Pension Trends &

Understanding Changes to GASB 68 Presented by

Betsy Waldofsky, Finance Director &

Leon Hank, Chief Finance Officer

About MERS• MERS is a nonprofit organization,

independent from the State, that provides retirement plans for municipal employees

• We listen and work in partnership with our members to deliver a superior value that meets their needs

• We provide one-stop access to shared professional retirement services

• MERS administers over 2,000 plans represented by 800 Michigan municipal employers and more than 100,000 participants

38,000 +Number of MERS participants

retired from or working for county governments or road

commissions

90% + Percentage of MERS 26,000+

retirees that remain in the state

23,000 +Number of MERS participants

retired from or working for city governments

$18,000 +Average annual pension

payment

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Trends in Retirement

Baby Boomers • The first Baby Boomer

reached age 65 January 1, 2011

• 77.3 Million Baby Boomers in the US • Currently makes up

25% of the entire US population

Longer Lives • Average lifespan is

78.7 years old • Normal retirement age

can change in the future

Preparing for Retirement• Auto Enrollment for

Defined Contribution Plans

• Employers and other nonprofits are promoting financial literacy programs

• MERS is working to help prepare municipal workers for retirement

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Trends in Plans

Defined Benefit • Portfolio structure• Act 314 updates,

focusing on strengthening governance of plans

• Focus on Unfunded Accrued Liability

Defined Contribution• Investment Menu• Focus on fee

transparency

Hybrid Plan • Combination of

both Defined Benefit Plan and Defined Contribution Plan

• Can reduce liability for municipalities moving forward

Strategy Description Municipal Adoptions Impact

Cost Sharing for Existing Employees

Employees contribute to help fund the overall cost of the plan

• Reduces the employer cost, but does not affect total cost, or the plan’s unfunded liability

Lower Benefit for New Hires

New hires receive a lower tier of Defined Benefit provisions

• Existing employees are not affected

• Reduces the liability for new hires

Bridged Benefits for Existing Employees

Benefits are offered in parts to existing employees

Multiplier is then lowered on a going-forward basis

• Leaves earned benefits unchanged

• Reduces the liability for new hires and existing employees

Hybrid for New Hires

New hires receive a Hybrid Plan

• Existing employees are not affected

• Reduces the liability for new hires

Defined Contribution for New Hires

New hires receive a Defined Contribution Plan

• Existing employees are not affected

• Eliminates the liability for new hires

109176 149

245

3

61 65

40

2

1417

11

314

61

25

4

19 1823

2010 2011 2012 2013, as of Q3

Pension Trends – Plan Design Changes

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MERS Defined Benefit Plan• Our Defined Benefit Plan is a multiple-employer plan

meaning that assets are pooled for investment purposes but separate trusts are maintained for each individual employer– Each municipality is responsible for their own plan liabilities; we do

not borrow from one municipality’s account to pay for another

– This is in contrast to a single-employer plan run by a municipality or a cost-sharing multiple-employer plan run by the State

• MERS does not have a “funded status” (each municipality has its own funded level)– 67% of all MERS’ 711 defined benefit and hybrid municipalities are

funded over 70%

– 108 municipalities are more than 100% funded

Distribution of Funded Percentage

Under 50%

50 - 59% 60 - 69% 70 - 79% 80 -89% 90 - 99% Over 100%

38

58

136

178

125

68

108

What is Unfunded Liability?

• Unfunded liability is simply the difference between a pension or OPEB plan’s estimated benefits and assets that have been set aside to pay for them– The dollar value of the benefits is actuarially

determined each year

– Assets are held in a trust and are professionally managed

Why Do Unfunded Liabilities Occur?

• Benefit improvements adopted • When municipalities don’t make et the

minimal required contributions as determined by the actuary

• Experience of the plan (investment experience and demographic experience)– This is the difference between what actually

happens in the plan compared to the actuarial assumptions

Economic Vitality Incentive Program (EVIP)

EVIP (for eligible cities, villages or townships) and CIP (for eligible counties) are revenue sharing packages for municipalities.

