Developing a timely and comprehensive plan for GASB 75 implementation is critical since many parties have a vested interest in an effective process for adopting the new standard. Unlike previous GASB pension standards, there are several nuances that apply only to OPEB (other post-employment benefits) and require careful consideration early on to ensure an accurate actuarial valuation.
Some governments are just now adopting GASB 74, while others are gearing up to adopt GASB 75. No matter where you are in the process, several best practices can guide you to a successful implementation.
1. Develop an implementation plan.As we experienced with the implementation of GASB 67 and 68 related to pensions, developing a timely and comprehensive implementation plan is critical. That plan should include involvement by all stakeholders throughout all phases.
As you develop or review your implementation plan, make sure it encompasses the steps necessary to ensure the issuance of a timely, accurate valuation, which then can be used to record your GASB 75 journal entries while also allowing sufficient time for those numbers to be appropriately audited.
2. Communication and continuing involvement by all parties.Many parties have a vested interest in successfully implementing the new GASB standards, including the plan, the governing board of the plan, the plan’s actuary, the employer government, the plan auditor, and the auditor of the governmental employer, if different than the plan’s auditor. Without getting all interested parties involved up front, a government could (at best) risk timing delays and, perhaps, (at worst) risk a modified opinion on its financial statements.
In most cases where a qualified trust is established, it is the OPEB board that conducts much of the conversation with the actuary and provides the actuary with appropriate direction and approvals. That said, individuals from the employer government (the city, county, township, village, etc.) must ensure the OPEB board fully understands the impact of these new OPEB standards and the need for assumptions to be reviewed and agreed upon not only by the OPEB board and its actuary, but also by the plan auditor, the employer government, and the auditor of the employer government. When no qualified trust is established, the employer government may be the party providing direction to the actuary. If all appropriate parties aren't part of the conversation, the risk of a less-than-smooth implementation of these new OPEB standards rises. In some cases, the actuarial report may even need to be redone if these parties aren't all in agreement in advance of the report's completion. It is important to note that the actuary’s expertise on these matters is critical, but the actuary typically needs approval from the OPEB board or employer government management to effectuate any changes.
3. Understanding of the plan.
A comprehensive written plan document may provide the best evidence of the terms of the OPEB plan as they’re understood by the employer and plan members. Unfortunately, such a plan document doesn't always exist or accurately reflect the understanding of the benefit terms of the plan (the substantive plan).
For the purpose of projecting benefit payments within the actuarial valuation, if different than the written plan document (if available), other factors must be considered, such as long-established practices, communications between the employer and plan members, and the historical pattern of practice with regard to the sharing of benefit-related costs with inactive plan members.
As employer governments prepare to implement GASB 75, either updating or developing an accurate written plan document to capture the benefit terms of the plan is an encouraged activity. Doing so will provide an accurate representation to the actuary, the auditor, and future and current plan beneficiaries. It will prevent possible confusion surrounding the benefit terms and ensure your valuation, and therefore financial statements, appropriately reflect the substantive plan as it currently operates.
A comprehensive written plan document may provide the best evidence of the terms of the OPEB plan as they’re understood by the employer and plan members.
4. Understand the nuances of OPEB and how plans are impacted.
You've probably heard many times that the new OPEB standards, GASB 74 and 75, are very similar to the pension standards, GASB 67 and 68, which were implemented just a few years ago. While this is true — they are identical in many respects — several nuances apply only to OPEB, and these concepts are critical to understand so you can appropriately address them in the actuarial valuation.
Let’s explore some of these key items:
- Excise tax — The OPEB standards tell us that the projection of benefit payments performed by the actuary should include taxes and other assessments expected to be imposed on benefit payments at either the rates in effect at the measurement date or approved rates that will be imposed in future periods.
One such tax that needs to be considered is the excise tax on certain high-cost employer health plans, popularly called "the Cadillac tax." A common misconception is that since the tax doesn’t go into effect for several years (the recent federal government continuing resolution bill, H.R. 195, signed in late January 2018, suspended the start of the tax until 2022), it doesn’t need to be built into actuarial valuations until that time.
