gasb 45 and 438

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GASB Statements 43 and 45:

OPEB Financial Reporting by Plans and Employers—Various Plan Types and

Circumstances Karl Johnson

Project ManagerGovernmental Accounting Standards Board

Norwalk, CT

Maryland GFOA Spring ConferenceStevensville, MD

April 25, 2008

The views expressed are those of the speaker and are not official representations of the Governmental Accounting Standards Board,

which expresses itself through written pronouncements issued after extensive due process.

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In a Nutshell

Flying Over Statements 43 and 45 at a Height of 10,000 Feet

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In a Nutshell:Statement 43 (for Plans)

Subject: reporting on steward-ship of plan assets by: A trustee or plan administrator that

is a governmental entity (stand-alone plan reporting)

An employer or plan sponsor that includes the plan as a trust or agency fund in its own financial report

Includes provisions for reporting: Plans that are administered as

qualifying OPEB plan trusts Multiple-employer plans that are

not administered as qualifying OPEB plan trusts

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In a Nutshell:GASB Statement 45 (for Employers)

Subject: accounting and reporting by employers for their annual cost (expense) and obligations associated with retiree healthcare and other forms of OPEB provided as compensation for employee services

Applies to all employers that pay all or part of the cost of benefits—based on claims costs, or age-adjusted premiums, for retirees (i.e., including “implicit rate subsidies”)

Takes different approaches to measurement, recognition, and disclosure for sole and agent employers and for cost-sharing employers

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In a Nutshell:GASB Statement 45 (for Employers)(continued)

Requires a change: From pay-as-you-go accounting—

in which expense is not recognized until OPEB obligations are finally paid after retirement

To accrual-basis accounting–in which expense is recognized during years of active service (for which OPEB is part of the compensation package)

Changes the measurement and recognition (timing) of expense

Contributes to better measurement of the total cost of government services

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In a Nutshell:GASB Statement 45 (for Employers)(continued)

Requires actuarial valuations every 2 or 3 years for accounting and financial reporting purposes (sooner if something major changes) Calculations using an alternative

measurement method are a possibility if < 100 total plan members

Requires measurement and disclosure of funded status information, including: The total actuarial accrued liabilities

for past service costs The net unfunded actuarial accrued

liabilities after subtracting plan assets, if any, that have been set aside to pay accrued benefits as they come due

The plan’s funded ratio

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What Do OPEB Plans and Employers Report?

Simplest Case: Sole Employer; Single-Employer Plan

Administered as a Trust

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Sole Employer:Expense and Liability Recognition

Year one (for most employers): Beginning F/S liability (“net OPEB obligation”) is zero, based on

prospective implementation provision of Statement 45 Expense (annual OPEB cost) = ARC (normal cost + component

to amortize the total UAAL within the parameters [maximum amortization period is 30 years])

Expense – amount actually contributed = net OPEB obligation at end of year

Year two (if a beginning net OPEB obligation): Expense (annual OPEB cost) = ARC + interest on beginning net

OPEB obligation – an “ARC adjustment” to prevent double accrual of previous contribution shortfalls and keep accounting and actuarial funding calculations in synch

Expense – amount actually contributed = addition to the net OPEB obligation

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Contribution Deficiencies or Excess Contributions

If an employer’s actual contributions to the plan in relation to the ARC for a given year are less than, or more than, the ARC, a contribution deficiency or excess contribution occurs

For accounting purposes, an employer has made a contribution in relation to the ARC if the employer: Paid (age-adjusted) premiums for retiree healthcare Paid claims costs to or on behalf of retirees or their beneficiaries Made an irrevocable contribution to a qualifying OPEB plan

trust (more on that later) Earmarking of employer assets or transferring money

to a fund that is not a qualifying OPEB plan trust does not constitute an employer contribution to the plan

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Contribution Deficiencies or Excess Contributions (cont.)

Because of the way in which GASB accrual accounting measurements are constructed to harmonize with actuarial funding measurements, a contribution shortfall (actual contributions < ARC) or excess contribution (actual contributions > ARC) has implications for both the actuary and the employer: The actuary should begin amortizing the shortfall or excess

contribution at the next actuarial valuation (including it in calculations of the ARC), unless settlement is expected not more than one year after the difference occurred

In the following period(s), the employer needs to make two adjustments to the ARC (discussed previously) to determine the employer’s annual OPEB cost (the amount to be recognized as expense), in order to keep accounting in synch with actuarial valuations and avoid double accounting for shortfalls or non-accounting for excess contributions: Interest on the net OPEB obligation An ARC adjustment (see Statement 45, par. 14-16 and Appendix C, par. 205, for

more specific guidance)

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Annual OPEB Cost and Net OPEB Obligation: Illustration

Year 1 Year 2 Normal cost (current service cost) $320,000 $ 340,000Amortization of the UAAL (for past services) 575,000 580,000

Annual required contribution (ARC)* 895,000 920,000Interest on beginning net OPEB obligation* - 50,000ARC adjustment* - (58,500)

Annual OPEB cost* = expense 895,000 911,500Actual employer contribution* (PAYGO method of financing) (245,000) (250,000)

Increase in net OPEB obligation* 650,000 661,500Net OPEB obligation—beginning* - 650,000Net OPEB obligation—ending* 650,000 1,311,500

* The ARC, the annual OPEB cost and its components, actual employer contributions, and changes in the net OPEB obligation are required to be disclosed in the employer’s notes to the financial statements.

