CSMFO Magazine June 2016

CSMFO CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS

M A G A Z I N E

JUNE 2016 #4

1 CSMFO MAGAZINE JUNE 2016

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CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS

M A G A Z I N E JUNE 2016 #4

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Thank you to all the authors in this issue for sharing with us their time and expertise. If you have an idea for a future article, please contact Melissa Dixon at the CSMFO office at melissa.dixon@staff.csmfo.org.

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For more information on CSMFO or this Magazine, please contact the CSMFO office at 916.231.2137 or visit the website at www.csmfo.org.

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CONTENTS JUNE 2016

6 8

President’s Letter John Adams

Executive Director’s Letter Melissa Dixon

12

Manage Pension Liabilities to Save Your Agency Money

16

Impact of Recent CalPERS Changes on Public Agency Contribution Rates

20

Dan Matusiewicz

Bianca Lin & John E. Bartel

League Policy Committee Update: Employee Relations Brad Wilkie

22

Managing Rising Pension Costs and Liabilities

24

Changing Standards for Other Post-Employment Benefits

26 30

Public Pension Plan

33 35

Diary of a Host Committee Chair

Dennis Yu

David Bullock

Jay M. Goldstone

My Alaskan Adventure in the Last Frontier John Adams

Drew Corbett

Job Opportunities

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The Importance of Developing a Strategy A

sk anyone who knows me and they will say it takes me a while to make a decision. I like to think that decision-making requires strategic thinking regardless of the decision being made. No matter how simple or complex the issue is, you should be strategic. Well, you might not think that applies for ordering lunch, and I might agree…except if you are on a diet or you are attending a big dinner event.

The point being that regardless of the decision, being strategic and having a plan is very important.

PRESIDENT’S LETTER JOHN ADAMS

JOHN ADAMS FACTS John’s favorite TV series is House of Cards.

This month the CSMFO Magazine As I reflect on the implementation of focuses on pensions and other postGASB 67 & 68 in Thousand Oaks, we employment benefits, better known as were fortunate that there was not a lot OPEB. With the recent implementation of “fanfare” around the change. Maybe of GASB 67 & 68 for pensions and it was because we communicated the implementation of GASB 74 & 75 next impacts to the financial statements to fiscal year for OPEB, a heightened the Finance Audit Committee and City awareness of these longCouncil in the prior year and term liabilities now prepared them for the exists. There are implementation. Or many questions that maybe it was simply “ After I previewed have and will be that our Unrestricted asked with the Net Position was the articles, it was implementation not negative after clear that many of these new adding the new “Net standards. The Pension Liability”. members will have question that many Or maybe everyone a lot to think about will ask is whether has a better general and prepare for.” these new GASB understanding pronouncements of the long-term actually change their liabilities that exist with agency’s reality? pensions. Regardless, the City of Thousand Oaks has To help answer that been strategic in its management question, and others, CSMFO of its long-term pension obligations is providing you insights from which made the GASB 67 & 68 various perspectives, including: city implementation easier. management, finance officer, actuary, plan designer & administrator, and external auditor. After I previewed the articles, it was clear that many members will have a lot to think about and prepare for. Every agency will have a different story to tell and each will develop a unique plan. Regardless of the details, there will be common elements for every agency including engagement with your governing board and transparency with your community.

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I believe this was also the case in many other agencies throughout the state, but will that be the case as we implement GASB 74 & 75 for OPEB? Don’t plan on it since there is not the same level of understanding related to OPEB, nor has there been the same level of funding for OPEB as there has been for pensions. Be strategic, start planning for communicating your longterm liabilities related to OPEB to your governing board and community. And if your agency has not established a trust and a funding strategy for OPEB, you need to be an advocate to address the long term challenge now rather than “kicking the can down the road”.

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Remember, it is our responsibility as municipal finance officers to be more diligent in promoting a higher standard in financial management and preparing long-term financial strategic plans by increasing transparency and engaging our governing boards. This will be key in the coming year as we implement GASB 74 & 75. I want to thank the authors for their contributions and I hope you find value after reading the articles and understand the importance of being strategic and having a plan.

“CSMFO is providing you insights from various perspectives, including: city management, finance officer, actuary, plan designer & administrator, and external auditor.�

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In Other News...

T

he focus of the June issue is pension and other post-employment benefits (OPEB), and as a non-government employee, I don’t have much of a point of view on either of those things. So while I will generally try to write to you on-topic, instead this month I’m going to focus on some CSMFO-specific news.

EXECUTIVE DIRECTOR’S LETTER MELISSA DIXON

MELISSA DIXON FACTS

Melissa’s favorite TV series is The West Wing.

If you’re a commercial member and would like to volunteer for a committee, please fill out the Volunteer Interest Form available on the CSMFO website.

Your information will be sent to the appropriate committee chair for followup. Remember, this is open only to I’m personally excited about this commercial members…exhibiting at the because it opens up an avenue of conference does not automatically put involvement for roughly you into this category. If you’d 10% of our membership like to participate but are that was heretofore not yet a member, you can unavailable. Our “Join Now” by going main focus for “A level of to that option under CSMFO is in “Membership” on our expertise exists providing website, www.csmfo. in these untapped services for our org. government resources that could I hope we see a lot members, but significantly benefit of new commercial by excluding members taking commercial the membership.” advantage of this members from opportunity to share their committees we’ve skills and expertise for the been missing their betterment of the municipal potential added value in finance profession in California! fulfilling that mission. A level of expertise exists in these untapped resources that could significantly benefit the membership.

The CSMFO Bylaws revision passed on June 1, 2016 with a more than 80% approval rate. Aside from some general clean-up language, the substantive change was to allow committee participation for commercial members.

