{Single Audit Update.}

(1)

Annual Complimentary Government Training Session August 20th_{, 2013}

{

Single Audit Update.

}

John Smith MBA, CPA, CFP, CFE Lead Audit Partner Jane Smith MBA, CPA, CFP, CFE Lead Audit Partner Jane Smith MBA, CPA, CFP, CFE Lead Audit Partner John Smith MBA, CPA, CFP, CFE Lead Audit Partner John Smith MBA, CPA, CFP, CFE Lead Audit Partner

Jamie Christian & Manju Patnaik

(2)

Internal Controls Over Compliance

Proposed OMB Changes (Extreme Make Over –

OMB Edition)

• Introduction

• Single Audit Threshold

• Changes Impacting Major Program Determination

• Criteria for Low-Risk Auditee Status

• Reduction in Types of Compliance Requirements to be

Tested

• Findings

• Streamlining of Related Circulars and Guidance

• Indirect Cost and Time and Effort Reporting

• Administrative Requirements

Changes to 2013 Compliance Supplement

Topics of Discussion

2

Analyzing Internal Control

• OMB Circular A-133 requires the auditor to plan our audit

to obtain “low” control risk

o

That is controls that “operate effectively”

o

Reliable controls

• How do we get to “low “ control risk?

o

Document our understanding

o

Test control design and implementation

(3)

Internal Controls Over Compliance

Understanding

We (the auditor) are required to document our understanding

of your internal controls over grant programs using the

COSO framework.

4

Internal Controls Over Compliance

Control Environment

What is management attitude about controls?

Risk Assessment

(4)

Internal Controls Over Compliance

Control Activities

• How are you certain your organization is in

compliance with a specific compliance

requirement? For example: alllowable activities

Information and Communications

• How and when do you notify people the (control

activity) is required?

6

Internal Controls Over Compliance

Monitoring

• What is the process used to ensure the (control

(5)

Internal Controls Over Compliance

Tips for Grant Managers

• Document your controls using COSO

• Make sure everyone in your organization knows

your control system

• Periodically, review the internal control system

and see if it is working

• Closely monitor new employees for strict

compliance with policies

8

Proposed OMB Changes

Introduction

• OMB issued preliminary changes to Circular

A-133

• Now issued proposed changes

(6)

Proposed OMB Changes

Single Audit Threshold for Audit

• Proposed to increase to $750,000

• Current threshold of $500,000 was established

in 2003.

• Responsibilities for entities that fall below the

proposed threshold

10

Proposed OMB Changes

Changes Impacting Major Program

Determination

• Type A/B Threshold

• Current threshold of $300,000 was established in 2003.

• High Risk Type A programs – In the most recent audit

• Failed to receive an unqualified opinion

• Had a material weakness in internal control, or

• Had questioned costs exceeding 5% of program’s

(7)

Proposed OMB Changes

Changes Impacting Major Program

Determination (Continued)

• Type B Programs

• Percentage of coverage

• 40% (normal)

• 20% (low-risk auditee)

12

Criteria for Low-Risk Auditee Status • Criteria has been revised

Reduction in Types if Compliance Requirements to be Tested

• Reduced from 14 compliance requirements to 6 compliance requirements

• Proposal would permit the federal agencies to request that certain of the deleted types of compliance requirements be added to the Special Tests & Provisions requirement for programs where they could be considered essential to the oversight of the program

• The Federal Register notice states that this change is not reflected in the draft proposal but would be implemented through the first OMB Compliance Supplement to be issued after the proposed change becomes final.

(8)

Proposed OMB Changes

Findings

• More detail will be required to be reported in

auditor findings

• Questioned cost threshold for reporting will be

increased from $10,000 to $25,000

14

Proposed OMB Changes

Streamlining Related Circulars and Guidance • Proposal streamlines 8 existing OMB Circulars

• Proposed guidance consolidates the cost principles into one single document (limited variations by entity)

• Proposed guidance will supersede the following OMB Circulars oA-21, Cost Principles for Educational Institutions

oA-87, Cost Principles for State, Local, and Indian Tribal Governments

oA-89, Federal Domestic Assistance Program Information oA-102, Awards and Cooperative Agreements with State and

Local Governments

oA-110, Uniform Administrative Requirements for Awards and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations

(9)

Proposed OMB Changes

Indirect Costs and Time and Effort

Reporting

• A number of changes are being proposed in

these complex areas that are currently being

analyzed over the upcoming months to

determine any impact on auditors performing

single audits.

Administrative Requirements

• A number of changes are being proposed in

this area as well.

16

Proposed OMB Changes

Timing of Implementation

• Comment period ended June 2, 2013

• Changes will be finalized by December 2013

(10)

De-clustering of ARRA funded programs

• Impact of the de-clustering

• Minimal changes to requirements over all as

well as program level

• Changes to the compliance matrix

Changes to 2013 Compliance

Supplement

18

“An error the breadth of a

single hair can lead one a

thousand miles astray.”

(11)

20

(12)

{

PPACA 2014 Initiatives.

