The Government Accounting Standards Board (GASB) has issued standards for the reporting of “other post-employment benefits” (OPEB) by state and local governments. The following questions and answers are intended to provide an overview of these standards and their potential impact.
The Government Accounting Standards Board (GASB) is a national body that sets the standards for governmental accounting and reporting. Generally, these are accounting standards that state and local governments use when preparing their GAAP-compliant financial statements. The Office of the State Comptroller (OSC) reviews these standards and provides directives, advice and opinions on how local governments should implement them.
Statement 45 (GASB 45), which was issued in June 2004, establishes accounting and reporting standards for “other post-employment benefits” offered by state and local governments.
Other post-employment benefits (OPEB) are employee benefits other than pensions that are received after employment ends. OPEB includes the following post-employment items:
OPEB generally does not include:
GASB 45 requires that public entities which prepare financial statements according to Generally Accepted Accounting Principles (GAAP) calculate and record the expense and liability of their OPEB benefits.
Typically, public agencies have reported the cost of retiree heath care and other non-pension benefits on a “pay-as-you-go” basis. The annual amount paid for benefits has been reported as the annual expense with no other liabilities or funding requirements reported. GASB believes that the current “pay-as-you-go” method does not accurately reflect the true costs that governments are accumulating for future benefits of current employees. According to GASB, the amount of the future benefit is an expense that must be recorded rather than deferred as a liability to a future generation.
Under GASB 45, public entities must account for, and report on their entity-wide financial statements, the annual required contribution (ARC) for OPEB in the same way they report pension contributions. The annual OPEB expense to be reported by most employers will be based on actuarially determined amounts rather than on the “pay-as-you-go” method currently followed by most public entities. Public entities must use actuarial valuations to determine the accounting and reporting amounts expected in the future. OPEB costs also must be reported over the working lifetime of employees, and the OPEB information provided in the notes to financial statements must include funding (if applicable), costs and provisions of an OPEB plan. While GASB 45 does not require that OPEB liabilities be funded, it does require disclosure of the ARC for OPEB and net OPEB obligations.
GASB 45 applies to all public entities (including state governments; county, city, town and village governments; and school districts) that follow GAAP in filing their annual financial statements and offer other post-employment benefits. In New York State, it is estimated that about one-quarter of local governments and most school districts will be required to comply.
There are two basic forms of post-employment benefit plans. Defined benefit plans are those that specify the amount of benefits to be provided to employees after the end of their employment. Defined contribution plans stipulate only the amounts to be contributed by an employer to a plan member’s account each year of active employment; such plans do not specify the amount of benefits employees will receive after the end of their employment.
In general, governments should account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in the same manner as they currently do for pensions. These amounts should be produced by actuarial valuations performed in accordance with parameters established by GASB. The valuations should be conducted at least every two years for plans that administer OPEB for 200 or more plan members (both active employees and retirees) or at least every three years for plans with fewer than 200 plan members. Generally, actuarial valuations should follow accepted actuarial practices as set forth by the Actuarial Standards Board.
When they implement GASB 45, many governments will report, for the first time, annual OPEB costs and the unfunded actuarial accrued liabilities (UAAL) for past service costs. Disclosure of this information will foster improved accountability and better informed policy decisions about the level and types of benefits provided by employers and potential methods of financing and managing those benefits. While governments are not required by GASB 45 to fund these benefits, they must now report them in their financial statements.
GASB 45 will be implemented in three phases:
According to GASB, the annual required contribution (ARC) is the amount the employer would be required to contribute for the year, calculated in accordance with certain parameters in order to fund the liability over time.
The ARC is the sum of the “normal cost” (the portion of the present value of estimated total benefits that is attributed to services received in the current year) and the amortized unfunded actuarial accrued liability (UAAL—the cost of those same employees for past, unfunded years of service). The ARC, in effect, recognizes that retiree health benefits are “earned” and are financial obligations accrued during an employee’s entire period of service. The ARC is the annual amount a government would have to pay to fund its liabilities over time. This liability can be amortized up to 30 years.
The net OPEB obligation (NOO) is based on the difference between the ARC and the amount actually contributed.