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What Do the ARC and the Net OPEB Obligation Tell Me as a Reader of the Financial Report?

The ARC expressed as a % of covered payroll represents the level of employer contribution effort that would be needed on a sustained, consistent basis to cover normal cost and amortize the UAAL over not more than 30 years: An indicator of the “size” of the employer’s commitment,

expressed in terms of the ongoing contribution effort required to sustain it

An indicator of potential long-term demands on future cash flows

The net OPEB obligation indicates whether since implementation of Statement 45 an employer has contributed less (more) than the ARC

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Funded Status Information: Illustration (Two Employers)Information Disclosed in Notes to Financial Statements and Presented in RSI

Govt. A Govt. BUnfunded Partially(PAYGO) Funded

Actuarial accrued liabilities (AAL) (a) $13,500,000 $13,500,000Actuarial value of plan assets (b) -0-- 9,000,000

Unfunded actuarial accrued liabilities (UAAL) (a-b) 13,500,000 4,500,000

Funded ratio (b/a) 0.0% 66.7%

Covered payroll (c) $6,000,000 6,000,000

UAAL as a % of covered payroll (a-b/c) 225.0% 75.0%

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What Does the UAAL Tell Me as a Reader of the Financial Report?

The UAAL is the portion of the present value of projected benefits attributed to past periods

It can be thought of as a measure of the value of employee services that were received by the employer and tax/rate payers or constituents in past periods but not paid or funded

Other things being equal, the higher the UAAL, the higher will be the following going forward: Amortization component of the ARC The ARC Annual OPEB cost, or expense Demands on future cash flows, or budgets

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Note Disclosure of Actual Employer Contributions as a Percentage of Annual OPEB Cost

A key factor affecting the funded status of the benefits is the level of employer contributions

Accordingly, employers also should disclose for each of the past three years: The annual OPEB cost ($895,00 and $911,500 in Years 1

and 2 of the illustration) The percentage of annual OPEB cost actually contributed

(27.5% and 27.4% in Years 1 and 2 of the illustration) The ending net OPEB obligation ($650,000 and

$1,311,5000 at the end of Years 1 and 2 of the illustration)

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To Summarize

What are some the key elements of information that Statement 45 requires a sole or agent employer to report?

On the face of all accrual-basis financial statements (government-wide, proprietary fund, and fiduciary fund)—

Expense equal to annual OPEB cost, regardless of the amount paid or contributed Net OPEB obligation

In the notes to financial statements— Annual OPEB cost and its components, amount actually contributed, and change in

net OPEB obligation Funded status of the plan (including UAAL and funded ratio) Annual OPEB cost and percentage actually contributed Disclosure of key methods and assumptions

In required supplementary information (RSI)—multi-year schedule of funding progress, with notes regarding any changes affecting users’ interpretation of trends

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If an Employer Provides OPEB as a Sole Employer, Does Statement 43 Also Apply?

It depends on the circumstances Circumstance A: a sole employer finances OPEB on a

PAYGO basis, paying insurance premiums or claims costs directly from employer funds—

Statement 43 does not apply, because there is no “plan” (in the Statement 43 sense) to be accounted for

Circumstance B: a sole employer finances OPEB by making contributions to a qualifying OPEB plan trust—

Statement 43 applies to financial reporting of the plan/trust, including:

Stand-alone plan financial statements when issued Plan financial statements when the plan is included as a fiduciary

fund or component unit in the employer’s CAFR (note that both Statements apply in that case)

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What Does an OPEB Plan Administered as a Qualifying Trust Report Under Statement 43?* Financial statements:

Statement of Plan Net Assets Statement of Changes in Plan Net Assets

Notes to financial statements Including funded status of the plan as of the most recent AV—same as for sole

and agent employers Required supplementary information (multi-year trend schedules:

Schedule of Funding Progress (funded status for last 3 actuarial valuations) Schedule of Employer Contributions (the ARC and the % of the ARC added to

plan net assets from employer contributions for last 3 actuarial valuations) Notes to RSI

Disclosure of factors that significantly affect the interpretation of trends in the required schedules—for example, changes in benefit provisions, changes in the size of composition of plan membership, or changes in actuarial methods and assumptions

* The OPEB plan reporting model is based on the Statement 25 model for pension plan reporting. The same model applies to any type of defined benefit OPEB plan (single-employer, agent multiple-employer, or cost-sharing multiple-employer) that is administered as a qualifying trust.

