AZ CPA January/February 2022
Three Guiding Principles in DEI Strategy
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AZ CPA The Arizona Society of Certified Public Accountants Oliver Yandle Haley MacDonell
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AZ CPA JANUARY/FEBRUARY 2022
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Jessica Estrada Glen Evans Tabitha Fox David Gephart Barbara Gonzalez James McGettigan Lauren Murro Eugene Park Megan Romo Gidget Slater Christopher Tyhurst
Immediate Past Chair Ginny DeSanto AICPA Council Members Mike Allen
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Chapter Presidents Northern Chapter James Shankland Southwest Chapter Helen Greenwell North-Central Chapter Gidget Slater
AZ CPA is published by the Arizona Society of Certified Public Accountants (ASCPA) to provide information, news and trends to the accounting profession. It is distributed six times a year as a benefit to ASCPA members. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA. Arizona Society of CPAs 4801 E. Washington St., Suite 180 Phoenix, AZ 85034-2040 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 www.ascpa.com
Volume 38 Number 1
AZ CPA
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January/February 2022
Features
Three Guiding Principles in DEI Strategy
Three Guiding Principles 9 in DEI Strategy
By Haley MacDonell
onnect Asks: Communicating 13 CWith Text
By Haley MacDonell
ASB: Who We Are, What We 16 GBelieve and Where We Are Going
Columns & Departments Chair’s Message by Thomas F. Duensing, CPA
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By Joel Black and Alan Skelton
Member News
7
in Arizona 19 Pre-Paying Pension Debt By Rushda Mustafa
Classifieds 26 Quick Quiz
27
elping Your Client Navigate 22 HLong-Term Care Insurance Rate Increases By Maryglenn Boals
4801 E. Washington St., Suite 180 Phoenix, Arizona 85034-2040 www.ascpa.com
JANUARY/FEBRUARY 2022 AZ CPA
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ASCPA Chair’s Message Embracing DEI There are many issues facing CPAs today. From tax law changes to technology issues to attracting and retaining talented staff, the role of a CPA certainly goes well beyond what I learned in school. A CPA isn’t simply a technician. We are a profession that comes with obligations to our clients, our staff and the community.
Thomas F. Duensing, CPA Chair, Arizona Society of CPAs Interim Deputy City Manager Chief Financial Officer, City of Tempe
I would like to discuss an issue that has been gaining traction for several years and is important to me personally: diversity, equity and inclusion (DEI) in the workplace. The role and definition of DEI in the workplace is complicated and evolving, but I’ll start with simple definitions of each term that should have meaning to us all. In the spirit of workplace DEI, Merriam-Webster defines each term as follows: • Diversity is the state of having people who are different races or who have different cultures in a group or organization. • Equity is the fairness or justice in the way people are treated. • Inclusion is the act or practice of including and accommodating people who have historically been excluded, for example, because of their race, gender, sexuality or ability. In a recent ASCPA planning meeting, there was much discussion surrounding this issue. Two of the interrelated ASCPA core values are “integrity and ethics guide us” and “diversity and inclusion is our ongoing commitment.” These values are part of what guide the Society. So, why are DEI efforts gaining so much traction and becoming so important to organizations? While this subject can sometimes be difficult to discuss and can certainly stir up emotions, it is imperative that we understand the concept and the impact to our businesses. In my view, there is the business case of implementing DEI measures and the moral case. Before we can implement change, it is imperative that we understand the issues and embrace the importance of change. DEI programs are not about reaching quotas in our organizations. It is about organizational strength and integrity. A study by McKinsey & Company and The Society for Human Research Management found that organizations that exhibit gender and ethnic diversity are more likely to outperform less diverse organizations. Companies with greater ethnic and racial diversity outperformed companies whose demographics matched the national average, and similar results were found for companies with greater gender diversity. Organizations that embrace diverse and inclusive environments tend to have higher employee satisfaction levels, which translates into greater business success. Moving beyond the business case, we are all leaders. As business and community leaders, I feel I should believe in the values of personal freedom, human dignity and equal rights under the law, and I hope you would agree. These are our equal rights and freedoms, at a core level. Believing in this change is a start. Implementing strategies to effectuate change is simply the right thing to do. There are resources available to your organizations to guide you through creating and maintaining an effective DEI plan. You all have an incredible opportunity to make a difference as leaders and role models in this state. For that, I remain optimistic that we will do our part in this critical endeavor. l
Respectfully, Tom Duensing
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Member News Casey J. Savatski, CPA of Insight Enterprises, Inc. graduated from the American Institute of Certified Public Accountants Leadership Academy.
Randy G. Brammer, CPA of Wallace, Plese + Dreher, LLP received the Construction Financial Management Association Best Under the Sun Associate Member award.
Roman H. Kepczyk, CPA director of firm technology strategy at Right Networks was named in Accounting Today’s Top 100 Most Influential People in Accounting.
Bradley J. Preber, CPA CEO of Grant Thornton, was named in Accounting Today’s Top 100 Most Influential People in Accounting.
