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OPEB Funding Considerations

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Whether or not to pre-fund Other Post-Employment Benefits (OPEB) - important considerations for employers

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OPEB Funding Considerations

  1. 1. OPEB: To Fund or Not to Fund? Important considerations for employers Contact: Mark Schulte marks@vaniwaarden.com Laura Pistotnik laurap@vaniwaarden.com GASB 74/75 upends many OPEB accounting calculations, and it also has a big effect on OPEB funding decisions. This document summarizes some important OPEB funding considerations. Under GASB 74/75, employer OPEB funding may be affected in one of two ways: 1. Employers who have not yet pre-funded their OPEB plans should consider whether OPEB funding is now a priority. 2. Employers who previously pre-funded their OPEB using the GASB 45 Annual Required Contribution (ARC) as their de-facto funding policy will need to develop a new Actuarially Determined Contribution (ADC) independent of the GASB 75 accounting requirements. It’s often taken for granted that pre-funding OPEB is a good idea – if the employer can afford it. However, things aren’t always so simple. Although pre-funding OPEB may seem like a prudent decision, there are several important considerations we discuss below. Employers should begin reviewing your OPEB pre-funding alternatives now. If you make the decision to establish an OPEB trust, then you should (1) develop a funding policy; (2) decide on investments; and (3) choose a trust provider. This is also a good time to review your OPEB plan benefits to see if they are meeting their objectives or need to be redesigned. • Does pre-funding OPEB create a perception of “guaranteed” benefits? • Is it worthwhile to voluntarily pre-fund OPEB if it takes resources away from required pension contributions or other immediate budget priorities? • Is it appropriate to fully-fund volatile OPEB liabilities; including the implicit subsidy liability? Prefunding Pitfalls • Does the annual budget determine the Actuarially Determined Contribution (ADC), or vice versa? • Instead of targeting 100% pre-funding before paying benefits from a trust, it may be better to coordinate paygo costs and trust contributions to smooth out total OPEB cashflow. • There are practical realities to level % of payroll vs. level $ contribution policies. Funding Policy Considerations • OPEB pre-funding is considered a GFOA best practice. • Investment policy and level of pre-funding may allow a higher GASB discount rate (and lower liability), and dedicated assets also directly lower the unfunded liability. • Pre-funding helps secure the benefit promise to plan members. Advantages of OPEB Prefunding The Governmental Accounting Standards Board (GASB) issued new statements GASB 74 and 75 regarding Other Post- Employment Benefits (OPEB; usually retiree medical). These accounting changes will affect most employers’ FY2018 financial statements. GASB 74/75 officially separate OPEB funding and accounting. Employers who pre-fund OPEB will need to develop their own funding policies and Actuarially Determined Contribution (ADC)

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