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What Is Reported in Plan Basic Financial Statements?

Statement of Plan Net Assets: Plan assets itemized (investments are valued at fair value

for this purpose) Plan liabilities (liabilities for benefits and refunds are

recognized to the extent due and payable) Plan net assets held in trust for benefits

Statement of Plan Net Assets: Plan net assets—beginning Additions—including contributions from plan members,

employer, and other and net investment earnings on plan assets

Deductions—including benefits, refunds, and plan administrative expenses

Plan net assets—ending

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What is Presented in Plan RSI?

The schedule of funding progress presents funded status information (AAL, actuarial value of plan assets, UAAL, funded ratio, covered payroll, and UAAL as a % or multiple of covered payroll) for the current and two preceding actuarial valuations

The schedule of employer contributions presents the ARC for the plan’s fiscal year and the % actually added to plan net assets for the year from employer contributions—for years covered by the current and two preceding actuarial valuations *

* Note difference from a sole or agent employer’s disclosure of employer contributions as a % of annual OPEB cost (the amount recognized as expense)

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Statements 45 and 43:Effective Dates and Transition

Staggered implementation of Statement 45 based on a government’s phase for implementing GASB 34: Phase 1 government ($100M+ total revenue)—first fiscal year beginning

after December 15, 2006 Phase 2 government ($10M to < $100M total revenue)—first fiscal year

beginning after December 15, 2007 Phase 3 government (< $10M total revenue)—first fiscal year beginning

after December 15, 2008 Statement 43 will be effective for the first plan fiscal year beginning

after December 15, 2005, 2006, or 2007, depending on the size of the largest participating employer in the plan

Earlier implementation is encouraged Employers may apply the measurement requirements of Statement 45

prospectively—that is, the employer may report zero beginning net OPEB obligation as of the beginning of the year in which it implements Statement 45

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Application of the Standards to Particular

Facts and Circumstances

Definitions, Distinctions, and Complications

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Is There a “Plan,” and Does Statement 43 Apply?

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What Is an OPEB Plan?

Note that GASB uses the term plan in more than one way in Statements 43 and 45.

Why? Top Two List:

2. We ran out of good words. 1. Although the British term “scheme” (as in “pension

scheme”) might have worked in Statement 45, frankly it doesn’t have such good connotations on this side of the pond.

This has contributed to the risk of semantic confusion. Example: a government calling for technical guidance tells us it

has OPEB but not an OPEB plan and wants to confirm its (mis)impression that Statement 45 does not apply

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What Is an OPEB Plan? (cont.)

In Statement 45 (employer reporting), plan usually refers to the terms of an employer’s substantive commitment or agreement to provide benefits that meet the definition of OPEB An employer has an OPEB plan in that sense if the employer

has (a) undertaken an obligation to provide postemployment healthcare benefits (etc.) as part of the total compensation for employee services and (b) makes a contribution toward the cost of the benefits

For purposes of Statement 45, it makes no difference whether the employer has established a trust or has adopted a policy of funding the benefits as they accrue

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What Is an OPEB Plan? (cont.)

In Statement 43 (plan reporting), plan usually refers to a trust fund (or agency fund) used to administer the accumulation of plan assets and the payment of benefits as they come due

That is, plan in Statement 43 usually refers to assets under the stewardship of trustees or an administering entity with accountability to others for its exercise of stewardship

Consider the context to discern the intended meaning in each particular usage of the term

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What Kind of Plan Is It?

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Defined Benefit OPEB Plan

An OPEB plan that has terms that specify the amount of benefits to be provided at or after separation from employment *

Benefits may be specified: In dollars (e.g., a flat dollar payment or an amount

derived from one or more factors such as age, years of service, or salary level), or

In terms of a type or level of coverage (e.g., medical, hospitalization, prescription drugs, or a percentage of health insurance premiums)

* In contrast to a defined contribution plan, in which the plan terms define only the amounts to be contributed or credited to individual employee accounts during active employment

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What Types of Defined Benefit OPEB Plans are Distinguished for Accounting Purposes?

Statements 43 and 45 (like 25 and 27 for pension plans) distinguish three types of defined benefit OPEB plans, based on number of employers and assignment of risks and responsibilities associated with financing benefits: Single-employer plan (“sole employer”) Agent multiple-employer plan (“agent employers”) Cost-sharing multiple-employer plan (“cost-sharing

employers”) Plan type affects which accounting and financial

reporting requirements of Statement 45 apply to employer(s) in the plan

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What is a Single-Employer Plan?

A single-employer plan (in the Statement 45 sense) is one that covers retirees and potential future retirees of a single, legally separate governmental unit

Could be either: A plan for which a qualifying OPEB plan trust has been created,

where the trust is used to administer benefits for the sole employer’s group

A plan that the sole employer finances on a PAYGO basis (for example, paying health insurance premiums directly from the general fund), without establishing a trust

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What is an Agent Multiple-Employer Plan?

