The
New GASB Retiree Welfare Benefit
by
Christopher B. Clark, CEBS
Palmer & Cay
The Governmental Accounting Standards Board (GASB), which is responsible for developing the accounting rules for State and Local Government (SLG) entities, views Other Postemployment Benefits (OPEB) as a form of deferred compensation. Other Postemployment Benefits include postemployment healthcare benefits (medical, dental, and other health-related benefits) regardless of the type of plan that provides them, and all postemployment benefits such as life and disability provided separately from a pension plan (excluding vacation, sick leave and benefits defined as termination offers and benefits). GASB has re-released Exposure Drafts (January 2004) requiring recognition of OPEB liability in the financial statement when a benefit is earned versus when it is paid. Changing from a pay-as-you-go accounting basis to an accrual basis will have a significant impact on many SLG’s financial statements. Immediate attention needs to be given to understanding the requirements, alternatives and financial effect of the proposed GASB standard if it applies to you.
A new annual expense, called the Annual Required Contribution (ARC) must be actuarially determined and will impact the Income Statement. The accumulation of annual differences between the employer’s funding of the plan and the ARC will create a new Balance Sheet Liability or asset, called the net OPEB Obligation. GASB will allow the use of any of six actuarial cost methods, but they strongly encourage SLG employers who also sponsor a pension plan to use that plan’s valuation cost method.
Many plans use a composite premium rate for all under-65 participants whether active or retired. In the original exposure draft (February 2003), the GASB took the position that, as long as the early retiree pays the full composite premium rate, the valuation need not recognize the value of the subsidy (the difference between the actual cost and the composite premium rate). This position has been reversed due to pressure from the actuarial community. Requiring recognition of the so-called “implicit rate subsidy” is the most significant change in the exposure draft. The GASB’s revised view on this issue is now consistent with comparable accounting standards applicable to private sector accounting (FASB).
Biennial actuarial valuations will be required for plan sponsors with over 200 members. The effective dates of the new accounting standard will be based on the employer’s total annual revenues used for GASB 34 implementation, and phased in as shown below.
|
Total Annual Revenues |
Effective for
Fiscal Years Beginning After |
|
$100 million or more |
December 15, 2006 |
|
$10 million to $100 million |
December 15, 2007 |
|
Less than $10 million |
December 15, 2008 |
SLGs need to begin the process of planning for the impact of the proposed standards now. If significant plan changes are required, they may need to be phased in over a period of years. SLG’s should take the following action steps:
With many SLGs already facing budgetary shortfalls, this is a particularly bad time to be faced with a new expense and no corresponding new source of revenue. This new accounting rule is not going away (final rules are expected to be released in June 2004) and SLGs are well advised to begin the process of understanding and dealing with its impact immediately. The measurement of these liabilities is not done with “a push of a button” and plan design changes take time and resources to implement.