}

(13)

PPACA

I. ExchangeOverview II. Individual Mandate III. Subsidies

IV. Large Group Determination

V. Large Group Shared Responsibility VI. Variable Hour – Safe Harbor

Exchange Overview

4

Essential Health Benefits

Levels of coverage are grouped together based on the Actuarial Value (AV) of benefits under the plan as follows, commonly referred to as “metal tier”

• Platinum level – 90 percent

• Gold level – 80 percent

• Silver level – 70 percent

• Bronze level – 60 percent

Deductibles and out-of-pocket limits are equal to the Health Savings Account limits. 2013 limits are:

• Deductible - $2,000/single, $4,000 family

• Out-of-Pocket maximum - $6,250/single, $12,500 family

(15)

PPACA

Shared responsibility payment amount for any

taxable year may not exceed an amount equal to

the national average premium for bronze-level

qualified health plans offered through Exchanges

for the applicable family size

Individual shared responsibility amount:

• 2014 – Greater of $95 per person (up to three

people/family, or $285) or 1 percent of taxable income

• 2015 – Greater of $325 per person (up to three

people/family, or $975) or 2 percent of taxable income

• 2016 – Greater of $695 per person (up to three

people/family, or $2,085) or 2.5 percent of taxable income

• Indexed for 2017 and beyond

• The applicable dollar amount for a child under age 18 is

one-half of the otherwise applicable amount

Individual Mandate

6

PPACA

Penalty paid through federal income tax

Exemptions from penalty

• Required contributions exceed 8% of income

• Income below FPL

• Without coverage for period of less than 3 months

(16)

PPACA

Federal Premium Assistance Tax Credit

Beginning in 2014, available to eligible individuals to subsidize the cost of insurance coverage purchased through a state exchange Eligibility requires:

• Household income between 100 and 400 percent of the Federal Poverty Level (FPL), and

• Individual must either:

• Not be offered minimum essential coverage by an employer, or

• Be offered minimum essential coverage, but the coverage is: oUnaffordable (contribution exceeds 9.5% of the employees

household income), or

oDoes not provide the required minimum actuarial value (60%)

Subsidies

8

• Individual may not be claimed as a dependent by another taxpayer

(17)

PPACA

Reduced Cost Sharing

Cost-sharing subsidies to protect lower income individuals with health insurance from high out-of-pocket costs at the point of service

• Eligibility requires:

• Household income between 100 and 400 percent of the FPL

• Enrollment in a QHP in the silver level of coverage

• Allows for:

• Reduction of applicable out-of-pocket expenses

• Additional benefits

Subsidies

10 Income Level Actuarial Value

100 – 150% FPL 94% 150 – 200% FPL 87% 200 – 250% FPL 73%

Income Level Reduction in Out-of-Pocket Liability 100 – 200% FPL 2/3 of the maximum 200 – 300% FPL 1/2 of the maximum 300 – 400% FPL 1/3 of the maximum

PPACA

Only an “applicable large employer” is subject to

the employer shared responsibility requirement

“Applicable large employer” means, with respect to a

calendar year, an employer who employed an average of at

least 50 full-time employees on business days during the

preceding calendar year

“Full-time employee” means, with respect to any month, an

employee who is employed on average at least 30 hours of

service per week

• 130 hours of service in a calendar month is equivalent to

30 hours of service per week

(18)

PPACA

Full-time equivalent employees (FTEEs) treated as full-time employees

• Solely for purposes of determining whether an employer is an applicable large employer, in addition to the number of full-time employees for any month, include for such month a number of full-time employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120

EXAMPLE An employer with 40 part-timers who average 90 hours per month would have 30 FTEEs (40 x 90 = 3,600; 3,600/120 = 30) who must be added to the number of full-time employees when determining whether the 50-FTE threshold is met

Large Group Determination

(continued)

12

Effective January 1, 2014, PPACA requires “Large” employers to offer their full time employees (and their dependents) an opportunity to enroll in at least one plan with “minimum essential coverage” that provides minimum value and is affordable, or potentially pay a penalty

Proposed regulations provide that a large-employer will be treated as offering coverage to its full-time employees (and their

dependents) for a calendar month if, for that month, it offers coverage to all but 5%, or, if greater, 5 of its full-time employees

(19)

PPACA

Minimum essential coverage means any of the following:

•Government sponsored programs, such as oMedicare

oMedicaid

oChildren’s Health Insurance Program (CHIP) oTRICARE

•Employer-sponsored plan

•Plans in the individual market

•Grandfathered health plan coverage

•Other coverage

Large Group Shared

Responsibility (continued)

14

PPACA

Minimum Value Assessment

A health plan provides “minimum value” if the plan’s share of

the total allowed cost of benefits provided under the plan is

at least 60% of such costs

• Methods to determine “minimum value”

• Minimum Value Calculator

• Safe Harbor Checklist

• Actuarial Certification

(20)

PPACA

Affordability Assessment

Generally, if an employee’s share of the premium for self-only coverage for the lowest-cost plan exceeds 9.5% of household income for the taxable year, coverage is considered unaffordable Affordability Safe Harbors

• W-2 Rule: 9.5% of Box 1 W-2 wages

• Must be determined after year-end

• Rate of Pay Rule: 9.5% of

• Hourly rate x 130 hours, or

• Monthly salary

oEach as of the first day of plan year

• Poverty Line Safe-Harbor: 9.5% of federal poverty line for single individual ($11,490 for 2013)

• Equates to $90 per month

Large Group Shared

Responsibility

16

Shared Responsibility Penalty No Offer Penalty

• If employer does not offer minimum essential coverage to all full-time employees (and dependents)

• Dependent – employee’s child who is under 26 years of age (does not include spouse)