Can be thought of as a collection of single-employer plans with combined administrative functions (holding and investing plan assets and administering benefits) for efficiency or effectiveness

Is distinguished from a cost-sharing multiple-employer plan because each agent employer remains responsible for financing benefits of its own individual plan *

Accounting implications of an agent plan: Separate actuarial valuations Employers’ expense and obligations measured like those of sole

employers

* A multiple-employer plan that is not administered as a qualifying trust is required by the standards to be accounted for as an agent, rather than cost-sharing, plan—even if the plan is cost-sharing in intent

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What Do Agent Plans and Employers Report?

Financial reporting for an agent multiple-employer plan is essentially the same as financial reporting for a single-employer or cost-sharing plan, provided that each type of plan is administered as a qualifying trust Note that actuarial information at the aggregate, or administrative, level

for agent plan reporting is the aggregate of actuarial information from valuations of each individual employer plan (planning note: it may be helpful from a plan reporting standpoint if AV dates and actuarial methods for individual plan AVs are coordinated)

Accounting and financial reporting for an agent employer are essentially the same as for a sole employer Note that the ARC, annual OPEB cost, the net OPEB obligation, and

funded status and funding progress information for an agent employer should be based on AVs of that employer’s individual plan

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What is a Cost-Sharing Multiple-Employer Plan?

Employers: Pool their assets, risks, and benefit obligations, forming a

single, combined plan Transfer to plan trustees the risks and responsibilities

associated with funding benefits (that is, trustees take on, as a fiduciary responsibility, assuring that assets are available to pay benefits as they come due)

In exchange for assuming responsibility for funding and administrative services, the plan assesses contractually required contributions for specified pay periods that cost-sharing employers must pay Statements do not specify how contractually required

contributions are determined CRC may or may not be equal to the ARC

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Issue: Accounting by Cost-Sharing Employers

OPEB Implementation Guide Question 127:

Under what conditions should an employer in a multiple-employer plan follow the requirements of GASB 45 for cost-sharing employers (rather than those for sole and agent employers)?

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Answer:

When the plan (a) is cost-sharing in intent (pooling/sharing of benefit costs, assets, and risks), and (b) is administered in a way capable of making pooling of assets and cost sharing actually possible—that is:

The plan is administered as a trust, or equivalent (i.e., legally separate plan entity)

Employer contributions to the plan are irrevocable Plan assets are dedicated to providing benefits per

substantive plan, and Plan assets are legally protected from employers’

creditors.

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What Do Cost-Sharing Plans and Employers Report?(Applies to plans that are both (a) cost-sharing in intent and(b) administered as a qualifying OPEB plan trust)

Under Statement 43, all types of OPEB plans administered as a qualifying trust are reported in essentially the same way Note that, in contrast to agent plans, actuarial information is developed for

the plan as a whole (one valuation) under requirements of Statement 43 Accounting measurement and disclosure requirements for cost-

sharing employers differ from those for sole and agent employers Employer expense is measured based on an employer’s contractually

required contributions to the plan, however determined (with disclosure of the basis for determination)

No actuarial information is required for employer reporting, if a plan financial report complying with Statement 43 is publicly available, and an employer discloses how to obtain a copy*

* If there is no Statement 43-compliant plan report, and no other entity (i.e., plan sponsor) includes the plan in its report, each cost-sharing employer is required to include plan funding progress and employer contribution schedules as RSI in its own report, with explanatory disclosure

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Suppose there is a multiple-employer plan described as a cost-sharing plan, but the plan is not administered as a trust that further meets the other conditions of GASB 45. How should employers and plan account for that plan?

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Answer:

Employers should follow the requirements of GASB 45 applicable to an agent employer (reflecting that there is no effective pooling of assets or transfer of individual employers’ risks to the plan), including: Separate actuarial valuations of employers’ individual plans Measurement and reporting of annual OPEB cost, UAAL, etc.

Plan administrator should report the plan as an agency fund: Financial statement display limited to net +/- in assets and liabilities,

with no net assets or changes in net assets Any assets from contributions in excess of PAYGO requirements

reported as liabilities to employers (and by them as employer assets, not contributions)

Limited plan disclosures required (not including actuarial information)

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If All Employers are Rated as a Single Group, is it a Cost-Sharing Plan?

Maybe, maybe not Community rating is not determinative, one way or the other

What is shared in a cost-sharing plan is not current-year premiums but past baggage (the responsibility of amortizing UAALs related to the participating employers’ benefit provisions and group experience) and ongoing service costs (normal costs and future normal costs) In a cost-sharing plan, the employers have agreed to share, or

pool, their unfunded past service costs and have committed to finance those, as well as normal costs, collectively going forward

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If All Employers are Rated as a Single Group, is it a Cost-Sharing Plan? (cont.)

