GASB 74 and 75 for Local Governments: Q&A Between an Auditor and Actuary
The Governmental Accounting Standards Board (GASB) finalized Statements 74 and 75, changing how publicly sponsored retiree health care plans (and other postemployment benefits, or OPEB) will be reported within a local government’s financial statements. The new accounting treatment for OPEB has many striking similarities to the updated pension standards under GASB 67 and 68.
Many governments are still figuring out how the net OPEB liability will be measured, how this liability and related deferred inflows and outflows of resources will be reported on the basic financial statements, how they will be disclosed in the notes to the financial statements, and how it will be reported within the required supplementary information (RSI).
Because a local government’s auditors work closely with their actuaries in this reporting process, a question-and-answer dialogue between an auditor and actuary is helpful in understanding some of the finer nuances of the new procedures. On occasion, I work with actuary Christine O’Neal of Foster & Foster Actuaries and Consultants, so I asked her for her insights. Here’s our exchange.
Census data and valuation
Q: I understand that the number of employees covered by benefit terms must be disclosed in the financial statements. This information can be gleaned from the census data. Would the actuary disclose this information in the valuation, or is it up to the employer sponsor to do so?
A: Actuaries provide the disclosure of the number of employees covered by benefit terms. It’s part of our analysis of the annual census data.
Q: Sometimes the information that governments supply in their census data isn’t sufficient, and actuaries have to keep digging for the numbers they need to reach an accurate valuation. Any best practices you might suggest?
A: It’s most helpful for everyone when actuaries provide a specific template (typically in Excel) to the local government sponsor with clearly defined column headings that specify the information we need — no more, no less. This helps ensure from the start that those responsible for accumulating the data will know what to provide to the actuary and save time for both parties.
Q: Why are salary changes relevant assumptions if benefits are not impacted by employee compensation?
A: While salary changes don’t appear to be a relevant assumption for OPEB, my theory is that the new OPEB standards attempted to largely mimic the new pension standards under GASB 67 and 68. I think that’s why you’ll find significant redundancy not only in the employer financial reporting requirements but also the actuarial assumptions when comparing GASB 68 to GASB 75.
Q: So if part of the actuarial assumption is that salaries will increase over time, how material an impact will this have on the valuation of total OPEB liability?
A: It won’t have a material impact, but it will affect how the liability accrues over time.
Q: What will the dates of experience studies usually be for OPEB valuations? Will a local government with a single-employer pay-as-you-go plan ever have an experience study? Is this something they would specifically request an actuary to conduct? Can you explain what an experience study would entail?
A: Most OPEB plans probably have not undergone an experience study. For many local governments, this may not be necessary. However, one important assumption for pay-as-you-go plans is the utilization. A nice way to visualize this is to consider if we assumed no one elected post-retirement medical coverage, then the liability would be zero. The higher the utilization assumption, the higher the liabilities.
Q: If a government has a pay-as-you-go plan, will there be a long-term expected rate of return?
A: No, because there are no investments.
Q: So, if the plan is pay-as-you-go, there will only be a discount rate, which will be the municipal bond index rate. And if the plan is funded under a trust arrangement, there will be a discount rate and a long-term expected rate of return. Can you help us understand the distinction between the discount rate and rate of return and how each rate impacts the net OPEB liability?
A: Yes, there is only a discount rate for pay-as-you-go plans, which will be the municipal bond index rate. That bond index rate is obviously susceptible to fluctuation from year to year, which may cause a greater difference in the net OPEB liability in a roll-forward year when compared to previous roll-forward procedures under GASB 45. For plans funded under a trust arrangement, the discount rate is the rate used to discount the liabilities, while the long-term expected rate of return is what the plan expects to earn on the assets. The required discount rate under a funded arrangement will be a blend between the municipal bond rate and the long-term expected rate of return. This blended rate will depend on the extent to which the plan is funded. If the plan was fully funded, the discount rate would be the long-term expected rate of return.
Net OPEB liability calculations
Q: When disclosing the changes in net OPEB liability, what calculations are involved?
A: The calculation is the total OPEB liability and the OPEB plan’s fiduciary net position. If the OPEB plan is pay-as-you-go, there will not be fiduciary net position.
Valuation and measurement dates
Q: Does the valuation date line up with the date range of the census information?
A: Yes. For example, if the census was for the period between July 1, 2017, and June 30, 2018, then the valuation date would match that last day covered under the census.
Q: Will the measurement date normally be the same date of the valuation? Why would those two dates be different?
A: It may make sense for a local government to use a beginning-of-year valuation date and a measurement date one year later (at the end of its fiscal year), which is permissible under the standards. This would allow the local government to accumulate its census data during the fiscal year and have the OPEB valuation largely completed and available on or before the end of the fiscal year. Under that strategy, there won’t be delays in generating year-end financial statements and providing OPEB information to the external auditor. OPEB expense calculations
Q: Should OPEB expense equal service cost, interest on OPEB liability, administrative expense, and amortization of deferred inflows/outflows? Will the amount of OPEB expense disclosed ever be different than the sum of those parts? Let’s use Sunshine City as an example. Service costs were $6.9 million, interest was $11.47 million, and administrative expenses were $15,000, so the total adds up to $18.39 million. But the OPEB expense disclosed was $16.98 million. Why?
A: Sunshine City partially funds their OPEB liability, so the expected return on assets reduces the expense.
10-year schedule of contributions
Q: This question relates to preparation of the 10-year schedule of contributions (actuarially determined and/or contributions that are statutorily or contractually established). If a local government offers an implicit subsidy (retirees can still participate in a local government’s health care plan but must pay their own premiums at the city’s blended rate) and the local government offers a $50 per month stipend (direct subsidy) to retirees to help them cover their premium costs, do we have both an actuarially determined contribution and a contractually established contribution? Would we need to report two separate RSI schedules in this case?
A: If there is no trust fund, an actuarially determined contribution may not be calculated for the implicit subsidy, but the RSI schedule would require the contractually established contribution amount for the $50 per month stipend. If the actuarial determined contribution is determined, it should include the value of the stipend; thus, one RSI schedule could represent the total amount of the implicit subsidy paid and the explicit stipend amount.
Q: Similar to the question above relating to the schedule of contributions, for a pay-as-you-go plan, will the actuarially determined contribution always equal the contributions made in relation to the actuarially determined contributions? When would actual contributions made be different than actuarially determined contributions?
A: Like pension funding, the actuarially determined contribution (if determined) would not equal the current amount contributed because it includes the present value of contributions for active employees when they are eligible for benefits in the future. The pay-as-you-go contributions are only based upon current retirees.
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