When discussing this at the Board level, there were concerns expressed regarding having too many commercial members on any given committee, and suggestions to putting a percentage cap on how the committees’ membertype composition. This was ultimately decided against, as the officers for the committees (chairs, vice chairs, senior advisors) are still required to be active municipal members. Whether or not commercial participation is seen as beneficial is up to the committee officers, as is the number of commercial members that will be accepted per committee.

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Understanding SUI Risk Transfer First Nonprofit Group’s “Financial Mechanics of Funding SUTA” series

The essence of any meaningful, effective state unemployment insurance (SUI) risk transfer is to minimize or eliminate future unexpected, adverse risk.

Creating a concrete, working SUI funding strategy to manage an election by a nonprofit to directly reimburse a state, dollar-for-dollar for future benefit charges, requires a clear understanding of the risk appetite and potential events that may affect an organization from year-toyear. Plus, it also requires an informed understanding of who is contractually covered and who is responsible to pay when limits are reached.

What that means is, shrewd stewards of nonprofit organizations’ limited funds must prepare for and be mindful of:

3. Membership in an Unemployment Savings Program organized so that it insures each member against the losses of another with no joint and several liability and has a proven working stop-loss for each member plus the entire group.

4. Individually designed coverage for specific unconventional nonprofit reimbursing risks.

Membership in group self-insured SUI programs, some formed as trusts others less formally structured, has been available to nonprofits for many years.

The risk transfer components in these programs vary. There may be no transfer whatsoever, pooled stop-loss coverage utilizing reserves within the group itself, or stop loss provided by a private insurer.

• how much tolerance their organization Managed group-shared-risk trust funds utilize an accrued and co-mingled capital has for maximum unexpected SUI advance from their nonprofit trust member losses, credit accounts to reimburse state agencies • taking advantage of opportunities to for SUI benefit charge losses for the entire transfer the unacceptable portion of group trust. Though trust managers go their risk to a party willing to assume to great lengths to insure specific benefit the hazard for a reasonable fee charges are assigned to the appropriate • knowing the details and financial designated member, there may be no implication of any risk transfer elimination or reduction of the collective coverage. groups’ total risk or liability. In fact, some • engaging with a solid, reputable, and programs’ members share collectively in losses by other members who shut down highly rated insurance carrier their operations.

Transferring all or a portion of the For more information about risk transfer risk of nonprofit organizations’ SUI options contact the leader in SUI reimbursements has been an available options,First Nonprofit Group. option for years and is currently offered in many forms. The most efficient options Next article, “Best and Safest include; Practices for SUI Options” (Stay tuned!)

1. Fully insured, first dollar, claims paid coverage with cost control through a TPA. It is a pure risk transfer of reimbursing benefit charges to a third-party backed by a guaranteed surety bond issued by a suitably rated insurance company.

2. Partially insured under a working stoploss coverage suitable to the risk tolerance of an individual nonprofit or group of nonprofits and provided by a financially sound insurance company.

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CALL FOR SESSIONS H

ave you ever wanted to speak at the CSMFO conference? Now is your chance to submit your idea for the conference “breakout sessions� at the 2017 conference in Sacramento. Even if you are not interested in presenting, you may know someone who is or just have a really great idea for a session. If so, visit the CSMFO website and submit a suggestion to us. Breakout sessions cover all aspects of local government finance, including accounting and financial reporting, budget and long-term planning, treasury and debt, information technology, management and leadership, and any other finance-related topic. If you have an idea for a great session, please let us know by submitting a response to our Call for Sessions.

Deadline to submit is June 30, 2016.

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Manage Pension Liabilities to Save Your Agency Money Dan Matusiewicz, Finance Director/Treasurer, City of Newport Beach

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L

ocal agencies are accumulating extraordinarily large actuarial accrued liabilities (AAL) relative to their budgets at an alarming pace. In a survey of Orange County plans, the average local agency AALs grew at an annualized rate of 7% per year between 2007 and 2014. This means the pension obligations grew 875% faster than the agencies’ ability to pay for them.

Admittedly, the measurement period contained the Great Recession and a relatively mild economic rebound.

As of the June 30, 2014 actuarial valuation, the smallest agency AAL was nearly $60 million and the largest exceeds $2.2 billion. At 7% growth per year, accrued pension obligations would double in 10 years. It is difficult to imagine that revenue growth could possibly keep pace. Further, even if these obligations are fully funded, each agency’s “debt to income ratio” is increasing each year and agencies are becoming increasing vulnerable to the growing size of their AAL and potential

adverse plan experience.

participating in a CalPERS plan is about 75% funded. This leaves almost $2.6 billion left to fund.

I don’t have any easy solutions to this problem and only hope that PEPRA and further pension reform will Unfortunately, both of these statistics mitigate the disproportionate growth will undoubtedly get worse over the next between agency revenues and two valuation periods as investment pension obligations. Many of returns fell short of the assumed you reading this are likely 7.5% earnings rate for fiscal similar to me in that as year ended 2015 and very future annuitants, we likely for 2016. You can stand to benefit greatly estimate the impact on “Most local agencies are your plan by multiplying from the generous pension plans currently still grappling with large the earnings shortfall unfunded liabilities...” in place. However, I’m by the market value sure you also join me in of your plan assets. recognizing what I see For example, CalPERS as our moral and ethical earned 2.4% during fiscal obligation to make sure our year 2015, falling 5.1% pension plans don’t bankrupt our short of expectations. A decent agencies. approximation of your experience loss on assets is simply the market AVOID NEGATIVE value of assets (MVA) multiplied times AMORTIZATION TO REDUCE THE 5.1%. Since this is an experience loss, BLEEDING CalPERS will amortize this loss over Most local agencies are still 30 years by default. Also by default, grappling with large unfunded liabilities the impact on the expected employer associated their pension plans. The contribution will be phased-in over average Orange County local agency

13 CSMFO MAGAZINE JUNE 2016

five years per the relatively new asset smoothing policy that became effective with the June 30, 2013 valuation.

