GASB 43 and 45 Accounting for Other Postemployment Benefits OPEBs

1
GASB 43 and 45Accounting for Other
Postemployment Benefits (OPEBs)

• TAC Annual ConferenceAugust 17, 2006

2
Statement 45 (for Employers/Sponsors)

• Issued June 2004
• Will generally affect an employer that offers
  retiree healthcare or other post employment
  benefits that are not pension benefits
• If applicable to an employer, will require
  accrual-basis accounting for expense and
  measurement and disclosure of funded status
  (UAAL)

3
Statement 43 (for Funded Plans)

• Issued in April 2004
• Affects administrators and sponsors of plans
  (here, meaning a plan that has assets)
• For trusts, requires statements and disclosures
  similar to GASB 25 for non-trust funds, requires
  reporting as an agency fund

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Executive Summary

• GASB Statement Nos. 43 and 45 in brief
• Government employers which sponsor certain
  post-retirement benefits programs (e.g., medical)
  are affected and must generally comply with and
  report under GASB No. 45
• Results in recording expense and liabilities in
  financial statements rather than typical past
  practice of pay as you go expensing
• May have significant impact on sponsors
  financial statements
• Funded OPEB plans must generally comply with and
  report under GASB No. 43
• Sponsors and funded plans will need actuarial and
  accounting analysis to evaluate impact on
  accounting treatment of these plans
• There is opportunity to understand implications
  and explore alternatives before effective date of
  Statements

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What is an OPEB?

• Postemployment benefits other than pensions
  (OPEB)
• Includes postemployment healthcare benefits
  (medical, dental, etc.)
• Includes other types of non-pension benefits
  (e.g., life insurance) if provided separately
  from a pension plan (otherwise accounted for as
  part of pension benefits)
• OPEB does not include special termination
  benefits, early retirement incentive programs,
  etc. (however, effects of these special benefits
  on existing OPEB plans should be accounted for
  under GASB Nos. 43 and 45)
• OPEB does not include conversion of sick leave to
  individual defined contribution retiree
  healthcare accounts (but any subsidy in amounts
  charged for healthcare coverage and deducted from
  account are covered by GASB 43 and 45)

6
Current Practice

• Very few governmental OPEB plans have ever had an
  actuarial valuation
• Most OPEB plans are financed on a pay-as-you-go
  basis
• Financial reporting practice has generally
  focused on reporting outflows of current
  financial resources (i.e., the pay-as-you-go or
  cash basis)
• Therefore, current financial reporting generally
  fails to
• Recognize the cost of benefits in periods when
  services are received
• Provide information about the current value of
  future promised benefits and associated
  liabilities
• Provide information useful in assessing potential
  demands on future cash flows

7
Accrual Recognition of OPEB

• The new standards require that OPEB costs
  generally be recognized over the working lifetime
  of employees
• The new standards are the GASB-equivalent of
  FASBs SFAS No. 106 in the private sector
• The entity legally responsible for making the
  contributions should report and comply with GASB
  45
• Postemployment benefits (both pensions and OPEBs)
  are considered part of compensation for services
  rendered by employees, so theoretically should be
  expensed and accrued during the employees
  working lifetime
• GASB 45 does not apply to sponsor if retirees and
  beneficiaries pay 100 of actuarially determined
  cost of coverage, taking into account only
  retirees and their beneficiaries

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Implementation Provisions for GASB 45

• Prospective implementation the initial Net OPEB
  Obligation on balance sheet is generally set
  equal to 0, regardless of funded status of plan
• Can develop retroactively determined Net OPEB
  Obligation if desired, but this will likely be
  very rare
• Effective for periods beginning after December
  15
• 2006 if sponsor has gt100M revenue
• 2007 if sponsor has 10M 100M in revenue
• 2008 if sponsor has lt10M in revenue
• Earlier implementation is encouraged

9
Recognition in Governmental Entity Financial
Statements

• Under GASB 45, financial statements of employers
  should recognize OPEB expense in an amount equal
  to Annual OPEB Cost for the period, regardless of
  the amount paid in cash
• The cumulative difference between amounts
  expensed and contributions to the plan will
  create a liability (or asset) on the sponsors
  balance sheet called the Net OPEB Obligation
• Additional footnote disclosure and supplementary
  information is required