• Annual tax of $2,000 for each full-time employee (less the first 30 full-time employees)

• If at least one full-time employee obtains federally-subsidized

(21)

PPACA

Minimum Value/Affordability Penalty

• If an employer does offer minimum essential coverage to all full-time employees, but at least one full-time employee obtains federally-subsidized coverage through a public Exchange because the plan failed either the affordability or minimum value assessment

• Employer must pay an annual tax of the lesser of:

• $3,000 per subsidized* full-time employee, or

• $2,000 for each full-time employee (less the first 30 full-time employees)

oPenalty is calculated monthly

*Employee is only eligible for subsidy if cost exceeds 9.5% of household income

Large Group Shared

Responsibility (continued)

18

PPACA

Optional Look-Back Measurement Method for

Determination of Full-Time Employees

• Gives employers flexible and workable options and greater

predictability in determining full-time status

• Minimum standards to facilitate the identification of full-time

employees

• Employers can treat more employees as eligible for

coverage than would be required to avoid penalty

(22)

PPACA

Ongoing employee has been employed by an employer for at least one Standard Measurement Period

Standard Measurement Period

• Used to determine full-time status

• Employer determines length (at least three, no more than 12 consecutive months)

• Must be uniform for all employees; however, the different measurement periods may be used for

•Each group of collectively bargained employees covered by separate collective bargaining agreements

•Collectively bargained and non-collectively bargained employees

•Salaried and hourly employees

•Employees whose primary places of employment are in different states

Employer may change its measurement period for subsequent years, but generally not after measurement period has begun

Safe Harbor Ongoing Employees

20

Administrative Period

• Optional

• Allows time for employer to calculate status, notify

qualifying employees and handle enrollment

• Up to 90 days in length

• May neither reduce nor lengthen the measurement or

stability periods, or cause a gap in coverage

• Must overlap with prior stability period

(23)

PPACA

Stability Period

Immediately follows standard measurement period (and any applicable administrative period)

Employees employed on average at least 30 hours of service per week during the standard measurement period are treated as full-time employees during a subsequent stability period, regardless of the number of hours of service during the stability period, as long as he or she remains an employee

• Full-Time Employee

• Duration at least the greater of six consecutive calendar months or the length of the standard measurement period

• Not a Full-Time Employee

• Duration no longer than the associated standard measurement period

Safe Harbor Ongoing

Employees

22

PPACA

New employees are individuals who have worked less than one standard measurement period

New Full-Time Employees

Reasonably expected to average 30 hours of service per week

• Offer coverage before conclusion of employee’s initial three calendar months of employment

• If elected by employee, coverage must become effective by the 91st day of employment

oNo penalty

New Variable and Seasonal Employees

If employer uses the look-back measurement method for its ongoing employees, they may also use the optional method for new variable hour and seasonal employees

Fact and circumstance at start date cannot reasonably expect the period of employment at least 30 hours per week over the initial measurement period

(24)

PPACA

Initial Measurement Period

Used to determine if a new employee averages 30 hours of service per week

Start date is unique to each individual

• Begins on the employee’s start date, or

• The first day of the calendar month following the start date Employer may use both an initial measurement period of between three and 12 months and an administrative period of up to 90 days Initial measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date

• If employer complies with the requirements above, employer is not subject to shared responsibility penalty for failing to offer coverage to a variable hour and seasonal employee during the initial measurement period

Safe Harbor New Employee

24

Administrative Period Must not exceed 90 days in total

• Counted from the date of hire to the date the employee is first offered coverage, other than the initial measurement period

• If the initial measurement period begins on the first day of the first month of the first month following date of hire, the period between the employee’s date of hire and the first day of the next month must be taken into account in applying the 90-day limit on the administrative period

• If there is a period between the end of the initial measurement period and the date the employee is first offered coverage, that period must be taken into account in applying the 90-day limit on the administrative period

(25)

PPACA

Initial Stability Period

Employees employed on average at least 30 hours of

service per week during the initial measurement period are

treated as full-time employees during a subsequent stability

period, regardless of the number of hours of service during

the stability period, as long as he or she remains an

employee

• Immediately follows initial measurement period (and any

applicable administrative period)

• Stability period must be a period of at least six consecutive

calendar months that is no shorter in duration than the

initial measurement period (and any associated

administrative period)

Safe Harbor New Employee

26

PPACA

Employees determined not to be a full-time employee during

the initial measurement period, employer is permitted to treat

the employee as not a full-time employee during the stability

period that follows the initial measurement period

• Must not be more than one month longer than the initial

measurement period, and

• Must not exceed the remainder of the standard

measurement period (plus any associated administrative

period) in which the initial measurement period ends

(26)

PPACA

Employee Y works an average of 30 hours a

week during initial measurement period

Coverage offered 6/2015 thru 5/2016

Employer must test Employee Y again based on the period

October 15, 2014 through October 14, 2015

• First standard measurement period that begins after start

date

Variable Hour Employee

Safe Harbor Illustration

28

Variable Hour Employee

Safe Harbor Illustration

(27)

PPACA

Absence of Federal Tax Penalty Protection The Internal Revenue Service recently issued regulations that require written advice regarding tax matters to meet very detailed and comprehensive requirements before it can be relied upon by a taxpayer to avoid penalties that may apply if the tax benefits or results discussed in the document are disallowed. Compliance with these rigorous standards and requirements exceeds the scope of this

engagement. Consequently, the analysis and advice contained in this document regarding federal tax matters is not intended to be used, and may not be relied upon by you or your organization, for the purposes of avoiding any federal tax penalty.