These policies were developed with the intent to minimize volatility of required employer contributions and to spread the burden over time. It is important to note that these policies were developed to determine the minimum employer contribution and are biased towards economically challenged agencies. Unfortunately, I believe the economic impact of simply paying the minimum contribution is very costly. The high cost and negative side effects of the asset smoothing and amortization policies have largely gone unnoticed by most finance directors because it is exceedingly difficult to replicate the amortization schedules without actuarial assistance. However, I’ve not been shy and CalPERS actuarial staff has been very generous with their time and patience with me. You can download the Excel-based amortization schedules at www.newportbeachca.gov/csmfo.

Downloading “Comparative Amortization Schedule” mentioned above is a very good way to visualize and understand the issues associated with lenient repayment schedules. Based on my own analysis of the schedules, I’ve concluded the following: 1) Avoid the 30-year level-percentof-pay1 amortization schedule almost always – It’s too costly and amortizes the balance too slowly. In fact, because of negative amortization on the front end of the schedule, it takes 18 years before the outstanding balance drops below the starting balance.

2) Avoid the five year phase-in whenever possible too. While not all that more expensive than a non-phasedin schedule, the phase-in does cause the original balance to remain higher than the original balance for significant period of time whether on the twenty or thirty year schedule.

3) On a level-percent-of pay basis, only schedules less than 22 years avoid negative amortization altogether. This is different from a level-dollar-payment schedule as is used with a traditional home mortgage 1 A level-percent-of pay schedule increases at the same rate of your assumed payroll growth, in this case CSMFO MAGAZINE JUNE 2016

3% per year. Under this basis, your payment expressed as percent of payroll would remain constant if payroll grew at exactly 3% per year.

DON’T GO IT ALONE Many of these concepts are complex, difficult to communicate, and easy to get wrong, but there are many analytical resources available at your disposal. Make use of your resources to prepare a comprehensive analysis of your situation. CalPERS actuaries are readily available to you to assist you with your analysis and you certainly want to consult them before making recommendations to your City Council or Board of Directors. Some prefer to employ private actuaries for the sake of independence and appearances.

There are also emerging tools and services that can help you analyze, visually communicate and educate your governing boards and the public on these issues, including GovInvest, Pro Val PS and Open Pensions just to name a few.

CONSIDER ADOPTING A PENSION & OPEB FUNDING POLICY

provide economic relief during recessionary cycles • Dedicate a portion of surplus funds to accelerate payment on unfunded liabilities ADDITIONAL RESOURCES The following resources may be helpful to you in improving your knowledge and understanding of pension policies and practices.

Government Finance Officers Association (GFOA) http://www.gfoa.org/core-elementsfunding-policy http://www.gfoa.org/sustainablefunding-practices-defined-benefitpension-plans California Actuarial Advisory Panel (CAAP) http://www.sco.ca.gov/Files-ARD/ BudLeg/CAAP_Funding_Policies_w_ letter.pdf Comparative Amortization Schedules http://www.newportbeachca.gov/ csmfo

Managing Pension and OPEB Once you have educated your Finance Committees, Boards or Councils on these Liabilities Webinar dense issues, do yourself and favor and http://icma.granicus.com/ commit favored practices to a policy.

MediaPlayer.php?view_id=4&clip_ Formal policies help guide future Board id=446 or Council decisions, help support your actions, demonstrate to constituents that you are taking thoughtful action towards pension management, and can save time when educating new members.

Consider addressing the following: • Target funding at 100% of Actuarial Accrued Liability • Contribute no less than 100% of Actuarial Determined Contribution Annually • Analyze schedule of amortization bases each and every year • Amortize ALL gains/losses no longer than a 20-year, closed period • Asset Smoothing or Rate Phase-in no longer than five years • Transparency in pension funding progress • Establish a rate smoothing reserve to avoid phase-in periods and

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Impact of Recent CalPERS Changes on Public Agency Contribution Rates Bianca Lin, Senior Actuary, Bartel Associates and John E. Bartel, President, Bartel Associates

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O

ver the past few years the CalPERS Board has taken the following actions: 1. Made significant contribution policy changes, most notably: a. Changing market asset smoothing to 5-year direct rate smoothing

4.

Adopted a far-reaching risk mitigation strategy that will: a. Make CalPERS investments less volatile over the next 20 years or so b. Gradually reduce CalPERS discount rate from the current 7.5% to 6.5% over the same period.

Space does not permit going into each item’s detail, such as why b. Replacing rolling 30-year CalPERS made these changes or amortization of gains and losses with their merits. However, before the fixed amortization. changes, we were telling agencies that These changes were first implemented CalPERS contribution policy would, absent investment returns higher in the June 30, 2013 valuations and than anticipated, result in high are being phased in over 5 contribution rates far into the years, initially affecting future – with little reduction 2015/2016 rates, in unfunded liability in with the full impact in sight. These changes “...sustainability will 2019/2020. dramatically alter this be determined based 2. Made significant prediction. Unfunded on whether each changes to their risk liabilities will likely be agency can pay the pooling approach. paid off (though it will upcoming rates.”

These changes also take about 30 years), were implemented but with much higher in the June 30, 2013 contribution rates over the next valuations, affecting 15-20 years followed by lower 2015/2016 rates, and are not long-term rates. This is not a surprise: being phased in. The changes have a If you have an unfunded liability that’s very modest impact on most agencies not being paid off and you move to but a very significant impact on others – pay it off, you must pay more than you particularly those that contracted out for otherwise would have. services in prior years.

The impact of the contribution policy, 3. Introduced, through their regular assumption, and risk mitigation changes assumption review, the concept that will take some time to be felt, so mortality will continue to improve and there’s no reason to worry contribution have built a margin into their mortality rates will spike in the next couple of rates to accommodate this concept. years. But they almost certainly will These changes were first implemented go up. Let’s start with some basic in the June 30, 2014 valuation and generalizations: are also being phased in over 5 years, initially affecting 2016/2017 rates, with the full impact in 2020/2021.

