul><li>Includes: </li></ul><ul><ul><li>Vacation Leave </li></ul></ul><ul><ul><li>Sick Leave </li></ul></ul><ul><ul><li>Sabbatical Leave </li></ul></ul>Requirement: Accrue a liability for “compensated absences that are attributable to services already rendered and are not contingent on a specific event that is outside the control of the employer and employee.”
    8. 8. GASB 27: Pension Benefits <ul><li>Calculations: </li></ul><ul><li>Balance sheet liability and annual expense </li></ul><ul><ul><li>ARC </li></ul></ul><ul><ul><li>Annual Pension Cost </li></ul></ul><ul><ul><li>Net Pension Obligation </li></ul></ul><ul><li>Actuarial calculations generally required </li></ul><ul><li>Full valuation every 2 years </li></ul><ul><li>Other details: </li></ul><ul><li>Does not include postemployment healthcare benefits (medical, dental, vision, etc.) </li></ul><ul><li>What constitutes a “DB pension plan”? </li></ul><ul><li>Includes: </li></ul><ul><ul><li>Pension benefits </li></ul></ul><ul><ul><li>Life insurance </li></ul></ul><ul><ul><li>Other benefits provided through a DB pension plan </li></ul></ul>Requirement: Accrue a liability for “retirement income and all other benefits provided through a defined benefit pension plan, except postemployment healthcare benefits.”
    9. 9. GASB 45: OPEB <ul><li>Calculations: </li></ul><ul><li>Balance sheet liability and annual expense </li></ul><ul><ul><li>ARC </li></ul></ul><ul><ul><li>Annual OPEB Cost </li></ul></ul><ul><ul><li>Net OPEB Obligation </li></ul></ul><ul><li>Actuarial calculations generally required </li></ul><ul><li>Full valuation every 2-3 years </li></ul><ul><li>Other details: </li></ul><ul><li>Postemployment healthcare benefits are “always” OPEB. </li></ul><ul><li>Any postemployment benefit provided through a plan that does not provide retirement income is considered OPEB. </li></ul><ul><li>Includes: </li></ul><ul><ul><li>Healthcare benefits </li></ul></ul><ul><ul><ul><li>Medical </li></ul></ul></ul><ul><ul><ul><li>Dental </li></ul></ul></ul><ul><ul><ul><li>Vision </li></ul></ul></ul><ul><ul><li>Other benefits (if not provided through pension plans) </li></ul></ul><ul><ul><ul><li>Life insurance </li></ul></ul></ul><ul><ul><ul><li>Disability </li></ul></ul></ul><ul><ul><ul><li>Long-term care </li></ul></ul></ul><ul><ul><li>Certain HCSP payments </li></ul></ul>Requirement: Accrue a liability for “postemployment benefits other than pension benefits.”
    10. 10. GASB 47: Termination Benefits <ul><li>Calculations: </li></ul><ul><li>Depends on type of termination benefit </li></ul><ul><li>May require actuarial calculations </li></ul><ul><li>Other details: </li></ul><ul><li>Voluntary benefits recognized when offer is accepted and amount can be estimated </li></ul><ul><li>Involuntary benefits recognized when plan of termination has been approved by those with authority to commit the government to the plan </li></ul><ul><li>Includes: </li></ul><ul><ul><li>Voluntary termination benefits (e.g., early retirement incentives) </li></ul></ul><ul><ul><li>Involuntary termination benefits (e.g., severance benefits) </li></ul></ul>Requirement: Recognize a liability and expense for voluntary and involuntary termination benefits.
