GASB 43 & 45: Other Post-Employment Benefits

1. GASB 43 & 45: Other Post-Employment Benefits Greene, Finney & Horton, LLP Larry Finney, Partner 864-232-5204 October, 2008

2. OPEB – What is it? Payments made to former employees or their beneficiaries, or to third parties on their behalf, as compensation for services that were rendered while they were active employees.

3. OPEB – What is it? Post-Employment Benefits Other than Pensions provided to employees • Most Common Benefit: Healthcare insurance promised to retirees • Other benefits, if provided separately from a pension plan (for example, life insurance, legal services or disability)

4. OPEB – What’s the Big Deal? • The State of South Carolina has an estimated $9 billion unfunded OPEB liability on top of a $9 billion unfunded pension liability • South Carolina is among the majority of the states and local governments that currently account for OPEB costs on a pay-as-you-go basis; for example, the monthly premium payment to the insurance carrier for current retirees is the only cost being recognized

5. OPEB – What’s the Big Deal? • OPEB liabilities for other states and local governments are much larger than SC: • California - unfunded retiree health care tab could be as high as $70 billion, costing the state $6 billion annually for the next 30 years • Maryland – estimated at $20 billion • Boston - $5.2 billion, costing the city $176 million annually for 30 years

6. OPEB – What’s the Big Deal? • Our experience to date is that if the benefits are not changed, moving from a pay-as-you-go basis to GASB 43/45 results in the GASB 43/45 annual required contributions being about 4-6 times the pay-as-you-go requirements, but much of this depends on the benefits being offered

7. GASB #43 and GASB #45 – Implementation Dates

8. OPEB – Why were GASB #43 and GASB #45 issued? • To reflect complete and reliable financial reporting regarding the costs and obligations that governments incur when they provide post-employment benefits other than pensions as part of the compensation for services rendered by their employees • Pay-as-you-go accounting only reports costs after the employees retire and fails to account for promised future benefit payments as the services are being rendered

9. Background Information

10. Background Information • Some misconceptions • GASB requires advance funding • OPEB will eliminate fund balance • Catching up on OPEB from previous years will result in a large liability • No written agreement means no OPEB • As long as retirees pay their health care premiums there is no health care OPEB • As long as a contribution is made by the employer it does not matter how it is accounted for

11. Background Information • To qualify as the equivalent to a trust: • Employer contributions must be irrevocable • Assets must be dedicated to providing plan benefits • Assets must be protected from creditors of employers and administrators • So you can’t just earmark contributions • Can’t reserve or designate fund balance

12. Background Information • OPEB versus Pension Benefits • Post-Employment healthcare is always considered OPEB regardless of whether administered by a Pension Plan • Other types of benefits (life insurance, disability, etc.) if offered through a pension plan are not considered OPEB benefits but should be accounted for as part of pension benefits

13. GASB #45 – Funding of OPEB • Funding contributions involve a 3 step process • Project the future benefit payments • Discount those benefit payments to present value • Allocate the present value of the benefits to appropriate periods of service

14. GASB #45 – Funding of OPEB • Project the future benefit payments • Usually based on employer/employee shared understanding of promises made by employer to provide benefits to employee upon retirement (“substantive plan”)

15. GASB #45 – Funding of OPEB • Discount future benefit payments to present value • Estimated inflation rate between present and retirement

16. GASB #45 – Funding of OPEB • Allocate the present value of the benefits to appropriate periods of service • Six accepted methods available

17. GASB #45 – Actuarial Valuations • OPEB Cost – derived from an actuarial calculation that must be done every: • two years (200 or more plan participants) • three years (less than 200 plan participants) • Any year in which substantial changes are made to the plan • Employers with less than 100 plan participants have option to use a non-actuarial approach

18. GASB #45 – Actuarial Valuations • Calculations are based on Assumptions: • Turnover rate • Retirement age • Health care cost factors (age, gender, inflation, etc.) • Mortality • Projected salary increases • Inflation rate • Expected rate of return on plan assets • Benefit design and promises to retirees

19. GASB #45 – Actuarial Valuations • Actuarial gains and losses • Gains come from the actual costs being less than the actuarial calculated costs • Losses come from the actual costs being more than the actuarial calculated costs

