The document discusses GASB 43 and 45, which pertain to accounting for other post-employment benefits (OPEB) such as medical and life insurance for former employees. It outlines the requirements for compliance, effective dates based on annual revenues, and the necessary disclosures regarding the valuation of OPEB liabilities. Additionally, it addresses how these standards may impact municipal bond ratings due to increased reported liabilities.

1. WHO, WHAT, WHEN, WHY & HOW GASB 43 & 45

2. Topics to be covered Who is GASB? What are GASB 43 & 45? When do we have to comply with the statements? Why were these statements created? How do we address the issues? What is to be disclosed on financial statements? How do GASB 43 & 45 affect my bond rating?

3. Who is GASB? GASB is the Governmental Accounting Standards Board Independent, private & not-for-profit organization that establishes & improves standards of financial accounting & reporting for State & Local governmental entities Governments & the accounting industry recognize GASB as the official source of generally accepted accounting principals (“GAAP”) for State & Local governments

4. What are GASB 43 & 45? GASB 43 & 45 address accounting for Other than Pension Employee Benefits (“OPEB”) such as medical, dental & life insurance provided to former employees GASB 43 covers financial reporting for OPEB plans GASB 45 covers both financial reporting & accounting for government employers who sponsor OPEB plans Most times GASB 45 will apply (unless you pre-fund the plan)

5. GASB 43 Employer may create an “irrevocable” trust to pre-fund OPEB benefits GASB 43 requires financial reporting for the Plan including funded status, changes in assets, composition & sources of assets along with liability information (GASB 45)

6. GASB 45 Values OPEB liabilities on an “accrual” basis rather than the current “pay-as-you-go” basis Requires use of many actuarial assumptions including, but not limited to: Healthcare trend Mortality (pre & post retirement) Termination of employment Salary increases Probability of retirement by age Probability of electing coverage for retiree and/or dependents

7. GASB 45 The OPEB plan to be valued is the “substantive” plan (i.e., the plan as understood by the employer & plan members)

8. GASB 45 – What are the Key Assumptions? Healthcare trend – will be projected over 80 years Mortality – reflects probability of death each year for employees, retirees & dependents Termination of employment – allows the actuary to determine likelihood employee will reach eligibility for benefits Retirement – the liabilities will vary based on the age at which the employee retires Discount rate – if plan is funded in irrevocable trust under GASB 43, we can use a long-term rate. Else, the rate shall be based on what the entity earns on short-term cash

9. When must we comply with GASB 45? GASB defined three (3) phases (used for GASB 34) & associated effective dates: Phase I (total annual revenues of $100 million or more) – financial statements for periods beginning after December 15, 2006 Phase II (total annual revenues of $10 million or more, but less than $100 million) – financial statements for periods beginning after December 15, 2007 Phase III (total annual revenues of less than $10 million) – financial statements for periods beginning after December 15, 2008

10. Why was GASB 45 developed? Postemployment benefits represent deferred compensation (i.e., participants elect a lower current pay in exchange for a future promised benefit) Under accrual accounting, OPEB costs should be associated with the period earned, not the period paid Recognize cost of benefits earned while employee provides services Provides information related to past benefits earned and funding (if any) Provide information related to potential future demands on employer cash flows

11. How do we comply with GASB 45? First – determine if you offer employees to continue any benefits, other than pensions, beyond the COBRA period after employment ends – if so, you have an OPEB plan Second – review with your auditors regarding materiality – it has likely been in your annual management letter Third – if under 100 total members, you may use an alternative measurement method (have seen very few try this)

12. How do we comply with GASB 45? Fourth – contract with an actuarial firm to provide an actuarial valuation of the plan (if under 200 members, every three years, else every two years) Fifth – provide actuarial valuation report to your auditors to allow them to reflect in your financial statements

13. What do we value & disclose? Under GASB 45, the plan sponsor (i.e., municipal entity) will disclose the following: Actuarial Accrued Liability (“AAL”) – value of benefits earned to date Fair Value of Plan Assets (“Assets”) – will be zero unless funded under GASB 43 in an irrevocable trust Funded Status of Plan (“UAAL”) – AAL less Assets Liability as % of Payroll – UAAL / Payroll

14. What do we value & disclose? (Continued) Elements of the Annual Required Contribution (“ARC”) Service Cost (“SC”) – value of benefits accruing during year Amortization Cost (“AC”) – May be either a flat dollar or level % of pay over a period not to exceed 30 years (this amount reflects interest and is NOT a straight-line amortization) Interest to end of year

15. What do we value & disclose? (Continued) Disclosure of key assumptions Discount Rate Healthcare trend Description of substantive plans Description of cost-sharing arrangements Rate of compensation increases Plan funding policy Details of Annual OPEB Cost, Amount funded & change in OPEB Obligation Annual OPEB Cost, % of Payroll & Amount contributed each of last three (3) years Funded status & funding progress

16. How do GASB 43 & 45 affect my bond rating? All municipal entities are required to comply with GASB 43 & 45 to issue GAAP financial statements Over 90% of municipal entities have OPEB plans & liabilities (including plans with implicit liability) Therefore, all will face increased liabilities on financial statements S&P, Moodys & Fitch have known about these plans and are unlikely to downgrade sponsors in the short run Longer term, those with liabilities that are large in relation to taxing authority & payroll may suffer compared to others

17. Questions?