Session Outline
• GASB 74 – OPEB Plans• GASB 75 – OPEB for Employers• Unique considerations for non-trusted plans• Implementation challenges by plan type• Initial journal entries• Alternate Measurement Method (small plans)
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GASB Statements 74/75The New OPEB Standards
• GASB 74 (effective 06/30/2017)– Applies to the financial statements of OPEB plans
(OPEB trust funds)
• GASB 75 (effective 06/30/2018)– Applies to the financial statements of employers
providing other postemployment benefits
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GASB Statements 74/75The New OPEB Standards
• OPEB Plans defined– Arrangements through which OPEB is determined,
assets dedicated for OPEB (if any) are accumulated and managed, and benefits are paid as they come due.
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GASB Statements 74/75Defining Pension & OPEB
• Pensions– Retirement income and benefits (other than
healthcare) provided through a pension plan
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GASB Statements 74/75Defining Pension & OPEB
• Other Postemployment Benefits (OPEB) defined– All postemployment healthcare benefits
• Medical, dental, vision, hearing, etc.• Regardless of whether provided by a pension plan
– Postemployment benefits other than retirement income not administered by a pension plan
• Death benefits, life insurance, disability, long-term care
– Excludes termination benefits
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GASB Statements 74/75Defining Pension & OPEB
• Termination benefits (GASB 47):– An inducement to hasten the termination of
services (e.g., early retirement incentives)– May be voluntary or involuntary– Requires professional judgment to determine
employer’s intent and employee’s understanding– Recorded at the NPV of the benefits to be paid
when the agreement is made (not OPEB)
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GASB Statements 74/75Defining Pension & OPEB• Two broad types of OPEB plans:
– Defined benefit (DB)• Benefits are defined by plan terms• No individual accounts by plan member• Primary focus of GASB 74/75
– Defined contribution (DC)• Contributions are defined • Individual account for each plan member• Little changed by GASB 74/75
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GASB Statements 74/75Defining Pension & OPEB• Three types of defined benefit plans:
– Single-employer OPEB plan• A primary government and its component units may be
considered to be one employer– Agent multiple-employer OPEB plan
• Assets are pooled, but each employer’s share is legally available to pay the benefits of only its employees
– Cost-sharing multiple-employer OPEB plan• Assets are pooled, and may be used to pay benefits of
the employees of any participating employer
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GASB Statements 74/75Defining Pension & OPEB
• GASB has determined that OPEB plans are conceptually similar to pensions, and has largely replicated the guidance from GASB 67/68 in GASB 74/75– Retains requirement for actuaries to consider the
implicit rate subsidy– Retains the option for small plans to use the
alternative measurement method
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GASB Statements 74/75OPEB Plan Financial Statements
• Defined benefit or defined contribution plans administered through a qualifying trust or equivalent arrangement are reported in an OPEB trust fund– Resources accumulated for OPEB not in a
qualifying trust are reported in governmental / proprietary funds of the employer (or an agency fund if held for other governments)
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GASB Statements 74/75OPEB Plan Financial Statements
• DB plans calculate and disclose the employer’s net OPEB liability, but do not record it in the OPEB trust fund, itself
• GASB 74 does not apply if there is not an “OPEB plan”
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GASB Statements 74/75OPEB Plan Financial Statements
• Statement of Fiduciary Net Position– Major categories of assets held– Principal components of investments and
receivables– Deferred outflows of resources, liabilities, and
deferred inflows of resources typically small or non-existent
– Balance is fiduciary net position
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GASB Statements 74/75OPEB Plan Financial Statements
• Statement of Changes in Fiduciary Net Position– Additions (employer / employee contributions,
investment income by component)– Deductions (benefits, plan administrative
expenses)– Should report all benefits paid (even if initially
paid directly by the employer)
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CPE Prompt 1 of 4
• What is the relationship between GASB Statements 74 and 75?A. You either implement one or the other,
depending on the existence of an OPEB trustB. GASB 74 applies to OPEB plans, while GASB 75
applies to employers who provide OPEBC. GASB 74 applies to single-employer plans, while
GASB 75 applies to multiple-employer plansD. All of the above