Disclaimer

(28)

{

GASB 67 and 68 - Basic

}

Kris Ray, CPA

(29)

1. Background and Overview 2. Details of the requirements

3. Impact on employees participating in various types of pension systems

4. How to prepare 5. Final thoughts 6. Q&A

Agenda – Basic Session

2 Early 2009 GASB Issues Invitation to Comment June 2010 Preliminary views document issued June 2011 Exposure drafts Issued June 2012 Final standards issued 2013 Time to prepare 2014 GASB 67 required to be implemented 2015 GASB 68 Required to be implemented

(30)

GASB 67, Financial Reporting for Pension Plans

Years beginning after June 15, 2013 IMPACT:

• Stand alone plan f/s – timing of actuary report, new disclosures • Employer with a pension trust fund – timing of actuary report, new

disclosures

GASB 68, Accounting & Financial Reporting for Pensions (EMPLOYER)

Years beginning after June 15, 2014 IMPACT:

• Employer impact is not the same; depends on plan type • Generally, will impact both employers accounting and reporting • Does not impact funding!!

Effective Dates

4 June year end December year end Pension – FY2014 Employer – FY2015 Pension – FY2014 Employer – FY2015

This is a Big Deal!

GASB 67

• Defined benefit pension plans

• Single employer

• Agent multiple-employer

• Cost-sharing plans • Defined contribution plans

• Employers reporting a pension trust fund

GASB 68

(31)

• Not much, that is why I am here!

• Attended a few webinars, but feel there is much more to

learn

• Started talking to my colleagues

• Spent a lot of time researching and

discussing; I feel well prepared

How much have you heard or read

about GASB 67/68 to date?

6

Current:

Pension costs are recognized as the pensions are

funded (or how they should be funded, based on

the actuarially required contribution (ARC))

There is no liability reported if the government fully

funds it’s ARC (single-employer or agent plans) or

pays its contractually required contribution

(cost-sharing plan)

(32)

GASB 67/68:

Key conceptual shift in reporting pension liabilities

and expense under the economic resources

measurement focus from a “funding” approach to

an approach more focused on interperiod equity.

Current Approach vs. GASB

67/68

8

Theory:

• Pension costs are part of the employment

exchange, and should be recognized as the

employment services are rendered (not as they

are funded)

• The pension plan is the primary obligor for the

(33)

Accounting implications:

• Pension expense will be reported as employees earn their

pension benefits by providing services

• If the amount funded is less than this, the government-wide

statements and proprietary funds will report a net pension

liability

• Changes in pension liability will be immediately recognized

as pension expense or reported as deferred

outflows/inflows of resources depending on nature of

change

No significant changes to accounting for

pensions in modified accrual funds!

Approach Under GASB 67/68

10

GASB 67 – What has NOT changed?

• Measurement focus – Economic resources

• Basis of accounting – accrual basis

• Statement of Fiduciary Net Position – generally the same

• Statement of Changes in Fiduciary Net Position – generally

the same

GASB 67 – What HAS changed?

• Footnotes – new terminology, new disclosures

• RSI – significantly expanded

• Actuarial valuation timing – as of the plan’s year end!

• Actuarial assumption changes

(34)

GASB 68 – What has NOT changed?

• Hmmmm……..

GASB 68 – What HAS changed?

• Large liability to be recorded (most likely)

• Deferred inflows and outflows related to pensions

• Bigger income statement swings (potentially)

• ARC is no longer relevant to financial reporting

• Actuarial assumption changes

• Timing of actuary report

• More coordination with the plan

• Note disclosure changes

• RSI changes

Approach under GASB 67/68

12

“We expect the information not

only to give analysts a more

consistent and meaningful view of

pension liabilities and future

(35)

14

(36)

Employers will now record the NET pension liability on the full accrual statements.

These amounts will be measured as of the “measurement date”

Formula for Net Pension

Liability

16 TOTAL pension liability Plan Net Position NET pension liability

• Calculated by the actuary

• Similar to today’s actuarial accrued liability (BUT definitely

NOT the same)

• GASB significantly limits HOW the total pension liability will

be calculated

• Actuarial cost method

• Discount rate

• Measurement date

Total Pension Liability

TOTAL pension

(37)

PLAN NET POSITION = PLAN ASSETS – PLAN

LIABILITIES

• Assets are valued at FMV (not smoothed value!)

