Maryland GFOA

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Maryland GFOA

• GASB Update
• The views expressed in this presentation are
  those of Mr. Bean.
• Official positions of the GASB are determined
  only after extensive due process and
  deliberation.

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Discussion Topics

• Recent Pronouncements
• Exposure Drafts
• Other Due Process Documents
• What Will Be Issued Soon?
• Other Current Projects

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Recently Issued Final Pronouncements
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Recently Issued Documents

• Statement 45Accounting and Financial Reporting
  by Employers for OPEB
• Statement 46Net Assets Restricted By Enabling
  Legislation
• Statement 47Accounting for Termination Benefits
• Concepts Statement 3Communication Methods in
  General Purpose External Financial Reports That
  Contain Basic Financial Statements

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Recently Issued Documents

• Implementation guides
• OPEBStatements 43 and 45
• Statistical sectionStatement 44
• Comprehensive2005 edition
• New User GuideNotes and supporting information

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Effective Dates

• June 30, 2006
• Statement 34, Retroactive infrastructurePhase I
• Statement 42
• Statement 44
• Statement 46
• Statement 47
• June 30, 2007
• Statement 27, Amortization period
• Statement 34, Retroactive infrastructurePhase II
• Statement 43Phase I
• June 30, 2008
• Statement 43Phase II
• Statement 45Phase I

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Statement 44The New Statistical Section

• A Principle-based Standard with Specific
  Provisions

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A Quick ReviewFive Categories

• Financial trend information
• Revenue capacity information
• Debt capacity information
• Demographic and economic information
• Operating information

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Financial Trends Information

• Net assets
• Changes in net assets
• Financial resourcesinflows, outflows, and
  balances
• Governmental funds

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Revenue Capacity Information

• Schedules should focus on a governments most
  significant own-source revenue (not just property
  taxes)
• Revenue base (updated)
• Revenue ratesdirect and overlapping (updated)
• Principal revenue payers (updated)
• Property tax levies and collections, if
  applicable (updated)

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Debt Capacity Information

• Ratios of outstanding debt (new)
• Includes all long-term debt
• Ratios of general bonded debt, if applicable
  (updated)
• Includes all general obligation and any other
  bonded debt financed with general governmental
  resources

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Debt Capacity Information

• Direct and overlapping debt (updated)
• Legal debt margin (updated)
• Pledged-revenue coverage (updated)
• Includes all debt backed by pledged revenues, not
  just revenue bonds

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Demographic and Economic Information

• Demographic and economic indicators (updated)
• Population, total personal income, per capita
  personal income and unemployment rate required
  other indicators encouraged
• Principal employers (new)
• Ten largest employers in terms of number of
  persons employedunless fewer are needed to reach
  50 of total

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Operating Information

• Government employees (new)
• Number employed by function, program, or activity
• Operating indicators (reorganized)
• Indicators of demand or level of service
• Capital assets information (reorganized)
• Volume, usage, or nature of capital assets

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What Are the Effective Date and Transition
Provisions?

• Effective for periods beginning after June 15,
  2005 (June 30, 2006)
• Retroactive reporting encouraged, but not
  required
• Encouraged, but not required, to report
  government-wide information retroactively to the
  year Statement 34 was implemented

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Statement 43 and 45

• Other Postemployment Benefits
• What Do You Need to Know?

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Why Are We Discussing This Now?

• All about planning
• Significant policy implications that are not 11th
  hour considerations
• When should an actuary (if any) be engaged?
• Should changes (if any) be made to the plan?
• Fund or not to fund?

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What is the Substance of the OPEB Transaction?

• Postemployment benefits (both pensions and OPEB)
  are part of the compensation for services
  rendered by employeesthat is, they are part of
  an exchange transaction

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What are the Reporting Objectives?

• Recognize OPEB cost (expense) systematically over
  periods approximating employees years of service
• Provide relevant information about
• (a) actuarial accrued liabilities for promised
  benefits associated with past service,
• (b) the annual cost of OPEB, and
• (c) progress made in funding the plan

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What is an OPEB Plan?

• The plan as understood by the employer and plan
  members
• Should be based on the types of benefits provided
  at the time of each valuation, including any
  changes made and announced to plan members

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MeasurementA Statement 27 Approach

• All postemployment benefits (OPEB as well as
  pensions) will be reported using the same general
  approach.
• Broad steps
• Project cash outflows for benefits
• Discount projected benefits to present value (PV)
• Allocate the PV of projected benefits to periods
  using an acceptable actuarial cost method

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Employee Age Timeline
Assumed age at retirement
Age when hired
Life Expectancy
Present age
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Recognition in Government-wide and Proprietary
Fund Financial Statements

• Employers would report OPEB expense in an amount
  equal to annual OPEB cost for the period,
  regardless of the amount paid
• The cumulative difference between amounts
  expensed and contributions or benefits paid would
  create a liability (or asset) called the net OPEB
  obligation

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Why Are Implicit Rate Subsidies So Important?

• When current employees and retirees are in the
  same groupcosts for retirees generally are
  significantly higher
• Therefore, retirees that pay for the cost of
  healthcare benefits through a blended (with
  current employees) premium often are not paying
  the actual costs of their benefits

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Implicit Rate Subsidies

• Difference between the common premium charged
  and the actual rate needed if retirees rate was
  calculated as separate group
• Even if employer does not otherwise contribute to
  retirees benefits

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Implicit Rate Subsidy Example
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How Frequently Should An Actuarial Valuation be
Done?

