GASB 43 and 45 OPEB James M' Williams Member of the Board Governmental Accounting Standards Board

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GASB 43 and 45 OPEB James M.
WilliamsMember of the BoardGovernmental
AccountingStandards Board

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

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Objectives of Session

• OPEB basics and GASB OPEB objectives
• OPEB accounting
• Implicit rate subsidies
• OPEB reporting and disclosures
• Use of OPEB display and disclosures
• Implementing GASB OPEB statements
• OPEB reminders and resources

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OPEB Basics and GASB OPEB Objectives
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Other Postemployment Benefits (OPEB)

• The term refers to postemployment benefits other
  than pensions
• OPEB include
• Postemployment healthcare benefits (medical,
  dental, vision, hearing)
• Also, other forms of postemployment benefits when
  provided separately from a pension plan (for
  example, life insurance, long-term care, cash
  stipends if compensation for services)

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Why Does GASB Consider OPEB Important?

• Potential materiality, complex issues related to
  measurement and recognition of costs and
  obligations
• Inadequacy of pay-as-you-go accounting practice
  to provide complete decision useful information
  to users

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What Are the Objectives of the GASBs OPEB
Standards?

• Recognize OPEB cost (expense) systematically over
  periods approximating employees years of service
• Provide relevant information about
• Actuarial accrued liabilities for promised
  benefits associated with past service
• The annual cost of OPEBand its effect on the
  total cost of government services
• The progress made in funding the plan

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Two GASB OPEB Statements

• GASB OPEB statements
• GASB 43 for plans
• GASB 45 for employers
• Based on GASB pension statements
• GASB 25 for plans
• GASB 27 for employers

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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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Reporting Pension Benefits and OPEB Applicable
Standards

• Pension benefits? GASB 27
• Retiree healthcare benefits? GASB 45
• Retiree healthcare benefits Two
  benefits, DB pension through a DB pension plan?
  benefit (GASB 27)
  and OPEB (GASB 45)
• Postemployment benefits other If
  through a DB pension than retirement income
  (pensions) plan, report as pension or
  retiree healthcare (e.g., life in-
  benefits (GASB 27) if surance or long-term
  disability)? provided separately,
  report as OPEB (GASB
  45)
• Termination payments of GASB 16
  (compen-
• unused sick leave? sated absences)
• Termination benefits? GASB 47
  (termination
• benefits)

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OPEB Accounting
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MeasurementA Statement 27 Approach

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

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What Are the Key Featuresof Allocation?

• Actuarial cost method
• Entry age
• Frozen entry age
• Attained age
• Frozen attained age
• Projected unit credit
• Aggregate
• Amortization of unfunded accrued liability30
  years maximum
• Amortization methodlevel dollar or percentage of
  projected payroll

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Amortization

• Periods
• Maximum30 years, no transition
• Minimum10 years
• Change in actuarial cost method
• Change in method to determine actuarial value of
  assets
• Methods allowed
• Level dollar
• Level percentage of projected payroll

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What Qualifies as a Contribution?

• Made direct payments of benefits
• Paid insurance premiums
• Irrevocably transferred assets to a dedicated
  trust, or other third party acting in that
  capacity, for benefits as they come due in the
  future

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How Frequently Are Valuations Required?

• OPEB plans with 200 or more total
  membersactuarial valuations at least biennially
• OPEB plans with fewer than 200 total
  membersactuarial valuations at least triennially
• OPEB plans with fewer than 100 total members
  could choose (a) actuarial valuations or (b)
  calculations using a simplified alternative
  measurement method

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What is the Alternative Measurement Method?

