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GASB 45 – Other Post Employment Benefits. GFOA SC October 19, 2010 Jack Beam, ASA, EA, MAAA. What is a consultant?. What we will do today. GASB 45 in general Implicit vs. Explicit subsidies Actuarial Assumptions Critical issues Key Results in SC. Retirement today?.

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gasb 45 other post employment benefits

GASB 45 – Other Post Employment Benefits


October 19, 2010

Jack Beam, ASA, EA, MAAA

what we will do today
What we will do today
  • GASB 45 in general
  • Implicit vs. Explicit subsidies
  • Actuarial Assumptions
  • Critical issues
  • Key Results in SC
retirement today
Retirement today?
  • A recent Towers Watson survey said 40% of US workers are planning to delay retirement
  • 59% of workers who plan to delay retirement cite healthcare as the cause
  • Recent GAO Report indicated that healthcare spending has grown from 12% of overall state and local expenditures in 1978 to 20% in 2008
  • Life expectancy at 65 has increased by about 40% in the last 35 to 40 years
  • Local governments shed 76,000 jobs from their payrolls. Of those, roughly 50,000 jobs were cut from local schools
gasb 43 gasb 45
GASB 43 & GASB 45
  • GASB standards:
    • Before GASB 45 – Cash Accounting
      • OPEB expense equals cash contribution made by employer
      • Balance sheet liability equals zero,
      • Except for self-insured plans
        • may have IBNR liability attributable to retirees
    • After GASB 45 – Accrual Accounting
      • OPEB cost accrued during active member’s working career
      • Cost “fully accrued” when active member retires
      • Significant balance sheet liability may accrue if benefits funded on a pay-as-you-go basis
gasb 43 gasb 457
GASB 43 & GASB 45
  • Statement 43 applies to pre-funded OPEB plans
    • “Plan” usually refers to a trust or agency fund (that is, to assets under the stewardship of an administering entity) used to administer the financing of OPEB and the payment of benefits—regardless of the financing policy adopted
  • Statement 45 applies to the employers sponsoring OPEB plans
    • “Plan” usually refers to an employer’s substantive commitment or agreement to provide OPEB, may be referred to as a “Program” if there is no trust
  • GASB 43/45 Key Disclosure Requirements
    • Actual employer contributions
    • Actuarial liabilities versus actuarial value of assets
    • Annual OPEB Cost (Expense)
      • Normal cost plus Unfunded Actuarial Accrued Liability amortization plus technical adjustment
    • Net OPEB Obligation (Balance sheet liability)
      • Cumulative difference between Expense and Employer Contribution
explicit rate subsidy
Explicit Rate Subsidy
  • When some or all retirees are charged less than the full cost of providing benefits
  • Often imaginative …
    • X% per year of service subsidy up to Y% max
    • A lower charge if retired prior to 10/1/19XX
    • A lower charge if enrolled in HMO vs. PPO
    • Retirees pay full active rate
  • It is clear that GASB would want an accounting of this type of subsidy. Many plans will contain both explicit and implicit rate subsidies.
implicit rate subsidy insured plans
Implicit Rate Subsidy – Insured Plans
  • Part of what is paid for actives is really for retirees
  • Collecting an average rate, but true incidence of cost is different
  • Retirees cost more than actives because they are older
  • So employers are “implicitly” subsidizing the retiree rate
  • GASB wants a proper accounting of this hidden subsidy
actuarial assumption setting
Actuarial Assumption Setting
  • Demographic assumptions similar to pension plan valuation
  • Election rates
  • Lapse rates – premium may change after a few years
actuarial assumption setting12
Actuarial Assumption Setting
  • Economic Assumptions are somewhat unique
  • Discount rate should be the interest rate being earned by the assets that will pay the benefit
  • Per Capita Claim Cost – insured vs.


