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Frequently Asked Questions

Have a look at frequently asked questions & answers to understand more.
This is the value of benefits in today’s dollars that will be paid in the future to currently active employees that they have not yet earned. Active employees have their benefit attributed to their expected service at retirement, so throughout their career a portion of their benefit has already been earned and a portion has yet to be earned.
Liabilities as a % of payroll is a GASB 45 disclosure. It is meant to make liability between different entities more comparable.
The Net OPEB Obligation is the cumulative total of the Annual OPEB Expense less the cumulative total of the Total Employer Contributions since the adoption of GASB 45. This is the liability that will be stated on your financial statement under GASB 45.
The Adjustment to Annual Required Contribution is necessary to avoid double counting of interest under GASB 45 as you are charged interest on the amortization of initial unfunded liability as well as the Net OPEB Obligation.
Normal Cost represents the present value of the benefits that active employees earn for their service in the current year. This can be thought of the deferred compensation that active employees earn this year that they will receive in retirement.
The actuarial Gain/Loss reflects the variance between the expected liabilities vs the actual liabilities.
Pre-funding your OPEB benefits will allow the use of a higher discount rate. The discount rate is ultimately based on the level of funding and what the auditor will allow. An increase in the discount rate will significantly reduce disclosed plan liabilities. It is important to note that this does not impact the benefits paid from the plan (e.g., the true cost).
The driving force for many current assumption changes is to comply with the pending implementation of GASB 75. Assumption changes also occur based on new experience studies which may change mortality, termination and withdrawal assumptions.
Under Actuarial Standards of Practice No. 6 (“ASOP 6”) actuarial valuations must include “Implicit Cost” in the value of benefits provided. An example of Implicit Cost is a plan that charges the same premium for a 63 year old retiree than a 40 year old active employees despite the fact that statistics show that medical care usage increases with age and varies by gender. Thus, the younger active population is implicitly subsidizing the healthcare costs of the older retirees. The plan sponsor pays a piece of this implicitly subsidy through their cost sharing arrangement resulting in the higher stated employer share of costs.
The Excise Tax levies a 40% tax on medical plans that provide benefits in excess of established limits (10,200 for a single plan and 27,500 for a family plan for the calendar year 2020). Technically this is a tax that is paid by the insurer not the plan sponsor, however insurers are likely to pass this extra cost down in the form of increased premiums or fees. This tax may be avoided or mitigated via plan design changes.
While your current rates are under the excise tax thresholds they are expected to grow over time such that they will exceed the thresholds. This happens because the excise tax thresholds are indexed to rise with general inflation while your premiums are expected to increase at the long term medical trend rate. As medical costs tend to increase faster than general inflation, it is expected that your premiums will exceed the threshold leading to the stated liability.
There is not one best or right way to fund OPEB benefits. Whatever funding schedule fits with your needs is the right schedule. It is important to not lose sight of the bigger picture when thinking about funding OPEB benefits. While funding these benefits is an admirable goal, the plan sponsor must balance their other capital needs. Our report outlines several funding options including pay-as-you-go, level funding over 30 years, increasing funding over 30 years and funding the annual normal cost.
We would be happy to work with you to customize a funding schedule that fits your needs.
GASB cannot require you to fund your OPEB benefits. GASB establishes the accounting standards for reporting those benefits. GASB 74/75 requires increased disclosures and links interest rates more strongly to the funding & investment policies of the plan sponsor. While this does not require you to fund, it may put pressure on many entities to begin funding their OPEB benefits.
We generally recommend against using an OPEB obligation bond to fund your OPEB liability. An OPEB obligation bond reduces the flexibility of the plan as payments must be made to bond holders and the face value of the bond must be repaid at the end of the bond’s term.

The argument for OPEB bonds is that they allow the plan sponsor to take advantage of an “arbitrage” situation where the funds received can be invested to earn 6%-8% returns while paying 3%-5% on the bond. This leverage increases risk as the 3%-5% payment on the bond is guaranteed and the 6%-8% return on the investment is not. While there may be situations when an OPEB obligation bond makes sense, we recommend approaching OPEB obligation bonds with extreme caution.

Much like a funding policy, there is no single good or right investment policy. The investment policy should be designed to achieve a reasonable return based on the long term nature of these liabilities while not exposing the plan sponsor to more investment risk than they are willing to bear. Examples include:

• A plan sponsor whose main concern is preservation of capital
• A plan sponsor that wants consistent returns with little downside risk
• A plan sponsor that is willing to accept more volatility to achieve higher returns
• A plan sponsor that can bear large market swings in exchange for high potential returns

The right investment policy is one that aligns your long-term goals with your risk tolerance.

The Medical trend rate used in your valuation is a long-term assumption. While your recent renewal may be higher or lower than the medical trend rate shown in your report, it’s important to remember than one year doesn’t make a trend.
The main ways to reduce overall liabilities is to address the following:
• Plan design – Talk with your provider about enroll in more economical plans.
• Change eligibility requirements
• Change cost sharing (i.e. Retiree portion of premiums)

Please remember that you must weigh human resource concerns against potential savings. Also, certain states have restrictions on what municipalities can do to in regards to eligibility requirement and cost sharing arrangements.

Many states require that a plan sponsor fund their pension plan per a fixed schedule or appropriation but do not have a such a requirement for OPEB plans. You may want to create a combined funding schedule that reflects this reality (a near-term emphasis on pension funding which will transition to OPEB funding once the pension obligation is satisfied). While this is a backloaded approach to OPEB funding, it treats the pension & OPEB as a combined retirement plan liability and this schedule would be presented to ratings agencies in that fashion.

Do you have any questions about GASB? Let us know.