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Three GASB 74 Requirements to Remember When Establishing an OPEB Trust
- OPEB plans offer benefits other than pensions for former or retired employees such as healthcare, dental insurance, life insurance, and other ancillary benefits.
- Many states and municipalities are moving away from a pay-as-you-go model and addressing their growing unfunded OPEB liabilities by establishing a trust.
- For a trust account to be considered an OPEB Trust, it must meet GASB 74 requirements.
In 2018, according to a study conducted by S&P Global Ratings, the combined OPEB liabilities across all 50 states totaled over $600 billion. In order to lower the staggering mountain of unfunded OPEB liabilities under GASB 74 and GASB 75, many states chose to establish a Trust to fund these promised benefits. But to establish an OPEB Trust, it must meet three key requirements set by GASB 74.
Before we jump into that, let’s cover the basics.
What is an OPEB Plan?
OPEB plans offer benefits other than pensions for former or retired employees. The benefits may include healthcare, dental insurance, life insurance, and other ancillary benefits.
One of the main reasons why municipalities face increasing deficits is these plans have historically been funded using a pay-as-you-go model. Under GASB 74 and GASB 75, the establishment of a Trust provides a better solution to address the growing unfunded benefits.
What is GASB 74?
GASB 74 is a statement released by the Governmental Accounting Standards Board that relates to the financial reporting of the OPEB plan itself rather than the governmental entity, employer, or plan sponsor.
What is an OPEB Trust?
It is a savings vehicle that allows a governmental entity to fund all or part of its OPEB liability. The funds set aside in an OPEB Trust are then invested to further decrease the liability.
Creating a Trust isn’t without challenges. There are pros and cons you should consider. Most government budgets are under pressure, even more so today. While building a new school, buying a fire truck, or fixing roads may seem more important today, continuing the pay-as-you-go funding model will continue to increase the amount of your OPEB obligation. This can create a red flag for credit raters.
The Trust allows you to decrease your current & future OPEB liability and ensure funds will be available to pay for future promised benefits.
So, what are the GASB 74 requirements to establish an OPEB Trust?
GASB 74 states that an OPEB Trust must have the following three (3) features:
- Contributions to the Trust and earnings thereon must be irrevocable.
- Trust assets may only provide the funds for other post-employment benefits per plan terms. Therefore, assets accrued may not revert to the plan sponsors until all obligations have been satisfied.
- OPEB Trust assets must be legally protected from the creditors of employers, contributing entities, and plan members.
The biggest issue or concern that we hear relates to the irrevocability of the contributions. While we don’t dismiss the concern, the reality is that the plan sponsor can pay benefits from the OPEB Trust at any time so that they have access to one year’s worth of benefit payments for any fiscal year in the event of budgetary pressures.
Please note that we do not recommend this approach as the OPEB Trust is meant to be a long-term funding vehicle to address your long-term liabilities. Keep in mind that the end goal is that it will bring your municipal organization financial stability and predictability.
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