20. GASB #45 – What is? • Annual Required Contribution (ARC)? • Portion of present value of cost of OPEB earned by employees for a given period • Usually is the OPEB cost for accounting purposes

21. GASB #45 – What is? • Actuarial Accrued Liability (“AAL”) • Present value of benefits already earned by employees based on their service • Not just what is vested • Not reported on the face of the financial statements

22. GASB #45 – What is? • Unfunded Actuarial Accrued Liability (“UAAL”) • Difference between the actuarial accrued liability (“AAL”) over the actuarial value of plan assets (“AVA”) • Not reported on the face of the financial statements • BUT, this measure is important because it reflects benefits that have been earned but not yet paid for!

23. GASB #45 – What can cause? • Unfunded Actuarial Accrued Liability (“UAAL”) • Actuarial gains and losses • Changes in benefit formula • Transitional liability for unfunded past costs prior to implementation of GASB 45 • This can happen if an employer is fully funding the ARC!

24. GASB #45 – How do we handle a UAAL? • ARC is made up of: • Normal Cost • Portion of benefits which is allocated to that fiscal year by the Actuarial Cost Method used • Amortization of the Unfunded Actuarial Accrued Liability or “UAAL” • 30 year maximum period • Level dollar or level percentage of payroll

25. GASB #45 – Accounting and Financial Reporting by Employers for OPEB • Expense/expenditure recognized in financial statements for defined contribution plans and cost-sharing multiple employer defined benefit plans is the total of the contractually required contributions • For other plans, it is the ARC

26. GASB #45 – Accounting and Financial Reporting by Employers for OPEB • When an employer does not fully fund the ARC, a liability is created-Net OPEB Obligation • Note that when the ARC is not fully funded, there will be future years where the actual funding is higher than the ARC

27. GASB #45 – Accounting and Financial Reporting by Employers for OPEB Net OPEB Obligation - • Reported in full accrual-based statements • Government-wide statement of net assets • Proprietary fund statement of net assets • Statement of fiduciary net assets • Not reported in Governmental funds statements • SO THE EFFECTS OF UNDERFUNDING ARE ONLY RECOGNIZED ON THE FULL ACCRUAL FINANCIAL STATEMENTS

28. GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Disclosure Requirements • Plan description • Employer • Name of plan, ID of who administers the plan, what type of plan (i.e. single employer, multiple employer, etc.) • Brief description of the types of benefits and the authority under which benefit provisions are established or may be amended • Whether the OPEB plan issues stand-alone financial statements and how they may be obtained

29. GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Disclosure Requirements • Funding Policy • Disclose the authority under which the obligations of the plan members, employers and other contributing entities to contribute to the plan are established or may be amended • Required contribution rates of plan members (amount and percent or as a percentage of payroll) • Required contribution rates of employer in dollars or as a percentage of current-year covered payroll and, if applicable, legal or contractual maximum contribution rates

30. GASB #45 – Accounting and Financial Reporting by Employers for OPEB – Disclosure Requirements • Sole or Agent Employers should also disclose the following for each plan: • For the last three years – provide the OPEB cost (and its components), contributions made (and percentages), and the net OPEB obligation (if any) • Information on the funded status of the plan. Disclose the authority under which the obligations of the plan members, employers and other contributing entities to contribute to the plan are established or may be amended • Disclosure of the actuarial methods and assumptions used

31. GASB #45 – Accounting and Financial Reporting by Employers for OPEB • Assets held in trust or equivalent arrangements should be maintained in a OPEB Trust Fund (similar to a Pension Trust Fund) • Assets of multiple-employer plans not held in trust or equivalent arrangements should be maintained in an Agency Fund • Assets of single employer plan not held in trust or equivalent arrangements does not qualify as an OPEB plan – would be deemed unfunded (designations or reservations of fund balance for example)

32. GASB #45 – Key indicators of the financial health of a defined benefit plan • Funding progress-assets compared to obligations • Employer contribution trends compared to ARC • UAAL as a percentage of covered payroll

33. SO WHAT? • Get going if you have not done anything! • Actuarial valuation to see current status • Educate Board/Council and management

34. SO WHAT? • If current status not good • Evaluate options • Keep current plan and find resources to fund ARC • Change plan-numerous options • Takes time to do this-can’t wait until the last minute