Questions to consider (perhaps never asked before): Which is the intent:

That participating employers obtain coverage through the multiple-employer arrangement but remain individually responsible for their own benefit obligations? (Agent plan)

That the trustee or sponsor of the plan accepts fiduciary responsibility for financing the pooled benefit obligations? (Cost-sharing plan)

Can a participating employer leave the plan? Re-enter? Easily? (The easier to leave and re-enter, the more indicative of an agent plan)

If a participating employer leaves the plan, are there provisions to ensure that other employers are left whole? (If not, indicative of agent plan)

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When Is the Plan in Which an Employer Participates a Defined Contribution Plan?

As narrowly and quite specifically defined in par. 5 of Statement 45 (and par. 7 of Statement 43), a defined contribution plan is one in which all of the following conditions exist: Each member has an individual account The plan terms specify how contributions to an active member’s

account (prior to retirement) shall be determined, rather than the benefits to be provided after retirement

Benefits are a function solely of the amounts contributed prior to retirement and earnings on investment of account assets

The standards require that a plan that has both DB and DC features be accounted following the requirements for a DB plan

Moral: if you think you have a DC plan, be careful; probably you don’t

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Is the Following a DC Plan for Accounting Purposes?

Plan design: Employer agrees with a union to pay a specified sum in cash

each bargaining period, or determined based on a pre-agreed formula, to a benefit plan administered in trust by union-appointed trustees

The plan is administered as a retiree benefit pool The trustees annually determine the level of benefits to be

provided to retirees from the pool Because the level of contributions is established by contract or

bargaining, there is the notion that benefit levels should be managed with that constraint in mind

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Is the Following a DC Plan for Accounting Purposes? (cont.)

For accounting purposes, the type of plan described is not a DC plan and has none of the characteristics of a DC plan Individual accounts are not maintained The plan does not define how much employer is to contribute to

individual accounts while members are in active service Benefits to retirees are not determined solely by individual account

balances Employer should account for its costs and obligations under

requirements of Statement 45 applicable to a DB plan Best staff guidance: benefits should be projected based on the

current benefit level and the pattern of employer-member cost sharing observed to date

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How Many Plans Are There?

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Is There One OPEB Plan, or Are There Multiple Plans?

Situation: an employer has five PAYGO-financed retiree healthcare arrangements with five categories of employees

Question: how can one determine whether there is one OPEB plan, five OPEB plans, or something in between?

Basis for distinction (discussed in par. 14 of Statement 43 in the context of a PERS ): If any portion of plan assets is legally restricted to paying

benefits for a particular category of employees, that is evidence of a separate plan covering those employees

Practice issue: If plans have been PAYGO-financed, the question may never have

come up Employer may need to determine whether a portion of plan assets

would be so restricted, if plan assets ever were to be accumulated

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Active-Employee and Retiree Healthcare Benefits Provided

through the Same Plan

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Reporting Active and Retiree Healthcare Benefits Provided Through the Same Plan

Employer (and plan) should separate the two benefits

for accounting purposes Employer should report retiree healthcare benefits as OPEB

under Statement 45 (and plan administrator should report the OPEB plan in conformity with Statement 43)

Employer (and plan) should report active-employee healthcare benefits as risk financing in conformity with Statement 10, as amended

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Issue: Separate Accounting for Active-Employee and Retiree Healthcare Benefits When Both Provided through Same Plan


In an experience-rated healthcare plan that includes both active employees and retirees, in which the nominal employer and member contributions are stated in terms of blended premium rates, how should the employer’s share of the cost of covering retirees for the current year be determined for financial accounting purposes?

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Issue: Separate Accounting for Active-Employee and Retiree Healthcare Benefits When Both Provided through Same Plan

Answer: Active and retiree benefits should be accounted for separately, under GASB 10 and GASB 45, respectively Employer’s share of the current coverage cost for each group should

be calculated based on the claims costs, or age-adjusted premiums, for that group Employer’s share for retiree benefits is the difference between

claims costs or age-adjusted premiums for retirees and the amount contributed by retirees (i.e., it includes implicit rate subsidies)

Possible exception: a sole or agent employer that provides coverage through participation in a community rated plan may qualify to use unadjusted rates if the actuary for the employer’s plan makes the certification required by par. 13a(2) and ASOP 6

Employer’s share of current-year cost for retiree coverage—determined in that manner—establishes the relevant starting point, or basis, for the actuarial projection of benefits for financial accounting purposes

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Example

Single-employer plan 500 plan members:

400 actives 100 retirees

Employer’s policy is to allow retirees to continue participating in healthcare group with actives at the blended premium rate

Employer pays blended rate for each active employee Retirees pay blended premium rate for their coverage

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Example (cont.)

Blended premium rate = $2,880 / member Total premiums for group = $1,440,000 Nominal contributions at blended rates:

400 Active 100

Employees Retirees Total Total blended premiums $1,152,000 $288,000 $1,440,000

Less: Member contributions 0 288,000 288,000

Employer contributions $1,152,000 $0 $1,152,000

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Example (cont.)