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GASB Statements 74/75Net OPEB Liability
• Recorded by the employer (not the plan)• Equal to the actuarially determined total OPEB
liability, less the net position of the OPEB trust fund
• Recorded in full accrual financial statements (certain portions are offset by deferred inflows/outflows and amortized)
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GASB Statements 74/75Total OPEB Liability
• Calculated by the actuary:– Project future benefits– Discount to present value– Attribute present value to specific periods
Hire Today DeathRetirement
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GASB Statements 74/75Total OPEB Liability
• Calculated by the actuary:– Project future benefits– Discount to present value– Attribute present value to specific periods
Hire Today DeathRetirement
Future Benefits
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GASB Statements 74/75Total OPEB Liability
• Calculated by the actuary:– Project future benefits– Discount to present value– Attribute present value to specific periods
Hire Today DeathRetirement
Future BenefitsDiscount Rate
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GASB Statements 74/75Total OPEB Liability
• Calculated by the actuary:– Project future benefits– Discount to present value– Attribute present value to specific periods
Hire Today DeathRetirement
TOL
Service Cost
Future BenefitsDiscount Rate
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GASB Statements 74/75Key Actuarial Principles
• Actuarial cost method– Entry Age, Level Percent of Pay– Project future benefits using age-adjusted
premiums (implicit rate subsidy)
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GASB Statements 74/75Key Actuarial Principles
• Expected return/discount rate– Single blended rate comprised of:
• Expected rate of return (years w/ sufficient assets)• AA 20-year muni bond rate (years w/ insufficient assets)
– A lower discount rate produces a higher liability and vice versa
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GASB Statements 74/75Key Actuarial Principles
• Expected return/discount rate– Example:
Long-term MoneyExpected Weighted
Target Real Rate of Rate ofAllocation Return Return
Domestic equity 46% 5.4% 2.48%International equity 21% 5.5% 1.16%Fixed income 26% 1.3% 0.34%Real estate 6% 4.5% 0.27%Cash 1% 0.0% 0.00%
100% 4.25%
Inflation 3.50%
Investment rate of return 7.75%
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GASB Statements 74/75Key Actuarial Principles
• AA 20-year muni bond rate– Examples (12/31/17):
• Bond Buyer - 3.44%• S&P - 3.16%• Fidelity - 3.31%
Source: www.bartel-associates.com
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GASB Statements 74/75Key Actuarial Principles
• Expected return/discount rate– Single blended rate calculation (example):
• Expected rate of return = 7.75% for 36 years• AA 20-year muni bond rate = 3.44% for 24 years• Blended rate = 6.03% (applied to all years)
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GASB Statements 74/75Key Actuarial Principles
• Asset method– Fiduciary net position is calculated based on GAAP
(i.e., fair value of plan assets)
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GASB Statements 74/75Key Actuarial Principles
• Annual Cost– OPEB Expense equal to the benefits earned during
the period with adjustments for deferred recognition of some gains/losses
– Net OPEB Liability is not smoothed– OPEB Expense (and impact on employer net
position) is smoothed through offsetting deferred inflows/outflows
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GASB Statements 74/75Key Actuarial Principles
• Deferred inflows/outflows– Plan changes – expense immediately– Assets returns other than expected – 5 years– Other actuarial liability gains and losses – average
remaining service life of plan participants
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GASB Statements 74/75Key Actuarial Principles
• Sensitivity analyses– Changes in the discount rate
– Changes in the healthcare cost trend rate
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GASB Statements 74/75Other Actuarial Considerations
• Significant challenges for OPEB valuations– OPEB plans are less likely to be well funded– Healthcare cost trend assumptions
• Effect of the Affordable Care Act
– Assumed age at retirement– Participation rate assumptions– Pensions/OPEB are different actuarial specialties
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CPE Prompt 2 of 4
• How should the actuary discount future projected benefits?A. Using the long-term expected real rate of return
on plan assetsB. Using a risk-free rate of returnC. Using a single blended rate based on A and BD. It’s a mystery
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GASB Statements 74/75What to Expect from Your Actuary
• GASB 75-specific valuation– Valuation date & measurement date– Plan membership– Total OPEB Liability– Plan Fiduciary Net Position (may be separate)– Development of the single discount rate– Sensitivity analysis - discount rate
(cont.)