• OPEB plans with total membership (active
  employees and retired) over 200at least
  biennially
• OPEB plans with total membership of 200 or
  fewerat least triennially
• OPEB plans with total membership of 100 or
  feweroption to use alternative calculation
  method with certain simplifying assumptions

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OPEBEffective Dates

• Phased implementation based on same phase used
  for Statement 34
• Benefit Plan implementation is for years
  beginning after December 15, 2005, 2006, or 2007
• Employer implementation is for years beginning
  after December 15, 2006, 2007, or 2008
• Earlier application is encouraged

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Statement 46

• Net Assets Restricted by
• Enabling Legislation

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Background

• Statement 34 identifies three sources of
  restrictions on net assetsexternal parties,
  constitutional provisions, and enabling
  legislation
• Enabling legislation is a type of legislation
  that authorizes the raising of a new revenue (not
  earmarking existing revenues) and that contains a
  legally enforceable restriction on the purpose
  for the use of those revenues

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Objectives of Statement 46

• Amend Statement 34 to address practice issues
  raised
• Provides clarification regarding legal
  enforceability

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Legal Enforceability

• Legal enforceability means that an external
  partysuch as citizens, a public interest group,
  or the judiciarycan compel a government to abide
  by the restriction
• Remains a matter of professional judgment, which
  may include reviewing determinations for similar
  legislation, obtaining the advice of legal
  counsel, or other actions

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Legal Enforceability

• Restrictions should be reviewed on a case-by-case
  basis
• If a restriction is found to no longer be legally
  enforceable, a government may reevaluate the
  legal enforceability of similar restrictions, but
  should not necessarily conclude that all such
  restrictions are unenforceable
• Prohibitions against one legislature binding a
  subsequent legislature generally are not, on
  their own, sufficient basis for determining a
  restriction is not enforceable

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Statement 46Effective Date

• Periods beginning after June 15, 2005

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Statement 47

• Accounting For Termination Benefits

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Accounting for Termination Benefits

• Inducements or payments for early termination of
  services
• Voluntary and involuntary
• Recognition issues in accrual basis financial
  statements
• Voluntarywhen the offer is accepted and amount
  can be estimated
• Involuntarywhen the offer is communicated to
  employees and amount can be estimated

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Accounting for Termination Benefits

• Measurement Issues
• Healthcare-related benefits
• Non-healthcare related benefits
• Effect on employers defined benefit
  postemployment benefit obligations
• Disclosure requirements
• Effective Dates
• Periods beginning after June 15, 2005
• Exception for defined benefit OPEB

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Exposure Drafts
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Sales and Pledges of Receivables and Future
Revenues

• Exposure Draft

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Primary Guidance

• Transactions of this nature should be reported as
  a collateralized borrowing unless the conditions
  required for reporting as a sale are met.

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SalesReceivables

• PrincipleNo continuing involvement in
  transaction
• Criteria
• Transferees ability to sell or pledge the
  receivables is not restricted
• Receivables are isolated from the transferor
  government
• Transferor does not have the ability to
  unilaterally remove specific accounts

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SalesFuture Revenues

• Principleno continuing involvement in the
  transaction
• Own-source revenues and most other future
  revenues will not qualify
• Revenue recognitionperiod in which the revenue
  relates, will result in deferral of proceeds

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Project Timetable

• Exposure DraftComment deadline recently passed
• Final StatementAugust 2006

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Accounting and Financial Reporting for Pollution
Remediation Obligations

• Exposure Draft

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Types of Remediation Obligations

• Pre-cleanup activities site assessment,
  feasibility study, design
• Cleanup activities neutralization, containment,
  disposal activities
• Oversight and enforcement costs
• Operation and maintenance of the remedy and
  monitoring

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Recognition Threshold

• Determine whether one of more components of a
  pollution remediation obligation are recognizable
  as a liability when . . .
• Government knows or reasonably believes that a
  site is polluted, and
• Obligating event occurs

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Obligating Events

• Imminent endangerment compels action
• Violate pollution prevention permit
• Named as responsible party
• Named in lawsuit to enforce action
• Voluntary remediation commenced

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Recognition

• Recognize components of liability as they become
  reasonably estimable
• Recognition benchmarks
• Cost accumulation, not fair value
• Current value, not present value
• Expected cash flow technique would be required

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Capitalization Criteria

• Outlays to prepare property for anticipated sale
• Outlays to prepare property for use when known
  polluted property was acquired and expected to be
  remediated
• Outlays to restore pollution caused decline in
  service utility that was recognized as an asset
  impairment
• Outlays used to acquire assets that will have
  alternative uses other than remediation efforts

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Project Timetable

• Preliminary ViewsMarch 2005
• Public HearingJune 2005
• Exposure DraftJanuary 2006
• StatementNovember 2006

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What Will Be Issued Soon?

• Accounting for Medicare Part D PaymentsED in
  February and Final TB in June
• Derivatives and HedgingPV in April
• Fund Balance ReportingITC in July
• Elements of Financial StatementsED in August
• Sales and Pledges of Receivables and Future
  RevenuesStatement in August

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Other Current Projects

• Intangible AssetsED in September
• Comprehensive Implementation Guide
  UpdateSeptember
• Recognition and Measurement AttributesConcepts
  Statement

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Research Agenda

• Economic Condition Reporting
• Electronic Financial Reporting
• Intergovernmental Financial Risks
• Pension Accounting and Reporting
• Reporting Units / Statement 14 Revisited
• Service Efforts and Accomplishments Reporting

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• Questions?

Telephone[phone] Web sitewww.gasb.org