CACUBO

1
CACUBO

• GASB Update
• The views expressed in this presentation are
  those of presenter. Official positions of the
  GASB are determined only after extensive due
  process and deliberation.

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Discussion Topics

• Recent pronouncements
• Due Process documents
• Documents that will be issued during the
  remainder of 2006
• Other current projects
• Research projects

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Effective Dates June 30

• June 30, 2006
• Statement 34 Retroactive Infrastructure Phase
  I
• Statement 42 Impairment of Capital Assets and
  for Insurance Recoveries
• Statement 44 Economic Condition Reporting
  The Statistical Section
• Statement 46 Net Assets Restricted by Enabling
  Legislation
• Statement 47 Accounting for Termination
  Benefits

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Effective Dates June 30

• June 30, 2007
• Statement 27 Amortization period
• Statement 34 Retroactive infrastructure Phase
  II
• Statement 43 Phase I

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Effective Dates June 30

• June 30, 2008
• Statement 43 Phase II
• Statement 45 Phase I
• Statement 48 Sales/Pledges of Receivables and
  Future Revenues
• Statement 49 Pollution Remediation Obligations?

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Recent Pronouncements

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Statement 45

• Other Postemployment Benefits
• What Do You Need to Know?

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Commonly Asked Questions

9
What Is OPEB?

• Postemployment healthcare benefits (medical,
  dental, vision, hearing)
• Other forms of postemployment benefits when
  provided separately from a pension plan (for
  example, life insurance, long-term care, cash
  stipends if compensation for services)

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What are the Reporting Objectives?

• Recognize OPEB cost (expense) systematically over
  periods approximating employees years of service

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What are the Reporting Objectives?

• Provide relevant information about
• (a) actuarial accrued liabilities for promised
  benefits associated with past service,
• (b) the annual cost of OPEB, and
• (c) progress made in funding the plan

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What is an OPEB Plan?

• The plan as understood by the employer and plan
  members
• Should be based on the types of benefits provided
  at the time of each valuation, including any
  changes made and announced to plan members

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Does an Institution Have an OPEB Plan From an
Employers Perspective?

• Not to be confused with an entity, like a
  retirement system
• The OPEB plan is the plan as understood by the
  employer and plan members
• Should be based on the types of benefits provided
  at the time of each valuation, including any
  changes made and announced to plan members

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How Is the Type of Plan Determined?

• The establishment of a plan is not required by
  the GASB
• Alternatives (if a plan is established)
• Defined Benefit Plan
• Single Employer
• Agent Multiple Employer
• Cost Sharing
• Defined Contribution Plan
• Insured Benefit

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Overview New OPEB Reporting

• Very similar to pension reporting
• Initial existing liability not required to be
  reported in the financial statements disclosed
• Annual expense would equal actuarially determined
  cost an amount sufficient to cover the normal
  cost and amortized unfunded liability

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Employee Age Timeline
Assumed age at retirement
Age when hired
Life Expectancy
Present age
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What Are the Key Features of the Parameters?

• Projection
• Based on actual experience of covered group
• Takes into consideration the established pattern
  of sharing of benefit costs between the employer
  and plan members to that point
• Healthcare cost trend rate

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What Are the Key Features of the Parameters?

• Discounting
• Investment return assumption long-term yield on
  investments expected to be used to finance
  payment of benefits
• If not funding, investment return for
  governments own assets
• Weighted average for partially funded plans

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What Are the Key Features of the Parameters?

• Allocation
• Six acceptable actuarial cost methods
• Entry age
• Attained age
• Unit credit
• Frozen entry age
• Frozen attained age
• Aggregate

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Does a Institution have OPEB If Their Employees
Pay Their Own Way?

• No, as long as retirees are insured separately
  from current employees
• However, if they are insured together as a group,
  an implicit rate subsidy exists, and it is a
  form of OPEB that is reported

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Why Are Implicit Rate Subsidies So Important?

• Costs for retirees generally are significantly
  higher
• Therefore, retirees that pay for the cost of
  healthcare benefits through a blended (with
  current employees) premium may not be actually
  paying the actual costs of their benefits

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Implicit Rate Subsidy Example
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Does an Institution Need To Change When It Pays
for OPEB?

• No Funding is a policy decision that will be
  made by the institution
• Implications
• Net OPEB Obligation
• Discount rate used

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What Qualifies as a Contribution?

