1.  What is GASB 45?

GASB 45 addresses how state and local governments should report their costs and outstanding obligations related to other post employment benefits (OPEB).  The statement requires employers to recognize the cost of benefits during the period employees are actually performing services.  The statement establishes a disclosure requirement that may represent a liability on the employer’s financial statement.

GASB 45 does not require that OPEBs be pre-funded.   

2.  What are OPEBs?

OPEBs are other (than pension) post-employment benefits that are provided by the plan sponsor after employment.  OPEBs may include:

OPEBs do not include pension or termination benefits as those are covered under other GASB statements

3.  What is the difference between GASB 43 and GASB 45?

GASB 43 applies to separate trusts that are established in order to pre-fund OPEB benefits, whereas GASB 45 applies to the financial statements issued by the employer.

4.  What do GASB 43 and GASB 45 require employers to disclose
     on their financial statements?

There are three primary disclosure categories:

• Information about the OPEBs including descriptions of benefits, how many employees are covered, etc.

• Information about the actuarially determined liability including the annual required contribution (ARC), assets available to offset the liability and the actuarial assumptions used in the valuation. 

• Information on the funding policy including the funding status and progress.

5.  When must an employer provide its first disclosure?

GASB 45 implementation schedule:

Annual Revenues*

Deadline for Fiscal Years Beginning After

Phase I

> $100 million

December 15, 2006

Phase II

$10 million - $100 million

December 15, 2007

Phase III

< $10 million

December 15, 2008

*Based upon annual revenue reported in the first fiscal year ending after June 15, 1999.

GASB 43 implementation is one year earlier than GASB 45.  If a trust is established during the fiscal year that GASB 45 is implemented, then GASB 43 would also be implemented that same fiscal year.

6.  Who calculates the liability and how frequently must it be
     calculated?

An actuarial firm with pension and health actuaries will need to complete the valuation.  For some smaller employers covering fewer than 100 participants, a simplified method may be used for determining the liability. 

Burnham & Flower has partnered with Watkins Ross, and actuarial firm in Grand Rapids.  Discounted service fees are available to employers utilizing the B&F GASB 45 solution.  Request a quote today!

For plans with more than 200 combined active and retiree participants, an actuarial valuation must be completed every two years.  For plans with fewer than 200 participants, the valuation must be completed ever three years.  Plans of all sizes may consider completing more frequent valuations if they incur a number of changes with their OPEBs in any given year including benefit cost increases and/or changes to participant demographics.

7.  Do employers have to pre-fund their OPEBs?

No, GASB 45 only requires the liability be recognized through disclosure within the financial statements.

8.  If there are no requirements to pre-fund OPEBs, why would an
     employer decide to do so?

There are a number of reasons an employer should consider pre-funding retiree benefits:

• Bond ratings - The growing liability reported within the financial statements for employers that do not pre-fund could have a negative impact on credit ratings and the cost of issuing debt. .

• Discount rate – The discount rate used in the valuation reflects the expected investment return of the funds set aside to pay for the benefits.  A funded plan could use a higher discount rate than unfunded plan because a larger portion of the assets may be invested in equity investments.  The higher assumed rated of rate would ultimately produce a lower overall liability and lower annual required contribution.

• Lower costs long-term – The future investment income on the funds set aside could help pay for the OPEBs reducing funding costs in the long run.

• Benefit security – Similar to pension plans, pre-funding OPEBs provides security to employees who can count on the benefit being there after its earned.

• Paid when earned – Paying for OPEBs during the time the employees are working means that the right generation of taxpayers (the taxpayers receiving the services of the municipal employees, such as police officers and firefighters) is paying the costs for those employees.

• Positive public perception - GASB 45 is not going away.  To fund what you can shows a responsible approach as opposed to ignoring the option.

9.  What is an implicit rate subsidy?

Implicit rate subsidy applies to the true cost of an OPEB benefit when the total cost of a benefit is the same for both retired and active employees.  GASB 45 requires the implicit rate subsidy be recognized in calculating the OPEB liability. Because many benefits, such as health insurance, calculate costs under one rating structure, and retirees use the benefit at a higher rate than active (younger) employees, the active employees are subsidizing the cost of the retirees’ benefit.  Therefore, even if the retirees pay the entire cost of their benefit, such as an insurance premium, there will most likely still be a liability because the actual cost for their coverage is higher.

Let’s look at an example:

Assume the monthly health insurance premium for both active and retired employees is $400.  Retired employees pay the full ($400) premium.  After analyzing the claims experience, it is discovered that the retirees’ average cost is $500.  The difference between the retiree’s average cost and the combined population cost, $100, is the implicit rate subsidy.

An employer must utilize actual experience or actuarial adjustments to calculate the true cost of retiree benefits.

10.  What is the Annual Required Contribution (ARC)?

The ARC is the amount an employer would contribute to a qualified plan if the employer chose to pre-fund their liability.  The ARC consists of two amounts:

• The normal costs for covered active employees (the amount earned in the current year)

• The amortization of the unfunded actuarial accrued liability over 10 to 30 years.

11.  What solutions does Burnham & Flower offer to help
        employers pre-fund their liability?

Burnham & Flower has packaged a total turn-key solution that will help you to meet your reporting and funding needs.  In addition to a GASB 45 funding vehicle, we can also assist you with benefits-plan re-design to help manage the liability going forward.   Request more information today!