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• Significant increases have already begun and will not slow down until fiscal year 2022/2023.

• Safety plans will be harder hit than Miscellaneous plans.

• Plans with enhanced formulas will be harder hit than those without enhanced formulas.

• Agencies that did not establish a second tier (before January 1, 2013) will be harder hit than those that did.

• Agencies that are more mature (larger retiree liabilities compared to active liabilities) will be harder hit than those that are less mature.

• Recent (June 30, 2015 and likely June 30, 2016) adverse investment returns will add salt to the rate increase wounds – with rates gradually being higher in 2017/2018 and continuing to go up through fiscal year 2022/2023.

• CalPERS risk mitigation strategy will increase rates very modestly in the short run but quite significantly into the next decade and beyond.

You can expect rates to: 1. Rise rapidly until 2022/2023 2. Increase slowly or remain relatively flat for the next 10-15 years 3. Decrease gradually thereafter until the unfunded liability is mostly paid off in about 30 years.

• The single biggest driver of future rates will be investment return.

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Expect significant investment return volatility resulting in substantial rate volatility; for example: 1. A typical Safety plan will see an ultimate rate increase of about 4.5 percentage points whenever actual investment return is 5 percentage points below the expected return 2. A typical Miscellaneous plan will see an ultimate rate increase of about 3.0 percentage points whenever actual investment return is 5 percentage points below the expected return.

3. Because CalPERS risk mitigation strategy will dampen the impact of investment gains, they will decrease rates at approximately ½ the impact that investment losses will increase rates. For example, an investment return 5 percentage points above the expected return would reduce the typical Miscellaneous plan contribution rate 1.5 percentage points.

With GASB 68 there has been and will continue to be lots of attention on the unfunded liability, but sustainability will be determined based on whether

each agency can pay the upcoming rates. Unless CalPERS has adverse investment returns, those rates will pay off the unfunded liability.

So where do we think future contribution rates will go? Without knowing future investment returns we can’t be sure, but we can offer some generalizations: • Agencies with Safety plans can expect rates in the following ranges with some variance based on plan maturity and whether a second tier was established before PEPRA: 1. Above 50% of pensionable wages beginning in the early 20s and extending into the mid-30s for agencies with 3%@50 classic employee benefits 2. Above 40% over the same period for agencies with 3%@55 benefits 3. Above 30% over the same period for agencies with 2%@50 benefits.

• Miscellaneous plan rates will likely be: 1. Above 35% of pensionable wages beginning in the early 20s and extending into the mid-30s for

agencies with enhanced formulas (2.5%@55, 2.7%@55, and 3%@60) 2. Above 25% over the same period for agencies without enhanced formulas (2%@60 and 2%@55).

• Generally, you can expect rates to increase by roughly ½ of your 2015/2016 rates.

The message to take away: Unless your agency is very new to CalPERS, expect contribution rates over the next 10-20 years to be much higher than they are now, - a projection your management team and Council should understand.

As the Director of Finance, it is important to stay involved in the progress reports from the beginning.

This provides tone at the top with the entity. The audit is an important function for the entity and needs efficient and effective attention to make it a successful audit from all parties involved.

INSIDE LOOK

League Policy Committee Update: Employee Relations Brad Wilkie, City of Lompoc

CSMFO

has a long-standing partnership with the League of California Cities. As part of the League’s Advocacy program, Policy Committees have been established by topic to review proposed legislation and make recommendations to the League’s Board to “support” or “oppose”.

There are eight Policy Committees: Administrative Services; Community Services; Employee Relations; Environmental Quality; Housing, Community and Economic Development; Public Safety; Revenue and Taxation; and Transportation, Communication and Public Works. Each year, the CSMFO President appoints one member to each Policy Committee. The Committees meet at least three times annually. Meetings begin with a general session briefing covering recent League efforts, state budget proposals, and other current issues. After the stage The Employee Relations Policy Committee (ER) reviews issues related labor relations and human resources management.

In addition to review of proposed legislation, each Policy Committee receives relevant informational presentations. The ER received presentations from the League related to alternative healthcare solutions the League is preparing to provide to members as well as a review by CalPERS related to investment returns, recent developments related to the reduction of funding risk and sustainability. Other presentations included a review of the Workers Compensation system and possible reforms being contemplated through legislation. On the June ER meeting agenda, Alan Milligan will be presenting a primer on PERS Pension Funding and there will be a legal briefing on California Labor Relations.

BRAD WILKIE

in June in Sacramento and in August at the League Annual Conference in Long Beach.

The CSMFO appointee reports to the CSMFO Board after each Policy Committee meeting and prepares an annual report that is distributed to the members at the end of each year. Participation in the Policy Committees is a great way to see how League Advocacy works, and is a wonderful way to bring home information relevant to each of our agencies. If you are interested in learning more, tune into CSMFO Board meetings or contact the CSMFO appointee to the Policy Committee you’re interested in. Appointees are listed in the CSMFO Directory each year, or on the leadership contact spreadsheet on the CSMFO website. A complete list of all appointees to each Policy Committee is available on the League’s Policy & Advocacy page of their website.

The 2016 Work Program for the ER Committee includes four areas of interest which are: • Review and recommended positions on legislation • Continuation of the exploration of opportunities for a Local Government Agency Flexible Workforce • Continued focus on ways to address CalPERS Unfunded Liabilities and Unfunded Retiree Healthcare • Continue to monitor Fredrichs V. CTA Related Legislation The ER Committee is committed to advocating for reforms that will help lower CalPERS Pension cost and Other Post Employment Benefit (OPEB) costs such as retiree healthcare costs for cities.