• Made direct payments of benefits
• Paid insurance premiums
• Irrevocably transferred assets to a dedicated
  trust, or other third party acting in that
  capacity, to fund benefits as they come due in
  the future

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What Will Be Reported in the Financial Statements?

• An OPEB expense equal to annual OPEB cost for the
  period, regardless of the amount paid
• The cumulative difference between amounts
  expensed and contributions or benefits paid will
  create a liability (or asset) called the net OPEB
  obligation

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Accrual-Basis Illustration(Initial Year of
Implementation)

• Normal cost (service cost for year)
  29,000
• Amortization of the UAAL 30,000
• Annual required contribution (ARC) and
• annual OPEB cost/expense 59,000
• Actual employer contribution (PAYG
• amount here 42 of annual OPEB cost)
  (25,000)
• Increase in net OPEB obligation
  34,000
• Net OPEB obligation beginning
  (---0---)
• Net OPEB obligation ending
  34,000
• Assuming that the net OPEB obligation at
  transition was set at zero (prospective
  implementation)

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Note Disclosure Highlights

• Assumptions used
• Required disclosure of funded status as of the
  most recent actuarial valuation (same elements of
  information required as RSI in Schedule of
  Funding Progress)
• Linking language to RSI

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Funding Progress Schedule
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Schedule of Employer Contributions
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How Frequently Will A Valuation Be Conducted?

• OPEB plans with 200 or more total members
  actuarial valuations at least biennially
• OPEB plans with fewer than 200 total members
  actuarial valuations at least triennially
• OPEB plans with fewer than 100 total members
  could choose (a) actuarial valuations or (b)
  calculations using an alternative measurement
  method that employs simplified assumptions

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The Alternative Measurement Method

• Includes the same three broad measurement steps
  as an actuarial valuation
• Is governed by most of the same parameters
• But allows simplification of certain assumptions
  and techniques to permit potential application by
  non-specialists

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When Is the Standard Effective?

• Three phases of Statement 34
• Separate reporting by plans would begin in
  periods beginning after December 15, 2005
  (12/31/06 or 6/30/07)
• Institution themselves would begin reporting in
  periods beginning after December 15, 2006
  (12/31/07 or 6/30/08)

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GASB Publications about OPEB

• Implementation guide
• Over 250 questions and answers regarding the OPEB
  standards
• More than two dozen illustrations

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GASB Publications about OPEB

• What Else You Should Know about a Governments
  Finances A Guide to Notes to the Financial
  Statements and Supporting Information (user guide
  series)
• Discusses what the information in the notes and
  supporting schedules means and how it can be
  used, in plain nontechnical language

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Statement 47

• Termination Benefits

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Termination Benefits

• Inducements or payments for early termination of
  services
• Voluntary and involuntary
• Recognition and measurement issues
• Voluntary when offer is accepted
• Involuntary when offer is made
• Implicit rate subsidies
• Enhancements of pension or OPEB benefits

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Termination Benefits vs. OPEB

• Determine whether the nature of arrangement is to
  provide benefits
• In exchange for the early termination of services
  (a termination benefit)
• As compensation for services (OPEB)

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Termination Benefits vs. OPEB

• Consider all relevant factors, including
• Employers intent
• Employees view of the benefits
• Whether conditioned on termination of employment
  prior to normal retirement age
• Length of time benefits have been made available

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Measurement Requirements

• Include
• Fringe benefits related to the termination
  benefits
• Directly resulting changes in estimated costs of
  other employee benefits (such as compensated
  absences), if reliably measurable

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Measurement Requirements

• Exclude
• Effects of termination benefit on defined benefit
  pension or OPEB obligations
• Account for these effects using Statement 27
  (pensions) or Statement 45 (OPEB), as appropriate
• Disclosure requirements of Statement 47 also
  applicable

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Statement 47 Effective Date

• Periods beginning after June 15, 2005 except
  for benefits provided through OPEB plans

42
Medicare Part D

• Recognition of Payments

43
Recognition

• Based on Statements 33 and 24
• Nonexchange transaction Federal Government
  has not assumed the obligation
• Revenues and expenses should be reported versus
  netting

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TB on Medicare D

• Basis for staff position is view that Medicare D
  payments are transactions separate from the
  exchange of salaries and benefits for services
  received by the institution.

