Basic Information about GASB Statement 45

1
Basic Information about GASB Statement 45

• Karl Johnson
• Project Manager
• Governmental Accounting Standards Board
• Norwalk, CT
• National Governors Association
• GASB Live Meeting Conference Call
• April 19, 2007
• The views expressed are those of the speaker and
  are not official representations of the
  Governmental Accounting Standards Board, which
  expresses itself through written pronouncements
  issued after extensive due process.

2
What Is the GASB?

• An independent, professional standard-setting
  Board
• Operates as a function of the Financial
  Accounting Foundationa private, NFP foundation
  created to ensure continuity, support, and
  independence to the FASB and the GASB
• Establishes generally accepting accounting
  principles (GAAP) for accounting and financial
  reporting by state and local governmental entities

3
Why the Boards SuddenInterest in Accounting for
Retiree Healthcare Benefits?

• Actually, the subject of other postemployment
  benefits (OPEB) was first placed on the Boards
  technical agenda for research and development of
  standards in 1987
• GASB issued interim guidance in 1989, 1990, and
  1994, but even then contemplated a more
  comprehensive look at the subject (i.e., the OPEB
  Project that produced Statements 43 and 45 in
  2004)
• The subject of OPEB was considered major for
  several reasons
• The potential materiality of retiree healthcare
• The inadequacy of pay-as-you-go accounting
  practice to provide relevant, decision useful
  information about OPEB costs, obligations, and
  potential demands on future cash flows
• The complexity of issues related to measurement
  and recognition of costs and obligations

4
The OPEB Project

• Nov. 1994GASB issued Statements 25, 26, and 27
  on pension accounting
• 1995-1996GASB Board and staff attempted a quick
  adaptation of Statements 25 and 27 to OPEB but
  ran out of time because of competing project
  priorities, including Statement 34
• 1999-2004Board and staff worked steadily on OPEB
  issues
• Settled on an overall accounting approach (same
  as for pensions)
• Adapted pension requirements to OPEB
• Addressed issues unique to OPEB (including
  alternative measurement method for very small
  plans and implicit rate subsidies)
• Conducted extensive due processutilized an
  expert Task Force to advise and assist, issued
  three Exposure Drafts (two for Statement 45),
  analyzed respondents comments on issues, and
  held two public hearings and a focus group
  meeting of financial analysts
• Issued Statements 43 and 45 in April and June
  2004, respectively

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In a NutshellGASB Statement 45 (for Employers)

• Subject accounting and reporting by employers
  for their OPEB expenses and obligationsmost
  notably, for retiree healthcare benefits
• Applies to all employers that pay all or part of
  the cost of the benefits, including implicit
  rate subsidies

6
In a NutshellGASB Statement 45 (for
Employers)(continued)

• Requires a change
• From pay-as-you-go accountingin which expense is
  not recognized until OPEB obligations are finally
  paid in years after retirement
• To accrual-basis accountingin which expense is
  recognized during years of active service (for
  which OPEB is part of the total compensation
  package)

7
In a NutshellGASB Statement 45 (for
Employers)(continued)

• Requires measurement and disclosure of the total
  actuarial accrued liabilities for past service
  costs, the net unfunded actuarial accrued
  liabilities after subtracting plan assets, if
  any, that have been set aside to pay accrued
  benefits as they come due, and the plans funded
  ratio
• Requires actuarial valuations every 2 or 3 years
  for accounting and financial reporting purposes
  (sooner if something major changes)

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Objective of Statement 45

• To faithfully represent (reflect like a good,
  non-distorting mirror) the financial effects of
  the underlying financial transaction that creates
  OPEB
• The Board concluded that OPEB arises from an
  exchange transaction between an employer and
  employees in which an employer
• Acquires employee services, for which it
• Pays or provides salaries, active-employee
  healthcare, etc., and promises to pay or provide
  after employment a pension and OPEB such as
  retiree healthcareall as components of a total
  compensation package
• That exchange, rather than the annual payments of
  premiums or claims costs for retired people that
  follow from it, is the basic transaction to be
  accounted for (the substance of OPEB)
• The Board considered but rejected the view that
  OPEB is a serial gift or gratuity (a series of
  non-exchange transactions in which the employer
  gives benefits for which it receives no value in
  return)

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Measurement Approach for OPEBBroad Steps of
Process to Develop Information for Accrual
Accounting and Financial Reporting

• 1. Project cash outflows for benefits
• 2. Discount projected benefits to present value
  (PV)
• 3. Allocate the PV of projected benefits to
  financial reporting periods using an acceptable
  actuarial cost method and amortization method

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Employee Age Timeline
Age when hired
Present age
Assumed age at retirement
Life Expectancy
11
15000
14000




4500
2) Discount
A.P.V.
3) Actuarial cost method
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How Allocated Portions of the PV of Projected
Benefits Affect Financial Reporting

• Amounts allocated to past periods actuarial
  accrued liabilities
• Disclosed in notes to financial statements
• Also, an amount that would amortize the total AAL
  within an acceptable period of years if paid as
  part of a regular funding policy is included in
  the measurement of annual OPEB cost, or expense
• Amount allocated to current period normal cost
  (service cost)
• The other principal component of annual OPEB cost
  