The next scheduled Policy Committee meetings are

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Managing Rising Pension Costs and Liabilities Dennis Yu, Senior Vice President, Public Agency Retirement Services (PARS)

T

he implementation of Governmental Accounting Standards Board Statement 68 (GASB 68) was a watershed moment for public agencies across the country as it shifted public pension costs to the forefront of the fiscal landscape. GASB 68 requires pension costs, also known as “Net Pension Liability (NPL’s)” to be shifted from budgetary footnotes to a line item on balance sheets.

due to economic or other conditions.

Ultimately these types of trusts can serve to reduce an agency’s unfunded Net Pension Liability and stabilize employer contribution rates. They also provide an opportunity for agencies to maintain his 2016-17 budget proposal, asking governments to save for a rainy day.

Alongside rapidly rising CalPERS With costs and CalSTRS costs, the still continuing to ongoing baby boomer rise, how retirement surge, longer can this life expectancies, “...state and local growing lower discount rate public pension issue be assumption, and a funds across the solved? greater public and nation underfunded One of media focus on public by more than 1 the newer sector pensions, and more this change has put trillion...” innovative increased fiscal and approaches political pressures on public to addressing agencies to address their long growing pension term liability. liabilities is by prefunding With state and local public pension the obligation using an funds across the nation underfunded IRS-compliant, Section by more than $1 trillion according to 115 irrevocable trust.

Pew Research conducted last year, Irrevocable trusts and CalPERS and CalSTRS accounting provide a vehicle to for $62 billion and $74 billion of this help agencies mitigate amount respectively, according to the pension volatility Public Policy Institute of California, this and reduce long-term has clearly become a critical issue that liabilities by allowing needs to be addressed. Governor Jerry for assets to be invested Brown has continually put California’s in diversified investment pension issues at the forefront of his portfolios with potential agenda since his election five years ago. Even after spearheading sweeping for higher rates of return. Pension prefunding trusts typically focus on pension reform in 2012, he has continued to call for proactive measures achieving higher investment returns than traditional general fund approaches to address the state’s unfunded liability burden which he has called, “enormous (often targeting 4 – 7 percent), and can be used to assist with rate stabilization and ever-growing”. Governor Brown in years when costs rise sharply, or most recently addressed the topic in employer revenues are impaired CSMFO MAGAZINE JUNE 2016

local control over their assets—while at the same time creating a more actuarially sound retirement system.

Ensuring the trust is set up correctly is imperative to ensure an agency remains legally compliant and that contributions, earnings or distributions occur on a tax-exempt basis. But what are the CSMFO.ORG

requirements of a “GASB compliant trust?” According to GASB, in order for a trust to be compliant, it must be: (1) irrevocable, (2) inaccessible to creditors and (3) established for the sole purpose of prefunding pension contributions.

In essence, GASB makes it very clear that the trust must be solely for pension prefunding, with the upside that with clear parameters, assets held within an eligible trust can offset liabilities on financial statements.

Even with the GASB restrictions, entities often do not realize that once

an eligible Section 115 trust is set up, the monies can be accessed at any time to pay for any pension related costs.

For instance, some entities choose to run their annual pay-as-you-go through these trusts, others look to use the funds only in tough budgetary times, and there are also those who aim never to touch the assets before the pension plan is fully funded. There is flexibility along with local control of funds.

These advantages, coupled with the other key benefits that prefunding brings, means that these unique trust programs are only likely to continue growing in popularity now and in the years to come.

PARS administers over 1,400 retirement plans for 780+ public agency clients and more than 375,000 public employees.

PARS designed one of the first irrevocable pension prefunding trusts in the nation.

In combination with The PARS OPEB Trust, which already comprises over 200 agencies and over $1 billion in assets, the company is now one of the largest private providers of multiple-employer Section 115 trusts in the nation. PARS holds an exclusive IRS-Private Letter Ruling for its Section 115 Pension Rate Stabilization Program (PRSP) Trust. For more information on PARS as well as

PRSP contact PARS at prsp@pars.org or visit their website at www.pars.org/ prsp.

5 key advantages of pension prefunding through an IRScompliant Section 115 trust: 1. Contributions to the trust are considered “assets” that could offset liabilities on financial statements, potentially improving credit ratings 2. Investment diversification within the trust can result in a potentially greater rate of return over the long run 3. Assets can be accessed at any time for pension-related expenses, used to offset future pension rate increases and other growing costs, or as a rainy day fund 4. Prudent pension plan management helps agencies continue to address longterm benefit liabilities 5. Prefunding now means future generations will not bear a disproportionate burden of the costs

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Changing Standards for Other Post-Employment Benefits David Bullock, CPA, Partner, MGO CPAs & Advisors

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multiple-employer will disclose a new measure: its proportionate share of the collective Net OPEB Liability.

he Governmental Accounting Standards Board (GASB) issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (GASB 74), and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (GASB 75), which address the accounting and financial reporting for other postemployment benefits (OPEB) that are provided to employees of state and local governmental employers. OPEB plans provide retiree health insurance and other health-related benefits as well as death benefits, disability, long-term care, life insurance, and other services when those benefits are provided separately from a pension plan. Termination benefits and termination payments for sick leave are not included under OPEB. This article will focus on GASB 75, which relates to the employer’s accounting and financial reporting of OPEB. Governments have historically recorded liabilities that only reflect the unfunded portion of annual required OPEB contributions. The new standards will now require that governments report their total OPEB liabilities, net of the fair value of the plan’s resources (i.e., fiduciary net position).

Under the new guidance, an annual OPEB expense will be matched to the period in which those benefits are earned. Expense recognition will be more volatile as employers will generally be using shorter amortization periods than used in past standards. By comparison, the current standards allow a maximum amortization period of 30 years for the unfunded actuarial

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The new standard essentially requires a separation of accounting and funding for OPEB. It requires financial reporting based on the actuarial present value of projected benefit payments that is attributable to past periods of employee service, less the plan’s fiduciary net position, rather than the plan funding.