Total premiums for group = $1,440,000 Age-adjusted premiums (determined by

actuary): Retirees: $4,810 / retired member Actives: $2,397.50 / active member

400 Active 100Employees Retirees Total

Total age-adjusted premiums $ 959,000 $481,000 $1,440,000Less: Member contributions 0 288,000 288,000Employer contributions $ 959,000 $193,000 $1,152,000

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Example (cont.)

Note that the employer’s nominal contribution for active-employee benefits ($1,152,000) exceeds the actual cost of providing coverage to active employees ($959,000) by $193,000

The $193,000, therefore, has nothing to do with insuring active employees but reflects the increase in blended rates as a result of the inclusion of retirees in the group

The $193,000 is an actual cash contribution by the employer toward the cost of covering retirees in the plan for the current year It is the relevant starting point for the projection of future employer

cash outlays for benefits for OPEB accounting purposes The amount of this contribution might be expected to increase over

time (other things being equal) as the combined result of (a) the healthcare cost trend and (b) changing demographics (increasing number and proportion of retirees)

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What Happens to the Insurance Fund Used to Account for Active-Employee and Retiree Healthcare Benefits?

Q1: Does an internal service fund or enterprise fund used to account for healthcare benefits to actives and retirees under the Statement 10 risk-financing model qualify as an OPEB plan trust under par. 4 of Statement 43?

A1: Generally, no; a risk-financing fund is going to fail one or more, and perhaps all, of the qualifying tests: A qualifying OPEB plan trust must in fact be a trust (or equivalent

arrangement, if there is one)—that is, it must be legally separate from the employer in the way a trust is, not a fund of the employer

The trust assets must be dedicated to paying other postemployment benefits in accordance with the substantive plan to retirees and their beneficiaries

The trust assets must be legally protected from creditors of the employer(s) or the plan administrator, and

Employer contributions to the trust must be irrevocable—that is, the employer(s) legally can’t withdraw assets contributed to the trust unless all liabilities payable from the trust have been paid or defeased with no remaining risk related to changes in asset or liability values

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What Happens to the Insurance Fund Used to Account for Active-Employee and Retiree Healthcare Benefits? (cont.)

Q2: May an employer or health insurance plan sponsor continue to report the active-employee and retiree healthcare benefits using a single risk-financing fund—perhaps using separate columns for the two subgroups?

A2: No. The Codification Instructions for the OPEB Statements amend the scope of Statement 10 to delete retiree healthcare benefits. This means that only active-employee healthcare benefits are now classified as an example of risk financing, to be accounted for using a fund type and accounting approach as required by Statement 10.

Q3: Does A2 mean that an employer or sponsor can no longer administer a healthcare arrangement covering active employees and retirees through a single ISF or enterprise fund created under the risk-financing concept?

A3: Not necessarily. GASB standards do not extend to how a government chooses to administer benefits on a day to day basis. However, at the end of the year, for GAAP financial reporting purposes, funds and activities must be restructured to report the active-employee benefit piece in accordance with Statement 10 and the retiree benefit piece in accordance with the OPEB Statements 43 and 45.

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Q4: How should the retiree benefit piece of a fund previously used to account for both active-employee and retiree healthcare benefits under the risk-financing model be accounted for now?

A4: A definitive answer may depend on the facts and circumstances, but here are a couple of possibilities:

1. If a sole employer is involved, and the fund used under Statement 10 has been an internal service fund:

The fund might be separated for financial reporting purposes into two internal service funds—one to account for the active-employee benefit as a risk financing activity under Statement 10, and the other to account for the employer’s OPEB contributions under Statement 45.

Note that the OPEB-related ISF would not be an OPEB plan in the Statement 43 sense, but an employer fund. Accordingly, financial activity between other funds and the ISF would be internal activity, not OPEB contributions—which could only occur when premiums or claims costs, or contributions to a qualifying OPEB plan trust, were paid from the ISF.

(continued on next slide)

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(continued from previous slide) If multiple employers are involved, and the fund used under

Statement 10 has been an enterprise fund: The retiree benefit piece probably should generally be separated off

as an OPEB plan not administered as a qualifying trust—and reported as an agency fund—according to the requirements of par. 5 and 41 of Statement 43.

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Determining Whether Statement 43 Applies—and Whether an Employer or Plan Sponsor Should Include a Plan in

Its Financial Report

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The Five Circumstances in Which Statement 43 Applies

1. A DB plan is administered as a qualifying OPEB plan trust, and the plan administrator:

1. Is an SLG (state or local governmental) entity and2. Issues a plan financial report

2. A DB plan is administered as a qualifying OPEB plan trust, and the employer or sponsor:

1. Is an SLG entity and 2. Includes the plan as a trust fund in its own financial report

3. An SLG administers a multiple-employer plan but not as a qualifying trust and includes the fund in its own financial report or issues a separate report on the plan/fund activity—in which circumstances the administering government should follow special requirements of par. 41 of Statement 43


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The Five Circumstances in Which Statement 43 Applies (cont.)