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GASB Statements 74/75What to Expect from Your Actuary
• GASB 75-specific valuation– Sensitivity analysis - healthcare cost trend rate– List of actuarial assumptions used– Calculation of OPEB expense– Deferred inflows/outflows (may be separate)– Allocation by division (optional)– Sample footnotes and RSI (optional)
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GASB Statements 74/75Timing Implications
• In an ideal world, everything would be measured in real time at the employer’s fiscal year end
• In reality, plans and employers don’t always have the same year end, and actuarial valuations take time to complete
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GASB Statements 74/75Timing Implications• Actuarial valuations
– GASB 74 allows up to 24 months prior to the FYE of the OPEB plan
• Use update procedures to roll forward to the OPEB plan’s FYE (i.e., the “measurement date”)
– GASB 75 allows up to 30 months prior to the FYE of the employer
• Use update procedures to roll forward to the OPEB plan’s FYE (i.e., the “measurement date”)
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GASB Statements 74/75Timing Implications
• “Measurement date”– Date at which the NOL is measured– Based on the plan’s FYE– May be up to one year prior to the employer’s FYE– OPEB contributions (including direct benefit
payments) made after the measurement date are reported as deferred outflows of resources
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GASB Statements 74/75Timing Implications
• Examples– Plan FYE = June 30– Employer FYE = June 30– Measurement date = June 30, 2018
MeasurementDate
OPEB Expense
Jun2016
Jun2018
Jun2017
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GASB Statements 74/75Timing Implications
• Examples– Plan FYE = June 30– Employer FYE = June 30– Measurement date = June 30, 2017
MeasurementDate
Deferred OutflowsOPEB Expense
Jun2016
Jun2018
Jun2017
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GASB Statements 74/75Timing Implications
• Examples (MERS)– Plan FYE = December 31– Employer FYE = June 30– Measurement date = December 31, 2017
Jun2016
Jun2018
MeasurementDate
Deferred Outflows
Jun2017
OPEB Expense
Dec2017
Dec2016
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GASB Statements 74/75Timing Implications
• Examples (MSPERS)– Plan FYE = September 30– Employer FYE = June 30– Measurement date = September 30, 2017
Sep2017
Jun2018
MeasurementDate
Deferred Outflows
Jun2017
Pension Expense
Dec2017
Dec2016
Sep2016
Mar2017
Jun2016
Mar2018
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GASB Statements 74/75Non-trusted Plans
• Not all OPEB plans are administered through a qualifying trust or equivalent arrangement– Contributions/earnings are irrevocable– Plan assets are dedicated to providing OPEB– Plan assets are legally protected from creditors
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GASB Statements 74/75Non-trusted Plans
• Many non-trusted plans are fully unfunded (i.e., no trust)
• Some are funded through non-qualifying trusts– Report Total OPEB Liability (not net)– Report any offsetting assets in governmental /
proprietary funds of the employer– Use 20-year AA muni bond rate for discounting
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GASB Statements 74/75Non-trusted Plans
• GASB Implementation Guide 2017-3– Trust agreement calls for a return of amounts
remaining in trust once all obligations have been fulfilled
• Qualifying trust
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GASB Statements 74/75Non-trusted Plans
• GASB Implementation Guide 2017-3– Trust agreement calls for a return of trust assets to
an employer if funded status reaches a specified level
• Not a qualifying trust
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GASB Statements 74/75Non-trusted Plans
• GASB Implementation Guide 2017-3– Trust reimburses employer for OPEB benefits paid
as they come due• Qualifying trust
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GASB Statements 74/75Non-trusted Plans
• GASB Implementation Guide 2017-3– A single trust is used for both OPEB and some
other benefit that is not OPEB (e.g., pensions or active employee healthcare)
• Not a qualifying trust, unless the “OPEB partition” of the trust is dedicated solely to providing OPEB
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GASB Statements 74/75Non-trusted Plans
• GASB Implementation Guide 2017-3– Trust A is a qualifying OPEB Trust, that pays
benefits. A second trust (Trust B) is established for the sole purpose of making payments to Trust A.