The NOO is calculated annually and is based on the accumulated contributions and the accumulated ARC. At the end of a year, the NOO equals the summation of beginning of the year NOO and the annual OPEB cost, less the actual contribution made that year. If the accumulated contributions:
An actuarial valuation is generally required for all plans having at least one participating employer with more than 100 members, including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them and retirees and beneficiaries currently receiving benefits.
Sooner rather than later. GASB has established an implementation schedule (see above), but procurement requirements and supply and demand for actuarial services may necessitate quicker action. Having this information will also aid in planning, budgeting and management for OPEB. In some cases, the information may be relevant for upcoming collective bargaining talks. In addition, rating agencies expect that public entities know what their OPEB liabilities are in order to begin managing those liabilities.
You will want to hire an actuarial consulting firm with expertise in health benefits to perform the valuation work. OSC does not endorse or recommend any specific actuarial firms and the local government should take care to comply with its procurement policies and procedures for obtaining professional services, which, as a rule, should provide for an RFP process. We suggest that you contact the American Academy of Actuaries, the American Society of Pension Professionals & Actuaries (ASPPA), or the Society of Actuaries to obtain a list of actuarial firms.
Three statewide contracts for actuarial services which can be used for OPEB valuations have been approved and are accessible on the Office of General Services website at http://www.ogs.state.ny.us/purchase/snt/awardnotes/7903700939can.htm.
In addition, the Government Finance Officers Association (GFOA) has drafted an "RFP Checklist for OPEB Actuarial Valuation" that could be helpful to local governments in obtaining actuarial services. 
OSC also suggests that school districts contact their local Board of Cooperative Educational Services (BOCES) to inquire about possible actuarial services. Counties should contact the New York State Association of Counties (NYSAC) to inquire about possible actuarial services.
No, OSC will not be performing actuarial valuations for employers.
Data elements needed by actuarial firms to begin an actuarial valuation generally include:
The New York State Health Insurance Program (NYSHIP) may be able to provide some data elements listed above to local governments who are members of NYSHIP. For more information, contact the Public Employer Liaison Unit of the New York State Department of Civil Service at (518) 485-1771. In addition, some of this information may have already been gathered and submitted for purposes of Medicare Part D. Check with your personnel officer.
OSC can assist local governments in providing some of the required data on retirees and current employees, but local governments themselves are probably the best source of most information required on their employees and the health benefit plans provided to them.
GASB 45 permits a choice of six actuarial cost methods to determine annual OPEB expenses, as follows:
According to GASB, demographics, the level and amount of OPEB and the funding status of benefit plans generally influence the actuarial method chosen. The actuary which you retain should review these factors and recommend the best method given your particular situation.
Actuarial studies often produce future liabilities which are higher than initially expected. In addition, estimates of OPEB liabilities can be more volatile than pension liabilities from one actuarial study to the next. The volatility is due to changing demographics (people living longer and retiring earlier), changes in the level of benefits offered and increases in health care costs that are difficult to predict.
GASB does not require that the OPEB liability of a government be funded. However, GASB has advised that if an employer decides to fund its OPEB liabilities, in order to be considered funded in accordance with GASB, the employer must transfer assets to a qualifying trust or equivalent arrangement in which OPEB assets are held in trust for the exclusive benefit of plan members and their beneficiaries in accordance with the terms of the OPEB plan. These OPEB plan assets must be legally protected from creditors of the employer.
No, and in the absence of such a statute, it is questionable whether local governments have the requisite authority for establishing an OPEB trust. A State statute providing express authority is highly advisable as it would eliminate questions as to the underlying authority for the creation of the trust. Several states (including Virginia, Michigan and California) have enacted legislation that provides local governments with additional authority in response to GASB 45.
General Municipal Law, Section 6-p, allows municipal corporations in New York to establish and maintain an Employee Benefit Accrued Liability Reserve Fund to help finance the cost of certain “employee benefits”. The term “employee benefits” is defined in the statute to include accrued but unliquidated time earned by employees that is payable upon termination of service. Typically, moneys in this reserve are set aside to pay for accumulated, unused leave when an employee separates from service. Currently, moneys cannot be accumulated in this reserve for OPEB obligations. Moreover, such a reserve fund would likely not comply with all GASB requirements for a qualifying trust or equivalent arrangement. There is no other reserve fund authorized by the General Municipal Law or any other law for this purpose.
