GFOA Summer Conference GASB Update

1. GFOA Summer ConferenceGASB Update August 8, 2014

2. Effective Dates – Years beginning after • December 15, 2012 (June 30, 2014) • Statement 65 – Items Previously Reported as Assets and Liabilities • Statement 66 - Technical Corrections - 2012 - an amendment of GASB Statements No. 10 and No 62 • June 15, 2013 (June 30, 2014) • Statement 67 – Financial Reporting for Pension Plans - an amendment of GASB Statement No. 25 • Statement 70 - Accounting and Financial Reporting for Nonexchange Financial Guarantees • December 15, 2013 (June 30, 2015) • Statement 69 - Government Combinations and Disposals of Government Operations • June 15, 2014 (June 30, 2015) • Statement 68 – Accounting and Financial Reporting for Pension Plans - an amendment of GASB Statement No 27 • Statement 71 - Pension Transition for Contributions Made Subsequent to Measurement Date - an amendment of GASB Statement No. 68

3. GASB No. 65 Items Previously Reported as Assets and Liabilities

4. Background • Certain items previously identified as assets and liabilities are not really considered to be assets or liabilities • The use of the concept of deferred inflows and outflows was established to handle these items • This statement establishes those items which are now to be recast as deferred inflows and outflows

5. Deferred Inflows/Outflows • Previously restricted only to use in hedging and Service Concession arrangements • Deferred Outflows • A consumption of net position that is applicable to a future accounting period (e.g. dfd loss on refunding) • Shown as a separate category below assets • Deferred Inflows • An acquisition of net position that is applicable to a future accounting period (e.g. Unavailable revenue in a governmental fund) • Shown as a separate category below liabilities

6. Areas of Specific Guidance • Refunding of Debt • Nonexchange transactions • Sales of Future Revenues • Debt issuance costs • Leases • Acquisition costs related to insurance activities • Lending activities • Mortgage Banking activities • Regulated Operations • Revenue recognition in governmental funds • Use of the term Deferred • Major Fund criteria - effects

7. Specific Guidance • Debt refunding • Gain or Loss from a refunding resulting in a defeasance • Deferred Inflow – Gain • Deferred Outflow - Loss • Nonexchange transactions • Deferred inflows when resources are received or reported as a receivable before: • The period for which property taxes are levied • The period when resources are required to be used or first permitted • Deferred outflows are reported for resources received before time requirements are met, but eligibility requirements have been met

8. Specific Guidance (continued) • Debt Issuance costs • Report as a period expense when incurred, no longer amortized over the life of the debt • Sale of Future Revenues • Transferor reports a deferred inflow for resources in both the government-wide and fund financial statements • Only exception is found in GASB 48, para. 14 and has to do with revenue not previously recognized due to uncertainty of inability to measure • Intra-entity sales - recognize as deferred inflow and outflow until all revenue recognition criteria met(GASB 48, para. 15)

9. Specific Guidance (continued) • Leases • Operating lease – lessor • Record initial direct costs (acquisition, legal, etc) as a period cost • Sale/-Leaseback transaction • Gain/loss on sale/leaseback should be recorded as either a deferred inflow or outflow, as applicable • Revenue recognition in Governmental Funds • Revenue not recognized because of availability criteria should be reported as deferred inflows (e.g. property taxes)

10. Specific Guidance (continued) • Use of the term Deferred in GASB financial statements • Limited only to use in connection with “Deferred Inflows” and “Deferred Outflows” • Major Fund Criteria • Utilize deferred Outflows as part of assets and deferred inflows as part of liabilities in the calculations in determining major funds

11. GASB No. 66an amendment of GASB No. 10 and 62 Technical Corrections – 2012

12. Fixed… • GASB No. 54, removed the limitation on using general fund or internal service fund for risk financing activities • GASB No. 62, 13, and 48. Clarified language on issues related to: • Operating leases • Recognition of premium or discount on purchase of loans • Servicing fees for receivables that have been sold

13. GASB No. 67 Financial Reporting for Pension Plans

14. Scope and Applicability • Replaces previous guidance under GASB No. 25, Financial Reporting for Defined Pension Plans and Note Disclosures • Establishes financial reporting standards for pension plans administered through trusts in which: • Contributions to the plans and related earnings are irrevocable • Plan assets are dedicated to providing pensions to plan members in accordance with benefit terms • Plan assets are legally protected from creditors of employers, nonemployer contributing entities and plan administrators • Applicable for defined benefit plans and defined contribution plans • Does not include OPEB plans

15. Defined Benefit Pension Plans • Recognition, measurement and presentation of the financial statement amounts generally similar to current guidance • Incorporates deferred outflows of resources and deferred inflows of resources, where applicable