• Trust A is a qualifying OPEB trust• Trust B is not a qualifying OPEB trust, as it does not
make benefit payments; it is reported as employer assets
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GASB Statements 74/75Non-trusted Plans - Recap
Description Trust meeting par. 4 Non-Trust1 Recognize in Statement
of Net PositionNet OPEB Liability (NOL) Total OPEB Liability (TOL)
2 Present Value for TOL determined using
Long term rate of return (LTROR) or single blended rate of LTROR and AA 20 year Municipal Bond Index
AA 20-year municipal bond index
3 Recognize in Statementof Net Position
Deferred O/I for both TOL and Investments
Deferred O/I for TOL only
4 Recognize in Statementof Net Position
Deferred outflow for contributions after Measurement Date (MD)
Deferred outflow for OPEB payments after MD
5 OPEB related assets Recorded in Plan FS and used to determine Plan Fiduciary Net Position
Recorded in appropriate governmental or proprietary fund
6 OPEB expense Change in the NOL with appropriate deferrals and amortization
Change in TOL with appropriate deferrals and amortization
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CPE Prompt 3 of 4
• If an employer provides OPEB, but has not established a qualifying trust:A. It should report its total OPEB liability, rather than
its net OPEB liabilityB. It should use the risk-free rate of return to discountC. It should report any assets accumulated for OPEB
as employer assetsD. All of the above
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GASB Statements 74/75Unique Challenges by Plan Type
• Single-Employer– May be administered by pension, but must be
accounted for separately– May be in a multiple-employer pension but single-
employer OPEB (different actuaries/processes)– More frequently pay-as-you-go– May share some assumptions with pension, and
differ in others
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GASB Statements 74/75Unique Challenges by Plan Type
• Agent Multiple-Employer– Actuarial valuations are conducted separately for
each participating employer, but may not allow for unique assumptions for each
– Need to ensure that the actuarial certification (cover letter) is addressed to the employer
– Will need employer-specific info provided by plan for fiduciary net position
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GASB Statements 74/75Unique Challenges by Plan Type
• Cost-Sharing Multiple-Employer– Actuarial valuation is conducted for the plan as a
whole, with each employer having a proportionate share to record
– Will need employer-specific info provided by plan– Pension and OPEB portions may be comingled
internally, and need to be separated for GAAP reporting
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GASB Statements 74/75Employer FN Disclosures
Plan Description A B C DName of plan, administrator of plan, and type of plan
Benefit terms, including (1) classes of employees covered, (2) types of benefits, (3) key elements of OPEB formula, (4) terms or policies with respect to automatic benefit changes, including ad hoc cost of living adjustments (COLAs), (5) legal authority
Number of employees covered
Fact that no assets accumulated in a trust
Contribution requirements, including (1) authority under which contributions made, (2) legal or maximum contributions rates, (3) contribution rates, and (4) contributions made
Authority under which to pay OPEB benefits as they come due and amount
Availability of audited plan financial statements
A = Trusted: Single/Agent
B = Trusted: Cost-sharing
C = Non-Trusted Single
D = Non-Trusted PG + CU
(stand-alone reports only)
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GASB Statements 74/75Employer FN Disclosures
A = Trusted: Single/Agent
B = Trusted: Cost-sharing
C = Non-Trusted Single
D = Non-Trusted PG + CU
(stand-alone reports only)
Assumptions and Other Inputs A B C D
Significant assumptions, including inflation, healthcare cost trend rates, salary changes, postemployment benefit changes
Source of mortality assumptions
Dates of experience studies
Fact that projections of sharing of benefit costs based on established pattern of practice
NOL sensitivity to healthcare cost trend rate (±1%)
TOL sensitivity to healthcare cost trend rate (±1%)