• Include three categories of eligibility, each with its own set of requirements and deadlines, and

• Offering 1/3 of the total available incentive revenue

EVIP Category 3 addresses unfunded accrued liabilities Requires local units of governments with unfunded accrued liabilities in pensions or other post employment benefits to submit a plan to lower liabilities

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Unfunded Accrued Liability Resources Web Resources

EVIP Template

Strategic Partnerships• Michigan Municipal League• Department of Treasury • Michigan Local Government

Management Association

GASB 68 Resources• GFOA Resources• Webinars• Fact sheets• Glossary of Terms• How to

communicate changes with your board

Understanding Changes to GASB

New Pension Reporting Standards

The Governmental Accounting Standards Board (GASB) issued two new standards that will substantially change the accounting and financial reporting of public employee pensions

Statement No. 67 - Financial Reporting for

Pension Plans• Revises existing

guidance for the financial reports of most pension plans

Statement No. 68 - Accounting and Financial Reporting for Pensions

• Revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits

Key Changes for 2015

• Net Pension Liability (NPL)• Net Pension Expense• Deferred Outflows and Inflows• Discount Rate

What is Net Pension Liability?

Total Pension Liability

Actuarial Value of Assets

Unfunded Accrued Liability

Total Pension Liability

Market Value of Assets

Net Pension Liability

Today:

Future:

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Net Pension Expense

• Today– Annual Required Contribution (ARC) and

Pension Expense are the SAME

• Future– Annual Required Contribution (ARC) and

Pension Expense are DIFFERENT

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Deferred Outflows and Inflows

• Differences between projected and actual experience

• Changes in assumptions• Difference between projected and actual

earnings

• Similar to depreciation, spread out over future years

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Discount Rate

• Today– Public pension plans use the rate of return they

expect on their investments (8% typically)

• Future– Severely underfunded plans that do not make

contributions must use a lower rate for some of their obligations

What will municipalities actually see?

The Bottom Line

• If pension is well-funded (95%), the liability is likely small

• If plan is less well-funded (60%), the new liability could be the largest number on your balance sheet

• These new rules may make local governments appear weaker

NPL Effects at 94% FundingAssets 2012 2012 with GASB

Cash and Equivalents $ 1,320,000 $ 1,320,000 Receivables, net 10,114,000 10,114,000Capital Assets 27,442,000 27,442,000Total assets 38,876,000 38,876,000

LiabilitiesAccounts Payable/Accrued Liabilities 552,000 552,000Long Term Debt 19,630,000 19,630,000Net pension liability   1,178,000Total liabilities 20,182,000 21,360,000

Net PositionInvested in capital assets, net of debt 10,003,000 10,003,000Unrestricted 8,691,000 7,513,000

Total Net Position $ 18,694,000 $ 17,516,000

NPL Effects at 79% Funding

Assets 2012 2012 with GASBCash and Equivalents $ 6,711,000 $ 6,711,000 Receivables, net 25,870,000 25,870,000Capital Assets, net 18,240,000 18,240,000Total assets 50,821,000 50,821,000

LiabilitiesAccounts Payable/Accrued Liabilities 8,433,000 8,433,000Unearned revenue 6,171,000 6,171,000Long Term Debt 12,342,000 12,342,000Net pension liability   14,792,000Total liabilities 26,946,000 41,738,000

Net PositionInvested in capital assets, net of debt 5,690,000 5,690,000Unrestricted 18,185,000 3,393,000

Total Net Position $ 23,875,000 $ 9,083,000

NPL Effects at 63% Funding

Assets 2012 2012 with GASBCash and Equivalents $ 9,900,200 $ 9,900,200 Receivables, net 24,300,000 24,300,000Capital Assets, net 14,970,000 14,970,000Total assets 49,170,200 49,170,200

LiabilitiesAccounts Payable/Accrued Liabilities 5,590,000 5,590,000Unearned revenue 5,011,000 5,011,000Long Term Debt 26,380,000 26,380,000Net pension liability   35,444,000Total liabilities 36,981,000 72,425,000

Net PositionInvested in capital assets, net of debt 5,690,000 5,690,000Unrestricted 6,499,200 -28,944,800

Total Net Position $ 12,189,200 $ (23,254,800)

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GASB Next Steps

Communications • Municipalities need to find out what this

means for them • Help explain reporting changes to

board/council, media, and citizens to help them understand

• Talk about long-term changes• Use resources

– MERS

– GFOA

Contacting MERS

MERS of Michigan

1134 Municipal Way

Lansing, MI 48917

Phone: 800.767.6377Fax: 517.703.9707 www.mersofmich.com

This presentation contains a summary description of MERS benefits, policies or procedures. MERS has made every effort to ensure that the information provided is accurate and up to date. Where the publication conflicts with the relevant Plan Document, the Plan Document controls.