Get New Clients List your firm or update your firm information listed on the ASCPA Find a CPA directory. Please log in to the website and visit www.ascpa.com/cpareferral to register or to update your account.
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Three Guiding Principles in DEI Strategy By Haley MacDonell
Thank you to Deloitte for its generous contribution of $5,000 to the ASCPA’s diversity, equity and inclusion programs. Deloitte is committed to generating more advisory, auditing and tax career opportunities and leadership pathways for the next generation of certified public accountants (CPAs) through Making Accounting Diverse and Equitable (MADE). MADE represents a bold vision for the accounting profession, both in terms of increasing racial and ethnic diversity, and helping students of color see and realize their future in business through the prism and possibilities of accounting. Consumers and aligned social movements have demanded change in the organizations they support. In response, businesses across sectors responded and recalibrated to prioritize diversity, equity and inclusion (DEI). Accounting, including the CPA profession, continues to have a disparity in diversity. A minority – defined as a distinct group that coexists, but is often subordinate to, a more dominant group – includes racial and ethnic groups, the LGBTQ+ community and people with differing abilities. According to the American Institute of Certified Public Accountants, these groups only represent 14% of CPAs.
“Accounting is a profession that not many minorities think is right for them,” Ken Udenze, a managing partner at Deloitte LLP, explained. “We have seen a seismic shift in corporate America: a shift where people are willing to talk about [DEI].” It may be that negative stereotypes dissuade people entering the workforce or changing careers from entering the profession. They may lack a personal connection to the idea of the job, a connection others may have through a friend or family member in accounting. Additionally, becoming a CPA has a fifth-year education requirement. After earning a degree in accounting, pursuing the designation requires additional resources, including funding, that may not be available. Continued on next page...
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Deloitte is one firm that has made this challenge a priority. In the last year, the organization released its first transparency report, detailing the data behind the workforce in an effort to inform future decisions and create accountability. As part of this reaffirmed commitment to DEI through a $75 million investment, the firm announced Making Accounting Diverse and Equitable (MADE) program in summer 2020 to support bridging the gap in accounting around the fifth-year requirement. This pledge includes MADE, which provides scholarships to minority students pursuing the CPA designation. “You tackle one layer of education, and [the CPA designation] becomes an obstacle,” Udenze continued. “MADE says don’t worry about the fifth year.” While diversity and inclusion have been in the corporate spotlight for some time, equity is a new addition to the movement that seeks to recognize individual experiences within a profession. Udenze views this as a new wave of DEI. “Equality means not locking anyone out, but welcoming everyone in,” Udenze explained. “You let everybody into the restaurant, but some of them are vegetarians. Some of them have dietary needs. I assume you want everyone to have a good meal and a good experience. That’s equity. Let’s make sure everyone has a good experience.” There are several benefits to creating a more inclusive workforce. Different backgrounds and perspectives spark important conversations and new ideas. Likewise, your workforce is stronger when your employees reflect your customers and stakeholders. “You have to be representative of your customers,” Udenze said. “And it’s not that you have to be; companies and stakeholders are demanding diverse teams.”
1. Hold yourself and your organization accountable. Deloitte’s diversity, equity and inclusion transparency report detailed metrics exploring the firm’s workforce representation including a breakdown of race, ethnicity, gender and age. Going a step further, it analyzed representation by job role, leadership level and promotion status to showcase the progress and aspirations for diversity at every level of the organization. Take a critical look at your business’s demographics, and decide if more information is needed. Based on that data, determine goals where you aspire to take the organization’s workforce. For example, Deloitte stated a goal to increase the number of Black and Hispanic/Latinx professionals in its overall United States workforce by 50% by 2025. “One of the most effective ways to deal with information is to hold yourself accountable,” Udenze said. “For example, if you have a goal you’d like to achieve four years from today, use that information to establish and write down your objectives. Four years from now, people are going to look at your document and they’ll be able to see the changes you’ve made.” Determining and delivering upon goals will require ongoing check-ins to see your progress. Udenze advises to keep your DEI hat on throughout your professional experiences. “We now monitor just about everything, including how we try to encourage and increase the representation amongst various teams,” Udenze elaborated. “All of these actions are consciously being done. You don’t just check the box … You’re constantly looking from the perspective of a representative of DEI.”
2. Create equitable opportunities to seek out and foster diversity in your workforce. “You can sit and complain, ‘I don’t see enough qualified minorities,’ or you can say, ‘I’m going to make it happen,’” Udenze said.
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Outside of setting goals, the local Deloitte practice has created new opportunities to share the perks of accounting with students in underrepresented groups. The Arizona Latino Mentorship Program allows University of Arizona and Arizona State University students to see broader perspectives around careers in business. Additionally, Deloitte continues to build upon existing relationships with historically Black universities and Hispanic-serving institutions to fund curriculum development for accounting students. Both initiatives create roots not only within the local community, but also within underrepresented groups. Consider the ways your organization can connect with minority communities and share why you enjoy your profession. Anecdotes from your experiences as a CPA can be foundational as a first step to creating new diversity in your hiring pool. “The mentality of, ‘If I see them, I’ll hire them,’ doesn’t work,” Udenze added. “DEI is a full contact sport. You need to go in there, get your hands dirty and go on with it.”