    11. 11. Classifying Benefits Under GASB What is purpose of benefit? Compensated Absence Termination Benefit Employee Service GASB 16 Pension Payment OPEB Payment Enhance OPEB Enhance Pension GASB 47 GASB 45 GASB 27 New Term Benefit
    12. 12. Classifying Benefits Under GASB Compensated absence – GASB 16 Compensated absence – GASB 16 Classification Cash payment Form of Payment 50% x USL (max 90 days) x pay rate Severance Benefit Example 1 Classification Payment to Health Care Savings Plan (HCSP) Form of Payment 50% x USL (max 90 days) x pay rate Severance Benefit Example 2
    13. 13. Classifying Benefits Under GASB Pension – GASB 27 OPEB – GASB 45 Classification Cash payment Form of Payment 4 days of pay per yr of svc (max 100 days) Severance Benefit Example 3 Classification Payment to HCSP Form of Payment 4 days of pay per yr of svc (max 100 days) Severance Benefit Example 4
    14. 14. Classifying Benefits Under GASB OPEB – GASB 45 with termination benefit footnote OPEB – GASB 45 Classification Subsidized healthcare coverage Form of Payment District currently offers 5 years of free retiree healthcare coverage. If retire before July 1, 2010 with 20 years of service, then get additional 5 years free. Severance Benefit Example 5 Classification Conversion of unused sick leave to retiree health premiums. Form of Payment 1 month of retiree medical premiums for each day of unused sick leave at retirement. Severance Benefit Example 6
    15. 15. Classifying Benefits Under GASB 25% of B is Pension (GASB 27) 75% of B is OPEB (GASB 45) Operation of 150 day limit on C is undefined, so we cannot definitely determine allocation of benefit between A and B. A is a compensated absence benefit (GASB 16) Classification 25% paid as cash, 75% paid to HCSP Form of Payment A = 50% x USL (max 90 days) x pay rate B = 4 days of pay per yr of svc (max 100 days) C = A + B (max 150 days) D = C – 403(b) contributions, with offset applied to B first Severance Benefit Example 7
    16. 16. Dealing with GASB Statements Monitor and Adapt Measure Benefit Promises Understand GASB Requirements
    17. 17. <ul><li>GASB requirements provide framework </li></ul><ul><ul><li>Account for benefit promises </li></ul></ul><ul><ul><li>Use GASB measurement techniques </li></ul></ul><ul><li>Districts have options within GASB framework </li></ul><ul><ul><li>Valuation assumptions </li></ul></ul><ul><ul><li>Valuation process </li></ul></ul><ul><ul><li>Plan benefits & funding </li></ul></ul>Dealing with GASB Statements
    18. 18. Dealing with GASB Statements <ul><li>Discount rate, if funded </li></ul><ul><li>Pay increase rates </li></ul><ul><li>Healthcare trend rates </li></ul><ul><li>UAAL amortization method </li></ul><ul><li>Participation rates </li></ul><ul><ul><li>Employee </li></ul></ul><ul><ul><li>Spouse </li></ul></ul><ul><ul><li>Pre/post Medicare </li></ul></ul><ul><li>Retirement/turnover rates </li></ul><ul><li>Plan election </li></ul>Demographic Economic Valuation Assumptions
    19. 19. Dealing with GASB Statements <ul><li>Timing – beginning or end of FY </li></ul><ul><li>Gather census, plan info, experience, and prior disclosures </li></ul><ul><li>Know options and repercussions </li></ul><ul><ul><li>Alternative method vs. full valuation: what are the costs? </li></ul></ul><ul><ul><li>Do some of the work “in-house” </li></ul></ul><ul><li>Who’s responsible for GASB vs. UFARS? </li></ul>Valuation Process
    20. 20. Dealing with GASB Statements <ul><li>Discuss materiality and classification with auditor </li></ul><ul><li>How can benefits be adjusted to minimize costs/complexity? </li></ul><ul><ul><li>Make use of your valuation report </li></ul></ul><ul><ul><li>Knowledge of costs can be used to your advantage. </li></ul></ul><ul><li>Pros and cons of advance funding </li></ul>Plan Benefits & Funding
    21. 21. <ul><li>Many districts have had initial experience with GASB requirements and need to use this to their advantage </li></ul><ul><li>Interpretations of GASB standards are evolving; auditors, districts, and actuaries need to communicate </li></ul><ul><li>Results and processes will be refined over first few cycles </li></ul><ul><li>Make use of your GASB knowledge to improve accounting results and benefit programs </li></ul>Summary
    22. 22. Discussion and Questions
    23. 23. Additional Information Contact Information: Mark Schulte, FSA, EA, MAAA [email_address] 612.596.5971 Van Iwaarden Associates 840 Lumber Exchange 10 South Fifth Street Minneapolis, MN 55402 1.888.596.5960