• Involves the same three broad measurement steps
  as an actuarial valuation with most parameters
• Allows simplification of certain assumptions and
  techniques to permit application by
  nonspecialists
• Assumed retirement age
• Turnover rate
• Marital status

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Implicit Rate Subsidies
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Implicit Rate Subsidies

• Difference between premium charged and rate if
  retirees rate calculated as separate group
• Original ED proposed exemption if employer does
  not otherwise contribute to retirees benefits
• Board reversed its position in GASB 45 based on
  comments received during due process and requires
  recognition of implicit rate subsidies

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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 may not be actually
  paying the actual costs of their benefits

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Implicit Rate Subsidy Example

• Single-employer plan
• 500 plan members
• 400 actives
• 100 retirees
• State law requires employer to allow retirees to
  participate in healthcare group with actives at
  the blended premium rate
• Employer pays blended rate for each active
  employee
• Retirees pay blended premium rate for their
  coverage

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• Blended premium rate 2,880/member
• Total premiums for group 1,440,000
• Nominal contributions at blended rates
• 400 Active 100
• Employees Retirees Total
• Total blended premiums 1,152,000 288,000 1,4
  40,000
• Less Member contributions 0 288,000
  288,000 Employer contributions 1,15
  2,000 0 1,152,000

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• Total premiums for group 1,440,000
• Age-adjusted premiums (determined by actuary)
• Retirees 4,810/retired member
• Actives 2,397.50/active member
• 400 Active 100
• Employees Retirees Total
• Total age-adjusted premiums
  959,000 481,000 1,440,000
• Less Member contributions 0 288,000
  288,000
• Employer contributions 959,000 193,000 1,
  152,000

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OPEB Reportingand Disclosures
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ReportingGovernment-wide and Proprietary Fund
Financial Statements

• Employers 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
  creates a liability (or asset) called the net
  OPEB obligation

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ReportingGovernmental Fund Financial Statements

• Employers recognize as OPEB expenditures the
  amount contributed to the plan or expected to be
  liquidated with expendable available financial
  resources

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What OPEB Disclosures Are Required for Employers?

• Plan description
• Funding policy
• Information on employer contributions for the
  current year
• Information on the Net OPEB Obligation (if any)
• Limited trend information
• Information on the funding status for the current
  year
• Information on actuarial methods and assumptions
  used

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What RSI Is Presented for Soleand Agent
Employers?

• Schedule of funding progressthree valuations
• Actuarial accrued liability (AAL)
• Actuarial value of plan assetsgenerally a market
  related value
• Unfunded AAL (AAL minus plan assets)
• Annual covered payroll
• Ratio of UAAL to annual covered payroll
• Disclosure of factors that significantly affect
  trends

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Use of OPEB Displayand Disclosures
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Annual OPEB Cost and Net OPEB Obligation
Illustration (Employer in Year 2 of Applying
Statement 45)

• Normal cost (current service cost)
  350,000
• Amortization of the UAAL (for past services)
  600,000
• Annual required contribution (ARC) 950,000
• Interest on beginning net OPEB obligation
  50,000
• ARC adjustment (58,500)
• Annual OPEB cost expense 941,500
• Actual employer contribution (PAYGO method
• of financing)
  (250,000)
• Increase in net OPEB obligation
  691,500
• Net OPEB obligationbeginning 650,000
• Net OPEB obligationending
  1,341,500
• The ARC, the annual OPEB cost and its
  components, actual employer contributions, and
  changes in the net OPEB obligation are required
  to be disclosed in the employers notes to the
  financial statements.

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What Do the ARC and the Net OPEB Obligation Tell
Financial Report Users?

• The ARC expressed as a of covered payroll
  represents the level of employer contribution
  effort that would be needed on a sustained,
  consistent basis to cover normal cost and
  amortize the UAAL over not more than 30 years
• An indicator of the size of the employers
  commitment, expressed in terms of the ongoing
  contribution effort required to sustain it
• An indicator of potential long-term demands on
  future cash flows
• The net OPEB obligation indicates whether since
  implementation of GASB 45 an employer has
  contributed less (more) than the ARC

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What Does the UAAL TellFinancial Report Users?