10
GASB 43 and 45 Accounting Impact
11
Accounting for Employers

• The impact on the sponsor is a function of
• Type of plan (Defined Benefit vs. Defined
  Contribution)
• Plan design
• Cost sharing provisions (sponsor vs. member)
• Assets in trust (if any)
• Demographics of covered members
• Currently virtually no government entities
  prefund or recognize a liability for OPEBs

12
Accounting for Employers

• Currently most governmental entities budget a
  years premiums/claims
• In future will need to budget the ARC (plus
  adjustments, if any) for enterprise and internal
  service funds
• Recognition may impact bond ratings which could
  change the cost of borrowing

13
Accounting for Employers

• Transition employers may (not required to)
  calculate net OPEB obligation at transition
• Most employers will set Net OPEB Obligation at
  transition to zero
• Discussion later focuses on how the unfunded
  actuarial liability is factored into Annual OPEB
  Cost (expense) and potentially becomes a
  financial statement obligation
• On-going Net OPEB Obligation
• Amount recognized at transition (if any), PLUS
• Cumulative difference between the annual OPEB
  cost and the employers contributions

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GASB 45 Note Disclosures (Highlights)

• Note disclosure requirements for OPEB employers
  generally are similar to those for pension
  employers under GASB 27
• Examples
• Disclosures of plan description and funding
  policy (all employers)
• Disclosures of amount and components of annual
  cost, amount actually contributed, change in Net
  OPEB Obligation, and of annual cost contributed
  (sole and agent employers)

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GASB 45 Note Disclosures (Highlights)

• However, the Board has added or modified
  disclosure requirements for OPEB at several
  points
• Examples
• OPEB note disclosures include disclosure of the
  funded status of single-employer and agent plans
  in which an employer participates, as of the most
  recent actuarial valuation (not required for
  pensions under GASB 27)

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GASB 45 Note Disclosures (Highlights)

• Examples (continued)
• There should be expanded explanatory disclosures
  about actuarial methods and assumptions
• The purpose of these is to make reported
  financial information about OPEB understandable
  to a wider range of financial report users

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GASB 45 Note Disclosures (Highlights)

• Information about funded status of the plan
• Actuarial valuation date
• Actuarial accrued liability (AAL)
• Actuarial value of plan assets generally a
  market related value
• Unfunded Actuarial Accrued Liability (UAAL)
• Funded ratio (actuarial value of plan assets/AAL)
• Ratio of UAAL to covered payroll
• Notes regarding changes affecting the
  interpretation of trends in the amounts reported

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GASB 45 Required Supplementary Information
(RSI)Schedule of Funding Progress

• Employers also will be required to disclose as
  RSI multi-year trend information about the UAAL
  and progress made in funding the plan (similar to
  pension plans under GASB 27), including
• Actuarial accrued liability (AAL)
• Actuarial value of plan assets--generally a
  market related value
• Unfunded actuarial accrued liability (UAAL)
  (AAL minus plan assets)

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GASB 45 RSI Required Schedule ofFunding
Progress (continued)

• Funded ratio (actuarial value of plan assets/AAL)
• Ratio of UAAL to covered payroll (an indicator of
  the relative size of the UAAL)
• Notes to RSI regarding changes affecting the
  interpretation of trends in the amounts reported
• Information is required for the most recent
  actuarial valuation plus the two preceding
  valuations
• Special provisions for sponsors in cost-sharing
  plans (information on entire plan to be included
  as RSI)

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GASB 43 Financial Statements for Plans

• Required statements for defined benefit plans
• Statement of net plan assets
• Statement of changes in net plan assets
• Required Supplementary Information (RSI)
• This presentation is for those plans administered
  as trust or equivalent
• Accrual basis (liabilities for benefits and
  refunds recognized when due)
• Investments at fair value in the financial
  statements (but at market-related or actuarial
  value in actuarial valuations to calculate the
  UAAL and the ARC)

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GASB 43 Financial Statements for Plans

• Note disclosures
• Plan description
• Summary of significant accounting policies
• Contributions/legally required reserves (includes
  sources and rates of contributions and funding
  policy)
• For single and agent employers
• Information about funded status as of most recent
  valuation date (similar to GASB 45)
• General information on actuarial methods and
  assumptions

