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GASB 43 & 45: Other PostEmployment Benefits
Greene, Finney & Horton, LLP
864-232-5204
Larry Finney, Partner
October, 2008
OPEB – What is it?
Payments made to former employees or
their beneficiaries, or to third parties on
their behalf, as compensation for
services that were rendered while they
were active employees.
OPEB – What is it?
Post-Employment Benefits Other than
Pensions provided to employees
Most Common Benefit: Healthcare
insurance promised to retirees
 Other benefits, if provided separately from
a pension plan (for example, life
insurance, legal services or disability)

OPEB – What’s the Big Deal?


The State of South Carolina has an
estimated $9 billion unfunded OPEB liability
on top of a $9 billion unfunded pension
liability
South Carolina is among the majority of the
states and local governments that currently
account for OPEB costs on a pay-as-you-go
basis; for example, the monthly premium
payment to the insurance carrier for current
retirees is the only cost being recognized
OPEB – What’s the Big Deal?

OPEB liabilities for other states and
local governments are much larger than
SC:
 California - unfunded retiree health
care tab could be as high as $70
billion, costing the state $6 billion
annually for the next 30 years
 Maryland – estimated at $20 billion
 Boston - $5.2 billion, costing the city
$176 million annually for 30 years
OPEB – What’s the Big Deal?

Our experience to date is that if the
benefits are not changed, moving from
a pay-as-you-go basis to GASB 43/45
results in the GASB 43/45 annual
required contributions being about 4-6
times the pay-as-you-go requirements,
but much of this depends on the
benefits being offered
GASB #43 and GASB #45 –
Implementation Dates
Type of government
for purposes of
GASB #34
Phase I
Governments
Phase II
Governments
Phase III
Governments
GASB 43:
GASB 45:
Plans for FY
Employer - FY
beginning after: beginning after:
12/15/05
12/15/06
(FYE 6/30/07) (FYE 6/30/08)
12/15/06
(FYE 6/30/08)
12/15/07
(FYE 6/30/09)
12/15/07
(FYE 6/30/09)
12/15/08
(FYE 6/30/10)
OPEB – Why were GASB #43
and GASB #45 issued?


To reflect complete and reliable financial
reporting regarding the costs and obligations
that governments incur when they provide
post-employment benefits other than pensions
as part of the compensation for services
rendered by their employees
Pay-as-you-go accounting only reports costs
after the employees retire and fails to account
for promised future benefit payments as the
services are being rendered
Background Information
Defined Contribution
plan
Defined Benefit plan
Inputs
Outputs
Financed-contractually
required payments
Financed-pay as you go
or advance funded
Risk-employee
Risk-plan or employer
Background Information

Some misconceptions





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GASB requires advance funding
OPEB will eliminate fund balance
Catching up on OPEB from previous years will result in
a large liability
No written agreement means no OPEB
As long as retirees pay their health care premiums there
is no health care OPEB
As long as a contribution is made by the employer it
does not matter how it is accounted for
Background Information

To qualify as the equivalent to a trust:


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Employer contributions must be irrevocable
Assets must be dedicated to providing plan
benefits
Assets must be protected from creditors of
employers and administrators
So you can’t just earmark contributions
Can’t reserve or designate fund balance
Background Information

OPEB versus Pension Benefits


Post-Employment healthcare is always considered
OPEB regardless of whether administered by a
Pension Plan
Other types of benefits (life insurance, disability,
etc.) if offered through a pension plan are not
considered OPEB benefits but should be accounted
for as part of pension benefits
GASB #45 – Funding of OPEB

Funding contributions involve a 3 step
process
 Project the future benefit payments
 Discount those benefit payments to
present value
 Allocate the present value of the benefits
to appropriate periods of service
GASB #45 – Funding of OPEB

Project the future benefit payments

Usually based on employer/employee
shared understanding of promises made
by employer to provide benefits to
employee upon retirement (“substantive
plan”)
GASB #45 – Funding of OPEB

Discount future benefit payments to
present value

Estimated inflation rate between present
and retirement
GASB #45 – Funding of OPEB

Allocate the present value of the
benefits to appropriate periods of
service

Six accepted methods available
GASB #45 – Actuarial Valuations

OPEB Cost – derived from an actuarial
calculation that must be done every:



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two years (200 or more plan participants)
three years (less than 200 plan participants)
Any year in which substantial changes are made
to the plan
Employers with less than 100 plan
participants have option to use a nonactuarial approach
GASB #45 – Actuarial Valuations

Calculations are based on Assumptions:

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Turnover rate
Retirement age
Health care cost factors (age, gender, inflation,
etc.)
Mortality
Projected salary increases
Inflation rate
Expected rate of return on plan assets
Benefit design and promises to retirees
GASB #45 – Actuarial Valuations

Actuarial gains and losses

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Gains come from the actual costs being less than
the actuarial calculated costs
Losses come from the actual costs being more
than the actuarial calculated costs
GASB #45 – What is?