• The UAAL is the portion of the present value of
  projected benefits attributed to past periods
• It can be thought of as a measure of the value of
  employee services that were received by the
  employer and tax/rate payers or constituents in
  past periods but not paid or funded
• Other things being equal, the higher the UAAL,
  the higher will be the following going forward
• Amortization component of the ARC
• The ARC
• Annual OPEB cost, or expense
• Demands on future cash flows, or budgets

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Disclosure of Actual Employer Contributions as a
Percentage of Annual OPEB Cost

• A key factor affecting the funded status of the
  benefits is the level of employer contributions
• Accordingly, employers also disclose for each of
  the past three years the annual OPEB cost, the
  percentage of annual OPEB cost actually
  contributed, and the ending net OPEB obligation

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Implementing GASB OPEB Statements
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GASB 43 and 45 Effective Dates and Transition

• Staggered implementation of GASB 45 based on a
  governments phase for implementing GASB 34
• Phase 1 government (100M total revenue)first
  fiscal year beginning after December 15, 2006
• Phase 2 government (10M to lt 100M total
  revenue)first fiscal year beginning after
  December 15, 2007
• Phase 3 government (lt 10M total revenue)first
  fiscal year beginning after December 15, 2008
• GASB 43 will be effective for the first plan
  fiscal year beginning after December 15, 2005,
  2006, or 2007, depending on the size of the
  largest participating employer in the plan
• Earlier implementation is encouraged
• Employers may apply the measurement requirements
  of GASB 45 prospectivelythat is, the employer
  may report zero beginning net OPEB obligation as
  of the beginning of the year in which it
  implements GASB 45

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What Should a Government Do to Manage Its OPEB
Obligations?

• Neither the GASB nor GASB staff can answer that
  question. However, our hope is that once a
  government has obtained an actuarial valuation
  and developed and absorbed the information
  required by GASB 45, officials will have a better
  basis for informed decision-making.
• In the broadest terms, there are only a few
  alternatives to work with to manage for
  sustainable retiree healthcare benefits (and
  other forms of OPEB)
• The actuarial accrued liability, and factors that
  drive the AAL
• The amount of assets contributed to the plan (the
  issue of whether or to what extent to fundwhich
  involves a related issue of whether or not to
  establish a qualifying OPEB plan trust to enable
  accumulation of plan assets)
• The allocation of the total cost of retiree
  healthcare coverage between the employer and plan
  members
• Within those categories, there may be many
  possibilities and combinations of possibilities

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Conclusions on Implementation

• Dont underestimate what may be involved in
  planning for implementation of GASB 45 (and GASB
  43?) or wait too long to start
• A governments first actuarial valuation
  generally is a watershed event in terms of
  measuring and understanding the financial
  implications of its OPEB commitments
• In the end, the information required to be
  developed and reported by GASB 45 is intended to
  provide the diverse users of governments
  financial reports
• A more transparent accounting for employers
  costs and obligations associated with OPEB,
  particularly postemployment healthcare benefits
• More decision-useful financial information to
  better inform discussion and decision-making
  about important matters including, for example,
  benefits and plan design, cost sharing between
  the employer and plan members, and the method of
  financing benefits

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OPEB Remindersand Resources
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GASB 43 and 45 OPEB Reminders

• Is there a plan?
• Required frequency of actuarial valuations
• GASB 25 and 27 measurement approach
• Importance of implicit rate subsidies
• Has an employer contributed to a plan?
• More guidance in the Comprehensive Implementation
  Guide and other GASB resources

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• Additional GASB OPEB Resources

• GASB website, www.gasb.org
• OPEB fact sheet
• Plain language summary
• Summaries of standards
• Order information (Statements, Imple-mentation
  Guides, Technical Bulletins, etc.)
• A system for submitting technical accounting
  and financial reporting questions to GASBs
  professional staff
• [phone]

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GASB Contact Information

• Street and mailing addresses
• Governmental Accounting Standards Board
• 401 Merritt 7/P.O. Box 5116
• Norwalk, CT 06856-5116
• Web site www.gasb.org
• Karl Johnson contact information
• Telephone [phone]
• E-mail kdjohnson_at_gasb.org

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• Questions