16. Defined Benefit Pension Plans (continued) Required Financial Statements • Statement of Fiduciary Net Position • Assets + Dfd Outflows – Liabilities – Dfd Inflows = Fiduciary Net Position • Statement of Changes in Fiduciary Net Position

17. Defined Benefit Pension Plans (continued) • Notes to the Financial Statements: • Plan description • Allocated insurance contracts excluded from plan assets • Plan investments, including investment policy, determination of fair value, annual money-weighted rate of return and identification of investments that represent 5% or more of plan net position • Receivables - terms of any long term contracts for contributions to the plan • Deferred retirement option program (DROP) balances • Policy for reserves of plan net position

18. Defined Benefit Pension Plans (continued) • Notes to the Financial Statements: • Components of the net pension liability, including • Total pension liability • Pension plan’s fiduciary net position • Net pension liability • Pension plan’s fiduciary net position as a percentage of total pension liability • Significant assumptions used to measure the total pension liability • Date of actuarial valuation and if applicable, disclosure that roll forward procedures were used to roll forward the total pension liability from the actuarial valuation date to the plan’s fiscal year end

19. Defined Benefit Pension Plans (continued) • Required Supplementary Information: • 10 year schedule of • Changes in net pension liability • Net pension liability • Contributions • Annual money –weighted rate of return • Encouraged to present all years retroactively in implementation year • If retroactive information is not available for all 10 years, only include those years where information is available in transition year and until 10 yrs of such information is available • Notes to the Required Schedules: • Significant methods and assumptions used in calculating the actuarially determined contributions

20. Schedule of Changes in Net Pension LiabilityLast 10 Fiscal Years Schedules of Required Supplementary Information SCHEDULE OF CHANGES IN THE SCHOOL DISTRICTS’ NET PENSION LIABILITY Last 10 Fiscal Years

21. Schedule of Net Pension LiabilityLast 10 Fiscal Years SCHEDULE OF THE SCHOOL DISTRICTS’ NET PENSION LIABILITY Last 10 Fiscal Years (Dollar amounts in thousands)

22. Schedule of ContributionsLast 10 Fiscal Years SCHEDULE OF SCHOOL DISTRICTS’ CONTRIBUTIONS Last 10 Fiscal Years (Dollar amounts in thousands)

23. Schedule of Investment ReturnsLast 10 Fiscal Years SCHEDULE OF INVESTMENT RETURNS Last 10 Fiscal Years

24. Defined Benefit Pension Plans (continued) • Net Pension Liability • Total pension liability, net of plan’s fiduciary net position • Measurement of Total Pension Liability • Timing and frequency of actuarial valuations • As of plan’s most recent fiscal year end or • The use of update procedures to roll forward to plan’s most recent fiscal year end from actuarial valuation • Actuarial valuation date can be no more than 24 months prior to plan’s fiscal year end

25. Defined Benefit Pension Plans (continued) • Measurement of Total Pension Liability • Discount rate • Long term expected rate of return on investments that are expected to be used to finance payment of benefits, to the extent that net position is sufficient to make projected benefits and assets are invested using a strategy to achieve that return, • Yield or index rate for 20 yr, tax exempt general obligation municipal bonds with an average rating of AA/Aa or higher to the extent the conditions used for the long term expected rate of return are not met. • Actuarial cost method • Entry age actuarial cost method should be used to attribute the actuarial present value of projected benefit payments to periods

26. Defined Contribution Plans • Footnote disclosures should include: • Identification of the pension plan as a defined contribution pension plan • Classes of members covered • Number of plan members • Participating employers for multiple-employer plans • Nonemployer contributing entities, if applicable • The authority under which the plan is established or may be amended.

27. Additional Resources • GASB Toolkit (available at the GASB website) • Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans • Podcast discussing the types of pension plans affected by Statement 67 and most significant changes • Article on the key implementation issues • Summary and Full Text of Statement 67

28. GASB No. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

29. Background • Investors are looking for more credit enhancements and assurances on obligations • Minimize the possibility of nonpayment • Government often provide guarantees and receive guarantees for free • Belief nonpayment is not likely • Currently, a liability is recorded when • It is probable the government will be required to pay and amount can be reasonability estimated

30. Scope and Applicability • Government provides a financial guarantee as a nonexchange transaction • Government receives a financial guarantee as a nonexchange transaction • Key considerations • Three legally separate entities (component units qualify) • Not deemed guarantees for this statement • Withholding or garnishing revenues • Pledges of future revenues • Joint-and-several obligations

