What Is GASB 75?

The Governmental Accounting Standards Board (GASB) has released GASB 75 “Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions” – a new accounting standards for public Other Post Employment Benefit (OPEB) plans which will replace GASB 45.

These Statements largely mirror recent changes to pension accounting made under GASB 67/68 and will significantly alter the measurement and reporting standards previously in place under GASB 45. This new Statement will move accounting for OPEB to the balance sheet and income statement from the notes disclosure, bringing more focus onto OPEB liabilities and related outflows/inflows.

Implementation of these Statements is required for fiscal years beginning after June 15, 2017.

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Other Postemployment Benefits (“OPEB”) refers to benefits, other than pension, offered to employees after they leave employment. The most common benefits are medical, dental, and life insurance.

OPEB is one element that rating agencies consider when they determine your bond rating. S&P and Moodys have recently increased the share of their rating based on municipal debt including General Obligation, Pension & OPEB.

With the implementation of GASB 75, your OPEB liability has moved from the notes section of your financial statement to the balance sheet. While this doesn’t change your liability, it does make it more visible. Your OPEB assets (if any) may allow for the use of a higher discount rate which serves to reduce this disclosed liability beyond the actual amount of OPEB assets.

  • Discount Rate
    What interest rate is being used to value liabilities in today’s dollars?
  • Termination Rate
    What percentage of employees are going to leave each year prior to retirement?
  • Retirement Rates
    What percentage of eligible employees are going to retire each year?
  • Election Percent
    What percentage of employees are going to elect coverage for themselves in retirement? For their spouse?
  • Trend Rate
    How much are medical (and dental) costs expected to increase each year?

There are five key factors that determine the discount rate:

  • Employer Share of Costs
    What is the portion of retiree medical, dental, and/or life benefits paid by the Employer each year?
  • Municipal Bond Rate
    What are high-grade municipal bonds earning as of the Measurement Date?
  • Current Asset Level
    What is the value of the assets currently held in an irrevocable OPEB trust?
  • Funding Policy
    How much is expected to be contributed to the OPEB Trust each year?
  • Investment Policy
    How will OPEB assets be invested (e.g., target % in stocks, bonds, cash, etc.)?

The rating agency, Moody’s, has been calculating liabilities at a lower discount rate than the actuarial report if they feel the assumed rate of return is higher than can be justified by the investment policy, increasing the liability they use when determining the bond rating. Therefore, we recommend using an assumed rate of return that is in line with your investment policy rather than an overly aggressive rate.

Service Cost represents the present value of the benefits to be paid in the future that are earned by active employees in the current year. This can be thought of as deferred compensation that active employees earn during the year that they are expected to receive in retirement (typically in the form of a medical, dental, and/or life insurance benefit).

If your OPEB plan offers Medicare Supplement plans, these plans generally represent the majority of your OPEB liability (usually 75% to 85%). While your active plans impact OPEB, most of the costs relate to the payments you make for your active employees rather than your retirees.

This is because your employer share of costs includes an implicit subsidy. The implicit subsidy arises because retirees who are not eligible for Medicare often are charged the same premium as active employees even though they are expected to incur higher medical costs as they age. Consequently, a portion of the premiums being paid for active employees “subsidize” the premiums of retirees. Actuarial Standards of Practice and GASB standards require the liability associated with this implicit subsidy to be valued.

While you are not required to prefund your OPEB liability, the management of your OPEB liability (including the level of funding) is one element that rating agencies consider when determining a municipality’s bond rating. You should consider this, coupled with your other financial needs, when determining whether funding is right for you.

No. However, prefunding your liability may allow the use of a higher discount rate which may decrease your disclosed liabilities. Additionally, rating agencies look favorably upon prefunding OPEB liabilities as it shows the plan sponsor is engaged in managing these liabilities.

While most municipalities are far from fully funded, with the implementation of GASB 74/75, we are seeing many municipalities begin to fund who had not previously done so.

At any time, regardless of your funding status, you can use money in your OPEB trust to pay up to the full amount of expected retiree contributions including implicit cost each year.

  • Change Medicare Prescription Drug Benefit
    Since most OPEB Plans see 75%-85% of the total liability related to benefits paid after attainment of Medicare eligibility, this is the most impactful area to make changes. We’ve seen plan sponsors modify their drug formulary which can reduce current medical payments by 10% to 15% and OPEB liabilities by 15% to 20%.
  • Make your Plan secondary to Medicare
    If you haven’t already done so, you should mandate that those retirees who are eligible for Medicare enroll in it and allow your Plan to become a secondary payor.
  • Change Cost Sharing
    You may consider varying cost sharing based on the age of the retiree, years of service, retirement date, hire date, etc. Before making any changes you should confirm that such changes comply with state laws.
  • Change in Eligibility
    You may change the requirements necessary to be eligible for OPEB benefits to reduce cash costs and liabilities. Similar to changes in cost sharing, you should make sure that any changes to eligibility comply with state laws.

Under the Patient Protection and Affordable Care Act (“PPACA”), an excise tax will be imposed for tax years beginning after December 31, 2021 (formerly December 31, 2017, but amended by the Consolidated Appropriations Act) for high cost employer sponsored health coverage. The law specifies a 40% excise tax, to be paid by the provider of such coverage, of the excess value beyond a basic dollar amount plus an additional “kicker” for qualified retirees or those engaged in a high-risk profession. The impact of the excise tax should already be reflected in your OPEB liability.

Odyssey Advisors was founded in 1998 by Parker Elmore to bring the skills and tools used by larger employers to the small and middle market.  Our consultants have extensive experience in public & private pension systems and work with hundreds of cities, towns, schools, housing authorities and more of varying sizes.  Odyssey’s GASB 75 team comprises health and pension actuaries and consultants who have a thorough understanding of the complex issues relating to GASB 75 and how they impact you and your organization.

Using Odyssey Advisors for your municipality needs comes with the security and reliability of a firm that has 25 years of industry experience in management and employee benefit consulting services.

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