The annual required contribution (ARC) concept for recognizing OPEB expense in accrual-based financial statements is eliminated.

However, OPEB expenditures (i.e., ARC payments) will still be used as the outflows measurement in governmental funds. Governments that do not provide OPEB through a trust would be required to recognize the total OPEB liability in the financial statements.

liability, whereas the new standards use the amortization period of 5 years for investment purposes or the average of the expected remaining service period of all employees for everything else, both of which are much shorter than 30 years.

While single employer and agent multiple-employer plans have reported the actuarial funded status of OPEB plans under current standards, costsharing multiple-employer plans have not. Cost-sharing employers currently do not report any share of the plan’s actuarial funded status of OPEB. Under the new standards, a cost-sharing

GASB 75 will be effective for fiscal years beginning after June 15, 2017. Employers will be required to restate beginning balances under the new rules. An OPEB plan may elect to early implement GASB 74, e.g., implement for its fiscal year ending June 30, 2016 financial statements.

While information may be available for employer(s) participating in an OPEB plan to early implement GASB 75, the standard does not require employers to simultaneously early implement GASB 75. For example, employers with a June 30 year-end can wait until the required implementation date of June 30, 2018 to report its Net OPEB Liability under the new standard even if the OPEB plan made GASB 74 information available as of June 30, 2016.

Moving forward, governments should familiarize themselves with the standard and assess the effects it will have on

CSMFO.ORG

their financial statements. Liabilities are expected to be large, and those who have not provided any funding to OPEB plans may not have any fiduciary net position to offset the liability, and in fact, may have a significantly larger liability due to using a lower discount rate in the actuarial valuation.

• Have you identified a basis for the distribution of OPEB expense/ expenditures, the Net OPEB Liability, and the deferred items?

A properly thought out plan on the front end will ensure an efficiently designed implementation. As there are many variables in the OPEB standards, spending the time to identify the key components is critical to staying on course and advising management and governing bodies of the impact to the financial statements. Key planning considerations may include the following:

• Have you started working on the reconciliation between governmental funds and governmental activities?

• Have you determined your type of OPEB plan(s)?

• For cost-sharing multiple-employer plans, do you agree with the methodology for determining your organization’s proportionate share of the collective Net OPEB Liability?

• Have you identified the source of plan and actuarial information, and the timing of that information?

• Have you evaluated the actuarial assumptions, in particular, the use of an appropriate discount rate for underfunded plans?

• Have you determined the appropriate Measurement Date?

• Have you identified all the employees that make up your organization’s OPEB plan within the reporting entity (e.g., component units)?

• Have you reported the expected changes to executive management and your governing body?

As you complete your planning considerations, the next step is to evaluate the financial statement impacts of reporting the Net OPEB Liability and the OPEB expense. Key accounting considerations include the following: • How will you determine the Net OPEB Liability?

• Have you examined the components of the changes in the Net OPEB Liability, including those immediately recognized and those to be deferred and amortized?

• Have you developed an allocation methodology for the distribution of OPEB throughout the reporting entity?

• How will the impact of creating a negative fund net position arising from the Net OPEB Liability affect your government-wide, proprietary fund, or fiduciary fund financial statements?

• Have you assessed the impact of “cost recovery” in proprietary funds associated with the new measurement and reporting of the Net OPEB Liability and OPEB expense?

and certain ratios; and (3) the actuarially determined contributions or statutorily/ contractually established contributions.

Many governments are feeling a bit more confident implementing the upcoming OPEB standards due to the recent implementation of pension standards under GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27 (GASB 68), which are very similar to the OPEB standards.

One thing to keep in mind, for those employers participating in the CalPERS California Employers’ Retiree Benefit Trust Fund, where the actuarial valuation is procured directly by the participating government, the OPEB related information will be gathered from two sources (the plan and the actuary), and the calculation of OPEB related amounts will be performed by the employer government. Therefore, the OPEB information may not be provided in a comprehensive reporting package from the plan. Employers should understand what information will be provided by the plan and what information the employer must obtain and plan for it accordingly.

Once the accounting considerations are completed, the next step is to determine what will be disclosed in the notes to the basic financial statements for the increase of trend information In summary, the purpose of presented in the required these changes in financial supplementary information reporting is to make the (RSI), which increases “Employers should government’s obligations from a three-year to a understand what for OPEB agreements ten-year presentation. information will be made with employees Key disclosures should more transparent, provided by the plan and include the following: which will improve the what information the • OPEB Plan usefulness of government employer must obtain...”

Description financial statements.

• Assumptions and other These changes do not inputs, with additional address how a government disclosures surrounding the funds OPEB plans, nor do they discount rate and healthcare cost change the obligations of any plan or trend rate the participating employers. However, some governments may begin to • OPEB Plan’s Fiduciary Net Position reevaluate retiree benefits or how they • Information regarding the are funded, given the new prominence calculation of the Net OPEB Liability of the recorded obligations and the and the deferred outflows and changes to the measurement of OPEB inflows of resources obligations.

• For cost-sharing plans, proportionate share and collective information • RSI schedules on (1) the changes in Net OPEB Liability; (2) the Total OPEB Liability, the plan’s fiduciary net position, the Net OPEB Liability, covered-employee payroll,

25 CSMFO MAGAZINE JUNE 2016

Public Pension Plan Jay M. Goldstone, Former Chief Operating Officer and Chief Financial Officer, City of San Diego

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to those who are already against them.

he new GASB reporting standards have materially changed the accounting and reporting requirements for public pension plans previously mandated under GASB Statements 25 and 27.

The new standards will shine greater light on an agency’s net pension liabilities (NPL) and will possibly increase the debate between those in support of and those against public pensions. While the new standards should lead to more consistent reporting when comparing funding ratios, the fiscal well-being of one plan to another and an agency’s ability to afford its annual pension payments, there still are many unanswered questions.

