QUESTION: Does ProVal calculate the discount rate required by paragraphs 26-31 and 64-69 of Governmental Accounting Standards Board Statement No. 68?
ANSWER: ProVal will not determine the GASB 68 discount rate directly, but you can derive it using ProVal output. Below are two possible approaches for developing Table 1 in Illustration 1 of GASB No. 68.
The example in Illustration 1 of GASB No. 68 uses a simple approach for determining projected salary, fiduciary net position and cash flows in future years, which depends only on the results from a Valuation. This is described in the first approach below. The second approach is more complex and requires Core Projections. The actuary should use professional judgment to determine whether either one of these or an alternative methodology is appropriate.
Valuation approach
· Run a Valuation and output the following items:
a. Total Salary
b. Normal Cost, and select Details for employer/employee normal cost split (to isolate the employee contribution piece)
c. Projected Benefits by year
d. Projected Active Salary by year
· Fill in the columns of Table 1 above as follows:
a. “Payroll for Current Employees:” Enter the Projected Active Salary by year from ProVal
b. “Payroll for future employees”: column (c) less column (a)
c. “Total employee payroll:” Enter the Total Salary from ProVal in row 1 and the assumed total payroll in future years
d. “Contributions from current employees:” Employee contribution rate times column (a), where employee contribution rate equals the employee contribution portion of the normal cost output from ProVal divided by the first year salary
e. “Employer contributions for current employees:” Employer contribution rate times column (a), where employer contribution rate is either defined by statute or otherwise estimated as described in paragraph 28 of GASB No. 68.
f. “Contributions related to payroll of future employees:” Employee contribution rate; plus employer contribution rate; less normal cost rate; times column (b); where normal cost rate is the gross normal cost (with employee contributions added back in to the net) divided by the first year salary
g. “Total contributions:” Calculate as column (d) + (e) + (f)
Core Projection approach
· Run a closed group Core Projection for up to 99 years on the baseline sensitivity (Run I)
a. Output the Expected Benefit Payments, Normal Cost split by employer/employee and Total Salary
· Run an open group Core Projection for up to 99 years on the baseline sensitivity (Run II)
a. Output the Expected Benefit Payments, Normal Cost split by employer/employee and Total Salary
· Fill in the columns of Table 1 above as follows:
a. “Payroll for current employees:” Enter the Total Salary by year from Run I above
b. “Payroll for future employees:” column (c) less column (a)
c. “Total employee payroll”: Enter the Total Salary by year from Run II above
d. “Contributions from current employees:” Enter the employee contribution portion of normal cost output from Run I above
e. “Employer contributions for current employees:” Employer contribution rate times column (a); where employer contribution rate is either defined by statute or otherwise estimated as described in paragraph 28 of GASB No. 68.
f. “Contributions related to payroll of future employees:” employee contributions from Run II minus employee contributions from Run I; plus employer contribution rate times column (b); less normal cost from Run II minus normal cost from Run I.
g. “Total contributions:” column (d) + (e) + (f)
Once the total contributions have been determined through the Valuation approach or Core Projection approach, Tables 2 and 3 from Illustration 1 of GASB 68 can be filled in to determine the discount rate.
Fill in the columns of Table 2 above as follows:
a. “Projected Beginning Fiduciary Net position:” Enter the current fiduciary net position in row 1, then set rows 2, 3, etc., equal to column (f) from rows 1, 2, etc.
b. “Projected total contributions:” Enter the values from column (g) of Table 1
c. “Projected benefit payments:” Enter the projected benefit payments by year (either from a Valuation or closed group Core Projection)
d. “Projected administrative expenses”: Enter the current year administrative expenses in row 1, then increase with the assumed increase rate to obtain rows 2, 3, etc.
e. “Projected Investment Earnings:” investment return on columns (a) through (d)
f. “Projected Ending Fiduciary Net Position:” (a) + (b) – (c) – (d) +(e)
Fill in the columns of Table 3 above as follows:
a. “Year:” Enter the values 1 to n
b. “Projected Beginning Fiduciary Net position:” Enter the values from column (a) of Table 2
c. “Projected benefit payments:” Enter the values from column (c) of Table 2
d. “Funded Portion of Benefit Payments:” column (c) when (c) >= (b), else 0
e. “Unfunded portion of benefit payments:” column (c) when (c)<(b), else 0
f. “Present value of funded benefit payments:” column (d) discounted with the long term investment rate of return (as described in paragraph 26a)
g. “Present value of unfunded benefit payments:” column (e) discounted with the assumed yield on high quality corporate bonds (as described in paragraph 26b)
h. “Present value of benefit payments using the single discount rate:” column (c) discounted with a single discount rate; by iteration, solve for the single discount rate so the sum of column (h) equals the sum of columns (f) and (g).