• All other amounts determined on same accounting basis

used by pension plan

Plan Net Position

18 Plan Net

Position

Plan:

Measured as of the plan’s year end

To accomplish this, the actuarial valuation may be performed

earlier (within 24 months and ROLLED FORWARD to plan’s

balance sheet date)

Measurement Date (of Net

Pension Liability)

TOTAL pension liability Plan Net Position NET pension liability As of plan’s year end; this may be calculated within 24 months, and

rolled forward

(38)

Employer:

• Preference as of a government’s balance sheet date

• If NOT as of the unit’s balance sheet date; no earlier than the end of the employer’s prior fiscal year

• Actuarial valuation

• Encourage valuation at measurement date

• If not, allow valuations up to 30 months and 1 day prior to the employer’s most recent year end

• Must update procedures to roll forward amounts to the measurement date

However, if there are new benefit changes or other significant changes, a new actuarial valuation may be required

Measurement Date (of Net

Pension Liability)

(39)

Employer Example

22 1. ACTUARIAL VALUATION DATE (OF TPL): *If not as of measurement date, as of date no more than 30 months (+1day) prior to FYE *Roll forward to measurement date 2. MEASUREMENT DATE:

*No earlier than end of prior fiscal year *Applies to BOTH TPL and plan net position

3. EMPLOYER’S FISCAL YEAR END (FYE)

Potentially three different dates to consider

Timing—Example

6/30/15 Employer FYE 6/30/14 6/30/13

(40)

Timing—Example

24 6/30/15 Measurement Date Employer FYE Prior FYE 6/30/14 6/30/13

From AICPA “An Overview of The New GASB Pension Accounting Standards”

(41)

Timing—Example

26 12/31/13 12/31/14 6/30/15 Measurement Date Actuarial Valuation Date Plan FYE Employer FYE Prior FYE 6/30/14 6/30/13 12/31/12 30 months + 1 day

Timing—Example

12/31/13 12/31/14 6/30/15 Measurement Date Actuarial Valuation Date Plan FYE Employer FYE 6/30/14 6/30/13 12/31/12 30 months + 1 day

(42)

Timing—Example

28 12/31/13 12/31/14 6/30/15 Measurement Date Actuarial Valuation Date Plan FYE Employer FYE 12/31/13 12/31/14 6/30/14 6/30/13 12/31/12 12/31/12 30 months + 1 day

Timing—Example

(43)

Timing—Example

30

Timing—Example

(44)

Three broad steps

1. Project benefit payments

2. Discount projected benefit payments to actuarial present

value

3. Attribute actuarial present value to periods employed

(past, present & future)

Methods and Assumptions

1. Generally, conform with Actuarial Standards of Practice

2. Fewer alternatives than in the past for GAAP reporting

purposes

3. For funding purposes, you may continue to use existing

actuarial methods and assumptions

Total Pension Liability

32

Everyone will use the same actuarial

methodology:

• The “entry age” actuarial cost method, and

• The “level % of payroll” basis for liability

measurement.

This means no more choice to use

projected unit credit, aggregate, etc.;

(45)

Discount rate (to be applied to

“present-value” of the projected benefit payment)

Single blended rate

• Long-term expected rate of return (LTeRoR), to

the extent that plan net position:

o

Projected to be sufficient to pay benefits

o

Plan assets expected to be invested using a

strategy to achieve that return

• Index rate for high-quality 20-year tax exempt

bond (AA/Aa or higher)

Discount Rate

34

(46)

36

Impact on pension expense: The change in the net

pension liability does NOT all get recognized as pension

expense immediately

Certain changes can be deferred (shown as deferred inflow

or outflow related to pensions)

• See table on next slide

(47)

CHANGE IN NET PENSION LIABILITY DUE TO: EXPENSE DEFD I/O 1. Employees work and earn more benefits X

2. Interest on the total pension liability X

3. Changes in total pension liability due to:

a) Actual economic & demographic changes differing from assumed

Amortized Over Service

Period b) Changing assumptions about economic &

demographic factors

Amortized Over Service

Period c) Changes in the terms of pension benefits X

4. Changes in amount of pension plan net assets due to:

a) Projected investment earnings X b) Actual investment earnings experience different than

assumed

Amortized Over 5

Years c) All other (receiving contributions, paying benefits, etc.) X

Income Statement Impact

38

ARC is no longer relevant for financial reporting

• But still need to comply with state law!

IF ARC is calculated under the new standards, it

will likely be higher than under current GAAP

• However, you can continue to calculate ARC under prior

parameters.

Coordination with actuary – plan and employer!

• Timing of roll forward procedures, if required

(48)

40

“Fitch believes the new GASB standards

will result in the reporting of

moderately weaker funded ratios and

more limited ability to spread the cost

of addressing the liability over time.

This in turn should increase public

pressure on decision-makers to reform

pensions in order to improve plans’

affordability, which we view

positively.”

FITCH, April 2013

Impact on employers –

(49)

Single-employer plans/single employer

Provide benefits to the employees of only one employer.

• Example: City of Anytown creates a pension system just for its

employees

Agent multiple-employer plans/agent employer

Provide benefits to more than one employer by pooling assets for investment purposes, but legally segregating the assets to pay benefits promised by individual employers. Essentially an agent plan is a collection of single-employer plans.

• Example: MERS, in Michigan

Cost-sharing multiple-employer plans/cost-sharing employer

Provide benefits to more than one employer by pooling the assets and obligations across all participating employers. As a result, plan assets may be used to pay the benefits of any participating employer.

• Examples: MPSERS, in Michigan

Types of Defined Benefit Plans

42

(50)

Liability measurement:

Current standards require liability for difference between the

ARC and the employer’s actual contributions

• In states where governments are legally required to

contribute to the ARC, it is rare to see a liability for a net

pension obligation today

GASB 68 — Net pension liability will be similar to today’s

UAAL

• 100% of NPL will be recognized by single employers

• Liability to be recorded on government-wide statements

• Allocation between governmental activities and

business-type activities

Employers with Single Employer

Defined Benefit Plans

44

Disclosures

• Already accustomed to disclosing unfunded pension

liabilities, actuarial assumptions, asset values, etc.