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GASB Statements 74/75Employer FN Disclosures
A = Trusted: Single/Agent
B = Trusted: Cost-sharing
C = Non-Trusted Single
D = Non-Trusted PG + CU
(stand-alone reports only)
Discount Rate A B C D
Discount rate used
Assumptions about projected cash flows
Long-term expected rate of return on plan investments and how determined
Municipal bond rate used
Periods of projected benefit payments applied to long-term rate of return and municipal bond rate, if applicable
Assumed asset allocation and long-term expected real rate of return for each major asset class
NOL sensitivity to discount rate (±1%)
TOL sensitivity to municipal bond rate (±1%)
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GASB Statements 74/75Employer FN Disclosures
A = Trusted: Single/Agent
B = Trusted: Cost-sharing
C = Non-Trusted Single
D = Non-Trusted PG + CU
(stand-alone reports only)
Additional Disclosures A B C DInformation about plan’s fiduciary net position if report not publicly available
Schedule of changes in NOL
Schedule of changes in TOL
MD
Actuarial valuation date
Employers proportionate share of net (total) OPEB liability and basis for allocation
Changes in assumptions and benefit terms
Changes subsequent to MD
OPEB expense in current period
Balance of deferred O/I by source and aggregate impact on OPEB expense in each of next 5 years and thereafter
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GASB Statements 74/75Employer RSI
A = Trusted: Single/Agent
B = Trusted: Cost-sharing
C = Non-Trusted Single
D = Non-Trusted PG + CU
(stand-alone reports only)
10-Year Schedules A B C D
Changes in NOL by source
Components of NOL and related ratios
Proportionate share of NOL
Employer contributions
Changes in TOL by source
TOL as a percentage of covered employee payroll
Proportionate share of TOL
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GASB Statements 74/75Transition• Restate beginning equity
– Remove any Net OPEB Obligation (GASB 45)– Add beginning Net OPEB Liability (GASB 75)– Add any beginning deferred outflow for contributions
subsequent to the measurement date (all other deferrals are prospective only)
• RSI schedules– Prospective only (if information is not available)– Contributions history will generally be available
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GASB Statements 74/75Transition – Initial Journal Entries• Sample City, a 06/30 FYE has the following
facts related to its 12/31 OPEB Plan:– Sample City uses a third-party to collect and invest
OPEB assets in a qualifying trust– The amounts on the next slide occurred related to
the self-insured OPEB Plan
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GASB Statements 74/75Transition – Initial Journal Entries
GASB 45 OPEB Obligation-6/30/17 A $ 800,000
Net OPEB Liability-12/31/16 B 3,500,000
Net OPEB Liability-12/31/17 C 4,200,000
Net OPEB Claims & Expense 01/01/17-6/30/17 D 1,000,000
Contributions to the Trust 01/01/17-6/30/17 E 600,000
Net OPEB Claims & Expense 01/01/18-6/30/18 F 1,100,000
Contributions to the Trust 01/01/18-6/30/18 G 600,000
Net OPEB Claims & Expense FY 6/30/18 H 2,200,000
Annual Contributions to the Trust 6/30/18 I 1,200,000
Investment return over expectation CY 2017 J 200,000
Actuarial losses on liability assumption for CY 2017 K 210,000
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GASB Statements 74/75Transition – Initial Journal Entries
• Additional information:– Sample City’s actuary has determined that the
average remaining service period of all OPEB participants is seven years
– Sample City has implemented procedures and controls to ensure that claims are properly classified as active or retiree and that cut-off/accruals for payments before and after the measurement date are fairly stated
L (7 years)
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GASB Statements 74/75Transition – Initial Journal EntriesEliminate the Net OPEB Obligation from GASB 45
Net OPEB Obligation A 800,000
Net Position 800,000
Book Beginning Net OPEB Liability per GASB 75
Net Position B 3,500,000
Net OPEB Liability 3,500,000
Book Beginning Deferred Outflows for Contributions Subsequent to the MD
Deferred Outflow-OPEB Payments/Contributions (1/1/17-6/30/17)
