By Kurt Miller, CPA
Public sector employers, get ready. First you recorded net pension liabilities, now net OPEB liabilities. The Government Accounting Standards Board (GASB) Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, revises current guidance for financial reporting of most government OPEB plans. GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, establishes new accounting and financial reporting requirements for most governments with other postemployment benefits (OPEB). GASB Statement No. 74, is effective for years ending June 30, 2017, and GASB Statement No. 75 is effective for years ending June 30, 2018. The new statements are intended to make accounting for OPEB, usually retiree health insurance, more transparent by moving the entire unfunded liability to the face of the financial statements.
These two standards provide the same fundamental improvements to accounting and financial reporting as we saw with the implementation of the pension standards. Together, the standards provide governments and the readers of their financial reports a more accurate reflection of the true costs promised to their employees and retirees.
GASB Statement No. 74 Summary
GASB Statement No. 74 (Statement) establishes new accounting and financial reporting requirements for governments whose employees are provided with OPEB. The Statement covers OPEB plans, both defined benefit and defined contribution plans, that are administered through a trust. The OPEB plan must meet the following criteria:
- Contributions from employers and nonemployer contributing entities to the OPEB plan and earnings on those contributions are irrevocable;
- OPEB plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms; and
- OPEB plan assets are legally protected from the creditors of employers, nonemployer contributing entities and the OPEB plan administrator.
For OPEB plans administered through a trust, GASB Statement No. 74 requires the following financial reporting by the plan:
- Statement of fiduciary net position
- Statement of changes in fiduciary net position
- Notes to the financial statements that are required to include:
- Descriptive information on the types of OPEB provided
- Classes of plan members covered
- Composition of the plan’s board
- Plan investments, investment policies, concentrations and monetary weighted rate of return
- Required Supplementary Information (RSI)
- Defined benefit OPEB plans are required to present 10 years of plan information to include the annual money-weighted rate of return
- Single-employer and cost-sharing OPEB plans are required to present 10 years of plan information to include:
- Source of changes in the net OPEB liability
- Information about the components of the net OPEB liability and related ratios, including the OPEB plan’s fiduciary net position as a percentage of the total OPEB liability and the net OPEB liability as a percentage of covered-employee payroll.
Measurement of the Net OPEB Liability
GASB Statement No. 74 requires the net OPEB liability to be measured as the total OPEB liability less the amount of the OPEB plan’s fiduciary net position. The total OPEB liability generally is required to be determined though an actuarial valuation.
OPEB Plans Not Administered Through a Trust
For OPEB plans not administered through a trust, the government is required to report assets accumulated in a fiduciary capacity in an agency fund.
GASB Statement No. 75 Summary
GASB Statement No. 75 (Statement) establishes new accounting and reporting standards for most governments. Readers of the financial statements will note that information about the governments’ commitments promised to employees and retirees related to OPEB are now on the face of the financial statements. This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources and expenses/expenditures. This Statement replaces the requirements of GASB Statement No 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended and GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB.
As in the pension standards, employers with defined benefit plans are classified in one of the following categories:
- Single employers – OPEB plans in which OPEB is provided to the employees of only one employer. A primary government and its component units are considered to be one employer.
- Agent employer – OPEB plans in which assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer’s share of the pooled assets is legally available to pay benefits of only its employees.
- Cost-sharing employers – OPEB plans in which the OPEB obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides OPEB through the plan.
Total OPEB Liability
As discussed above, the total OPEB liability is generally required to be determined though an actuarial valuation. Actuarial valuations must be updated within 30 months and 1 day of the employer’s most recent fiscal year-end.
Single and Agent Employers
Governments will record the net OPEB liability on the government-wide financial statements. The OPEB expense and deferred outflows of resources and deferred inflow of resources related to OPEB that are required to be reported by an employer, primarily result from changes in the components of the net OPEB liability. The Statement requires that most changes in the net OPEB liability be included in OPEB expense in the period of change. This includes changes resulting from current period service cost, interest on the total OPEB liability, changes in benefit terms and projected earnings.
Required Notes to the Financial Statements
The notes to the financial statements would include the following descriptive information:
- Types of benefits provided and number and classes of employees covered
- Sources of changes in the net OPEB liability
- Significant assumptions used to calculate the total OPEB liability
- Date of the actuarial valuation
Required Supplementary Information
The government will be required to present the following information for each of the 10 most recent fiscal years:
- Sources of changes in the net OPEB liability
- Components of the net OPEB liability and related ratios, including the OPEB plan’s fiduciary net position as a percentage of the total OPEB liability and the net OPEB liability as a percentage of covered payroll
Governments will recognize a liability for its proportionate share of the net OPEB liability. An employer’s proportion is required to be determined on a basis that is consistent with the manner in which contributions to the OPEB plan are determined. OPEB expense and deferred outflow of resources and deferred inflow of resources relate to its proportionate share. In addition, the effects of (1) a change in the employer’s proportion of the collective net OPEB liability and (2) differences during the measurement period between certain of the employer’s contributions and its proportionate share of the total of certain contributions from employers included in the collective OPEB liability are required to be determined.
Defined Contribution OPEB
This statement requires an employer to recognize OPEB expenses for the amount of contributions that are defined by the benefit terms as attributable to employee’s services in the period of service.
The new statements follow the same concepts of the recently implemented GASB pension statements. In 2017, all OPEB plans will implement GASB Statement No. 74, allowing for the information to be provided to government employers about the net OPEB liability. Governments will then recognize the net OPEB liabilities, deferred outflows of resources and deferred inflows of resources attributable to them in the statement of net position starting in 2018.
While all the OPEB information has previously been disclosed in the notes to the financial statements and required supplementary information, governments will now need to recognize the assets and liabilities attributable to OPEB in the face of their financial statements.
Will this affect your bond ratings? The rating agencies have indicated that there will be no adverse consequences from the implementation of these statements. The obligations have already been figured into the ratings.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com