Last week the Governmental Accounting Standards Board (GASB) released its long-awaited exposure draft of proposed Other Post-Employment Benefits (OPEB) accounting changes. Although there may be modifications before the rules are finalized, public employers should be aware of the potential consequences. Here’s our list of the top 5 items from the exposure draft:
1. Most of the proposed GASB 67/68 pension changes are carrying over to OPEB – which is not surprising. These include:
- The Net OPEB Liability (NOL; essentially the entire unfunded liability) goes on the face of the financial statements. This will be a major change from the incremental Net OPEB Obligation currently used as the balance sheet liability.
- The discount rate will be based on a projection of whether the employer’s current assets plus projected contributions are expected to cover current plan members’ future benefit payments.
- Enhanced disclosures of historical contributions, funded status, and the basis for selecting actuarial assumptions.
- Accelerated recognition of liability changes in OPEB expense; no more 30 year open amortizations.
- Funding and accounting are officially separated; this means no more ARC.
2. Goodbye community-rating exception to the implicit subsidy liability. Now everyone with blended premiums must calculate an implicit subsidy liability.
3. All plans will now use the Entry Age Normal (level percent of pay) actuarial method to allocate liabilities between past and future service periods. Although OPEB benefits are not usually pay-related, this new requirement is intended to make liabilities more comparable than the 6 different methods currently allowed under GASB 45.
4. Disclosure of the Net OPEB Liability’s sensitivity to changes in medical trend (+/- 1%), discount rate (+/- 1%), and combinations thereof. This means a total of 9 different NOL measurements.
5. Calculation of an Actuarially Determined Contribution (ADC) and development of a funding policy. Although not technically required, employers will need these two important items if they are prefunding their OPEB and not simply using pay-as-you-go funding.
And, as an added bonus, the exposure draft requires actuarial valuations at least biennially and has eliminated the triennial option for employers with fewer than 200 members. Given the volatility of OPEB liabilities, this is probably a better policy.
What do all of these changes mean for public employers? We’re still sorting through all of the details, but the primary outcome is that more effort will be required to prepare OPEB actuarial valuations and the results will have a greater impact on employers’ financial statements.
Although these changes aren’t scheduled to be effective until the fiscal year beginning after December 15, 2016, public employers will want to start thinking about the potential financial impact and whether they will prompt updated OPEB funding and investment policies. Comments regarding the exposure draft are due no later than August 29, 2014.