The Governmental Accounting Standards Board (GASB) has released a new accounting standard for OPEB plans. The new standard, GASB 75, will replace GASB 45. Changes will be similar to other recent changes under GASB 67 and GASB 68. In particular, the measurement and reporting standards under GASB 45 will be significantly modified. Here are the 8 major changes you should be prepared for.
1) The new standard is a complete replacement of GASB 43 and GASB 45
Actuaries will have to retool their valuation models to reflect the significant changes resulting from GASB 75. This first reporting period under the new Standard could produce sizable one-time changes to a plan sponsor’s unfunded OPEB.
2) The effective date for reporting is for fiscal years beginning after June 15, 2017
This is a ticking time bomb for many state and local governments whose escalating retiree plan cost continues to outpace annual funding, asset growth, and attempts to reduce costs.
3) The entire net OPEB liability must be reported on the face of the financial statements rather in the footnotes
Many plan sponsors will be shocked when they have to report on their first CAFR beginning in the 2017/2018 plan year. For the first time, 100% of their unfunded OPEB liability will be reported as a reduction in their Statement of Financial Position. For state systems like New York, New Jersey, Illinois, Texas, and California, that could amount to an over a $300 billion reduction in the aggregate net worth of those systems.
4) Governments can no longer amortize the unfunded liability for 30 years
The previous standard allowed governments to amortize the unfunded liability over a period of up to 30 years, but GASB 75 eliminates that provision. The private sector had to contend with a similar standard, FASB 158, back in 2006 and 2007. The 30-year spread of a plan sponsor’s unfunded liability effectively minimized the overall impact to a plan sponsor’s net financial position, but that will no longer be an option.
5) Attribution of benefit payments to specific years
While the previous standard allowed governments to choose from one of six different “cost methods,” the new standard establishes one cost method for attributing the present value of benefit payments to specific years. This will allow for more comparability and create more transparency when surveying like plans, or plans within your region of the country.
6) Recognition of changes in benefit plan assumptions
Changes in benefit plan assumptions that are used to determine the annual OPEB expenses will be recognized within the current reporting period. This will be a good change for those plan sponsors looking to aggressively modify their retiree healthcare plans because the financial impact of these changes will be recognized over a shortened period of time.
7) Recognition of deferred outflows and inflows
Governments will be required to recognize deferred outflows and inflows and factor them into the expense calculation systematically over the remaining years of employment. Changes in plans will now be recognized over a shortened period of time and better align the recognition of this expense over the period when the employees continue to earn their benefit, therefore achieving interperiod equity.
8) Disclosure and Required Supplementary Information
The more information available to stakeholders, the more informed plans sponsors and their constituents will be when assessing the effectiveness of government to control plan costs. Below is the additional information required under Statement 75:
- Reconciliation of changes in deferred outflows and inflows
- Impact on the OPEB liability of a 1% increase and decrease in the discount rate; and the healthcare cost trend rate
- The effects of changes during the period on the total OPEB liability (changes in service costs, benefit changes, investment earnings)
- Past 10 years beginning and ending OPEB liability
- OPEB plan’s fiduciary net position
- Components of the OPEB liability and related ratios, including covered employee payroll; OPEB liability as a % of covered payroll, % of net OPEB to total OPEB