Some that come to mind include: Do the new standards actually change reality or just the perception regarding public pensions, including the actual unfunded liabilities?

Have the new reporting standards actually improved transparency or just quantified what has already been reported in the notes of your CAFR, in a different manner? How important is it that the new GASB statements separate the actuarial methodology used for reporting purposes from the funding calculation? Does it really matter that you are now required to report your NPL (formerly Unfunded Actuarial Liability) on your balance sheet instead of including the information in the notes of your CAFR? What impact will it have on your income statement when you report your pension expense? How do you explain to your governing board and community the larger swings in NPL now that you no longer have the ability to smooth actuarial gains and losses over five, ten even twenty years and that you now must use the actual market

CSMFO MAGAZINE JUNE 2016

Let me state up front that it is not my intent to debate the merits of the new standards or pensions in general, but rather to generate some thoughts for you to think about as the finance professional(s) in your organization. I have to imagine many of you have already begun asking yourself some of these questions and perhaps have even had to answer questions from your governing board and community. I think it is still too early to fully know the implications, if any, of GASB Statements 67 and 68. Each community will have its own supporters and detractors.

value of your plan assets as of fiscal year end? And, will the rating agencies view your pension liabilities differently given all of these changes or have their respective methodologies already incorporate similar approaches?

Regardless of how you might answer these questions, the changes are certain to increase the debate over pensions and most likely provide a renewed vigor

As someone whose career has brought him face-to-face with more than one pension crisis or controversy and has had to dig deep beneath the pension surface to better understand the interrelationship between the various assumptions that go into calculating a pension liability and the annual pension payment (normal cost and unfunded components), I do believe that the new GASB standards will make it much more difficult for agencies to mask their potential pension problems.

We have seen, over and over again, the actuarial assumptions being changed, not to better reflect reality, but to make the numbers more politically palatable. The use of return assumptions higher than reality in today’s investment environment, as well as the continual extension of the amortization duration for the unfunded liability, has suggested that the size of the net pension liability is smaller than it most likely is and that your payment, especially as a percentage of your overall budget, is more affordable than it is. Any amortization period greater than 15 to 17 years means that the CSMFO.ORG

payment does nothing to pay down the ratio) of your plan, and other time get liability, thus negative amortization. your annual pension payments back That means that you are relying on under control. other factors such as market returns In the end, whether or not GASB and perhaps some luck to reduce your 67 and 68 have changed reality or liability over time. I can say one thing perception, your organization has with 100% certainty: no matter agreed to a future benefit for its what set of assumptions you employees and unless the laws or use to calculate your NPL the interpretation of the laws and pension payment, are changed it is a benefit they will be wrong. This “...new GASB standards that requires adequate is not good or bad, but will make it much more funding. Do not mask your sometimes the actuals difficult for agencies reality or push today’s will move in your favor to mask their potential obligations off to the next and sometimes not. The generation. If the new pension problems” more conservative the GASB standards do nothing assumptions the greater else but forces organizations to the likelihood that your face this head on, then perhaps actual results for a given year at least one objective has been will be better. This is a better yearaccomplished. end surprise than to see your annual pension payments grow each year, draining resources from other programs and services. There is no question that by lowering the assumed rate of return you will earn on your plan assets you will automatically increase your NPL, but in the long run you will increase your chances of exceeding your assumption, improving the financial position (funding

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My Alaskan Adventure in the Last Frontier

By John Adams, CSMFO President

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n early May, I had the pleasure of attending the Alaska Government Finance Officers Association (AGFOA) Spring Conference in Denali, Alaska.

For anyone who has been you will attest to the amazing natural beauty in Alaska, which has the motto of being “America’s Last Frontier”. As a finance officer, I was amazed to find out that the United States purchased Alaska for $7.2 million dollars, about two cents an acre, from Russia in 1868.

Alaska, which is larger than California, Texas and Montana combined, became the 49th state in 1959.

Today, Alaska has an estimated population of 740,000, which is less than Ventura County where Thousand Oaks is located. Alaska reaches so far to the west that the International Date Line had to be bent to keep the state all in the same day. It’s also the only U.S. state extending into the Eastern Hemisphere.

that late spring would be my choice. some takeaways: 1) Tourism, 2) Alaska Plus, who wants to visit in late fall when State Budget, 3) Marijuana Update, it is freezing and there are long and 4) Cyber Security. Tourism is the second largest industry in Alaska with over 1.1 million visitors per year, and is a major revenue source for local boroughs. For the State, over 85% of their General Fund revenue comes from Oil production, so it does not help if the price of oil has declined approximately 60% and production has decreased over 10% over the past five years.

For Marijuana, looks like Alaska is just like California with the potential of legalizing recreational use of marijuana in the near future. What was interesting was the use of technology to track marijuana from “Seed to Sale”. And finally Cyber Security, which made me change all my passwords.

In addition to the sessions, the conference had several activities including a Cabin Night Dinner Theater on Wednesday and a Nature Walk in Denali Park on Thursday The AGFOA has two major training morning. If you are ever in Denali, I events each year, one in the spring and would highly recommend attending a nights. The conference format is very one in the fall. The fall conference is similar to CSMFO, starting Wednesday dinner theater, feel free to check out usually in Anchorage in November, and ending mid-day on Friday. The big http://www.denaliparkvillage.com/ because of the convenience and the difference from CSMFO is the size: there alsakan-cabin-nite-dinner-theatre.aspx. fact that half of the state’s population is As far as visiting Denali Park, the nature were less than 75 attendees, which in the Anchorage/Mat-Su Region. The walk was a great introduction to the spring conference usually rotates around made it very intimate and engaging. history of Alaska and the National the state to less populated areas, like the The sessions were outstanding and Parks. I did find out that 7 of 10 of the Denali Borough, which has a population varied from a GASB Update and largest National Parks are in Alaska. of less than 2,000 people. status on the Economy, to Continuing Just happens that Denali is the third Having the option of visiting Alaska in Disclosure and an Alaska PERS update. largest National Park at just over 6 There were a few sessions that gave me million acres. What is interesting is that late fall or late spring, you could guess

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motorized vehicles are not allowed to be used on 4 million acres and the Park Rangers have to use dog sleds to patrol the park. Also, 16% of the park is covered in Glaciers.