3. Retain diverse talent through inclusive culture. Recruiting and hiring talent with diverse backgrounds and perspectives is not the end of implementing DEI within your organization. Conversations and education continue. “What am I doing to maintain that? You cannot bring on the underrepresented minorities into your organization, and then say ‘I’m done,’” Udenze explained. “Your talent organization brought them in, but it’s the job of the rest of your organization to make them feel welcome and to ensure that they have a good experience. If not, they’re cycled back out.” Udenze advised that you continue to keep your DEI hat on, no matter what part of your organization you represent.
“Be aware of who’s in the room and ensure you create an inclusive environment,” he explained. “Underrepresented minorities tend to feel isolated.” Trainings and conversations are one way to develop an understanding of fundamental concepts that support a respectful workplace, including anti-racism and allyship. Additionally, open dialogue and creating room for growth are essential. As Deloitte stated in its transparency report, “Data cannot, and will not, be the only basis for determining our course of action. Behind each number, there’s a unique human experience that we all can learn from.” Incorporating diversity, equity and inclusion is an ongoing process, and its development will look different based on the size and scope of your organization. Setting goals and taking action, even in small steps, is progress. “The simplest way to achieve equity is ensuring that you have that DEI hat on all the time,” Udenze reiterated. “When you have it on, you can see things differently. All of us bear that responsibility.” l
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JANUARY/FEBRUARY 2022 AZ CPA
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Connect Asks: Communicating With Text By Haley MacDonell
Our member-exclusive Connect forum creates opportunities to collaborate with industry peers, ask questions and share your knowledge. The following question and answer were originally posted in Connect. Join the discussion on this topic at ascpa.com/textingwithclients. I have not used text messages in my practice, because I cannot document the information I received in a text. However, many clients, especially younger clients, are moving away from email. Many are requesting text messages instead. I don’t want to use my personal cell phone. How are you making texting work with a business? Do I need a separate phone line, separate phone or iPad? Or, is one of the services that tie to your PC working for you? I appreciate any suggestions you have. Thank you in advance!
Joanne Elsen
Laura Williams
I use text with my clients. You can send a text to yourself (email). I then save it to the client’s folder in my document managing system.
When Laura Williams put out an inquiry about other members’ experiences with text messaging for clients, Joanne Elsen, principal owner of a full-service accounting and tax practice, responded. Even before the pandemic, she rarely met with clients face-to-face, especially when working with out-of-state clients. So, two years ago, she traded her landline for Google Voice. For about $10 a month, she shared, she uses her existing business line from any phone, tablet or computer. As part of the transition, her client began asking to use text as a means of notification. As they told Elsen, it’s easier to reply to text quickly and concisely, without having to check their email as frequently. Now, her firm uses text for notifications on progress, following up on an email and scheduling. “I believe that clients like text, because it’s a faster way to communicate without having to make a phone call,” she said. “The clients that use it aren’t always the younger generation either.” If you’re considering adding text to your client communications channels, ask what your goal is. Aside from Continued on next page...
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What recommendations should you consider when choosing a provider or system? There are four common vehicles for participating in SMS (Short Message Service, also known as plain text messaging) #1 Standard cell phone with SMS capabilities #2 VoIP (Voice over IP, aka, internet-based phone) with SMS capabilities #3 Standalone business texting platforms #4 Texting an email address or emailing a cell phone’s email address via the carrier’s gateway (phone#@txt.att.net)
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AZ CPA JANUARY/FEBRUARY 2022
notifications, text can also be used for marketing and conversing digitally in real time. Which of these three is your focus? If marketing is your goal, consider other alternatives. PK Tech, a Phoenix-based IT support and managed services company, advises against using text for this goal, as there are text-based scams centered around financial and transactional businesses that could create confusion, and links are an invitation to potential malware. “If you’re working with a few high-touch clients that demand back and forth text access to you, you have a few options,” Jordan Hetrick from PK Tech explains. A modern VoIP telephone system that supports SMS texting could be the solution to sending unencrypted texts without exposing your cell phone number. “However, it’s unsecure and should not be used for sensitive conversations. There are also standalone platforms that help centralize texting to a specific phone number, but again, they’re unencrypted. These platforms are typically for notifications, marketing or discussing information.” After you’ve selected your platform, it is important to establish the expectation that texting is an acceptable communication method with your clients and that you are ready for the commitment. “Did you respond quickly or during the weekend one time?” PK Tech warns. “Now, anything less than that service level is a potential disappointment.” After establishing boundaries, ensure that your clients understand that sensitive information should not be sent over text. If you’re using texting to notify clients about appointments, consider including a disclaimer stating your firm will never ask for financial information over text. “The benefits of using text messaging in a CPA firm relate to notifications,” explains Hetrick. “If it reminds your client about a meeting they would miss otherwise or that a document is waiting for them to review on your secure portal, that’s a win.” l
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GASB: Who We Are, What We Believe and Where We Are Going By Joel Black and Alan Skelton We are looking forward to being with you in Phoenix at the ASCPA Governmental Accounting Conference. At the conference, we will brief you on what the Board is working on, what is on the horizon and answer any questions you may have about the GASB. In this article, we wanted to take a step back to share our broader perspective on who we are, what we believe and where we are going as an organization.