(continued from previous slide)

4. An SLG entity administers a DC plan and issues a plan financial report

5. An SLG employer with a DC plan includes the plan as a trust fund in the employer’s financial report

Note: often only Statement 45 will apply—for example, where a sole employer has a PAYGO-financed retiree healthcare plan (that is, there is no trust, and premium or claims payments are made directly from employer’s funds)

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When Should an Employer or Sponsor Include an OPEB Plan as a Trust or Agency Fund in Its Financial Report?

Answer: When the entity administering the plan is a fiduciary component unit (Statement 14) or the employer or sponsor determines it has a “fiduciary responsibility” for the plan (par. 19 of Statement 14)

Par. 17-18 of Statement 32 provide additional guidance for determining whether employer or sponsor has fiduciary responsibility in that sense: Trust and agency funds are defined as funds held by a

government as trustee or agent for others—this suggests fiduciary responsibility with respect to the assets

Relevant factors to consider: Whether the government has significant administrative

involvement Whether the government performs the investing function for the

plan

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To Trust or Not to Trust?(About Qualifying OPEB Plan

Trusts)

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Factors Pro and Con

There may be many reasons why a government might or might not choose to establish an OPEB plan trust

The purpose here is limited to pointing out two accounting-related reasons why a government might consider doing so: Funding the plan—

If a government decides to fund or partially fund an OPEB plan, establishing a qualifying OPEB plan trust, legally separate from the employer, is necessary in order for any assets set aside to be accounted for as plan, rather than employer assets

Plan assets (but not earmarked employer assets) are deducted from total AAL, thereby reducing the UAAL, the ARC, and annual OPEB cost


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Factors Pro and Con

(continued from previous slide) Investment return assumption—

If a trust is established, it may be possible to provide for a mix of investments for which a higher long-term earnings assumption is appropriate, compared to the expected long-term rate of return on unrestricted general investments of the employer

The higher the expected long-term earnings rate on assets expected to be used to pay benefits, the higher the discount rate to determine the present value of projected benefits—and the lower the total AAL

Note: The discount rate is not based on whether or not there is a trust, but on the

assets expected to be used However, depending on applicable laws that otherwise restrict investments,

establishing a trust with investment authority tailored to the objective of funding OPEB may be the only way to provide a vehicle conducive to the possibility of relatively higher earnings

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Characteristics of a Qualifying OPEB Plan Trust

There are effectively four characteristics set forth in par. 4 and 34g of Statement 43 and in par. 13g of Statement 45: It must in fact be a trust (or equivalent arrangement, if there is one)—

that is, it must be legally separate from the employer in the way a trust is The trust assets must be dedicated to paying benefits in accordance

with the substantive plan to retirees and their beneficiaries The trust assets must be legally protected from creditors of the

employer or the plan administrator, and Employer contributions to the trust must be irrevocable—that is, the

employer can’t withdraw assets contributed to the trust unless all liabilities payable from the trust have been paid or defeased with no remaining risk related to changes in asset or liability values

Meeting each of these requires affirmative legal steps or provisions The Board has not taken a position with regard to particular trust forms—

and the phrase “or equivalent arrangements” signifies that the Board’s focus is on whether the characteristics are in fact met in a substantive way, not on particular forms by name The Board is not aware of any particular “equivalent arrangement” out there,

if indeed one exists or is possible

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What If Scope of Trustee’s Responsibility Is Narrower Than Scope of the OPEB Plan?

What the Board contemplated re: OPEB plan trusts: An OPEB plan has two functions: (1) hold and accumulate plan assets

and (2) pay benefits when due If an OPEB plan were administered as a trust, the plan would be under

the stewardship of a trustee or trustees, who would have oversight of the two functions of the plan—as in a DB pension plan administered by a PERS

How things actually began to develop: Trusts began to be created to hold and accumulate plan assets only The trustee or trustees in many cases will be reliant on others (e.g.,

employer’s risk financing department) for instructions about disbursement of plan assets for premiums or claims costs—when, to whom, and in what amounts

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Different cash-outflow scenarios may occur: Cash may be disbursed directly to insurers or plan members Cash may be disbursed to employer in reimbursement for premium or

claims cost payments previously made Cash may be disbursed to employer in anticipation of premium or claims

cost payments due Staff’s dilemma:

Is such a trust a qualifying OPEB plan trust? If so, where is its head? Do some designs break down plan/employer separation?

