GASB 75 - Introduction & Notable Changes
Parker Elmore, ASA, MAAA, EA, FCA | Kurtis Thompson
New accounting rules for public other postemployment benefit plans to replace GASB 45 will take effect in 2018 for most plan sponsors. To ensure a successful transition to the new standards, you will need to understand various new concepts (largely mirroring those found in GASB 67/68) and new terms. Odyssey will be providing a series of white papers on this subject which will review these topics in some detail. We begin with “GASB 75 – Introduction & Notable Changes” to provide a high-level overview as well as to outline key issues related to the transition to the new Statement.
The Governmental Accounting Standards Board (GASB) has released GASB 75 “Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions” – a new accounting standards for public Other Post Employment Benefit (OPEB) plans which will replace GASB 45. These Statements largely mirror recent changes to pension accounting made under GASB 67/68 and will significantly alter the measurement and reporting standards previously in place under GASB 45. This new Statement will move accounting for OPEB to the balance sheet and income statement from the notes disclosure, bringing more focus onto OPEB liabilities and related outflows/inflows. Implementation of these Statements is required for fiscal years beginning after June 15, 2017.
Odyssey has established a working group that is reviewing the new Statements, issuing guidance on how to best transition to the new Statements, determining the impact on our client’s liabilities and expenses and evaluating strategies for pre-funding and financial statement recognition.
Upcoming Work Group Updates
- Long-term expected rate of return and money- weighted rate of return
- Recognition of deferred inflows and outflows
- Calculation of Net OPEB Expense
- Crossover date projections
- Valuation, Measurement, and Reporting dates and their interaction
What Is Changing?
The biggest change under GASB 75 will be moving the OPEB Obligation to the plan sponsor’s balance sheet vs. the notes in the financial statement. This is being done with a series of new terminology which largely replaces currently familiar terms:
- Total OPEB Liability -replaces Actuarial Accrued Liability (AAL)
- Fiduciary Net Position – replaces Plan Assets
- Net OPEB Liability – replaces Unfunded Actuarial
- Accrued Liability (UAAL)
- Deferred Inflow & Outflows – amortization of variations from expected (changes in assumptions, demographics and investment returns)
What Type Of Plan Do You Have?
The three most common are Single Employers, Agent Employer and Cost Sharing Employers. There are additional scenarios such as a “special funding situation” which would require additional calculations beyond what is detailed here.
- A Single Employer Plan
This is an OPEB Plan where the benefits are provided to the employees of only one employer.
An Agent Employer Plan
This is an OPEB Plan where assets are pooled for investment purposes but segregated so each employer’s share is legally only available to pay the benefits of their own employees.
- A Cost Sharing Plan
This is an OPEB Plan whereby the OPEB Obligations of multiple employers are pooled and any plan assets are available to pay the benefits of any employer participating in the OPEB Plan.
How Does This Impact The Employer’s Financial Statement?
As noted earlier, this new statement is effective for fiscal years beginning on or after June 15, 2017 (GASB 74 is effective for OPEB Plans one year earlier – June 15, 2016). The key issues with this new Statement are calculation of the Net OPEB Liability (“NOL”) and the Net OPEB Expense (“NOE”). The calculations will be somewhat familiar in that we will use an Actuarial Cost Method to determine the Total OPEB Liability (“TOL”) and the associated Service Cost. Additionally, we will now have additional deferred inflows & outflows in our Net OPEB Expense calculation:
Net OPEB Expense = Service Cost + Interest on NOL + current period benefit changes + recognition of deferred outflows – recognition of deferred inflows – expected earnings on plan investments
What Is My Actuarial Cost Method?
To standardize OPEB reporting and make OPEB liabilities more easily comparable between different plans, GASB 75 requires that all liabilities be valued using the “Entry Age Normal” methodology vs. the choice between several methodologies previously allowed. For those switching to this methodology from “Unit Credit” or “Projected Unit Credit” this will tend to modestly increase disclosed liabilities for active employees with a slight reduction in the Service Cost.
What Is My Discount Rate?
Much like GASB 68, the choice is discount rate will be based on the plan’s funding & investment policy. Many plan sponsors with unfunded or limited funded OPEB Plan use a discount rate of 3.0% to 4.0% and those with funded plans use a discount rate in the 6.5% to 8.0% range.
Under GASB 75, the discount rate will be determined to be more closely tied to the funding situation of the plan. For years in which the projected fiduciary net position is expected to be sufficient to fully fund projected benefit payments, the benefit payments may be discounted at the long term assumed rate of return for the plan’s blended mix of assets. For years in which the projected fiduciary net position is not expected to be sufficient to fully fund projected benefit payments, the benefit payments will be discounted using the yield for a 20-year tax free municipal bond index rated AA/Aa (or equivalent) or higher. As of the writing of the paper (08/01/15) the S&P municipal bond 20 year high grade index has a yield of 3.66%.
This methodology creates a “crossover date” which will vary by plan sponsor and valuation before which the discount rate is the return on assets and after which the municipal bond index rate is used. The resulting present value is then used to calculate a single equivalent discount rate selected to produce the same actuarial present value. This single equivalent discount rate becomes the plan discount rate for the GASB 75 valuation.
The long term rate of return on assets must be calculated using the money weighted rate of return based on the historical return and mixture of the asset classes invested in by the plan. The calculation of this rate must be presented in the disclosures.
What About Small Employers?
While a plan with under 200 covered participants was required to have a valuation performed triennially under GASB 45, GASB 75 requires all plans to have a valuation done at least biennially regardless of size. The Alternative Measurement Method (“AMM”) will still be permitted for plans with fewer than 100 covered participants.
What Is My Measurement Date, Valuation Date, and Reporting Date?
In order to begin the calculation of Total OPEB Liability a measurement date and actuarial valuation date must be established. The measurement date is the date at which the plan’s net OPEB liability along with disclosures and related ratios are determined and must be within 30 months prior to the reporting date rolled forward to the reporting date. The actuarial valuation date may be any date up to one year and one day prior to the reporting date with the actuarial results projected from the valuation date to the reporting date. The reporting date must be the plan’s fiscal year end. The projection from the valuation date to the reporting date must reflect any source of material impact between the valuation date and the reporting date. This includes any expected increase in premiums for coverage and any upcoming benefit changes agreed upon before the reporting date.
What Is My Actuarially Determined Contribution?
GASB has recognized that the Annual Required Contribution (ARC) is not necessarily the best approach to accounting for OPEB benefits. Therefore, the ARC is no longer be the funding standard for a plan and a new Actuarially Determined Contribution (ADC) will be used as the funding standard for the plan. The ADC will be calculated by the actuary and must be a reasonable and actuarially based method for recognizing benefits earned during the present fiscal year and benefits previously earned but not yet reflected in the Net OPEB Obligation.
Are There New Disclosures?
New disclosures will be required under GASB 75 similar to those added for GASB 68. They include ten year schedule of changes to the Net OPEB as well as various components of OPEB liability, expenses, and related ratios. There will also be new disclosures detailing deferred outflows/inflows of resources from the plan. These will be included to help show what factors are influencing plan liabilities over time and will also draw attention to the funded status of the plan. Examples of these schedules will be published in a future white paper.
If you have any questions about what the GASB 75 rollout will mean for you or would like more information, please contact your Odyssey Advisors representative.