GASB changes rules on post-employment benefits

By Jacqueline Byers
Director of Research

In April 2004, the Governmental Accounting Standards Board issued Statement 43, titled Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (OPEB), and Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. These statements were designed to change governmental accounting processes to require all state and local governments to identify and disclose the liability and funding status of any post-retirement benefits offered by governments, excluding pensions.

In the past, most governments have been on a "pay-as-you-go basis," which means that the liability for any post-employment benefits offered (including health/medical benefits, dental benefits, prescription drug benefits, vision benefits, life insurance benefits, disability benefits and possibly long term care benefits) was reported as the benefits were required to be paid out to eligible recipients. The new statements require that these benefits, and the resulting liabilities and expenses, must now be accounted for on an accrual basis.

When does this apply to counties?

GASB 43 - Plan sponsors required to initiate uniform reporting standards for OPEBs

• Phase 1 counties (includes all counties with total annual revenues of $100 million or more) - must comply in the financial statements for all fiscal years beginning after Dec. 15. 2005.
• Phase 2 counties (includes all counties with total annual revenues between $10 million and $100 million) - must comply in the financial statements for all fiscal years beginning after Dec. 15, 2006.
• Phase 3 counties (includes all counties with total annual revenues of less than $10 million) - must comply in the financial statements for all fiscal years beginning after Dec. 15, 2007.

GASB 45 - Employers required to initiate uniform accounting standards for OPEBs

• Phase 1 counties (includes all counties with total annual revenues of $100 million or more) - must comply in the financial statements for all fiscal years beginning after Dec. 15, 2006.
• Phase 2 counties (includes all counties with total annual revenues between $10 million and $100 million) - must comply in the financial statements for all fiscal years beginning after Dec.15, 2007.
• Phase 3 counties (includes all counties with total annual revenues of less than $10 million) - must comply in the financial statements for all fiscal years beginning after Dec. 15, 2008.

The new statements require that all outstanding obligations and commitments related to OPEBs be reported in the same manner that governments currently list pensions in their financial statements. Actuarial evaluations of the amounts to be listed annually must be determined in order to insure that these amounts would provide sufficient resources to pay benefits as they come due.

This actuarial valuation is required at least every two years for all OPEB plans that have a total membership of 200 or more and at least once every three years for plans that have fewer than 200 members. Included in the membership total are all employees in active service, terminated employees who have accumulated benefits but are not yet receiving them and retired employees and any beneficiaries who are currently receiving benefits.

The projection of the cost of benefits should include all benefits covered by the current major or substantive plan and should include the procedure currently used to share costs of benefits between the employer and members of the plan at that time. In some actuarial assumptions, including the health care cost trend rate for employment healthcare plans, there are specific actuarial guidance standards.

A simplified alternative measurement method of obtaining actuarial valuations is available for OPEB plans that have fewer than 100 members. This method includes the same broad measurement steps as an actuarial valuation, but it does allow a simplification of certain assumptions that make the method usable by non-specialists.

How do we know if this is going to have a substantial financial impact on our county financial statements?

Some indicators include:

• retirees under the age of 65 have significant medical benefits paid entirely or in part by the employer
• retirees over the age of 65 have some medical benefits paid in full or in part by the employer, and
• retirees are provided significant amounts of life insurance (outside of their pension plans).

Do counties have to fund these OPEBs now?

No, counties can continue their pay-as-you-go funding. The standards do not require advance funding.

Will these new statements affect our county bond ratings?

If your county provides retiree health care benefits, the financial impact of these new statements will probably be significant. The county will no longer be able to fund only the current year’s retiree health coverage cost and list only those expenses as liabilities in the annual financial statements.

Some bond rating agencies have already said that they will be looking at this match - or rather the mismatch - between liabilities and assets. This new scrutiny could not have come at a worse time for many local governments that are already experiencing problems with retaining the most favorable bond ratings.

As of now, since many counties have not started calculating the OPEB costs and how compliance will affect their financial status, it is still a gray area. However, for many, this new system of calculating annual contributions for these benefits may add stress to budgets that are already tight.

What does this all mean?

Counties should consult with their financial advisors, accountants and auditors about compliance with these new statements. For a plain language summary prepared by the Governmental Accounting Standards Board, go www.gasb.org/project_pages/opeb_summary.pdf.

The Government Finance Officers Association has prepared a publication called "The Elected Official’s Guide to OPEB." For information about this publication, contact GFOA at 312/977-9700.

Although GASB 45 does not require pre-funding of OPEBs, NACo Financial Services Center has developed a program for counties that are interested in pursuing this course. NACo’s Post-Employment Health Plan (PHEP) program has been developed to provide a solution forÊfunding retiree health care.

This PEHP allows counties to set aside tax-free funds in an account for each employee. The county provides a defined contribution to the trust and the employees manage their own funds and have the ability to use the funds in the trust for any IRS-allowable medical expense tax-free once they have left employment with the county. For information about this program, contact Steve Swendiman at the NACo Financial Services Center (sswendiman@naco.org or 202/942-4282).