Shortly after the new pension standards (GASB Statement No. 67 and 68) were approved in June of 2012, the GASB set its sights on OPEB. After all, the two benefits are similar enough. Why wouldn’t similar accounting and reporting rules apply to both pension and OPEB? And, as we all suspected and have long since awaited, the GASB recently approved two new standards surrounding accounting and financial reporting for other post-employment benefits (“OPEB”). GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, enhances the reporting and disclosures for OPEB plans, whereas GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, provides financial reporting requirements, along with necessary disclosures for governmental employers that offer OPEB benefits.
These two new accounting standards for OPEB are eerily similar to their pension brethren. And since we’ve already faced GASB 67/68, these new standards shouldn’t be so hard to follow. In fact, many of the same concepts that were written into the pension standards will also apply to these new OPEB pronouncements, including the following:
- Governmental entities providing OPEB benefits will now recognize a liability (called a “net OPEB liability”) for defined benefit OPEB benefits earned by their employees.
- The net OPEB liability is calculated as the difference between the present value of projected benefit payments related to prior periods of employee service (called the total OPEB liability), and the related OPEB trust assets, measured at fair value.
- The OPEB liability will be recorded by all employers, whether the OPEB plan is a single-employer plan, an agent-employer plan, or a cost-sharing plan.
- The net OPEB liability will only be recorded on the full accrual statements; this should not change the accounting within the modified accrual funds.
- The change in the net OPEB liability will be recognized as pension expense on the full accrual financial statements, although, similar to pensions, there are some changes in the net OPEB liability that will be deferred.
- Significant footnote and requirement supplementary information disclosure requirements are part of the OPEB standards. No doubt that the additional disclosures will be time-intensive to compile, and will require some planning and coordination to ensure that all necessary information is available, accurate, and timely.
While typically an actuary would calculate the total OPEB liability, unlike pension, if you have an OPEB plan with less than 100 members, you may use an alternative measurement method similar to what we saw under the prior OPEB standards (GASB 45) that would not necessarily have to be done by an actuary.
As with pensions, the discount rate will be reflective of the expected long-term rate of return on the OPEB assets held in trust to the extent those assets will be sufficient to fund the benefit payments. At the time the benefit payments can’t be funded from the trust, the rate that will be applied to the present value of the benefits would decrease to the index rate for high quality 20 year tax-exempt bonds rated AA/Aa or higher. If your government hasn’t set aside assets for OPEB in a trust, the discount rate you will use is that lower 20 year tax-exempt rate. Unfortunately, that has the impact of significantly increasing the net OPEB liability to be recorded.
We’ve all come to appreciate the coordination that the pension standards required. Actuaries, plan auditors, employer auditors, the plan, and the employer all needed to get on the same page early on related to implementation timeframes. It is no different with OPEB. The OPEB standards remove the luxury we had previously with OPEB to have triennial valuations; therefore, planning for these changes is critical. Make sure to have in-depth conversations early in the process with all stakeholders to ensure these new standards are implemented correctly.
So, what does all of this mean for you? By now I’m sure you’ve guessed that the implementation of GASB Statement No. 74 and 75 will take additional time for all involved. The good news is you have time to plan! GASB Statement No. 74 is effective for periods beginning after June 15, 2016 (effective for OPEB plans), and GASB Statement No. 75 follows one short year later, and is effective for periods beginning after June 15, 2017 (effective for employers).
As with GASB No. 67 and 68, we expect GASB No. 74 and 75 will encounter significant implementation challenges, and we will work closely with our clients to assist in refining the process of adoption of these new standards.