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Who We Are As you are aware, the GASB exists to make sure users of state and local governmental financial statements have access to the important information they need to evaluate governments’ financial activity and make decisions about it. GASB provides the fundamental, foundational rules that allow the financial information governments report to be relevant, understandable, timely, consistent and reliable. Our work helps ensure the marketplace, legislators, analysts, investors, people who live in the communities and other stakeholders have the information they need to assess fiscal accountability. GASB stakeholders can trust the information because it is not presented in any way a government chooses, but in the way an independent third party – the GASB – requires its presentation under generally accepted accounting principles (also known as GAAP), the gold standard in governmental financial reporting.
What We Believe In order to maintain the public trust the Board has been given, we must continue to establish new governmental accounting standards and update existing guidance. We must also make sure preparers and auditors have the information they need to successfully implement those standards, and we must educate our stakeholders about our standards as well as what information flows from them. As leaders of the GASB, we have been entrusted with guiding the Board in the direction that maintains the integrity of our standards. First and foremost, that means maintaining the integrity of the standards-setting process and the resulting standards. Part of what makes GAAP generally accepted is that all parties involved – preparers, auditors, and users of financial reports – provide significant input into the process. It is important that we hear from you. We strive to make sure we are doing the right things, at the right times, for the right reasons – and that we communicate those reasons as well as the results. We are continuously working to improve our engagement with you. By providing that level of transparency, everyone can be clear on what we do and why we do it.
Where We Are Going Our global society is evolving and changing, and how governments operate is evolving and changing along with it. At the same time, financial reporting, the needs of financial statement users and how they consume and use the information also continues to evolve and change. Our standards must evolve appropriately, and keep pace with shifts in the landscape and changes in the environment. Beyond setting standards, it is essential for us to play our part in this evolution, so financial statement users receive information that is relevant, understandable, timely, reliable and consistent moving forward. GASB is nearing its 40th anniversary as a standards setter. During our time, we have operated
in a highly consistent way in terms of our people, our processes and the technology we use. Now, we are taking a step back and asking, are there other ways to interact with our people, to enhance our processes and to leverage technology to build on the successes of the past and carry them forward into the future? Some of the changes that have recently occurred include: • When we came back to the office in October 2021, we returned on a flexible and hybrid basis, which includes a remote work component. No one would have foreseen that just two years ago. • We are looking at our processes, for example, in how we conduct our research and at ways to modernize and integrate it into the standards-setting process more broadly. • With respect to technology, we are looking to enhance how we interact with our stakeholders and to find new, easier ways for them to share their feedback and ideas with us. In essence, the three pillars of people, process and technology are at the core of the journey and the future at the GASB.
Closing Thoughts Finally, not only are the considerations we just mentioned changing, but the transactions that governments enter into are evolving as well. They become more complex and more interrelated with the private sector and with other governments. The nature of how governments operate and transact business and the types of things they do are changing, so it is important for us, and our accounting standards, to keep pace with them. In closing, we want you to know that our stakeholders, including ASCPA members, are always our central consideration as we plan, shape and try new ways of doing things. As always, we’d love to know what ideas you may have. If you’re so inclined, please drop us a note to let us know at gasbnews@gasb.org. l
The views expressed in this article are those of the authors only. Official positions of the GASB on accounting matters are determined only after extensive public due process and deliberation. Joel Martin Black, CPA (licensed in FL) was named chairman of the Governmental Accounting Standards Board, effective July 1, 2020. Joel came to the GASB after almost 16 years as a partner at Mauldin & Jenkins in Atlanta where he was the partner in charge of the firm’s audit practice at the time of his departure. During his experience in public accounting, he exclusively served state and local government clients leading audits and financial statement preparation engagements. Alan Skelton was named director of research and technical activities of the Governmental Accounting Standards Board, effective April 1, 2021. He leads the staff and serves as the principal advisor to the chair and Board. Prior to joining the GASB, Skelton was the state accounting officer for the state of Georgia, initially appointed by the governor in 2012 and reappointed in 2019. Black and Skelton present at the Governmental Accounting Conference on February 4, 2022.
Virtual Road to the CPA The ASCPA successfully hosted its first virtual Road to the CPA event. The event educated college accounting and business students on accounting careers and opportunities in the profession. This event presented information on the CPA exam, the certification process and resources offered by the ASCPA. In addition, a panel of four CPA members shared their experience and answered student questions. Thank you to Ignatius Jackson, Anne Rogers, Scott Gianninoto and Janeen Butler for supporting the future of the CPA profession. If you are interested in being part of a future Road to the CPA panel, email cquinonez@ascpa.com.