And the final tidbit is that the National Park Service is celebrating its Centennial Anniversary on August 25, 2016.

In closing, I had an amazing time in Alaska, the conference was well done, and the sights and hospitality were tremendous. I just want to thank the President of the AGFOA, Mike Middleton, for the invitation, Annette Ziegman for the hospitality while in Denali, and the whole AGFOA Board for hosting me.

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INSIDE LOOK

Diary of a Host Committee Chair STORY BY DREW CORBETT anyone interested. Follow me @ CSMFOPresElect to get updates on what the Host Committee is up to in terms of conference preparation.

As President-Elect and Host Committee Chair Drew Corbett works on preparations for the 2017 Annual Conference in Sacramento, he thought it would be fun to give the membership a glimpse into the process of putting the conference together.

Each month, Drew will provide a running commentary on some of the work that goes into conference preparations.

April 19, 2016: Melissa and I have been discussing a potential theme for the conference, as well as conference logos, since March.

Those ideas have gone through two rounds of design, and a few prototype logos for the conference have been developed. I shared these with the Host Committee to get their feedback and insight. Response was very positive to the theme, and the vote on the logo was split but certainly favored one in particular. I personally liked them all, so I can understand why there wasn’t a unanimous choice, but ultimately we’ll have to pick one. As soon as we get all of that settled, we’ll announce it to everyone.

April 23, 2016: In my last diary, I mentioned the importance of the Host Committee being well coordinated with the Program Committee. Another area of needed coordination between CSMFO committees is between the Host Committee and the Membership Benefits Committee. The Membership Benefits Committee plays a vital role at the conference and in its planning. You all may be familiar with session that has been held during the conference for the last several years that focuses on maximizing the benefit you get out of CSMFO. Well, that’s a session produced by the Membership Benefits Committee. How about the CSMFO booth in the Exhibit Hall? And the new “Ask the Expert” that’s been added to the booth? Yep, both are the work of the Membership Benefits Committee.

To that end, the Host Committee needs to make sure it is well coordinated with Membership Benefits during the planning process. To that end, I have asked Board Member Marcus Pimentel, who also serves on the Membership Benefits Committee, to serve as the

DREW CORBETT liaison between the two committees.

April 29, 2016: Lots of activity on a number of fronts over the past few days. I met with Janet and Teri to discuss getting the regular Host Committee meetings set up from now until the conference. While a lot of the work is being done offline by subcommittees, having regular meetings allows everyone to provide input on the various conference components, and it helps ensure the communication is flowing as smoothly as possible.

Janet has taken on the task of trying to set these meetings up, which is no small task given everyone’s busy schedules and the fact that we have committee members scattered throughout the Sacramento area, the Bay Area, and even two down in Southern California. I expect us to hold our first meeting in May and then to have one full committee meeting each month through January 2017. I also exchanged a number of emails with Program Committee Chair Viki Copeland, who is working on securing our Thursday General Session speaker. We’ve almost got that tied up, and as soon as we do, I’ll let everyone know who it is. I’m certain that you’ll be excited about our selection.

I’m also excited to announce that Melissa has “green lighted” a twitter account for me so I can share updates on conference preparations with

May 1, 2016: David Cain is heading up the sub-committee that is looking for a great speaker for the Wednesday Keynote. This is the first official event to kick-off the conference, and it is a great tone-setter for the rest of the week. Getting the right person is very important. David, Joan Michaels Aguilar, and Pam Arends-King took on the task of reviewing a number of speakers and getting it down to a “short list” for full committee review. I just finished reviewing the videos of the candidates on the short list and have my feedback ready for David. This aspect of the conference, along with selecting the theme and the logo, will be the main focus areas of our first full committee meeting.

May 4, 2016: As I noted in my April 19th entry, one of the three logos the Host Committee was reviewing was the favorite of the majority of the committee members. Janet, however, had a great idea to combine some of the aspects of the other two logos into the first one, and Melissa had the designer mock that up for us. I went back out to the committee and had them vote for the original or the updated version, and the response was overwhelmingly for the updated version that kept the original logo but combined some aspects of the other two. It looks great, and after our first official Host Committee meeting where we finalize the theme and the logo, I will announce it to the membership.

May 11, 2016: Speaking of our first full committee meeting, we finally got a recurring monthly meeting set up for the group. Coordinating calendars amongst all of the busy professionals who serve on this

33 CSMFO MAGAZINE JUNE 2016

committee was quite the task. Thanks to Janet for polling committee members to find out what worked best in their respective calendars. After receiving and compiling the results, she shared them with me and we determined the recurring date that worked for the most people. Our first meeting is set for May 18th, which is right around the corner!

May 1 – May 14, 2016: I have continued to have a number of one-off email exchanges and phone calls with many different folks on conferencerelated issues. Logos, speakers, events, keynotes, and breakout sessions were all topics of discussion, and those discussions occurred with folks who are on the committee and those who are not. As I mentioned in my initial diary, picking the members of the Host Committee was so tough because there was no shortage of people who were interested in being a part of it and have a lot to offer. I had to make some difficult decisions to keep the size of the committee manageable, but what has been so great is that so many people who aren’t on the committee have provided input, thoughts, or suggestions on various things related to the conference and have offered to help in any way they can. It’s been great to get new ideas and perspectives from such a wide variety of people, and I appreciate the input.

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