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GASB 74/75 - Preparing for the New World of OPEB Accounting

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An overview of the changes from GASB 43/45 to GASB 74/75 accounting for Other Post-Employment Benefits (OPEB)

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GASB 74/75 - Preparing for the New World of OPEB Accounting

  1. 1. MNCPA Audits of Local Governments Conference Mark Schulte, FSA, EA, MAAA October 24, 2017
  2. 2. 1 Background 2 What’s changing  Terminology  Report frequency  Report timing  Discount rate  Financial disclosures  Experiences (so far) 3 What to do now 1
  3. 3.  Compliance with GASB 45 since at least 2008  Have a liability “on the books” (Net OPEB Obligation)  Record annual accounting expense (based on the ARC)  Biennial or triennial actuarial valuations  OPEB trusts (if any) were often established in early years of GASB 45 2
  4. 4. Why can’t we just keep using GASB 45? Net OPEB Obligation hides true cost of OPEB Cost recognition is too slow (never?) Too much variation in liability calculation methods Discount rate determination not appropriate 3
  5. 5.  June 2015: GASB 74 and 75 published  GASB 74  Plan-perspective accounting (if have an OPEB trust)  Effective for fiscal years beginning after 6/15/2016 (i.e., FYE 2017)  GASB 75  Employer-perspective accounting  Effective for fiscal years beginning after 6/15/2017 (i.e., FYE 2018)  Some employers are electing to early-adopt GASB 75 instead of disclosing both GASB 74 and GASB 45 in their FY2017 financial statement notes and RSI 4
  6. 6.  Lots of new terminology and acronyms!  More frequent actuarial reporting  Financial reporting changes  Unfunded liability goes on face of financial statements  OPEB accounting “expense” more volatile  More information to disclose  Discount rate process standardized 5
  7. 7. 6 GASB 45 GASB 74/75 Actuarial Accrued Liability (AAL) Total OPEB Liability (TOL) Plan assets Fiduciary Net Position (FNP) Unfunded Actuarial Accrued Liability (UAAL) Net OPEB Liability (NOL) Deferred inflows/outflows of resources Annual OPEB Cost OPEB expense Net OPEB Obligation (NOO) Net OPEB Liability Annual Required Contribution (ARC) Actuarially Determined Contribution (ADC)
  8. 8.  GASB 45  Usually January 1 Valuation Date (beginning of year)  Have 12+ months to complete calculations and report  Get at least two years of accounting in one report  Example • January 1, 2016 valuation report • Provides accounting information for FYE 2016 AND FYE 2017 • Small employers (< 200 participants) had triennial actuarial reports  Updated reports in the “off-years” were relatively rare 7
  9. 9.  GASB 74/75 require full actuarial reports every two years for all employers  “Update procedures” to reflect any changes since the actuarial valuation date [GASB 74 Q&A #4.104]  In most cases, employers will need an updated “off-year” report to reflect certain changes  Movement towards annual valuations because of OPEB volatility 8
  10. 10.  GASB 74/75 report will likely only contain accounting information for one fiscal year 9 Update Item Considerations Assets Need to reflect actual year-end assets Discount rate  Muni bond index rate  “Crossover” calculation for funded plans Benefit payments  GASB 74/75 specify actual benefit payments for roll forwards and other calculations.  May not be practical for implicit subsidy “payments” Plan changes What does this encompass? Retiree subsidies only; or group health plan/premiums in general?
  11. 11. 10 Date What it means Valuation Date  Census and claims data gathered  Liabilities calculated, but may then be “rolled forward” to the Measurement Date Measurement Date When liabilities and assets are “measured” Reporting Date Fiscal year end  Valuation Date can be up to 30 months and 1 day earlier than the Reporting Date (i.e., one valuation as basis for up to 2 fiscal years)  Measurement Date should be no earlier that the prior fiscal year end (i.e., prior Reporting Date)
  12. 12.  “Synchronized” method  Measurement Date = Reporting Date  Used for plans with or without trusts 11 12/31/2017 12/31/2018 12/31/2019 Valuation Date Measurement Date & Reporting Date “Roll” liabilities Measure assets & Report net amount at FYE Calculate liabilities
  13. 13. Timing considerations: Synchronized method ‣ VD before MD/RD makes report timing easier ‣ Still need to wait until MD/RD for actual benefit payments, assets, and discount rates ‣ What happens if plan “changes” before MD/RD? 12 12/31/2017 12/31/2018 12/31/2019 Valuation Date Measurement Date & Reporting Date “Roll” liabilities Measure assets & Report net amount at FYE Calculate liabilities
  14. 14.  “Lookback” method  Measurement Date up to one year before Reporting Date  Usually used for plans without trusts 13 Valuation Date & Measurement Date Reporting Date Calculate liabilities & Measure assets 12/31/2017 12/31/2018 12/31/2019 Net amount Reported at FYE
  15. 15. Timing considerations: Lookback method  VD/MD before RD makes timing much easier  Need to wait until RD for “deferred” contributions  Don’t have to deal with plan changes after MD 14 Valuation Date & Measurement Date Reporting Date Net amount Reported at FYE Calculate liabilities & Measure assets 12/31/2017 12/31/2018 12/31/2019
  16. 16.  Employers with irrevocable trusts should comply with GASB 74 for FYE2017  Include plan-perspective disclosures in Notes and RSI (if trust doesn’t issue standalone financials)  May be simplest to early adopt GASB 75 in FYE2017  Avoid two sets of numbers in Notes/RSI  Similar costs for GASB 74/45 vs. GASB 74/75 reporting 15
  17. 17.  GASB 45: “long-term investment yield on the investments that are expected to be used to finance the payment of benefits”  GASB 74/75: Single rate that reflects:  Long-term expected rate of return on OPEB plan investments (to the extent irrevocable assets are able to pay future benefits)  Index rate for 20-year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher  Funded plans (irrevocable trust) use “crossover” calculation to determine blended discount rate 16
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  26. 26. ‣ GASB 75 early adoption ‣ Timely asset information ‣ Payables/receivables ‣ Actual retiree benefit payments ‣ What’s a “contribution”? ‣ Understanding all of the dates ‣ Volatility ‣ When are updates needed? 25
  27. 27.  Funded plans (irrevocable trust)  Figure out GASB 74 transition strategy – now!  Early adoption of GASB 75 for FYE2017 may be easiest route  Funded plans (revocable trust)  Understand effect of using muni bond index rate vs. expected investment return for discount rate  Consider making trust irrevocable (FY2017-18) 26
  28. 28.  All plans  Figure out report timing and implementation options  Synchronized vs. Lookback: Is it a big deal if liabilities are a year old?  Better tracking of retiree benefit payments  Worthwhile/feasible to pre-fund OPEB? 27
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  30. 30. Mark Schulte, FSA, EA, MAAA Van Iwaarden Associates 612.596.5960 marks@vaniwaarden.com All information in this presentation is for general informational purposes only and should not be relied upon without the express written consent of the author. 29

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