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Pre-Paying Pension Debt in Arizona
Overview of Key Terms
By Rushda Mustafa
Actuarial Value of Assets (AVA): The current value of all assets held/invested by a pension fund to generate returns and make benefit payments to retirees
Actuarially Accrued Liability (AAL): The value in today’s dollars of all future benefits payable to current and future retirees
Paying off unfunded pensions as soon as possible can save a municipality significant General Fund dollars. Pension bonds may be a tool to pre-fund employer contributions to the two state-wide retirement systems, the Public Safety Personnel Retirement System (PSPRS) and the Arizona State Retirement System (ASRS). As an allocated costs plan, PSPRS has benefited from over $1.9 billion in supplemental pre-payment contributions from participating employers since 2020. ASRS is in the process of launching a voluntary Contribution Pre-Funding Program (CPP) for employers to make supplemental contributions to the system in exchange for guaranteed offset credits. What Is Pension Debt, and How Is It Impacting Municipalities? Legacy unfunded pensions are a debt growing at the actuarial rate. Any unfunded portion of a pension liability represents a dollar that cannot be invested to grow like other plan assets. Thus, the opportunity cost of lost investment earnings becomes the “interest” that accrues on the unfunded liability (UAAL) every year it remains outstanding. An example is a debt growing at the actuarial rate that must be amortized. Because of the steep debt accrual (7% to 7.50%), even as municipalities continue making accelerating payments every year, they are not making significant headway in paying off the UAAL. In Arizona, municipalities participate in the Public Safety Personnel Retirement System (PSPRS) and Arizona State Retirement System (ASRS). PSPRS is an allocated costs plan – which means each employer has a distinct liability and payment profile – while ASRS is a pooled, cost-sharing plan, whereby all participating employers pay the same annual contribution rate into the System.
Funded Ratio: The ratio of AVA to AAL; 100% funding implies Assets = Liabilities Actuarial Rate: The assumed rate of return on a pension plan’s assets; typically between 7.00% to 7.50% Unfunded Actuarially Accrued Liability (UAAL): The difference between the AAL and AVA. The UAAL is a debt accruing at the Actuarial Rate. This debt has to be repaid by a municipality like any other loan (UAAL Payment) Pension Cost: The current year’s cost (Normal Cost) + Past accrued costs being amortized (UAAL Payment)
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The Impact: Pension costs are crowding out other General Fund expenditures for municipalities in Arizona and around the country. Pension contributions are annual expenditure line items in a municipality’s budget. In recent years, the PSPRS annual contribution rate has escalated to over 40% of payroll on average, whereas the ASRS rate has been approximately 12.2% for all employers. This cost escalation is not the result of rising benefits but a result of systemic underfunding and large legacy UAALs. In fact, a 2018 study found that employer normal cost has declined from 7.1% of payroll in 2001 to 5.6% of payroll by 2017.1 This trend also applies nationally: a 2018 study by Standard & Poor’s found that this cost could represent up to 27% of annual expenses for most large cities nationally, crowding out other important capital and operational expenses:
“These pension contributions – which in many places have been driven higher by the additional amortization payments needed to help pay down unfunded liabilities – represent large portions of budgets that cities could have otherwise used to finance other crucial public needs, like road infrastructure, hiring more public safety officers, or tackling drainage and stormwater issues. Instead, these funds are increasingly being used to pay off legacy pension debt and the related interest that accrues on this debt.” 2 In addition to crowding out essential services, pension underfunding can also negatively drag a municipality’s credit rating, making it more expensive to fund other capital projects through debt.
How Can This Problem Be Tackled Head-On? Like any high-rate debt, early repayment can help reduce the total interest paid on unfunded pensions. To the extent possible, paying off a UAAL as soon as possible can help reduce the budgetary impact of growing interest payments on this debt. However, most legacy UAALs are very large and cannot be repaid with existing cash on hand in one or two installments. Pension bonds can help bridge the gap. Pension bonds are a debt instrument that refinance the legacy UAAL accruing at the actuarial rate with taxable bonds accruing at a market-based borrowing rate. The difference between the market borrowing rate versus actuarial rate could potentially generate annual cost savings for a municipal entity. In order to repay the UAAL, municipalities make annual UAAL amortization payments that are computed using the assumed actuarial rate (typically 7.00% to 7.50%). Instead of paying down this debt over a defined period, an issuer can access debt markets to generate proceeds for funding some or all of the unfunded liability, such as effectively refinancing the UAAL at a lower borrowing cost. The General Fund revenue going toward making annual amortization payments to the pension fund is now redirected to repay bond holders. The lower debt rate means that the annual amount payable to bondholders is likely lower than the annual payment that would have otherwise had to be made to the pension fund. While there are market and actuarial risks associated with pension bonds, employers can implement mitigation tools such as funding a Contingency Reserve Fund (CRF) to manage future variances in pension fund performance.
