Postemployment Benefit Reporting and GASB No.45

By: Janis Slater, CPA, Manager email

Governmental Accounting Standards Board Statement No.45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, issued in 2004, requires governments to recognize and report the cost of postemployment benefits (OPEB) when they are earned, regardless of when they are paid. Larger governments have already implemented GASB 45, while medium and smaller governments are required to report in fiscal years ending June 30, 2009 and 2010, respectively. The requirements include reporting the Net OPEB Liability on the Statement of Net Assets and a footnote disclosing Plan Descriptions, Funding Policies, Annual OPEB Cost and Net OPEB Obligations, (actuarially determined), Funded Status and Funding Progress, and descriptions of Actuarial Methods and Assumptions. A Schedule of Funding Progress for the Retiree Health Plan is part of the Required Supplementary Information. One of the most frequent situations which creates a liability for an entity is called an “implicit rate subsidy”. When current employees and retirees are insured together as group, the premium paid by the retirees is usually lower than the premium for retirees separately insured because the premiums are calculated using a blended rate. Because of the effect of age on the cost of claims, separately rated premiums for retirees would be higher than the blended premium rates. Even when retirees are required to pay their own premiums, the government is subsidizing the retirees’ premiums through higher premiums for current employees; the government has a liability for an implicit rate subsidy for retirees. Furthermore, the resources needed to make up the difference between what the retirees pay and what they should be paying (age adjusted premiums), are paid by the government, not the active employees. Thus the government has an obligation to cover the implicit rate subsidy. The frequency of the actuarially determined valuation depends on the number of members: every two years for plans with over 200 members, every three years for plans with between 100 and 199 members. Plans with less than 100 members are allowed to use an Alternative Measurement Method. Governments are encouraged to acquire the actuarial valuations required by the Statement. An independent auditor would be precluded from giving an unqualified opinion, or lowering the opinion to either qualified or adverse, since it would be difficult to determine materiality without the actuarial information. The potential for an adverse effect on an entity’s bond rating should also be considered.
Topics