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Comparison with GASB Nos. 25 and 27
23
Comparison with GASB Nos. 25 and 27 (cont.)
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Annual Required Contribution of Sponsor (ARC)

• Key measure that is basis of OPEB expense
  recognition, very similar to ARC for pensions
  under GASB 27
• Represents the level of contribution effort
  necessary on an ongoing, sustained basis to
• Cover the normal cost for each year (normal cost
  is the value of the portion of the ultimate
  benefit allocated to the current year by cost
  method), and
• Amortize the unfunded actuarial liability
  (UAL), or the difference between the actuarial
  liability and plan assets actuarial liability is
  the value of future plan benefits attributable to
  past service of members
• In calculating UAL, due and unpaid or excess
  contributions should not be included in assets
  unless settlement is expected not more than one
  year after the deficiency has occurred or if
  excess is to be used within one year

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Annual Required Contribution (ARC)
Amortization Payment (portion of unfunded
liability)
Normal Cost (value of benefits accruing in
current year)
Annual Required Contribution (ARC)


Annual OPEB Cost (expense)
Annual OPEB Cost (expense)
Interest on Net OPEB Obligation
Adjustment to ARC (amort of Net OPEB Obligation)
Annual Required Contribution (ARC)

-

Net OPEB Obligation (balance sheet)
Net OPEB Obligation (balance sheet)
Accumulated Annual OPEB Cost
Accumulated Employer Contributions

-
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Actuarial Valuations

• Generally must perform actuarial valuation to
  calculate cost and obligations
• Valuations will be required under GASB OPEB
  standards
• At least biennially for plans with 200 or more
  members
• At least triennially for plans with fewer than
  200 members
• More frequent valuations are acceptable
• Generally, expected that calculations would be
  performed by credentialed actuaries with
  appropriate expertise
• Alternative measurement method permissible if
  fewer than 100 members
• Members are current retirees or surviving
  spouses receiving retirement benefits plus active
  employees who could receive benefits in the
  future under current plan provisions

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Date of Actuarial Valuation

• Does not need to be as of financial statement
  date
• Must be within 24 months of first day of
  financial statement period if annual valuations
  are completed
• Must be within 24 months of first day of first
  year of a multi-year valuation cycle if
  valuations are biennial or triennial
• New valuation should be performed if significant
  changes in plan or participants covered since
  last valuation

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Substantive Plan

• The terms of the plan as understood by the
  employer and participants whether written or not
• Usually documented through Plan documents, SPDs,
  or other written communications to the
  participants
• Pattern of actual practice and procedures
• Legal or contractual caps apply for valuation
  purposes depending on sponsors record of
  enforcing them and other relevant facts and
  circumstances
• Note that subsidized benefits to retirees produce
  OPEB obligations (e.g., if retirees were required
  to pay only active employee rate)

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Implicit Rate Subsidy An Illustration

• Assume a sponsor provides healthcare benefits to
  active employees and to eligible retirees until
  age 65
• The sponsor pays 100 of the blended premium of
  250 per month per member for active members
• The retirees pay 100 of blended premium of 250
  per month
• Actual age adjusted premiums (approximating
  claims costs) are 200 for active members and
  400 for retirees
• By committing to allow retirees to pay only the
  blended premium, the employer is indirectly
  paying the difference between the true cost of
  retiree coverage and the amount being paid by the
  retiree by paying higher costs for the active
  members this subsidy creates an OPEB obligation
  under GASB 45

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Actuarial Valuation Process
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Suggested GASB 45 Implementation Approach

• Perform actuarial study of current plan
• Analyze funding options (could affect discount
  rate assumption)
• Evaluate impact on financial statements, future
  cash flows
• Consider modification of program to best meet
  needs of organization and employees if current
  plan cost is unacceptable
• Actuarial study of alternative plan designs
• Implementation of changes (if any)

32
Determining Cost of Current Plan (per GASB 45)

• Identifying affected benefits
• Identifying substantive plans
• Collecting data for measurement
• Selecting actuarial assumptions and procedures
• Measuring liabilities

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Identifying the Substantive Plan