  • Medical Trend
payment streams trend sensitivity medical only
Payment StreamsTrend Sensitivity – Medical Only

40% difference between Optimistic and Pessimistic Scenario in 2022

discount rate
Discount Rate
  • Unfunded
    • Return on general assets
    • Historical returns
    • Investment horizon
    • 3% to 5% per year
  • Prefunded
    • Irrevocable Trust
    • Little or no assets to start
    • Like a pension plan
    • Little payout at first
    • 6.0% to 7.5% per year
discount rate impact
Discount Rate Impact
  • Unfunded Plan – 3.0% vs. 4.5%
discount rate impact17
Discount Rate Impact
  • Funded plan – 6.0% vs. 7.5%
amortization period
Amortization Period
  • Maximum of 30 years under GASB 45
  • 30 years may not be appropriate
  • Plan amendment shifts majority of liability to retirees
  • Accounting principles for guidance
  • Payout period – retiree life expectancy
amortization period example
Amortization Period - Example
  • Impact of shorter amortization period
look at critical issues facing both member and the employer
Look At Critical Issues Facing Both Member And The Employer

Access to health care coverage when retired

Affordability to the retired member

Sustainability of the Plan by the employer (and subtopic of “velocity”)

Equity among the population segments (equity not necessarily meaning equal)



Retirees do not want the Plan to vanish

To ensure sustainability, the employer must know the long term ongoing annual commitment and assess whether the resources exist to meet the obligation

The first step in measuring sustainability is to assess the impact on the annual budget of the current program



Next, the employer should estimate what could be a long term annual budget amount that could be allocated to the retiree medical program

Then, the employer could look at the benefit strategies that could be implemented to bring the rate to a manageable level while keeping benefits as affordable as possible


general fund encroachment means less funding available for other activities
General Fund Encroachment Means Less Funding Available for Other Activities

Project NOO assuming cash pay-go funding. Assess impact on:

Cost of capital/bond rating

Borrowing restrictions that make access to capital markets more difficult

Ability to meet pay-go requirements in all years

Some entities are exploring non cash contributions (refer to formal legal counsel)

Example- firefighters just don’t feel they can cut into training budget- or their capital budgets- so are looking to find the money in the pension plan- how real is that solution?


understanding velocity
Understanding “Velocity”

The speed for change to take effect (e.g. the lowering of the GASB liability and costs) depends on what employee groups can have benefit changes.

If new hires only, we find it takes a generation to fully feel the impact of the change

If actives only (prospective benefits), the velocity of change can be sooner, depending on the depth of the change

Changing for all members (active, retiree and new hire) creates the highest velocity.

A governmental entity may say “the Actuarial Required Contribution must go from 15% to 7% in 7 years”.


current retirees vs future retirees
Current Retirees vs. Future Retirees

Contributions under

Full Advance-Funding

Future Hires under current Pay-As-You-Go

Current Active Employees under current Pay-As-You-Go

Current Retirees under current Pay-As-You-Go

30 Year Closed Level Percent Amortization (3% Growth)


arc per active member unfunded discount rate 4 5
ARC per Active Member – Unfunded Discount Rate – 4.5%

Survey of GASB 43 & 45 reports from GRS South Carolina clients

aal per plan participant unfunded discount rate 4 5
AAL per Plan Participant – Unfunded Discount Rate – 4.5%

Survey of GASB 43 & 45 reports from GRS South Carolina clients

arc per active member funded discount rate 6 0
ARC per Active Member – Funded Discount Rate – 6.0%

Survey of GASB 43 & 45 reports from GRS South Carolina clients

aal per plan participant funded discount rate 6 0
AAL per Plan Participant – Funded Discount Rate – 6.0%

Survey of GASB 43 & 45 reports from GRS South Carolina clients

key findings in sc opeb work
Key findings in SC OPEB work

The state wide plan is not included in these survey results.

key findings in sc opeb work31
Key findings in SC OPEB work

Over half of GRS’s South Carolina clients vary the retiree benefit based on years of service or points at retirement.

healthcare reform
Healthcare Reform
  • Early Retiree Reinsurance Program, go to
  • Retiree only plans exempt
  • Medicare Advantage and Medicare Part D plans are exempt