gasb 43 & 45: other post-employment benefits

GASB 43 & 45: Other Post-GASB 43 & 45: Other Post-Employment BenefitsEmployment Benefits

Greene, Finney & Horton, LLP

Larry Finney, Partner

864-232-5204

October, 2008

OPEB – What is it?OPEB – What is it?

Payments made to former employees or their beneficiaries, or to third parties on their behalf, as compensation for services that were rendered while they were active employees.

OPEB – What is it?OPEB – What is it?

Post-Employment Benefits Other than Pensions provided to employees Most Common Benefit: Healthcare

insurance promised to retirees Other benefits, if provided separately from

a pension plan (for example, life insurance, legal services or disability)

OPEB – What’s the Big Deal?OPEB – What’s the Big Deal?

The State of South Carolina has an estimated $9 billion unfunded OPEB liability on top of a $9 billion unfunded pension liability

South Carolina is among the majority of the states and local governments that currently account for OPEB costs on a pay-as-you-go basis; for example, the monthly premium payment to the insurance carrier for current retirees is the only cost being recognized


OPEB liabilities for other states and local governments are much larger than SC: California - unfunded retiree health care

tab could be as high as $70 billion, costing the state $6 billion annually for the next 30 years

Maryland – estimated at $20 billion Boston - $5.2 billion, costing the city

$176 million annually for 30 years


Our experience to date is that if the benefits are not changed, moving from a pay-as-you-go basis to GASB 43/45 results in the GASB 43/45 annual required contributions being about 4-6 times the pay-as-you-go requirements, but much of this depends on the benefits being offered

GASB #43 and GASB #45 – GASB #43 and GASB #45 – Implementation DatesImplementation Dates

Type of government for purposes of

GASB #34

GASB 43: Plans for FY

beginning after:

GASB 45: Employer - FY beginning after:

Phase I Governments

12/15/05

(FYE 6/30/07)

12/15/06

(FYE 6/30/08)

Phase II Governments

12/15/06

(FYE 6/30/08)

12/15/07

(FYE 6/30/09)

Phase III Governments

12/15/07

(FYE 6/30/09)

12/15/08

(FYE 6/30/10)

OPEB – Why were GASB #43 OPEB – Why were GASB #43 and GASB #45 issued?and GASB #45 issued? To reflect complete and reliable financial

reporting regarding the costs and obligations that governments incur when they provide post-employment benefits other than pensions as part of the compensation for services rendered by their employees

Pay-as-you-go accounting only reports costs after the employees retire and fails to account for promised future benefit payments as the services are being rendered

Background InformationBackground Information

Defined Contribution plan

Defined Benefit plan

Inputs Outputs

Financed-contractually required payments

Financed-pay as you go or advance funded

Risk-employee Risk-plan or employer


Some misconceptions GASB requires advance funding OPEB will eliminate fund balance Catching up on OPEB from previous years will result in

a large liability No written agreement means no OPEB As long as retirees pay their health care premiums there

is no health care OPEB As long as a contribution is made by the employer it

does not matter how it is accounted for


To qualify as the equivalent to a trust: Employer contributions must be irrevocable Assets must be dedicated to providing plan

benefits Assets must be protected from creditors of

employers and administrators So you can’t just earmark contributions Can’t reserve or designate fund balance


OPEB versus Pension Benefits Post-Employment healthcare is always considered

OPEB regardless of whether administered by a Pension Plan

Other types of benefits (life insurance, disability, etc.) if offered through a pension plan are not considered OPEB benefits but should be accounted for as part of pension benefits

GASB #45 – Funding of OPEBGASB #45 – Funding of OPEB

Funding contributions involve a 3 step process Project the future benefit payments Discount those benefit payments to

present value Allocate the present value of the benefits

to appropriate periods of service


Project the future benefit payments Usually based on employer/employee

shared understanding of promises made by employer to provide benefits to employee upon retirement (“substantive plan”)


Discount future benefit payments to present value Estimated inflation rate between present

and retirement


Allocate the present value of the benefits to appropriate periods of service Six accepted methods available

GASB #45 – Actuarial ValuationsGASB #45 – Actuarial Valuations

OPEB Cost – derived from an actuarial calculation that must be done every: two years (200 or more plan participants) three years (less than 200 plan participants) Any year in which substantial changes are made

to the plan

Employers with less than 100 plan participants have option to use a non-actuarial approach


Calculations are based on Assumptions: Turnover rate Retirement age Health care cost factors (age, gender, inflation, etc.) Mortality Projected salary increases Inflation rate Expected rate of return on plan assets Benefit design and promises to retirees


Actuarial gains and losses Gains come from the actual costs being less than

the actuarial calculated costs Losses come from the actual costs being more

than the actuarial calculated costs

GASB #45 – What is?GASB #45 – What is?