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TB on Medicare D

• Payments to employers
• Voluntary nonexchange transactions (Statement 33)
• Payments made directly to an OPEB plan
• On-behalf payments (Statement 24)

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TB on Medicare D

• Calculations of actuarial accrued liabilities,
  the ARC, and annual OPEB cost
• Follow Statement 43 and 45 without reduction for
  Medicare Part D payments

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Effective Date

• Effective for financial statements issued after
  June 30, 2006
• Except for portions of answers pertaining
  specifically to measurement, recognition, or
  required supplementary information requirements
  of Statement 43 or Statement 45. Those provisions
  should be applied simultaneously with the
  implementation of Statement 43 or Statement 45.

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Statement 48

• Sales and Pledges of Receivables and Future
  Revenues

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Sales and Pledges

• Scope of the project Government receives
  proceeds in exchange for the rights to future
  cash flows from
• Receivables
• Delinquent property taxes
• Uncollected fines
• Mortgages
• Student loans
• Future revenues

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Sales and Pledges

• Sale or Borrowing?
• Borrowing by default, unless institution can
  demonstrate otherwise
• Continuing involvement control
• Does the transferor government retain control, or
  is control relinquished?
• Criteria for receivables
• Criteria for future revenues

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Sales and Pledges

• Are receivables sold or pledged?
• Transferees ability to sell or pledge
• Isolation from seller (and its creditors)
• Legally separate
• No access to cash
• Source and timing of payments
• Satisfaction of accounts
• Bankruptcy protection
• No option or ability to replace or repurchase
  accounts

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Sales and Pledges

• Are future revenues sold or pledged?
• Transferees ability to sell or pledge
• Transferors continuing active involvement in the
  generation of the revenues
• Excludes own-source revenues
• Taxes
• User charges
• Grants, entitlements, shared revenues could be
  sold or pledged, depending on active involvement

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Effective Date

• Periods beginning after June 15, 2007

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Accounting and Financial Reporting for Pollution
Remediation Obligations

• Statement 49?

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Types of Remediation Obligations

• Pre-cleanup activities site assessment,
  feasibility study, design
• Cleanup activities neutralization, containment,
  disposal activities
• Oversight and enforcement costs
• Operation and maintenance of the remedy and
  monitoring

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Recognition Threshold

• Determine whether one of more components of a
  pollution remediation obligation are recognizable
  as a liability when . . .
• Institution knows or reasonably believes that a
  site is polluted, and
• Obligating event occurs

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Obligating Events

• Compelled to take remediation action because of
  pollution-caused imminent endangerment
• Violate pollution-prevention permit for
  example, RCRA permit
• Named, or evidence indicates govt. will be named,
  as responsible party or PRP for remediation (or
  cost sharing)

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Obligating Events

• Named, or evidence indicates government will be
  named, in lawsuit to participate in remediation
• Excludes lawsuits having no merit
• Institution commences, or legally obligates self
  to commence
• Limited to portion legally required to complete

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Recognition

• Recognize components of liability as they become
  reasonably estimable
• Recognition benchmarks
• Receipt of an administrative order
• Participation as a responsible party or PRP
• Completion of corrective measure feasibility
  study
• Issuance of authorization to proceed
• Remediation design and implementation

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Recognition

• Cost accumulation, not fair value
• Current value, not present value
• Expected cash flow technique would be required
• Not FASB Statement No. 5, Accounting for
  Contingencies

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Capitalization Permitted in Limited Circumstances

• Cleanup to prepare property for sale (limited to
  fair value)
• Polluted property bought and cleaned for use
  (limited)
• Asset impaired and cleanup restores lost service
  utility (limited)
• Acquired capital assets have future alternative
  use. For example, land (limited to future
  service utility)
• For a. b. capitalize only if incurred within
  reasonable period

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Project Timetable

• Preliminary Views March 2005
• Public Hearing June 2005
• Exposure Draft January 2006
• Comment Deadline May 1, 2006
• Statement November 2006

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Other Projects of Interest

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Current Projects

• Derivatives Preliminary Views issued in April
• Concepts Statement on Elements Exposure Draft
  (ED) issued in August
• Intangible Assets ED in December
• Pension Disclosures ED in December
• Recognition and Measurement Attributes
  Concepts Statement

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Research Agenda

• Economic Condition Reporting
• Electronic Financial Reporting
• Intergovernmental Financial Risks
• Pension Accounting and Reporting
• Public/Private Partnerships
• Reporting Units/Statement 14 Revisited
• Service Efforts and Accomplishments Reporting

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• Questions?

Telephone [phone] Web site www.gasb.org