GASB began reviewing OPEB due to a growing concern of the potential magnitude of employer obligations. The measuring and reporting of OPEB liabilities will:

• Recognize the cost of benefits in the period when services are received.
• Provide information about the actuarial liabilities for the promised benefits.
• Provide information useful in assessing potential demands on future cash flows.

What is the difference between GASB 43 and GASB 45?

GASB 43 applies to trusts that are established in order to prefund OPEB benefits and for trusts that are used as conduits to pay OPEB benefits. GASB 45 applies to the financial statements issued by employers that offer OPEB.

What do GASB 43 and GASB 45 require plan sponsors to disclose on their financial statements?

The disclosures fall into three basic categories:

• Information about the OPEBs: what are the benefits, who is eligible for the benefits, how many employees and retirees are covered, and so forth.
• The actuarially determined liability for OPEB benefits, and the assets (if any) that are available to offset the liability; also information about the actuarial methods and assumptions that were used to calculate the liability.
• The portion of the liability that must be reported as an annual accounting expense on the employer’s financial statements, and a cumulative accounting of the extent to which the plan sponsor actually makes contributions to offset its annual expense.

When must a plan sponsor comply with GASB 43 and GASB 45?

GASB has implemented the reporting of OPEB in three phases. The phase that applies to a plan sponsor for GASB 43 and GASB 45 implementation is identical to the phase that applied to that plan sponsor for GASB 34 implementation, and is based on annual revenue reported in the first fiscal year ending after June 15, 1999. The implementation schedule for GASB 45 is:

• Phase I implementation—for employers with annual revenues greater than $100 million—is for fiscal years beginning after December 15, 2006.
• Phase II implementation—for employers with annual revenues between $10 million and $100 million—is for fiscal years beginning after December 15, 2007.
• Phase III implementation—for employers with annual revenues less than $10 million—is for fiscal years beginning after December 15, 2008.

GASB 43 implementation is one year earlier than GASB 45 implementation, but note that GASB 43 implementation is only needed when a trust has been established. For example, if a trust is established during the fiscal year that GASB 45 is implemented, then GASB 43 would also be implemented in that same fiscal year.

What are OPEBs?

OPEBs are Other (than pension) Post Employment Benefits. Benefits defined as OPEB include medical, prescription drug, dental, vision, hearing, life insurance, long-term care benefits, and long-term disability benefits (not covered under a pension plan) that are provided after active service by the plan sponsor. OPEB does not include pension benefits or termination benefits, which are covered under other GASB accounting standards.

How often do GASB 43 and GASB 45 require an actuarial valuation of the OPEB benefits?

If a plan has more than 200 participants (active and retired combined) it must have an actuarial valuation provided at least every two years. If a plan has fewer than 200 participants it must have an actuarial valuation provided at least every three years.

Who calculates the liability for OPEB benefits?

For very small plans covering fewer than 100 participants, the plan sponsor or auditor can use a simplified method for these calculations. If a plan does not qualify for this exception, an actuarial firm with both pension and health actuaries will be needed to perform an actuarial valuation of the OPEB benefits.

What assumptions does the actuary use in the valuation?

• Turnover and retirement assumptions: How likely is it that an employee will work for the plan sponsor long enough to qualify for post-employment benefits?
• Medical inflation and claims cost assumptions: When an employee receives post-employment benefits many years from now, how much will the plan sponsor have to pay each year for the benefits?
• Mortality assumption: How long is a retiree likely to receive the benefits?
• Discount rate assumption: What is the present value of those future benefit payments in terms of today’s dollars? The Discount Rate must reflect the expected investment income of whatever funds are set aside to prefund the benefits; if there is no prefunding then the Discount Rate will be much lower and the liabilities significantly higher than if the benefits are prefunded.
• Since the liability is being recognized over the employee’s whole career, the present value is divided into three pieces: the part that is attributed to past years (the “Past Service Liability” or “Actuarial Liability”), the part that is being earned this year (the “Normal Cost”), and the part that will be earned in future years (the “Future Service Liability”). The Actuarial Liability is the amount disclosed on the financial statements.

What is an implicit rate subsidy?