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Success Stories The current low-rate environment has allowed over 27 municipalities in Arizona to refinance their PSPRS UAAL from 7.30% to ~2.80% on average; many of these entities have generated over 50% expected net present value savings for their budget in the process.1 Employers participating in PSPRS receive a required contribution rate (as a percent of payroll) from PSPRS every year. A portion of this rate addresses the year’s Normal Cost, while the balance goes to address the UAAL amortization. Because PSPRS is an allocated costs plan, this rate differs for every employer depending on their individual liability profile. Given the high level of underfunding for many employers, the UAAL portion of the rate has increased to over 40% of payroll in recent years. Employers who have accessed debt markets to repay PSPRS have been able to reduce their rate down to the Normal Cost only. Arizona cities, towns, counties and fire districts can utilize pledged revenue or excise tax obligations and certificates of participation to issue debt. Figure 1 on the next page highlights the one-year experience for the City of Flagstaff, which utilized Certificates of Participation to pre-pay its $116 mil PSPRS UAAL in July of 2020. Flagstaff expects to generate over $78 million (58.2%) in net present value savings for the City over the next 20 years.
Figure 1. City of Flagstaff – One-Year Impact of Pension Re-Payment BEFORE
POLICE FIRE
AFTER
Debt Rate
Annual Contribution Rate
Funded Ratio
Risk Protection
7.30% 7.30%
50.95% 88.79%
38.50% 36.50%
None None
Debt Rate
Annual Contribution Rate
Funded Ratio
Risk Protection
2.70% 2.70%
6.20% 8.46%
107.80% 108.10%
$6.85 mil CRF $7.39 mil CRF
ASRS is currently rolling out a voluntary Contribution Pre-Funding Program (CPP) that would enable participating employers to make additional contributions against their unfunded liability. While the ASRS annual contribution rate is uniform across all participating employers, ASRS will provide participating employers with offset credits against future payments under the CPP. This means that for any given year, a participating employer would receive the same annual rate from ASRS as everyone else. However, the ultimate dollar payment due for a pre-funded employer would net the offset credit from that homogenous contribution rate, thereby generating savings for that employer’s budget. At the option of the employer, these offsets will be calculated either at a riskadjusted fixed accrual rate (RAFAR) or the Actual Rate of Return Accrual Amount (ARORAA). The former option bakes in an estimated risk premium and allows ASRS to provide guaranteed offset credits. While the latter provides the potential to benefit from periods of great investment performance (such as in 2021), it also potentially exposes a participating employer to variance in annual offset credits.
Conclusion The PSPRS and ASRS pre-funding efforts are both significant positives for individual employers as well as the general fiscal health of the State of Arizona. Ultimately, the successful implementation of these pre-payments will generate positive impacts for employers, employees, retirees and taxpayers. l
1 https://publicplansdata.org/ ² The Reason Foundation, “City Budgets Bend Under Growing Pension Costs and Dwindling Revenues.” https://reason.org/commentary/citybudgets-bend-under-growing-pension-costs-anddwindling-revenues/ Rushda Mustafa, Vice President, joined Stifel’s Public Finance Department in 2012 and has provided quantitative and banking support for $4.2 billion of lead-managed transactions across a variety of credits for large issuers. Over the past 18 months, Mustafa has worked closely with her colleagues to structure and execute 31 PSPRS pension refinancings for cities, towns, counties and fire districts that participate in the Public Safety Personnel Retirement System, totaling approximately $1.9 billion (31 transactions). Contact her at mustafar@stifel.com.
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Helping Your Client Navigate Long-Term Care Insurance Rate Increases By Maryglenn Boals You dread the phone call. You and your client are shocked by the numbers, but rate increases for traditional long-term care insurance premiums are quickly becoming the norm. Some carriers are announcing a one-time increase, but now we are seeing phased amounts over the next few years already projected for the client (should they choose to maintain their original benefits).
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Rate increases are actually an opportunity for you and your client. For too long, LTC policies were placed in the back of someone’s file cabinet once they were purchased. The policy never saw daylight again until perhaps an adult child discovered it when the parent needed care. For many clients, talking about extended care needs is an uncomfortable conversation. They would rather see it as a transaction their financial advisor told them would protect their assets and family. Once it was secured, most don’t want to think about it. They set up auto payments and go back to living life. Transaction completed; uncomfortable thoughts packed away. Until that rate increase letter arrives in the mail ... What they don’t see is that a rate increase notice is a great time to review and rebalance their long-term care plan.