As a short-term option, local governments can designate a portion of their unreserved, unappropriated fund balance for OPEB purposes and explain this designation with a footnote in their financial statements. A designation is an accounting term used to represent management’s present intent but places no legal restriction on the use of that designated fund balance. Although such an approach does not meet the funding qualifications under GASB 45, this is a mechanism that may be used to temporarily designate funds in the absence of an OPEB funding vehicle that is in compliance with GASB standards. The designated amount would remain part of the local government's unreserved, unappropriated fund balance and would be included when determining the statutory maximum amount of fund balance that may be carried over from year to year.
Currently, local governments in New York State do not have the statutory authority to issue OPEB bonds.
While making annual payments towards annual OPEB costs is the simplest method in the short run, the “pay-as-you-go” method will result in annually increasing NOO for GASB 45 reporting purposes as the ARC likely exceeds the current PAYGO amount. In addition, as greater numbers of employees retire, the PAYGO amount will exceed the ARC initially calculated in the not-too-distant future.
Regardless of the funding option chosen, the maximum acceptable amortization period for the total unfunded actuarial liability is 30 years.
This depends on several factors, including: whether there is a plan in place to fund the liabilities over time, whether there is any existing pre-funding and whether the number of employees is growing or shrinking. For public entities with a stable number of employees and a plan to pre-fund, the ARC is often 3 times as large (or more) as PAYGO costs. For growing public entities with no plan to begin funding, the ARC could be much larger, as much as 4-10 times the current cash outlay.
For purposes of GASB 45, employer and employee contributions can be pooled together, as long as they are irrevocable. Both contributions would count towards the ARC. OPEB contributions should not be commingled with regular operating funds, or with pension assets.
Probably. While employers often stipulate that post-employment healthcare benefits are not vested or that the employer has the right to amend or discontinue benefits unilaterally, the current plan and the employer’s historical pattern of providing benefits up to the time of the valuation provide the most objective and reliable basis for projection of benefits for financial reporting purposes. Consult with your attorney on the specific situation in your municipality.
You should check with your actuary or accounting firm. If retirees participate in the same health care plan as current employees, and pay the same premiums as current employees, you will probably need an actuarial study and need to book a GASB 45 liability for an “implicit subsidy.” An implicit rate subsidy occurs when the premiums paid by retirees are the same as those paid by current employees but which would have been higher for retirees had they been insured under a separate health insurance plan.
This will vary from one local government to another, and will generally depend in part on the manner in which the benefit was provided (e.g., board resolution, collective bargaining agreement), as well as the specific terms of the benefit.
Ideally, the collective bargaining agreements or board resolutions that provide for the benefit will clearly specify the terms and conditions of coverage for retirees and current employees upon their retirement, including whether changes may be made. Plan documents and other records may be helpful in certain instances in determining the extent of the local government’s commitment to continue to provide benefits or a particular level of benefits.
However, collective bargaining agreements can change over time, sometimes making it unclear which agreement applies to a current or future retiree or group of retirees. Collective bargaining and healthcare plan documents may also contain confusing or even conflicting provisions. In some cases, State statute, local laws and court cases can affect coverage.
Thorough research of a particular local government’s collective bargaining and employee benefits documents is highly recommended. Since there often are legal issues to be resolved, it is advisable to consult with your attorney.
Doing nothing may be risky. Local governments that do not comply with GASB 45 will no longer be following GAAP standards which may have negative financial implications:
Credit rating agencies have stated that they will consider OPEB funding status in their evaluations of government financial condition. It is possible that bond ratings may suffer for those governments with large and/or mounting liabilities and no plan to pay for these future costs. This may be particularly true as certain governments move forward with OPEB strategies while others do not.  The extent to which a local government’s OPEB funded status affects its overall credit rating may depend on a number of factors, including the issuer’s current rating and a comprehensive review of the issuer’s finances.
Other Postemployment Benefits: A Plain-Language Summary of GASB Statements No. 43 and No. 45
OSC Bulletin: Other Postemployment Benefits (OPEB)
 Moody’s Investors Service. “Other Post Employment Benefits: New Accounting Requirements to Shed Light on Cost of State and Local Retiree Health Benefits; Funding Pressures Expected to Vary Widely,” July 2005.