Among all the moving parts of GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, one key to successful implementation will be communication with your actuary.
Together, you'll need to ensure the actuarial valuation is accurate. And since it involves some significant assumptions, it's especially important to create an open dialogue early in the process and remain on the same page throughout.
GASB 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (OPEB), was the first of the new OPEB standards to be implemented. It applies to the OPEB plan itself and calls for different requirements for actuarial valuations. With those requirements came new and expanded disclosures within the notes to the financial statements. GASB 74 didn't require amounts to be recorded in the financial statements themselves, however — it left that to its partner, GASB 75.
After implementing GASB 75, what you do for funding purposes may no longer parallel what’s required for financial reporting purposes.
GASB 75 is required to be implemented for periods beginning after June 15, 2017, one year after the required implementation of GASB 74, and it establishes guidelines for measuring and, more importantly, recognizing liabilities, expense/expenditures, and deferred inflows/outflows of resources in an employer’s financial statements.
Funding practices may diverge from financial reporting practices
After implementing GASB 75, what governments do for funding purposes (for example, to calculate the actuarially-determined contribution) may no longer parallel what is required for financial reporting purposes, particularly as it relates to establishing assumptions. For this reason, although many employer governments may think they're set from a funding perspective, several aspects of the actuarial valuations need to be revisited for financial reporting purposes.
Since both GASB 74 and 75 have certain requirements that may differ from those used in the actuarial valuations for funding purposes, a critical component of your implementation plan is to be sure the actuarial methodologies and assumptions comply with the GASB standards. Actuaries also are required to follow Actuarial Standards of Practice. And, the plan and the employer must use the same assumptions — a key reason why communication is so essential and all impacted parties must be at the table when these assumptions are being determined.
Key assumptions to discuss
Some of the significant assumptions that need to be considered in collaboration with your actuary include:
- Long-term rate of return — Most of us are familiar with the long-term rate of return assumption, as it's been a very significant assumption applied to actuarial valuations of pension plans. It will continue to be just as significant as it applies to actuarial valuations of OPEB plans. And while it may be tempting to rely on work previously done to determine the long-term rate of return for the government’s pension plan for the OPEB plan as well, using the same assumption and rationale likely is not appropriate unless the assets of both plans are commingled. The pension and OPEB investments may have completely different target allocations, investments, or investment strategies. A separate analysis considering the target allocation of the OPEB plan investments and the expected long-term rate of return for each asset class needs to be performed to determine the long-term rate of return assumption for the OPEB plan.
- Healthcare cost trend rate — One particular assumption unique to OPEB plans is the healthcare cost trend rate. It's so significant 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(s) 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).
- Opt-in/participation rates — Another assumption typical of OPEB plans, unlike with pensions, is the number of retirees that are not only eligible for healthcare, but that are expected to participate in the plan (opt-in). This could be a significant assumption and one that should be evaluated based on the experience of the plan as well as any changes to plan benefits that would impact this assumption.
- Discount rate — As we know from dealing with the GASB pension standards, multiple components are now involved in determining the discount rate, and it will impact plans differently depending primarily upon how well funded they are and whether they're an open or closed plan. The discount rate is a single blended rate that reflects: (1) the long-term expected rate of return on OPEB plan investments to the extent those investments are projected to be sufficient to make benefit payments, and (2) the 20-year, tax-exempt general obligation municipal bond rate (AA/Aa or higher) to the extent the OPEB plan investments aren't projected to be sufficient to make benefit payments. This rate will be calculated by the actuary based on cash flow projections.
For plans that don't have a qualifying trust accumulating plan assets, the discount rate will default to the 20-year, tax-exempt general obligation municipal bond rate. In addition, there are certain implications on the cash flow projections of open versus closed plans as well as the method of payment of benefits by the employer (out of a trust or with its own resources). These implications are discussed in more detail within GASB Implementation Guide No. 2017-2, including Illustration B2. Employer governments should discuss these projections with the actuary to ensure the appropriate methodology is being used.
From an employer government’s perspective, actuarial valuations for GASB 75 purposes are no longer business as usual.
The earlier you begin GASB 75 discussions with your actuary, the better. Use these discussions to agree on the significant assumptions to be used in the valuation and to ensure key elements of your OPEB plan are appropriately captured in the actuarial valuation. From an employer government’s perspective, actuarial valuations for GASB 75 purposes are no longer business as usual.
As always, if you have any questions, feel free to give us a call.