Why Are Rates Going Up? Long-term care (LTC) insurance has a “long tail” – meaning that utilization of the benefits often lag for 20-30 years after purchase. Carriers base their pricing on predicted market inflation rates, lapse ratios (how many will drop the policy) and benefit utilization. All of these factors did not behave the way many predicted. We have seen a long period of incredibly low interest rates, a recession and a pandemic just within the last 15 years. The low interest rates brought a favorable environment for major purchases, such as cars and houses, but greatly impacted LTC carriers. The recession validated the client’s decision to purchase LTC insurance as their portfolios contracted, but the pandemic made people realize the true value of being able to afford to stay at home if they needed care. With all these unpredictable variables, why did we expect a carrier to have “fixed” pricing? Because the rate increases of the past were almost non-existent. During the application process, it is disclosed several times that the rates can go up. Historically though, many clients were told “never in the history of the XYZ company has there been a rate increase.” Remember that “long tail”? No one predicted this extended period of low interest rates. Utilization of those early issued policies started to happen and it was not as predicted. Healthcare costs were climbing higher than expected. People were living longer, and claims were longer and more expensive. It was a perfect storm.
Navigating the Increase Options The process of a rate increase involves a letter from the carrier to the insured and usually includes a few options to proceed. 1. The client can accept the rate increase (usually this means doing nothing) and pay the new amount on the next renewal date. 2. There may be a predetermined reduced amount that the client can accept that would keep their premium the same as it currently is, but modifies the benefits. This may mean reducing their inflation rate or reducing the benefit amount or duration. The goal is to keep the premium the same, so you adjust some aspect of the policy to make that happen. 3. If the increase is of a certain specified amount, it may trigger the option of “contingent non-forfeiture.” By contract, this allows the client the ability to stop their payments completely and preserve their benefits equal to the amount they have paid into the carrier. For example, a client pays a $2,000 per year premium for 20 years. They have paid into their account $40,000. The same rules of their policy apply, but the new pool of benefits is not the insured pool, but an amount equal to the dollars they have paid in. Essentially, they only have $40,000 in LTC benefits if they do this. It allows them to feel like they didn’t lose their money, but remember, these dollars are only accessible if qualifying for benefits and following the original policy’s outline of benefits. 4. Ask the insurance carrier for different alternatives. This is the option most clients aren’t aware they have. For example, the client has an eight-year benefit period, and they would be willing to now reduce the duration of the benefits to five years. Or another option may be reducing the inflation to only 3% compound from 5% compound. Ask if they can keep the current growth but reduce the inflation moving forward to a lower amount. This is the time where the client is typically in a better position with the carrier to provide those alternatives. The design of the original policy may limit some of the choices, but this is a great opportunity to ask for alternative options. You then need to weigh those adjustments and the risk for future LTC expenses. If the policy has been in place 15 years, are the concerns the same? Savings? Investments? Be cautious in saving a few dollars in premium and losing future coverage unless you really can assess the risk to everyone’s comfort level.
A word of caution: Many clients will be frustrated and react with “I want to go buy something else.” This is usually not the best solution. Typically, many years have passed since the original purchase, and they are now older, and their health status may have changed. Both components greatly impact current pricing. Also, policies sold in the last several years have been significantly repriced. Providing them with a current quote similar to their original benefits helps a client gain some perspective on the bargain that they could be holding. This is why it is so important to reassess their LTC needs at this new point in time. Is it the same as when the policy was purchased? As Heraclitus famously said, “the only constant in life is change.” The real issue is how you and your clients navigate those changes. l Maryglenn Boals, CLTC, LACP is an independent insurance agent specializing in LTC products and planning. On a consultant basis, she can assist your client’s facing rate increases. She can be reached at 602-418-5069 or mgboals@ mgboals.com
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GAC 22
GOVERNMENTAL ACCOUNTING CONFERENCE Registration Open Now February 4, 2022 Desert Willow Conference Center or via webcast www.ascpa.com/gac22 Conference Agenda General Sessions
COVID Fraud Schemes David Cotton
Future of Government Accounting Standards Joel Black
Cotton & Company LLP
Governmental Accounting Standards Board
GASB Update David R. Bean (retired) Alan Skelton
Economic Update Jim Rounds
Rounds Consulting Group, Inc.
Governmental Accounting Standards Board
Breakout Sessions Single Audit Update Brittney Williams
Heinfeld, Meech & Co., P.C.
Cyber Fraud Against Government Kenny Kang
Post-COVID Workplace: Managing Remote Employees & Returning to the Office Panel Discussion
White Collar Crime David Cotton
ARPA Funding and Compliance Jay Parke
Kenny Kang CPA
Arizona Pension Best Practices & Strategies Mark Reader Omar Daghestani
Cotton & Company LLP
Walker & Armstrong, LLP
Stifel, Nicolaus & Company
Thank you to our platinum sponsor:
Gold Sponsors CLA (CliftonLarsonAllen) Fester & Chapman, PLLC Heinfeld Meech & Co., P.C. Stifel, Nicolaus & Company, Incorporated The Pun Group, LLP Walker & Armstrong, LLP
Thank you for joining us in person and online at our first Annual Conference. With eight specialized tracks and excellent speakers, we hope you took away new ideas, knowledge and a bigger professional network.
Save the Date Annual Meeting & Awards Luncheon May 12, 2022 11:30 a.m. – 1:30 p.m.