• New disclosures will be more voluminous, contain different

calculations, etc.

Valuations

• Process already in place for annual valuations

• Ensure actuarial valuation complies with GASB 68 – work

with actuary up-front on timing

(51)

46

Employers with Agent Multiple

Employer Plans

Similar transition issues as Single

Employer Plan in terms of:

• Liability measurement

• Disclosures

• Valuations

HOWEVER…

(52)

Employers need the following elements to record as of the measurement date:

• Total pension liability less fiduciary net position = net pension liability • Deferred outflows/inflows

• Pension expense

Potential Issues:

• Who controls census data – retirees versus actives?

• Audited statements for the Agent multiple-employer plan do NOT segregate each employer’s interest in the fiduciary net position • Allocation of fiduciary position reported by plan to employer is

unaudited

• Who will calculate the deferred outflows/inflows by employer?

Question: How does a participating employer determine and get

comfortable that these amounts as of the measurement date are accurate and verifiable?

Answer: Stay tuned for Part 2 of the GASB 67/68 session to find out!

Agent Multiple-Employer Plans –

Issues

48

(53)

Employers with Cost Sharing

Multiple Employer Plans

50 Current Standards GASB 68

Pension liability To the extent the contractually required contribution is not made

Net Pension Liability will be recorded Allocation of unfunded liabilities to individual employers No Yes Actuarial valuations by employer No No, but “proportionate” share calculations will be needed Disclosures – in general Minimal Substantial

Pension asset and liability disclosures by employer

No Yes

1. Begin by calculating the net pension

liability at the plan level

2. Calculate Employers “Proportionate

share”

o

GASB encourages the estimation of expected

(54)

Cost Sharing Plan Pension Benefits — Estimated GASB 68 Liability

(*see caveats on next slide)

Total Pension Liability (TPL) as of 9/30/x1 $ 60,927,000,000

Actuarial Value of Total Plan Net Position as of 9/30/x1

$ 43,294,000,000

Net Pension Liability (NPL) as of 9/30/x1 – plan level

$ 17,633,000,000 (A)

Total Covered Payroll for Year Ended 9/30/x1 _X _{$ 8,845,000,000} Estimated XYZ Entity Covered Payroll for

Year Ended 6/30/x2 _Y _$ _20,000,000 Covered Payroll as a Percentage of Total

Covered Payroll – PROPORTIONATE SHARE _Y/X _0.23%_(B) Estimated pro-rata share of Net Pension

Liability as of 6/30/x2 (NPL x proportionate

share of covered payroll) _{$ 39,871,114} _A*B

Cost-Sharing Employers

52

• The

allocation method

chosen for this

calculation was the proportion of covered payroll.

• This may be acceptable, but the GASB allows

any method that measures the proportionate

relationship of the individual employer to the

aggregate of all employers.

• They encourage the use of projected long-term

contribution efforts of each employer as the

(55)

Cost sharing employers expense will

include:

• Proportionate share of the plan’s pension

expense

• Amortization of deferrals including:

• Net effect of annual changes in the employer’s

proportionate share

• Annual differences between the employer’s

actual contribution and its proportionate share

Cost-Sharing Employers

54

(56)

Defined Benefit PLANS themselves

• Earlier implementation

• Same provisions related to assumptions, methodology, etc.

as it relates to actuarial projections

• Financial statement reporting similar to GASB 25

• DROP balances – not a liability, but require disclosure

• Much more significant note and RSI disclosures

• Agent/cost sharing plans – Need to consider employers’

needs (timing, verifiable data, etc.)

Pension Plans (GASB 67)

56

Defined Contribution Plans

• Accounting hasn’t changed – liability for the

difference between required contribution and

amounts actually contributed

• Similar disclosures as under GASB 25

(57)

Very significant footnote disclosure changes

(the illustrative model takes 5 pages!):

• Benefit terms

• # of participants

• Contribution requirements

• Assumptions

• Support for the discount rate

• Details of the changes in the net pension liability

Footnote Disclosure Changes

58 58

Likely these will be very time-intensive to compile!

Plan accordingly!

• 10 years of changes in net pension liability

• 10-year comparison of funding status

• 10 years of ARC v. actual contributions

Expanded Required

Supplementary Information

(58)

• Report as adjustments to prior periods

• Restate all prior periods reported

• Deferred inflows/outflows – restate if practical; otherwise,

assume zero beginning balance

• When single statements are issued, the prior year MD&A

comparative information will still need to be updated

• RSI schedules prospective if information not initially

available

Transition

60

What Changes will I see IF I AM administering a

single employer defined benefit plan when gasb

67 is implemented, but GASB 68 will not be

implemented until the following year?

• Plan financial statements will be very similar to current

statements (as will the pension trust fund stmts. in the

employer’s financial stmts.)

• There is no GAAP requirement for a stand-alone

statement

• Expanded disclosures and RSI will be implemented

• There is no net pension liability included in the plan

(59)

• Better measure of interperiod equity (the cost of providing

services will be matched better with the periods in which

the employment services were rendered)

• Higher volatility – possibly very significant

• These rules will not be required to be used for funding –

just for financial statement measurements



ARC is no longer relevant for accounting

purposes



Expect similar changes to OPEB (eventually!)

