The Governmental Accounting Standards Board (GASB) intends to make sweeping changes to the way governments account for other-post employment benefits (OPEB), similar to GASB’s recent changes to the way governments account for pension plans.
As most government finance officials are aware, the GASB overhauled the financial reporting requirements for governmental pension plans via GASB Statements No. 67 and 68. Among other requirements, GASB Statement No. 68 requires governments to report the underfunded status of defined benefit pension plans as a liability on their government-wide financial statements. As result, many in the industry are preparing for the implementation of GASB Statement No. 68 next year, as it will likely require governments to report large pension liabilities.
Now GASB plans to make similar changes related to OPEB plans. OPEB are benefits other than pensions which are provided to retirees. Examples include health care benefits, life insurance, and disability benefits.
In May 2014, the GASB issued Exposure Drafts of two proposed Statements that are designed to improve the usefulness of information about OPEB contained in the financial reports of state and local governments.
The first Exposure Draft titled, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (OPEB Plan Exposure Draft), addresses the reporting by OPEB plans administered through trusts, either as reported in stand-alone financial statements or in fiduciary funds within general purpose governmental financial statements. This proposed Statement essentially takes many of the requirements of GASB Statement No. 67 (which addressed pension plans administered through trusts) and makes them applicable to OPEB plans.
These requirements include the format and presentation of OPEB plan statements and the necessary footnote disclosures and required supplementary information (RSI). Similar to the requirements of GASB Statement No. 67, OPEB plans would be required to have an actuarial valuation performed every two years, and would have to disclose information from this valuation within the footnotes and RSI. The proposed Statement would be effective for financial statements for fiscal years beginning after December 15, 2015 (in other words, for December 31, 2016 and June 30, 2017 fiscal year ends). Since most OPEB plans are administered on a pay-as-you-go basis, with no assets being set aside in a trust for future benefit payments, this proposed Statement will not be applicable to as many governments as was GASB Statement No. 67.
The second Exposure Draft titled, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (OPEB Employer Exposure Draft), proposes guidance for reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other employers. This proposed Statement essentially takes many of the requirements of GASB Statement No. 68 (which addressed the accounting for pension plans by employers) and makes them applicable to employers who administer OPEB plans.
Similar to what is required under GASB Statement No. 68 for defined benefit pension plans, governments participating in single employer and agent multiple employer OPEB plans would report a net OPEB liability equal to the present value of projected future benefit payments less the OPEB plan’s fiduciary net position. Since most OPEB plans are unfunded, for most governments there will be no plan fiduciary net position to offset against the present value of future benefit payments, resulting in a large OPEB liability that must be reported.
Additionally, governments participating in cost sharing multiple employer OPEB plans would report a liability equal to their proportional share of the plan’s net OPEB liability. The proposed standard also requires note disclosures and RSI similar to what is required under GASB Statement No. 68 for pension plans. The proposed Statement would be effective for financial statements for fiscal years beginning after December 15, 2016 (in other words, for December 31, 2017 and June 30, 2018 fiscal year ends).
The addition of a net OPEB liability to the government-wide financial statements (particularly for governments who will already be adding a net pension liability next year) could have an adverse effect on the financial picture which these statements portray. For many governments, this could result in net position being a deficit balance.
Thus, governments should begin to plan how they intend to communicate the impact of this financial reporting change to citizens and users of financial statements. Although the economic realities associated with the OPEB plan will not have changed (i.e. the government’s OPEB obligations today are the same as they will be once the proposed Statements become effective), the financial position of the government as depicted by the financial statements will change dramatically.
Governments should also begin to communicate with their actuaries regarding these financial reporting changes and the consequences that these will have for the biennial OPEB actuarial valuation (including, potentially, increased cost). Finally, governments should begin to determine whether they have the necessary information at their disposal to prepare the required footnote disclosures and RSI under the proposed OPEB Statements.
The full Exposure Drafts of GASB’s proposed OPEB Statements may be found here.
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