D+E 1,600,000
Net Position 1,600,000
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GASB Statements 74/75Transition – Initial Journal EntriesRecord 2018 Amounts
OPEB expense (next slide) 3,980,000
Deferred outflow - contributions after MD F+G-D-E 100,000
Deferred outflow - assumption losses K-(K/L) 180,000
Deferred inflow - excess investment return J-(J/5) 160,000
Payments / contributions to trust * H+I 3,400,000
Net OPEB Liability C-B 700,000
* Assumes these were expensed as paid
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GASB Statements 74/75Transition – Reconciliation of OPEB Expense
Change in the Net OPEB Liability C-B 700,000
Current fiscal year OPEB payments H 2,200,000
Current fiscal year contributions I 1,200,000
Flow through of BOY deferred OPEB payments after MD D 1,000,000
Flow through of BOY deferred contributions to the Trust E 600,000
EOY deferral for OPEB Payments between MD & FYE F (1,100,000)
EOY deferral for OPEB Payments between MD & FYE G (600,000)
Deferred outflow - actuarial losses [K-(K/L)] (180,000)
Deferred inflow - excess investment earnings [J-(J/5)] 160,000
Total = OPEB Expense $3,980,000
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GASB Statements 74/75Transition – Allocations by Fund
• GASB does not specify how to allocate by fund– General rule: fund that is expected to pay the
liability– No JE in modified-accrual funds– Allocate to enterprise and internal service funds
on a rational basis (preferably contributions)– Use cost-sharing methodology for significant
changes in proportion from year to year
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CPE Prompt 4 of 4
• When recording adjustments for GASB 75, an employer should:A. Book a liability in the general fundB. Book a liability in the government-wide financial
statements, split between governmental and business-type activities
C. Book a liability in the government-wide financial statements and any proprietary funds that are expected to pay for the cost of OPEB
D. Any of these approaches are permitted
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GASB Statements 74/75Alternative Measurement Method
• Permitted by GASB 75 for plans with fewer than 100 employees (active and inactive)– Uses simplifying assumptions– Does not require the use of an actuary– May be updated/modeled internally
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Assumptions:
• Average retirement age• Benefits continue until (age/years/death)• Years to vest• Current cost of coverage (single/married, age-based)• Healthcare cost trend rate• AA 20-year muni bond rate
(cont.)
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Assumptions:
• Fiduciary net position of OPEB trust• Long-term expected rate of return• Contribution rate (% of salaries)• Assumed salary growth• Probability of accepting benefits
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Sample calculation:
• 30 employees (26 active, 4 inactive)• Average age at retirement = 62• Vest in 10 years, benefits provided until death• Plan is minimally funded ($12k), and pay-as-you-go• Rate of return = 5% investments; 3.31% AA 20-year
– Net OPEB Liability = $350,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Average age at retirement = 62 65
– Net OPEB Liability = $350,000 $110,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Rate of return = 5% 7%
– Net OPEB Liability = $350,000 $348,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Employer contributions = 0% 5%
– Net OPEB Liability = $350,000 $290,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Employer contributions = 0% 5%• Rate of return = 5% 7%
– Net OPEB Liability = $350,000 $235,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Healthcare cost trend rate = 6% 9%
– Net OPEB Liability = $350,000 $511,000
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GASB Statements 74/75Alternative Measurement Method
• Rehmann’s GASB 75 OPEB AMM Template– Change in assumptions:
• Years to vest = 10 20
– Net OPEB Liability = $350,000 $243,000
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For more information...
Stephen W. Blann, CPA, CGFM, CGMADirector of Governmental Audit [email protected]/government
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