Annual Required Contribution (ARC)? Portion of present value of cost of OPEB

earned by employees for a given period Usually is the OPEB cost for accounting

purposes


Actuarial Accrued Liability (“AAL”) Present value of benefits already earned by

employees based on their service Not just what is vested Not reported on the face of the financial statements


Unfunded Actuarial Accrued Liability (“UAAL”) Difference between the actuarial accrued liability

(“AAL”) over the actuarial value of plan assets (“AVA”)

Not reported on the face of the financial statements

BUT, this measure is important because it reflects benefits that have been earned but not yet paid for!

GASB #45 – What can cause?GASB #45 – What can cause?

Unfunded Actuarial Accrued Liability (“UAAL”) Actuarial gains and losses Changes in benefit formula Transitional liability for unfunded past costs prior

to implementation of GASB 45

This can happen if an employer is fully funding the ARC!

GASB #45 – How do we handle a GASB #45 – How do we handle a UAAL?UAAL?

ARC is made up of: Normal Cost

Portion of benefits which is allocated to that fiscal year by the Actuarial Cost Method used

Amortization of the Unfunded Actuarial Accrued Liability or “UAAL” 30 year maximum period Level dollar or level percentage of payroll

GASB #45 – Accounting and Financial GASB #45 – Accounting and Financial Reporting by Employers for OPEBReporting by Employers for OPEB

Expense/expenditure recognized in financial statements for defined contribution plans and cost-sharing multiple employer defined benefit plans is the total of the contractually required contributions

For other plans, it is the ARC


When an employer does not fully fund the ARC, a liability is created-Net OPEB Obligation

Note that when the ARC is not fully funded, there will be future years where the actual funding is higher than the ARC


Net OPEB Obligation - Reported in full accrual-based statements

Government-wide statement of net assets Proprietary fund statement of net assets Statement of fiduciary net assets

Not reported in Governmental funds statements SO THE EFFECTS OF UNDERFUNDING ARE ONLY

RECOGNIZED ON THE FULL ACCRUAL FINANCIAL STATEMENTS

GASB #45 – Accounting and Financial GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Reporting by Employers for OPEB – Disclosure RequirementsDisclosure Requirements

Plan description Employer Name of plan, ID of who administers the plan, what type

of plan (i.e. single employer, multiple employer, etc.) Brief description of the types of benefits and the

authority under which benefit provisions are established or may be amended

Whether the OPEB plan issues stand-alone financial statements and how they may be obtained

GASB #45 – Accounting and Financial GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Reporting by Employers for OPEB – Disclosure RequirementsDisclosure Requirements Funding Policy

Disclose the authority under which the obligations of the plan members, employers and other contributing entities to contribute to the plan are established or may be amended

Required contribution rates of plan members (amount and percent or as a percentage of payroll)

Required contribution rates of employer in dollars or as a percentage of current-year covered payroll and, if applicable, legal or contractual maximum contribution rates

GASB #45 – Accounting and Financial GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Reporting by Employers for OPEB – Disclosure RequirementsDisclosure Requirements Sole or Agent Employers should also disclose the following

for each plan: For the last three years – provide the OPEB cost (and its

components), contributions made (and percentages), and the net OPEB obligation (if any)

Information on the funded status of the plan. Disclose the authority under which the obligations of the plan members, employers and other contributing entities to contribute to the plan are established or may be amended

Disclosure of the actuarial methods and assumptions used


Assets held in trust or equivalent arrangements should be maintained in a OPEB Trust Fund (similar to a Pension Trust Fund)

Assets of multiple-employer plans not held in trust or equivalent arrangements should be maintained in an Agency Fund

Assets of single employer plan not held in trust or equivalent arrangements does not qualify as an OPEB plan – would be deemed unfunded (designations or reservations of fund balance for example)

GASB #45 – Key indicators of the GASB #45 – Key indicators of the financial health of a defined benefit planfinancial health of a defined benefit plan

Funding progress-assets compared to obligations

Employer contribution trends compared to ARC

UAAL as a percentage of covered payroll

SO WHAT?SO WHAT?

Get going if you have not done anything! Actuarial valuation to see current status Educate Board/Council and management

SO WHAT?SO WHAT?

If current status not good Evaluate options

Keep current plan and find resources to fund ARC Change plan-numerous options

Takes time to do this-can’t wait until the last minute

gasb 43 & 45: other post-employment benefits

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