Annual Required Contribution (ARC)?


Portion of present value of cost of OPEB
earned by employees for a given period
Usually is the OPEB cost for accounting
purposes
GASB #45 – What is?

Actuarial Accrued Liability (“AAL”)



Present value of benefits already earned by
employees based on their service
Not just what is vested
Not reported on the face of the financial statements
GASB #45 – What is?

Unfunded Actuarial Accrued Liability
(“UAAL”)



Difference between the actuarial accrued
liability (“AAL”) over the actuarial value of plan
assets (“AVA”)
Not reported on the face of the financial
statements
BUT, this measure is important because it
reflects benefits that have been earned but
not yet paid for!
GASB #45 – What can cause?

Unfunded Actuarial Accrued Liability
(“UAAL”)

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Actuarial gains and losses
Changes in benefit formula
Transitional liability for unfunded past costs
prior to implementation of GASB 45
This can happen if an employer is fully
funding the ARC!
GASB #45 – How do we handle a
UAAL?

ARC is made up of:
 Normal Cost
 Portion of benefits which is allocated to that fiscal
year by the Actuarial Cost Method used
 Amortization of the Unfunded Actuarial Accrued
Liability or “UAAL”
 30 year maximum period
 Level dollar or level percentage of payroll
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB


Expense/expenditure recognized in
financial statements for defined
contribution plans and cost-sharing
multiple employer defined benefit plans is
the total of the contractually required
contributions
For other plans, it is the ARC
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB

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When an employer does not fully fund the
ARC, a liability is created-Net OPEB
Obligation
Note that when the ARC is not fully
funded, there will be future years where
the actual funding is higher than the ARC
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB
Net OPEB Obligation 
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
Reported in full accrual-based statements
 Government-wide statement of net assets
 Proprietary fund statement of net assets
 Statement of fiduciary net assets
Not reported in Governmental funds statements
SO THE EFFECTS OF UNDERFUNDING ARE ONLY
RECOGNIZED ON THE FULL ACCRUAL FINANCIAL
STATEMENTS
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB –
Disclosure Requirements

Plan description
 Employer
 Name of plan, ID of who administers the plan,
what type of plan (i.e. single employer,
multiple employer, etc.)
 Brief description of the types of benefits and
the authority under which benefit provisions
are established or may be amended
 Whether the OPEB plan issues stand-alone
financial statements and how they may be
obtained
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB –
Disclosure Requirements

Funding Policy
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Disclose the authority under which the obligations
of the plan members, employers and other
contributing entities to contribute to the plan are
established or may be amended
Required contribution rates of plan members
(amount and percent or as a percentage of
payroll)
Required contribution rates of employer in dollars
or as a percentage of current-year covered
payroll and, if applicable, legal or contractual
maximum contribution rates
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB –
Disclosure Requirements

Sole or Agent Employers should also disclose the
following for each plan:
 For the last three years – provide the OPEB cost (and
its components), contributions made (and
percentages), and the net OPEB obligation (if any)
 Information on the funded status of the plan. Disclose
the authority under which the obligations of the plan
members, employers and other contributing entities to
contribute to the plan are established or may be
amended
 Disclosure of the actuarial methods and assumptions
used
GASB #45 – Accounting and Financial
Reporting by Employers for OPEB
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Assets held in trust or equivalent arrangements
should be maintained in a OPEB Trust Fund
(similar to a Pension Trust Fund)
Assets of multiple-employer plans not held in
trust or equivalent arrangements should be
maintained in an Agency Fund
Assets of single employer plan not held in trust
or equivalent arrangements does not qualify as
an OPEB plan – would be deemed unfunded
(designations or reservations of fund balance for
example)
GASB #45 – Key indicators of the
financial health of a defined benefit plan

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Funding progress-assets compared to
obligations
Employer contribution trends compared to
ARC
UAAL as a percentage of covered payroll
SO WHAT?

Get going if you have not done anything!

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Actuarial valuation to see current status
Educate Board/Council and management
SO WHAT?

If current status not good

Evaluate options
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Keep current plan and find resources to fund ARC
Change plan-numerous options

Takes time to do this-can’t wait until the last minute