GASB 43 and GASB 45 require that the true rates for retiree benefits be identified. Currently, many employers provide benefits for actives and retirees under one rating structure. Since retirees utilize benefits at a greater rate than the active population, the active employees are “implicitly” subsidizing the retirees’ cost of the plan of benefits. GASB 43 and GASB 45 require that an employer utilize actual experience or actuarial adjustments in order to calculate the true cost of retiree benefits in order to calculate the present value of the retiree benefits.

GASB 43 and GASB 45 require the implicit rate subsidy to be recognized in calculating the OPEB liability. This means that even if retirees “pay their own way” for benefits, there will most likely still be an OPEB liability for them.

What is the Annual Required Contribution (ARC)?

This amount consists of the sum of two pieces:

• Normal Cost (see above)—because the benefits earned each year should be paid for each year
• Past Service Cost—a catch-up payment to fund the Past Service Liability over a period not to exceed 30 years

Is there a requirement to pay the ARC?

No. There is no requirement to actually fund the OPEB benefits, but the cumulative deficiency must be disclosed on the plan sponsor’s financial statements.

If there is no requirement to pay the ARC, why would a plan sponsor choose to do so?

There are a number of reasons to seriously consider paying the ARC and prefunding the OPEB benefits:

• Because the Discount Rate must reflect the expected investment income of whatever funds are set aside to prefund the benefits, a funded OPEB plan could use a much higher Discount Rate than an unfunded plan (depending on how the assets are invested), and would therefore have a much lower liability. A funded OPEB plan invested with 60% equities/40% fixed income (typical of many pension plans) could have a Discount Rate of 8%, whereas an unfunded plan would have a Discount Rate based on the plan sponsor’s general fund investments, which might be as low as 2-3%. Liabilities are very sensitive to the Discount Rate, and the liability calculated at a 2% Discount Rate is likely to be three times larger than the liability calculated at 8%.
• The Discount Rate/liability relationship discussed above is another way of saying that if there are investments set aside to prefund the OPEB benefits, then future investment income will help pay for the benefits. So the short term costs will be higher with prefunding, but in the long run it will cost the plan sponsor less to prefund than to fund the benefits on a “pay-as-you-go” basis.
• One of the disclosures on the financial statement is a cumulative accounting of the extent to which the plan sponsor is paying the ARC. Because the benefits are often costly, the cumulative deficiency for a plan sponsor that does not prefund is likely to grow very quickly, and is likely to negatively impact the plan sponsor’s bond rating.
• Prefunding the OPEB benefits provides security to the plan members. In most places it is taken for granted that pension benefits will be prefunded, and the same logic applies to OPEB benefits as well.
• Paying for post-retirement benefits during the working lifetimes of the employees means that the right generation of taxpayers—those that are receiving the services of the employees—are paying all the costs for those employees.

Why do GASB 43 and GASB 45 matter now?

While there may still be time before the deadline for GASB 43 and GASB 45 implementation, there are several reasons why plan sponsors should be thinking about GASB 43 and GASB 45 now:

• To get an idea of the magnitude of the liabilities and annual contributions.
• To plan for the cash flow needed in coming years to pay the OPEB benefits.
• To address the question of whether or not the plan sponsor should prefund the benefits.
• To examine ways in which the overall cost of providing medical benefits can be reduced, for instance through use of the new Medicare prescription drug subsidy.
• To evaluate the cost impact of proposed benefit changes in the context of labor negotiations.

How will GASB 43 and GASB 45 affect the benefits that plan sponsors provide to retirees?

There are several ramifications that GASB 43 and GASB 45 may have:

• Bring the aging of our population to the forefront
• Apply additional fiscal pressures on already tight municipal budgets
• Bring the scrutiny of tax-payers and public officials
• Force consideration of plan re-design
• Force a separation of active and retiree benefits plans

Disclaimer: The information contained on this Web page is provided for general informational use only and should not be relied upon for any specific plan application. Each user should consult with his or her own actuary or other qualified professional for any specific plan application. Milliman does not certify the information in this Web page, nor does it guarantee the accuracy, completeness, efficacy, or timeliness of such information. Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy, completeness, efficacy, and timeliness has been performed.