Ready for another financial challenge? New Governmental Accounting Standards Board (GASB) Statements Nos. 43 and 45 — accounting for other post-employment benefits like retiree health care — are being phased in over a three-year period, similar to GASB 34, and will be effective for some governmental units as early as this year (see table of effective dates).

Effective Dates

Both pronouncements recognize that employees of governmental entities earn post-employment benefits, including health, life insurance, disability, dental, long-term care, and other benefits, over their career, rather than when they are paid after retirement. While the pronouncements do not require any funding of the liability, measuring and disclosing the funding status of this liability is required, much like we’re used to seeing with defined benefit pension plans.

GASB 43 deals only with reporting from the plan’s perspective, while GASB 45 dictates an employer’s reporting responsibilities. In addition, GASB 45 requires recognition in the employer’s financial statements of the cost of providing retiree health care coverage over the working life of the employee, rather than at the time the health care premiums are paid. GASB 45 will radically change how the related OPEB expense is reported, since most communities now recognize the expense when the benefits are paid (i.e., the pay-as-you-go method). The resulting accounting impact on the government’s financial statements will apply to the government-wide financial statements, not at the individual fund level.

What is required to get the data?

The new pronouncements will require a valuation of the obligation to provide retiree health care benefits, including an amortization of the past service cost over a period of up to 30 years. The valuation must include an annual recommended contribution (ARC). While the ARC does not need to be funded each year, upon implementation of GASB 45, any under funding must be reported as a liability on the government-wide statement of net assets.

The number of participants in the plan will drive the frequency of the valuation requirement, as detailed in the table below. Participants are defined as employees in active service, terminated employees not yet receiving benefits, plus retirees and beneficiaries currently receiving benefits.

Employers with less than 100 participants have the option of using an actuary to perform their valuation, but also can perform the valuation themselves using the parameters outlined in the GASB statement.

So when do you need to start the process?

Well, that depends. If you have an “OPEB-type Fund”, the required footnote disclosures will need to be made one year earlier than the requirement from GASB 45 to actually record the net OPEB obligation (see table of effective dates). You should generally plan up to six months for an actuarial valuation (including the time to gather the appropriate data). For a Phase II government with a December year end, the required disclosures under GASB 43 will need to be made on the December 31, 2007 financial statements. Assuming it takes six months to obtain an actuarial valuation, you will need to hire the actuary by July 2007. For a Phase II government with a June year end, GASB 43 disclosures are required for the June 30, 2008 financial statements, so you will have a little more time to hire an actuary (but only until December 2007).

If your government is planning to make the annual recommended contribution (or even contribute a portion of the ARC) for the first year GASB 45 is effective, you will need to act even faster, despite the fact that the required implementation date for GASB 45 is one year later than GASB 43. Taking a Phase II government with a December year end as an example again, assuming you will want to budget for this contribution, the results of the actuarial valuation need to be available by the time the budget process starts — around August 2007. That means, a Phase II December year end will need to hire an actuary now!! To fully fund this obligation or fund it at a level greater than the current funding level may require difficult budget choices or additional revenue. Leave yourself enough time to consider your options!

We’ve been hearing from a number of front-runners that compiling the data for the actuary can be very complex and extremely time consuming. Benefits data must be gathered from a number of different sources — contracts, personnel policies, employment agreements, ordinances, and other sources. In some cases, it’s been difficult to actually define the benefits of the plan because the plan is not in writing. So, early planning will lead to less heartache all the way around.

Should governments contribute the annual recommended contribution?

Under these new standards, there is no level of funding actually required. However, the GASB statement has provided a substantial incentive to fund the obligation in accordance with the annual recommended contribution. In addition to the normal fairness issue of paying for a service as you use it, the GASB has directed that lower rates of return be used for evaluating the annual recommended contribution in situations where the recommended contribution is not being funded. This will significantly increase the calculation of the following year’s contribution. So, funding the contribution will actually reduce your costs in the long run.

What type of funding vehicle can we use?

There are several alternative funding choices for OPEB dollars. It is important to note that both GASB 43 and GASB 45 stipulate that earmarking employer assets by merely transferring funds into a dedicated governmental or proprietary fund or designating net assets to be used for OPEB without formally segregating these monies or creating a qualifying trust will not be considered a contribution for purposes of meeting the ARC. Alternatives include the creation of a trust of some sort (VEBA or Section 115 government trust), the adoption of PA 149 of 1999 using a separately held bank or investment account, or investing the funds with a third party like MERS.

I heard we could bond for this liability?

As you may have heard, at the end of 2006 both the House and the Senate passed a bill (HB 6694) that would have amended the Revised Municipal Finance Act to allow a local unit of government, without a vote of its electors, to issue bonds to help pay for the costs of post-employment health care benefits for public employee retirees. In early January 2007, the governor vetoed this proposal. This bill is expected to come before the Legislature again.