Board’s feedback during process of drafting Q&A guidance: Craft guidance in a way that is flexible enough to apply standards to

developing realities of practice in this area

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Q&A 8.69.3 for Comprehensive Implementation Guide 2006-2007 provides the following guidance: An OPEB plan has two functions—asset accumulation and payment of

benefits Statements do not specify how an OPEB plan should be structured

administratively; a variety of structures may be created to fit circumstances

In all cases, the structure and the manner of carrying out the functions of an OPEB plan must be compatible with administration not as employer assets but as a trust for plan members and with the specific criteria for a qualifying trust

Also, anyone involved in asset accumulation or administration of benefits—whether or not a nominal trustee—must carry out his/her duties in a manner consistent with fiduciary responsibility


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(continued from previous slide) In some cases, both plan functions may be carried out by

personnel of a single administrative agency under a trustee’s oversight; in other cases, the trustee may rely on personnel of another entity for disbursement instructions

In the latter arrangement: Disbursements should be made in a manner consistent with the

purpose of the trust and the criteria of irrevocability, dedicated purpose, and protection from creditors

Everyone involved in the disbursement of plan assets should act in a manner consistent with fiduciary responsibility

If not, that is evidence the plan is not in fact being administered as a qualifying OPEB plan trust—and that it should not be accounted for as such

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What Happens If There Is a Major Change in the Nation’s Healthcare System?

The effect of a major change in the nation’s system of providing healthcare on an OPEB plan trust would depend on the nature of the change: If a new national system were created that superseded all

employer-sponsored healthcare plans, then presumably the purpose of the trust would have been rendered moot— If no more benefits remained to be paid from the trust, then it

would be appropriate if any residual trust assets reverted to the employer at that point

If the change reduced an employer’s OPEB obligations but did not completely supersede benefits to be provided by the plan— Assets in the trust should remain irrevocable, but the change

would reduce the ARC going forward (that is, would reduce additional amounts that the employer would need to contribute)

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Toward Implementation of Statements 45 and 43

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Potential Implementation Planning Tasks

Analyzing and classifying employee benefits offered Gathering information about plan terms and covered group Developing specifications for and obtaining an actuarial

valuation Absorbing the new information provided by the actuarial

valuation Considering how OPEB will be managed and accounted

for going forward

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Potential Implementation Planning Tasks (cont.)

Initiating discussions and decision processes regarding variables that can be managed to make or keep benefits sustainable Involving stakeholders in problem-solving about what is a multi-

dimensional challenge, often of major size Considering modifications, if necessary, in one or more of three

broad areas available to manage (assuming intent to sustain the benefits): Benefit terms Allocation of cost of providing coverage between employer and plan

members Method of financing (how much and when the employer contributes

to the plan)

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Once an actuary has modeled the plan, using the model to test out ideas for financial effects on a pro forma basis

If planning to fund or partially fund, establishing a qualifying OPEB plan trust Involving attorneys Working to establish legal authorization to create a suitable trust, if

not already in place Considering trust structure, trustees, and options including making

a trust available for use by multiple employers—and potential implications of that

Figuring out how to separate active-employee and retiree healthcare benefits for accounting and financial reporting purposes, if combined

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Working out issues related to funds structure, funds flows, administration, and accounting For example, working out how to settle up between an OPEB

plan trust, if used, and employer funds for implicit rate subsidies initially paid from employer funds

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What Should a Government Do to Manage Its OPEB Obligations?

Neither the GASB nor GASB staff can answer that question. However, our hope is that once a government has obtained an actuarial valuation and developed and absorbed the information required by Statement 45, officials will have a better basis for informed decision-making.

In the broadest terms, there are only a few elements to work with to manage for sustainable retiree healthcare benefits (and other forms of OPEB): The actuarial accrued liability, and factors that drive the AAL The amount of assets contributed to the plan (the issue of whether or to what

extent to fund—which involves a related issue of whether or not to establish a qualifying OPEB plan trust to enable accumulation of plan assets)

The allocation of the total cost of retiree healthcare coverage between the employer and plan members.

Within those categories, there may be many possibilities and combinations of possibilities.

So, measure, take a few deep breaths, absorb (understand the nature and dynamics of the transaction), assess where you are, and identify and explore your options.

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In Conclusion

Don’t underestimate what may be involved in planning for implementation of Statement 45 (and Statement 43?) or wait too long to start

A government’s first actuarial valuation generally is a watershed event in terms of measuring and understanding the financial implications of its OPEB commitments

In the end, the information required to be developed and reported by Statements 45 is intended to provide the diverse users of governments’ financial reports:

A more transparent accounting for employers’ costs and obligations associated with OPEB, particularly postemployment healthcare benefits

More decision-useful financial information to better inform discussion and decision-making about important matters including, for example, benefits and plan design, cost sharing between the employer and plan members, and the method of financing benefits

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Contact Information

Street and mailing addresses:Governmental Accounting Standards Board401 Merritt 7/ P.O. Box 5116Norwalk, CT 06856-5116

Web site: www.gasb.org

Speaker contact information:Telephone 203.956.5253E-mail [email protected]

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Additional Resources

GASB website, www.gasb.org:

• OPEB fact sheet• OPEB plain language summary• Summaries of the standards (from the Original Pronouncements)• Order information (Statements, Implementation Guides, Technical Bulletins, etc.)• A system for submitting technical accounting and financial reporting questions to GASB’s professional staff

gasb 45 and 438

Documents