Health and Welfare Services - Hildi Incorporated and GASB

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GASB Statements 43 & 45

Background
The Governmental Accounting Standards Board (GASB) issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits other than Pension. This new standard will require governmental employers to account for post-retirement healthcare benefits on an “actuarial basis” during an employee’s career instead of using the current practice, which accounts on a “pay-as-you-go” basis during retirement.

Question: Should we fund or set up a trust for Other Post Employment Benefits?

Answer: First, an employer will not be required to fund in advance OPEB liabilities. An employer can keep with current “pay as you go” practices, if they wish. There are some downsides to not pre-funding OPEB benefits. If OPEB liabilities are not funded in advance, this means that the discount rate used to value liabilities would be the expected return on assets of the sponsoring employer. Restrictions on fund investments, and the fact that entities may not have the extra funds to pre-fund, likely means a low rate of return on assets. This results in the mandated use of a low discount rate for OPEB liabilities which corresponds to high costs. On the other hand, if OPEB benefits are funded in advance using a separate trust dedicated to provide OPEB benefits, then the assets may be invested in longer term investments with higher return expectations. A higher return assumption means a higher discount rate can be used which corresponds to lower costs.

Question: What is an Other Post-employment Benefit (OPEB) covered under GASB 45?

Answer: Post-employment health care benefits — including medical, dental, vision, hearing, and other health related benefits. Also, life insurance, disability, and long term care. If a terminating employee’s unused sick leave credits are converted to provide or enhance a defined benefit OPEB, then this benefit should be covered under GASB 45. (See the following question for a bit more clarification.)

Question: What is NOT an OPEB covered under GASB 45?

Answer: Benefits that would be covered under GASB 16 – for example, vacation or similar compensated absences. Unused sick leave that is used as a severance payment is not covered under GASB 45, even if this balance is transferred to a health care account. If the money could be taken in cash, it is considered a “Compensated Absence” under GASB 16. Early retirement incentives are usually not covered under GASB 45. There is another GASB Statement coming out that will cover “Special Termination Benefits.”

Question: Do we have “implicit rate subsidies?”

Answer: Yes, every state and local government employer in Minnesota has some liability under GASB 45. This is due to Minnesota Statute Section 471.61 subd. 2b. Even where a retiree of an employer pays 100% of the current premium, there is likely an “implicit subsidy.” This “implicit subsidy” occurs in the difference between the premium rate charged to retirees and the estimated premium that would apply to retirees if they were treated as a group on their own. See example below:

Group Insured Medical Plan Costs
Monthly Premium	$300
Retiree Monthly Contribution	$300
Net Employer Cost	$0
GASB 45 Interpretation
Age adjusted Retiree Monthly premium	$700
Retiree Monthly Contribution	$300
Net employer OPEB cost	$400

Question: When do we have to comply with GASB 45?

Answer: Implementation is required in three phases based on a government’s total annual revenues in the first fiscal year ending after June 15, 1999. The definitions and cutoff points are the same as those used for GASB 34. The GASB 45* statement is effective for periods beginning after:

December 15, 2006 (Fiscal Year beginning July 1, 2007 for Minnesota schools)	Phase 1 government	Total Revenues of $100 million or more
December 15, 2007 (Fiscal Year beginning July 1, 2008 for Minnesota schools)	Phase 2 governments	Total Revenues of $10 million or more, but less than $100 million
December 15, 2008 (Fiscal Year beginning July 1, 2009 for Minnesota schools)	Phase 3 governments	Total Revenues of less than $10 million

Early Implementation is encouraged.

*The GASB 43 statement has effective dates that are one year EARLIER than the dates displayed for GASB 45 above.

Question: Why should we implement GASB 45 early or have an actuarial valuation performed before the effective dates?

Answer: There are many possible reasons to implement GASB 45 early and have an actuarial valuation performed sooner rather than later. Below are some of the possible reasons to implement early:

Collective Bargaining
There will be new terms, new liabilities, and many other financial implications to discuss and understand for all sides of the table on this Post-employment benefits issue. The sooner that all parties can start discussing and understanding the liabilities that lay ahead the better.

Funding the Benefits — Establishing a Trust
Looking at the actuarial liabilities and future contributions is necessary to evaluate the many different funding vehicle options. If the decision is made to fund, then contributions can be made and interest earnings can begin to grow right away.

Get ahead of the curve
There will be many plan design and financial implications to discuss from complying with GASB 45. There usually are advantages to allowing for more planning time, education for all parties, and consideration of alternatives. It is not the ideal situation to be pressed for time and short on alternatives as the effective date draws near.

Question: How often do we need to have an actuarial valuation performed?

Answer: The requirements are based on the number of plan members. A plan member is an active participant, a participant who has terminated with the right to future benefits, retirees, and beneficiaries. Employers with more than 200 plan members = valuations are required every 2 years. Employers with less than 200 plan members = valuations are required every 3 years. Employers with less than 100 members = allowed to use an “alternate measurement method.” This method is allowed to be done without an actuary.

Question: What information is needed to get a fee estimate for actuarial services?

Answer: Current census statistics/plan member information. Plan Documents, Contracts, and Retiree communications.

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