31. Three Legally Separate Entities

32. Government as the Grantor • Assess the issuer’s ability to pay using qualitative factors • If the government is more likely than not required to pay the issuer’s debt, then “book it” • More than 50% likelihood • Book - • The discounted present value of expected cash flows as the result of the guarantee, or • If cash flows are within a range, the discounted present value of the minimum expected cash flows (low part of the range)

33. Qualitative Factors • Bankruptcy or financial reorganizations • Breach of debt contract • Covenants • Coverage ratios • Default • Other financial difficulty indicators • Loss of major revenue source • Debt holder concessions • Using earmarked funding to pay debt

34. “Book It” • Journal entry • DR: Expense/Expenditures • CR: Nonexchange Financial Guarantee • Government-wide Financial Statements, and • Fund Financial Statement to the extent the liability is normally expected to be liquidated with expendable available financial resources.

35. Government as a Guarantor to a Group • You could analyze individually, or • You could analyze as a group using qualitative factor of the group - • Historical trends • Economic factors • Etc. • May book a liability similar to an allowance on bad debt, historical trends

36. Practical Timing Issue • The process should be ongoing and the books and records should be adjusted when the government becomes more likely than not to pay the debt of the issuer.

37. Disclosures

38. Government as Issuer • Footnote disclosure explaining the guarantee • If the government is required to repay the guarantor, then the liability should be reclassified as a liability to guarantor when the guarantor begins to pay the debt. • If the government is legally released from the debt, a revenue is recognized for guarantor’s assumption of the liability.

39. Disclosure

40. Intra-Entity • Primary government guarantees a blended component unit’s debt • Blended component unit guarantees a primary government's debt • Blended component unit guarantees another blended component unit • A receivable should be booked in the amount of the liability booked by the guarantor

41. GASB No. 68 Accounting and Financial Reporting for Pension Plans

42. Background • Part of the effort which goes back to GASB 34 to make government statements more usable, comparable and on par with the corporate world • Investors understand full accrual accounting and get confused with multiple levels of government reporting • Gives a better perspective as to both financial position and financial condition

43. Scope and Applicability • Applies to: • Employers in single-employer and agent multiple-employer defined benefit plans • Employers in cost-sharing plans • Special funding situations • One government makes payments on behalf of another • Employers in defined contribution plans

44. Defined Benefit Pensions • Employer liability • Current: Difference between the annual required contribution (ARC) and actual contributions = Net pension obligation • Only record a liability if required funding not made • New: Difference between the total pension liability and the fiduciary net position = Net pension liability • Record net liability of the governmental entity • Measured as of a date no earlier than the end of the employer’s prior fiscal year (measurement date)

45. Defined Benefit Plans (continued) • Changes in the pension liability – • Service cost, interest on the pension liability and changes in benefit terms • Recorded as pension expense immediately • Changes in economic and demographic assumptions and differences between economic and demographic assumptions and actual experience • Amortized over a closed period equal to the average remaining service period for plan members • Current portion recorded as pension expense • Remaining portion recorded as deferred outflows or deferred inflows of resources

46. Defined Benefit Plans (continued) • Changes in the pension liability (continued) – • Differences between expected and actual rates of investment returns • Amortized over a closed 5 year period (including current period) • Current portion recorded as pension expense • Remaining portion recorded as deferred outflows or deferred inflows of resources • Employer contributions made subsequent to the measurement date of the net pension liability are recorded as deferred outflows of resources

47. Defined Benefit Plans (continued) • Actuarial valuations • Required at least every two years • Total pension liability should be determined by • An actuarial valuation as of the measurement date which must be within 1 year and 1 day of the report date or • The use of update procedures to roll forward from the actuarial valuation to the measurement date no more than 30 months and 1 day before employers year end • Entry age method only • Consistency –multiple methods no longer accepted • No tie to actuarial method used for funding • Service cost determined as a percentage of pay

48. Timing of Measurement of Total Pension Liability Deferred Outflows of Resources Pension Expense (measurement period) Employer Prior Year-End Plan Current Year-End Plan Prior Year-End Employer Current Year-End Measurement Date June 2014 December 2015 December 2014 June 2015 • Measurement date will most likely correspond to year-end of plan. Employer contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer’s fiscal year should be recognized as a deferred outflow of resources.

49. Example – Impact of Using Prior Year Measurement Date Deferred Outflows of Resources Pension Expense (measurement period) Employer Prior Year-End Employer Current Year-End Plan Year-End Plan Year-End Measurement Date June 2013 June 2014 June 2015

50. Example – Impact of Using Current Year Measurement Date Pension Expense (measurement period) Employer Prior Year-End Employer Current Year-End Plan Year-End Plan Year-End Plan Year-End Measurement Date June 2014 June 2015 June 2013