• Review plan summaries
• Collective bargaining agreements
• Written documents to employees
• Review of actual practices
• Clarify cost-sharing arrangements (with retirees)
• New Medicare Prescription Drug Coverage (Part D)
• Subsidy or through plan design?
• Affects treatment under actuarial valuation

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Collecting Data for Measurement

• Could be an issue because normally this data has
  never been collected before, so could take more
  time the first time
• Census data for active employees
• Could include name, employee ID, DOB, DOH, sex,
  coverage information, marital status, salary (if
  applicable)
• Census data for retirees
• Could include name, ID, DOB, sex, coverage
  information, marital status
• Claims and/or premium data to set claims costs
• Effect of HIPPAA on obtaining employee data
• Concerns with distribution of protected health
  information (PHI)

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Selection of Actuarial Assumptions and Procedures

• Demographic assumptions
• Mortality
• Turnover
• Retirement age
• Marital status
• Should be consistent with those used for pension
  accounting where entity also has a pension plan
• Economic assumptions
• Discount Rate depends on funding
• Health care cost trend
• Depends on plan experience and benefits offered
• May be different for pre-65 and post-65 benefits
• Typically, grades down over a period of years
• Salary increases (where applicable)

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Actuarial Assumptions

• In general
• Same assumptions should be used for plan
  financials (GASB 43) and sponsor financials (GASB
  45) for same or related information
• Actual experience should be used if credible, but
  experience must by analyzed for anomalies and
  reasonableness
• Reasonableness of each assumption should be
  independently assessed (each one should be
  reasonable on its own)
• Each assumption should also be consistent with
  other assumptions (e.g., underlying inflation
  component of discount rate and salary increase
  assumptions)

37
Actuarial Assumptions

• Liability discount rate (investment return rate)
• Long-term investment yield on assets that will be
  used to pay benefits
• Based on plan assets, if funded, or
• Employer assets if pay-as-you-go, or
• Combination/blend if plan is partially funded
• OPEB expense will very likely be higher if plan
  is not funded
• Consider differences in discount rates for funded
  and unfunded arrangements

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Actuarial Assumptions

• Medical trend
• Medical trend in past few years has been in range
  of 10 - 15
• Claims costs
• Should be based on expected actual claims costs
  and expenses associated with current and future
  retiree population (not the insurance premium for
  an insured plan due to subsidy involved)
• If in community-rated plan, rates reflect
  experience of all those participating in plan,
  and same premium is charged for all of those in
  plan (active and retired), can use premium as
  basis for claims costs
• Demographic Assumptions
• Likelihood of receiving benefits
• Termination, disability, retirement and death
• Marital status, percentage electing spousal
  coverage

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Selection of Actuarial Cost Method and Procedures

• Actuarial Cost Method
• Several acceptable choices unlike accounting
  standard for private sector OPEB arrangements
• With sufficient lead time, can model costs under
  different alternatives
• Amortization of initial obligation
• Have some flexibility in choosing amortization
  approach
• Period of up to 30 years
• Numerous potential methods, should discuss with
  actuary

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More on Actuarial Cost Methods

• The cost method determines the allocation or
  attribution of the actuarial present value of
  benefits to different periods of time
• Plan costs in the long run are the plan benefits
  that are ultimately paid, so the method just
  allocates those costs to periods in different
  ways
• Method selected will impact the OPEB cost
• Differences in attribution can vary greatly
  depending on plan specifics should discuss with
  plan actuary to understand differences applicable
  to the specific plan and alternatives available

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Example Full Valuation

• Substantive Plan
• Large municipality has self-funded medical plan
  providing postretirement benefits
• Benefits are paid from the Governments general
  assets
• Approx. 4,300 active employees with annual
  payroll of 175 million and 600 retirees
• Each retiree pays 20 of the average
  active/retiree cost of the plan (300/month for
  single coverage)
• Under GASB 45, Sponsors OPEB Commitment is
• To pay 80 of average active/retiree plan cost
  for each retiree
• To pay retiree claim costs in excess of avg.
  active/retiree plan cost
• Assumed investment return assumption 4½
• Low rate due to unfunded status of plan

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Example 1 Impact on Expense
43
Example 1A Impact on Government-wide Statements
44
Questions?