Classifieds Employment EXPERIENCED TAX PROFESSIONAL (5 YEARS) Established and reputable CPA firm in beautiful Prescott, Arizona, seeking full-time, experienced tax professional that can prepare and review tax returns. This job can be remote, preferably limited to Arizona. Job Responsibilities • Accurately and efficiently prepare business, individual, exempt organization and trust tax returns • Act as a mentor to less experienced staff; review their work and provide guidance • Research complex tax issues • Perform tax planning for clients and answer tax questions Requirements • Bachelor’s degree or above • Min 5+ years relevant tax experience • CPA or EA obtained or desired • Proficient Computer user: Microsoft, Lacerte, QuickBooks • Strong written and verbal skills Apply via email Info@prescottaccountants. com with resume and cover letter Salary $65k-$85k plus benefits
TAX MANAGER
New Year, New Volunteer? If you are interested in getting more involved with the ASCPA, please fill out an interest form on www.ascpa.com/ascpavolunteer or email membership@ascpa.com.
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If you are a self-starter who’s motivated to learn and ready to assume more responsibility, this is a key role within the tax team with responsibility for financial reporting and projects. Primary responsibility of this role is to support domestic tax operations with a focus on quarterly and annual tax provisions (ASC 740), corporate tax compliance and special projects. Position can be located in either Phoenix or San Diego. Requires five years corporate tax experience with a minimum of two years at manager or supervisory level experience. Certified Public Accountant (CPA). ASC 740 experience. To apply/for more information: https://careers.joinmcm.com/job/san-diego/ tax-manager/29781/12433359312 .
7. What can help reduce the total interest paid on unfunded pensions?
AZ CPA Quick Quiz
You’ve Read It, Now Get Credit Take this quiz on AZ CPA content online or submit this hard copy. Receive a score of 70 percent or more and earn one hour of CPE credit in specialized knowledge. It’s that easy! Fees: Members: $25 Nonmembers: $40 Online Access Go to www.ascpa.com/quickquiz to access links to all active quizzes. Once a quiz is purchased, a link and password will be emailed to you. Your results will be sent immediately after completion, and certificates are emailed within two business days. Hard Copy Please select one answer for each question. Fill out registration/payment information below and mail or fax to the Society office. Quiz results and certificates will be emailed to the address provided on the registration form. *This quiz will be available until February 2023. Please note that users have three attempts to pass the quiz with at least a 70 percent score.
m Deductions, exemptions and interest m Distributors, entrepreneurs and inheritors m Diversity, equity and inclusion 2. What is an example of inclusion? m A restaurant manager ensures everyone has a good experience and is sensitive to dietary needs by offering vegetarian and gluten-free modifications. m A restaurant manager recommends other restaurants nearby that will accommodate dietary needs. m A restaurant manager tells a vegetarian that there is no meat in the recipe, even if that is not true.
8. True or False: ASRS is currently rolling out a voluntary Contribution Pre-Funding Program that would enable participating employers to make additional contributions against their unfunded liability. m True m False 9. Who speaks at the 2022 Governmental Accounting Conference? m Joel Black m Rushda Mustafa m Ken Udenze 10. Why are long-term care insurance rates going up?
January/February 2022 Issue of AZ CPA* 1. What does DEI stand for?
m Funding other capital projects m Early repayment m Amortize the actuarial rate
m Irregular predictive factors such as inflation rates, lapse ratios and benefit utilization m High interest rates m A desire to improve benefits
5. What is one recommended way to use text to communicate with clients? m Notifications m Receiving payment m Sharing sensitive document 6. The GASB exists to __________. m Make sure users of state and local governmental financial statements have access to information needed to evaluate government financial activity and decisions. m Manage complexities created by an evolving world and shifting government priorities. m Ensure government data is clear and often reliable.
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3. What is a reason that accounting students may not take the CPA exam? m The fifth-year requirement m Financial ability m All of the above 4. When using text to communicate with clients, what boundaries should you establish? m The times of day that you are willing to respond m The documentation that is and is not safe to send over text m All of the above
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Arizona Tax Guide
Pre-order your Arizona Tax Guide – the only comprehensive guide on Arizona taxes. Learn more and purchase the guide at: www.ascpa.com/taxguide Authored by: Pat Derdenger, Steve Rodis and Ed Zollars The Arizona Tax Guide includes the following guides: The Arizona Income Tax Guide is a comprehensive reference that highlights the differences between Arizona and Federal income tax law and provides references to the Arizona Revised Statutes for a more in-depth analysis. It highlights the differences between individual, corporate, partnership and trust taxes, includes tax tables, and is arranged in a way that facilitates research on any topic. The Arizona Sales and Use Tax Guide is a resource for anyone preparing or filing city sales and use tax returns. The guide details the various sales tax classifications, exemptions, deductions and rates as well as compliance, audits, refund claims and administrative appeals. The Arizona Personal Property Tax Guide provides an overview of Arizona’s personal property tax system, including exemptions, the classification structure and assessment rates, reporting, valuation and appeals. The Arizona Unclaimed Property Guide explains what unclaimed property is, reporting requirements for holders of unclaimed property, how owners of unclaimed property can claim their property and audits.