Impact of these Changes

62 62

“Fitch does not expect these enhancements to result in a

significant level of rating changes, as we believe the

overall plan information already provides sufficient basis

for analytical judgment and evaluation of pension risks to

participating governments.

Fitch believes the figures to be required under the new

GASB standards will be far more reliable and consistent

for local governments than an estimate based on current,

limited information.”

(60)

Governments, actuaries, and auditors will incur additional

time and cost to comply with these new standards.

• Start planning now!

Impact will be felt far more by cost-sharing plans and their

employers, because of the consideration that will go into

calculating and reporting each government’s share of the

collective net pension liability.

Changes are not suggestive of changes that governments

will need to make in their pension contribution practices.

GASB Implementation Guide Pension Guidance

• GASB 67 Implementation Guide – available NOW (plan

level guidance)

• 1Q14 – Employer guidance under GASB 68

In Conclusion

64

(61)

(62)

ETHICAL CALISTHENICS

Getting Fit and Staying Fit

Presented by:

Craig W. Lange

Kirk, Huth, Lange & Badalamenti, P.L.C.

19500 Hall Road, Suite 100

Clinton Township, Michigan 48038

(586) 412-4900



Right vs. Wrong?

(63)



Smell Test

Source: Kidder, Rushworth M., How Good People Make Tough Choices – Resolving the Dilemmas of Ethical Living (Simon & Schuster 1995).



Front Page Test

(64)



“Mom” Test



Smell Test



Front Page Test

(65)



Truth vs. Loyalty



Short-term vs. Long-term



Individual vs. Community



Justice vs. Mercy

(1)

What result provides the greatest good for

the greatest number?

(2)

What rule or standard would best apply for

all cases in the future?

(3)

What would we want to happen if the

situation was reversed?

(66)

(1)

Recognize the moral issue

(2)

Determine the actor

(3)

Gather facts

(4)

Test for right vs. wrong issues

(5)

Test for right vs. right paradigms

(6)

Apply the resolution principles

(7)

Investigate options

(8)

Make the decision

(9)

Revisit and reflect

ETHICAL CALISTHENICS

Getting Fit and Staying Fit

Presented by:

Craig W. Lange

Kirk, Huth, Lange & Badalamenti, P.L.C.

19500 Hall Road, Suit 100

(67)

EXERCISING FOR ETHICAL FITNESS

Getting Fit and Staying Fit

Problem #1

The City’s budget is tight -- extremely tight. The City Manager has directed that next

year’s budget eliminate completely the longstanding fund balance assignment for capital

improvements, and the amount be used to fund the current year “salaries” line item. The Finance

Director has advised against this action, as the City’s aging infrastructure concerns him; capital

outlay has been deferred for five years, and he believes the lack of capital replacement or

preservation will really hurt the City in the long run. You have heard him articulate real concerns

about this budget transfer. Labor contract negotiations are ongoing, however, and these monies

will likely be needed for salary increases. At the Board meeting, the Board asks the Finance

Director what concerns, if any, he has for the proposed budget. The City Manager expects his

support. The Finance Director responds that he has no issues whatsoever. You are the Assistant

Finance Director, and have accompanied him to the meeting. A Board member asks for your

thoughts. What do you say?

EXERCISING FOR ETHICAL FITNESS

Getting Fit and Staying Fit

Problem #2

(68)

EXERCISING FOR ETHICAL FITNESS

Getting Fit and Staying Fit

Problem #3

The “new majority” on the Board has painted a “bulls eye” on the back of the Building

Director because of his perceived political support of the “old majority”. The “new majority”

has made it clear that they want the Building Director “gone!” As Finance Director, they have

asked you for an analysis (wink! wink!) supporting the conclusion that the Township does not

need a Building Director -- the work can be performed by the two remaining employees, without

the need for a Director! Actually, they do need a Building Director. How do you conduct your

analysis? How will you respond? Ethical dilemma or moral temptation? What paradigms, if

any, apply?

EXERCISING FOR ETHICAL FITNESS

Getting Fit and Staying Fit

Problem #4

(69)

EXERCISING FOR ETHICAL FITNESS

Getting Fit and Staying Fit

Problem #5

(70)

{

Change Management.

}

(71)

2

Activity 1: Airplanes

Change management is an

approach to

shifting/transitioning from a

current state to a desired future

state.

(72)

4

Natural Responses to Change

The Nature of Change

Change is CONSTANT and accelerating

due to…

• New technology

• Global competition

(73)

Factors that Impact the Response to

Change

Surprise

Magnitude

Speed

Direct personal impact

The Dual Aspects of Change

‘Change’ is a Ying Yang concept.

Chinese philosophy is based on the

premise that things are never black or

white.

They are a balance of positive and

(74)

The Transition Curve

PERFORM

A

NCE

TIME

‘THE ENDING’ ‘THE NEUTRAL ZONE’ ‘THE BEGINNING’

LOOKING BACK LOOKING FORWARD

Reactions to Change

AVOIDANCE RESISTANCE INTEGRATION EXPLORATION PAST FUTURE FOCUS ON ENVIRONMENT

(75)

10

Strategies for Change Management

Managing Communication

Walk the Talk Listen Recognize

Provide Focus Connect People to the Business Articulate Vision,

(76)

(77)

• When the reason for the change is unclear.

• When it threatens to modify established patterns

of working relationships between people.

• When communication about the change is not

sufficient.

• When the benefits/rewards are not seen as

adequate for the trouble involved.

