GASB standards 74 and 75 will make significant revisions to the current accounting and reporting for OPEB. As you move toward implementation, we'd like to share some key points about these new standards that perhaps are most critical.
Plans are in the midst of implementing GASB 74, Financial Reporting for Postemployment Benefit Plans Other Than Pensions, beginning with June 30, 2017 year-ends, and employers are preparing to implement GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, the following year (beginning with June 30, 2018 year-ends). We recently hosted a webinar on the new OPEB standards and, based on participant questions and comments, compiled the most critical considerations.
Increasing OPEB liabilityJust as we saw with pensions, these new OPEB standards will require employers participating in single employer, agent employer, and cost-sharing employer plans to record the difference between the total OPEB liability, calculated by the actuary, and the plan’s net position, as a net OPEB liability. Because OPEB has not been funded like most pension plans, we suspect this liability might even exceed the net pension liability for many plans. This will have a significant impact on governmental employers' full accrual statements.
Funding structuresWe’ve seen employers fund OPEB in a variety of ways, perhaps with more variation than pensions. Some have begun to fund an OPEB trust. Others have set aside funds outside a trust vehicle, or combined these two trust and nontrust funding approaches. Still others haven’t begun to fund the obligation, opting instead to fund OPEB on a pay-as-you-go basis. While GASB does not dictate a specific funding method, the funding structure at your organization will likely have a big impact on when and how you implement these new standards. For those with trust funds, GASB 74 will likely apply. For those without a trust fund, implementation doesn’t take place until GASB 75 goes into effect.
Timing of actuarial valuation for plans
The prior OPEB standards, GASB 43 and GASB 45, allowed triennial valuations; GASB 74 and 75 allow for biennial actuarial valuations, just as GASB 67 and 68 do for pensions. Many pension plans obtain annual actuarial valuations, but we suspect OPEB plans will tend to rely more on biennial valuations. Be careful, however, since this can pose a timing problem.
Valuation date timing is critical for both plans and employers. Decisions made by plan management will likely impact employers as well, so everyone needs a seat at the table when making decisions about timing. Plans, under GASB 74, must have a valuation either as of the plan’s most recent fiscal year end or as of a date no more than 24 months earlier, using a roll forward process to ensure the net OPEB liability is stated as of the plan’s fiscal year end.
As it relates to employers, GASB 75 indicates that the total OPEB liability should be determined by (a) an actuarial valuation as of the measurement date or (b) through the use of update procedures to roll forward to the measurement date amounts from an actuarial valuation as of a date no more than 30 months and one day earlier than the employer's most recent fiscal year end.
It’s fairly straightforward to ensure the plan’s timing complies with the 24-month rule. However, employers can get into trouble here if they aren’t careful, particularly in situations where the plan and employer have the same fiscal year end and the employer would like to choose a measurement date, as allowed by GASB 75, one year prior to its fiscal year. Many employers prefer to have this lag between their fiscal year end and the measurement date for practical reasons; waiting on the plan to finalize its audit in order to book the employer’s GASB 75 liability and then close out the employer’s audit would cause an annual fire drill. We’ve seen this with the pension standards, and it takes careful coordination to ensure everything comes together in a timely way.
Let’s walk through an example of when the dates can go wrong:
As you can see in the example above, with biennial valuations and the employer opting for the one-year lag in its measurement date, the valuation dates exceed the timing - 30 months and one day - allowed under GASB 75 every other year.
Aside from moving to annual OPEB valuations, another possible solution is to change the valuation date to January 1:
Without carefully considering the various scenarios, employers can easily find themselves in a timing situation that doesn’t comply with GASB 75.
Determination of the discount rate under the new standards is also similar to the pension standards. The rate could impact the total OPEB liability if the plan doesn't have enough funding to support cash flows for future benefit payments or if the plan isn't funded at all. The actuary will compare the OPEB plan’s projected fiduciary net position to projected benefit payments and, as long as the plan is expected to be able to make those benefit payments, the actuarial present value of benefit payments projected to be made will be determined using the plan’s long-term expected rate of return on investments.
However, once projections show that the plan is no longer able to make its benefit payments, the remaining unfunded portion of the actuarial present value of benefit payments will be determined using a much lower 20-year, tax-exempt rate. While we haven’t seen many pension plans with this crossover occurrence, it will likely be more common for OPEB plans. In most cases, this will result in a lower discount rate, and a lower discount rate means a higher net OPEB liability.
The new OPEB standards require a discount rate sensitivity analysis much like the pension standards require. However, the OPEB standards also require a healthcare trend rate sensitivity disclosure for the impact of increasing and decreasing that trend rate by one percent.
Taxes and other assessments
Taxes and other assessments expected to be imposed on future OPEB benefit payments should be included in the actuary’s calculations of projected benefit payments, thus included in the calculation of the total OPEB liability. This means the actuary must consider the impact of the excise tax that the Patient Protection and Affordable Care Act (ACA) established on employer-provided health insurance benefits in excess of a defined threshold beginning in calendar year 2018, if the ACA is still applicable at that time.
Use of alternative method
Plans with less than 100 employees (active and inactive) have an option to use a specified alternative measurement method in place of an actuarial valuation. While some plans appreciate that this method permits simplification in the selection of assumptions, very few know that using the alternative measurement method will also require all changes in the net OPEB liability to be expensed versus the deferrals that otherwise would be allowed for certain changes in the net OPEB liability, such as changes in assumptions and experience differences.
There’s a lot to know and not much time left. Watch our webinar, and feel free to reach out to us with questions.