• Amounts allocated to future periods future
  normal cost
• Not reportedpertains to services that havent
  occurred yet

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Annual OPEB Cost and Net OPEB Obligation
Illustration (Employer in Year 2 of Applying
Statement 45)

• Normal cost (current service cost)
  350,000
• Amortization of the UAAL (for past services)
  600,000
• Annual required contribution (ARC) 950,000
• Interest on beginning net OPEB obligation
  50,000
• ARC adjustment (58,500)
• Annual OPEB cost expense 941,500
• Actual employer contribution (PAYGO method
• of financing)
  (250,000)
• Increase in net OPEB obligation
  691,500
• Net OPEB obligationbeginning
  650,000
• Net OPEB obligationending
  1,341,500
• The ARC, the annual OPEB cost and its
  components, actual employer contributions, and
  changes in the net OPEB obligation are required
  to be disclosed in the employers notes to the
  financial statements.

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What Do the ARC and the Net OPEB Obligation Tell
Me as a Reader of the Financial Report?

• The ARC expressed as a of covered payroll
  represents the level of employer contribution
  effort that would be needed on a sustained,
  consistent basis to cover normal cost and
  amortize the UAAL over not more than 30 years
• An indicator of the size of the employers
  commitment, expressed in terms of the ongoing
  contribution effort required to sustain it
• An indicator of potential long-term demands on
  future cash flows
• The net OPEB obligation indicates whether since
  implementation of Statement 45 an employer has
  contributed less (more) than the ARC

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Funded Status Information Illustration (Two
Employers)Information Disclosed in Notes to
Financial Statements and Presented in RSI

• Govt. A Govt. B
• Unfunded Partially
• (PAYGO) Funded
• Actuarial accrued liabilities (AAL)
  (a) 13,500,000 13,500,000
• Actuarial value of plan assets (b)
  -0-- 9,000,000
• Unfunded actuarial accrued
• liabilities (UAAL) (a-b) 13,500,000
  4,500,000
• Funded ratio (b/a) 0.0
  66.7
• Covered payroll (c) 7,600,000 7,600,000
• UAAL as a of covered payroll (a-b/c)
  177.6 59.2

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What Does the UAAL Tell Me as a Reader of the
Financial Report?

• The UAAL is the portion of the present value of
  projected benefits attributed to past periods
• It can be thought of as a measure of the value of
  employee services that were received by the
  employer and tax/rate payers or constituents in
  past periods but not paid or funded
• Other things being equal, the higher the UAAL,
  the higher will be the following going forward
• Amortization component of the ARC
• The ARC
• Annual OPEB cost, or expense
• Demands on future cash flows, or budgets

17
Disclosure of Actual Employer Contributions as a
Percentage of Annual OPEB Cost

• A key factor affecting the funded status of the
  benefits is the level of employer contributions
• Accordingly, employers also should disclose for
  each of the past three years the annual OPEB
  cost, the percentage of annual OPEB cost actually
  contributed, and the ending net OPEB obligation

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Effective Dates and Transition

• Staggered implementation of Statement 45 based on
  a governments phase for implementing GASB 34
• Phase 1 (100M revenue)first fiscal year
  beginning after Dec. 15, 2006
• Phase 2 (10M to lt 100M revenue)one year
  setback
• Phase 3 (lt 10M revenue)two year setback
• Earlier implementation is encouraged
• Employers may apply Statement 45
  prospectivelythat is, may report zero beginning
  net OPEB obligation as of the beginning of the
  year of implementation

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Concluding Comments

• Implementation planning tasks may include, for
  example
• Analyzing and classifying employee benefits
  offered
• Gathering information about plan terms and
  covered group
• Obtaining an initial actuarial valuation and
  absorbing the new information it provides (a
  watershed event)
• Considering how OPEB will be managed and
  accounted for going forward
• Initiating discussions and decision processes
  regarding variables that can be managed to make
  or keep benefits sustainable
• If planning to fund, establishing a qualifying
  OPEB plan trust
• Separating active-employee and retiring
  healthcare benefits for accounting purposes, if
  combined
• Working out issues related to fund structure,
  funds flows, and accounting and financial report
  preparation

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Concluding Comments(continued)

• In the end, the information that Statement 45
  requires to be developed and reported is intended
  to provide the diverse users of governments
  financial reports
• A more transparent accounting for employers
  costs and obligations associated with OPEB
• More decision-useful financial information to
  better inform discussion and decision-making
  about important matters such as
• Benefits and plan design
• Cost sharing between the employer and plan
  members
• The method of financing benefits

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• Additional Resources

• GASB website, www.gasb.org
• OPEB fact sheet
• Plain language summary
• Summaries of standards
• Order information (Statements, Implementation
  Guides, Technical Bulletins, etc.)
• A system for submitting technical accounting
  and financial reporting questions to GASBs
  professional staff
• Telephone [phone]