Resistance to Change

14

Tips for Successful Change:

• Communicate a clear vision

• Gain trust by doing what you say and saying

what you do!

• Increase Urgency

• Build a Guiding Team: Involve interested

parties in planning of change

• Focus on positive aspects of change

• Address the people needs and concerns

• Handle difficult situations openly and tactfully

(78)

Identifying Areas of Control and

Influence

“Do not let what you cannot do interfere with what you can do.”

John Wooden

I can

influence

I can’t

control

I can

control

“Incredible change happens in your

life when you decide to take control

of what you do have power over

instead of craving control over what

you don’t.”

(79)

Thank You!

Contact Information

Christine Fleis, M.A.

Management Consultant Manager 248.223.3589

[email protected]

Chad Perry, M.A.

Senior Management Consultant 248.223.3562

(80)

{

GASB 67 and 68 – Advanced.

}

(81)

1. Potential issues with agent multiple employer plans 2. Potential solutions!

3. Potential issues with cost-sharing multiple-employer plans

4. Potential solutions!

5. Considerations for PLANS and EMPLOYERS 6. Example financial statements calculations 7. Q&A

Agenda – Advanced session:

3

(82)

Agent Plans – potential issues

5

Agent plans – potential issues

(83)

Agent plans – AICPA proposed

recommendations

7

Example Combining Schedule of

Changes in Fiduciary Net Position

(by employer)

Example Agent Multiple-Employer PERS Combining Schedule of Changes in Fiduciary Net Position

Year ended June 30, 2015

Employer 1 Employe r 2 Employer 3 Total Additions: Contributions: Employer 86,252,000 34,500,000 51,751,000 172,503,000 Member 32,662,000 13,065,000 19,597,000 65,324,000 Investment income: 80,965,000 20,347,000 37,112,000 138,424,000 Total additions 199,879,000 67,912,000 108,460,000 376,251,000 Deductions:

Pension benefits, including refunds 384,635,000 184,352,000 228,356,000 797,343,000 Administrative expenses 4,716,000 1,886,000 2,829,000 9,431,000

Total deductions 389,351,000 186,238,000 231,185,000 806,774,000 Net increase (decrease) (189,472,000) (118,326,000) (122,725,000) (430,523,000)

Net position restricted for pension benefits:

(84)

Agent Plans – AICPA Proposed

recommendations

9

(85)

Information required from MERS:

• Two-fold Purpose:

• To calculate balances for financial reporting purposes

• To give your auditors assurance

• Timing of data

• MERS is a 12/31 year end and will implement GASB 67 12/31/2014

Agent Plans - Participants in

MERS

11 Employer year end GASB 68 implementation date Report information from MERS as of: December 12/31/2015 12/31/2014 March 03/31/2016 12/31/2015 June 06/30/2015 12/31/2014 September 09/30/2015 12/31/2014

Data needed from MERS:

• For internal financial reporting purposes:

• Actuary report for your government that includes net

pension liability, deferred outflows/inflows, pension

expense and discount rate calculation

• Break out of Changes in Net Position (contributions,

investment income, benefits, expenses) for your

government only

• For your auditor:

• Plan auditor’s report on allocation of inflows and outflows

• Plan auditor’s assurance on the Changes in Net Position

• Plan auditor’s testing on census data controlled by the

plan

(86)

13

Cost sharing plans

(87)

Cost sharing plans – potential issues

15

(88)

Example Schedule of Employer

Allocations

17

Cost sharing plans – AICPA

proposed recommendations

(89)

Example Schedule of Employer

Pension Amounts

19

Cost sharing plans – other

recommendations and observations

(90)

21

Implications for the PLAN

NPL must be calculated as of the beginning of the year (as well as end of year) – TWO OPTIONS

• Actuarial valuation can be done as of PLANs year end to determine both BOY and EOY NPL

• Actuarial valuation can be done as of PLANs prior year end and then a roll forward done to the EOY

(91)

• Collectability of employer

contributions (Paragraph 17 of GASB

67)

• Timing issues – actuary, auditor, plan

• Additional time to prepare footnote

disclosures

Other Considerations at the

PLAN level

23

(92)

• Timing issues – actuary, auditor, plan • One actuarial valuation or two?

• Disclosure of DROP plans

• Allocations to BTA

• Deferred outflows or resources for employer

contributions made subsequent to the measurement date of the NPL but before the end of the employer’s fiscal year

• If ARC is being contributed (and expect to continue), do

you need to still need to officially calculate the discount rate?

• Impact on open versus closed amortization on this calculation

• Cost-sharing plans – involvement in assumption setting

Considerations at the

EMPLOYER level

25

(93)

Large liability (typically) to be recorded within

full accrual funds

• Governmental-activities – may go into deficit net position

• Business-type activities – liability is shown as noncurrent

so impact on bond covenants may not be significant

• Most significant impact for cost-sharing employers who

aren’t used to showing employer-specific unfunded

liabilities, even in the footnotes

Income statement swings could be more

significant

• Amortization of investment earnings different than

assumed

Financial statement impacts

-overview

27

Step 1 – Gather Data

Pension plan financial statements

Actuarial report

(94)

County’s Employee Retirement

System

29

From the pension plan’s f/s

(95)

County’s Net Pension Liability

31

A B

A – From the RSI schedule – total pension liability end of year B – From the balance sheet – Plan net position end of year