GASB's Exposure Drafts for OPEB Accounting: Comments to GASB Due by August 29, 2014
In May, the Governmental Accounting Standards Board (GASB) released two exposure drafts related to accounting for Other Postemployment Benefits (OPEB). One of the exposure drafts covers OPEB trusts and the other covers employer accounting for OPEB plans (collectively the "OPEB exposure drafts"). GASB's news release on the exposure drafts can be found at this link. The exposure drafts can be downloaded at this link. Until approved, the current rules under GASB 43 and 45 are still in effect.
Action Needed: Plan sponsors should decide whether they want to submit comments to GASB or to testify at one of the hearings. Comments are encouraged and must be received by August 29, 2014. Public hearings are scheduled on September 10, 11, and 12, 2014.
Cheiron Commentary: The OPEB exposure drafts are modeled after GASB statements 67 and 68 for pension plans. The effective date would be fiscal years beginning after December 15, 2015, for plans, and fiscal years beginning after December 15, 2016, for employers.
GASB Obligations and Annual Expense: Governmental employers would be required to include on their balance sheet the total amount of any unfunded OPEB liabilities (liabilities in excess of assets). Current GASB requirements provide for an annual expense amount called the Annual OPEB Cost. The accumulation of the differences between the Annual OPEB Cost and the actual employer contribution, referred to as the Net OPEB Obligation, has been recognized on the balance sheet since the effective date of GASB 45. Generally, this Net OPEB Obligation is considerably smaller than the unfunded OPEB liabilities because it included various options for amortizing unfunded liabilities.
Going forward, if the exposure draft is approved "as is," the annual expense would be based upon:
- the change in the total obligation, adjusted by
- an amount so that changes in liabilities due to variations in actuarial experience and assumptions are recognized over the average expected future working lifetime of all plan participants, using zero for retirees or terminated participants. (For example, if there are 100 actives with 12 years of future working lifetime and 100 retirees, the computation is over 6 years on a straight line basis.) This compares to the current standard permitting 30-year amortization on a discounted basis. The exposure draft continues to permit flat dollar or percent of payroll during the recognition period.
Plan amendments would be recognized immediately in the obligation in the year applicable, as opposed to amortizing the impact of plan changes. It would be important to distinguish what is a plan amendment as opposed to experience or assumption change, since a plan amendment would require immediate recognition but variations in experience and assumptions would be amortized (as above). It is sometimes difficult to distinguish plan amendments from routine adjustments of the benefits and/or retiree contributions. Some clarification in the final exposure draft would appear to be helpful, and comments might be offered in these areas.
The exposure draft is expected to generate more volatility than the current standard when assumptions or experience vary from expected results, since such variations would be recognized over shorter periods of time, or when the plan is amended, since amendments would be recognized immediately.
Methods: As under GASB 67 and 68 for pension plans, the OPEB liabilities are to be valued using the entry age normal funding method. Currently, OPEB liabilities can be valued using one of six funding methods. As a result, the exposure drafts are narrowing the computation methods applied to one approach.
Discount Rate: The exposure drafts also follow GASB 67 and 68 on the determination of the discount rate applied in the OPEB valuation. They define it to be a single rate computed to reflect the composite of two rates: 1) the expected long-term rate of return on trust assets to the extent that plan assets are projected to cover the obligations, and 2) the expected yield on high-quality municipal bonds to the extent that the plan assets are not projected to cover the obligations. "High quality municipal bonds" refer to 20-year tax-exempt general obligation municipal bonds with an average rating of AA/Aa or above. Explicit reference to high quality municipal bonds in the selection of the discount rate is a material change to current GASB rules, which refer to the expected yield on the employer's general assets. Also, the additional provision that the expected long-term yield only applies to the extent assets fund the obligation is a material change in OPEB.
Disclosures: The OPEB exposure drafts require various sensitivity disclosures including: the use of a discount rate that is 1% more and 1% less than the blended discount rate used to value the liabilities, and use of healthcare cost trends that are 1% more and 1% less than the trend used to value the liabilities. Each discount rate has to be used with each trend rate, which (as specifically acknowledged in the drafts) totals nine (9) results. In addition, the exposure draft requires more specific reconciliation of obligations by source from year to year.
Cheiron is continuing to analyze the impact of the OPEB exposure drafts and will provide more information later. Each plan sponsor will need to evaluate the impact of the exposure draft for its particular data, plan and funded status.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.