In reality, if an employer government has a Cadillac plan, the actuary's projection of future benefit payments, undertaken now in order to compute the total OPEB liability under GASB 74 or GASB 75, needs to factor in any increased benefit costs due to the implementation of this tax in 2022, if it's expected to apply to your plan.
- Cash-in-lieu — Some plans may offer cash payments to retirees who opt out of health care. Depending on what this cash-in-lieu payment could be used for, it may be deemed an OPEB benefit (if it can only be used to reimburse healthcare costs) or may actually be deemed a pension benefit (if retirees have the ability to use that cash payment for anything they like). Actuaries shouldn't ignore this potential payment when projecting future benefit payments or they risk understating a liability. It’s important to understand the nature of these payments and treat them appropriately.
- Implicit rate subsidy — The implicit rate subsidy was a concept introduced as part of GASB 45, but it hasn't gone away under GASB 74 and 75. If the same health insurance premium rates are given for both active and inactive employees, the actuary should use age-adjusted premium rates for inactive employees to calculate the projected future benefit payments.
- Actuarial assumptions – Certain assumptions needed for the OPEB valuations are unique only to OPEB. And, because you weren’t forced to consider them in your pension valuations, you may inappropriately skim over them as they relate to OPEB valuations.
Two such assumptions are the participation or opt-in rates and healthcare cost trend rates. The number of retirees that is not only eligible for healthcare but that is expected to participate in the plan (opt-in) could be a significant assumption and one that should be evaluated based on the experience of the plan.
The healthcare cost trend rate assumption is so significant to OPEB that GASB 74 and 75 require a disclosure of the impact on the net OPEB liability of a one-percent increase and decrease in this rate. The GASB does not specify a particular source of information about future changes in healthcare costs to be used; however, the GASB Implementation Guide associated with these new standards indicates that the source selected should be publicly available, objective, unbiased, and generally representative of the demographic characteristics of the covered group and the benefits provided under the benefit terms (such as medical, dental, vision, and prescription).
5. Timing of actuarial valuations.When implementing the new GASB OPEB standards, triennial actuarial valuations, previously allowed for some smaller employers, are no longer allowed — the valuations must be biennial or annual. Many pension plans obtain annual actuarial valuations, but we suspect OPEB plans will tend to rely more on biennial valuations.
From the OPEB plan perspective, in accordance with GASB 74, the actuarial valuation must be within 24 months of the plan’s fiscal year end, but remember — the measurement date of the net OPEB liability must be the same as the plan’s year end. Therefore, update procedures must be applied to the valuation to roll it forward to the plan’s year end even if the valuation is performed within the 24-month timeframe.
From the government employer’s perspective, under GASB 75, the actuarial valuation must be within 30 months and one day of the employer’s fiscal year end. For an employer, the measurement date of the OPEB liability can be no earlier than one year prior to the employer’s fiscal year end and should be applied consistently from period to period. Any valuations performed before the measurement date, again, will need to apply update procedures to roll the valuation forward to the measurement date.
If you don't consider the timing of actuarial valuations from the perspective of both the plan and the employer in the planning stages, situations can arise that could cause problems. 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.
In a previous article, we looked at a detailed example of when the timing of valuations can go wrong from an employer perspective. View that article here. Without carefully considering various timing scenarios, employers can easily find themselves in a situation that doesn’t comply with GASB 75.
6. Get started now.
If you haven’t already, get in touch with your actuary and other interested parties to start collaboratively planning. Once you discuss the elements above and agree to a plan, memorialize the plan in writing so all parties stay on the same page.
Remember, too, that in your first year of implementation, you not only need your GASB 75 numbers as of the end of the year, but you'll also be required to retroactively implement GASB 75 back to the beginning of your fiscal year. In order to do that, your actuary will need to provide the total OPEB liability (and net OPEB liability) both as of the beginning and end of year.
If you haven’t already, get in touch with your actuary and other interested parties to start collaboratively planning.
In conclusionWith these items addressed early, you'll be well on your way to ensuring the application of GASB 75 doesn’t hold up your year-end close or year-end audit — not only in the year of implementation but also on a continuing basis going forward.
As always, if you have any questions, feel free to give us a call.