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Other
Post-Employment
Benefits (OPEB)
- Non-Pension Benefit Plans
Introduction
Employees of state and local
governments, including public school districts, public universities and
other governmental entities, may be compensated in a variety of
forms in exchange for their services. In addition to a salary,
many employees earn benefits over their years of service that
will not be received until after their employment with the
government ends through retirement or other reason for
separation. The most common type of these postemployment
benefits is a pension. As the name suggests, other
postemployment benefits (OPEBs) are postemployment benefits
other than pensions. OPEBs generally take the form of defined
benefit health insurance, dental, vision, prescription drug, or other
health care benefits. It may also include some types of life
insurance, legal services, and other benefits.
Private
sector and non-profit employers have been subject to OPEB
reporting since the early 1990s under the FASB 106/158 Standard.
Governmental employers were exempt from this reporting
obligation until the issuance of GASB Statement 45 in August of
2004.
What
is the GASB requiring?
The value of the promise made to provide
retiree benefits must now be actuarially calculated and accrued during the working years of
employees and recognized as a financial obligation of the
employer as the OPEB Cost. This amount needs to be reported on
the financial statements of all public sector employers
beginning in the first financial reporting period after December 15, 2006 for the largest employers while small
employers have until 2008 to begin reporting.
OPEB Cost is derived from an
actuarial calculation1
that must be done every two or three years depending on employer
size. Actuarial valuations take several assumptions into
account:
-
Turnover rate and retiree rate
-
Medical care inflation
-
Mortality
-
Discount rate
-
Benefit design
-
Health care cost factors such
as age, gender, family size, geographic area, industry
-
The promise to retirees
-
Salary scale assumption
-
Expected long-term (or
short-term) rate of return on plan assets
The determination of the costs
and obligations for postemployment benefits other than pensions
is based on the calculation of the actuarial present value of
the postemployment benefits that are expected to be paid to or
on behalf of the employee under the terms of the plan and the
attribution of such present value to periods of service.
Generally, the attribution period is from the date of hire to
the date the employee gains full eligibility for benefits (e.g.,
retirement).
The largest component of OPEB Cost is retiree health care
benefits. According to The Kaiser Family Foundation’s
Employer Health Benefits 2006 Annual Survey, 82% of public
sector employers employing more than 200 workers offer some form
of retiree
health care benefits. Continuing with a “pay-as-you-go”
philosophy will create a significant new financial liability for
these employers to deal with. This may be increasingly difficult in a
time when most public sector employers are experiencing
double-digit health care cost increases, reduced
and restricted budgets, and reduced
federal and state subsidies. In addition, many states have laws
that mandate a provision allowing early retirees to remain on
the active health care plan until they become eligible for
Medicare. The cost difference between the blended plan cost
(including actives and retirees) and the actual cost for the
retirees must be recognized as an implicit rate subsidy by the
employer. This amount adds additional liability for the
employer, even if the employer is not contributing financially
toward the retiree health care plan.
Does the GASB
require funding of the OPEB Cost?
Although there is no requirement that the employer actually fund the OPEB Cost, not doing so
could have a significant impact on the employer’s overall credit
rating, consequently, affecting the cost of issuing debt financing
for the public sector employer. Any Net OPEB Obligation needs to
be reported as an unfunded liability on financial statements.
Several of the Nation's rating agencies have indicated that they
will now consider GASB 45 obligations in financial analyses.
Standard & Poor’s, the Nation’s largest
rating agency, issued a report stating2: “The new
[GASB 45] reporting
may reveal cases in which the actuarial funding of
postemployment health benefits would seriously strain
operations, or, further, may uncover conditions under which
employers are unable or unwilling to fulfill these obligations.
In such cases, these liabilities may adversely affect the
employer's creditworthiness. All Standard & Poor's rated
employers will be monitored closely in terms of their reporting
under GASB 45. Upon implementation of these new standards, we
will include the new information as part of our ongoing
analytical surveillance of ratings."
FitchRatings issued a report stating3:
“Initially, Fitch's credit focus will be on understanding
each issuer's [GASB 45] liability and its plans for addressing
it. Fitch also will review an entity's reasoning for developing
its plan. An absence of action taken to fund OPEB liabilities or
otherwise manage them will be viewed as a negative rating
factor. Steady progress toward reaching the actuarially
determined annual contribution level will be critical to sound
credit quality."
How can the obligation be
reduced?
A well
designed GASB 45 OPEB mitigation strategy involves several
different risk management strategies and funding techniques. First, any
defined benefit promise by the employer should be funded, at
least partially, in a qualified trust to enable actuaries to use a long-term discount
rate during calculations. Second, consider your funding sources
such as issuing OPEB
obligation bonds or pooled financing to fund all or a portion of the Actuarial
Accrued Liability. Lastly, combine the first two steps with an
effective strategy to
migrate to a defined contribution approach over time by blending
a defined benefit approach with a defined contribution strategy.
Collectively, OPEB liabilities can be successfully managed.
Defined benefit OPEB plans are
those having terms that specify the benefits to be
provided at or after separation from employment. The benefits
may be specified in dollars (e.g., a flat dollar payment
or an amount based on one or more factors such as age, years of
service, and compensation) or as a type or level of coverage
(e.g., major medical, prescription drugs, or a percentage
of premiums). Defined benefit OPEB plans involve a
complicated reporting obligation, making assumptions as to
future medical care inflation, mortality, Medicare availability,
and the probability of occurrence of events far into the future.
Defined contribution OPEB plans
are those having terms that (a) provide an individual account for
each plan member and (b) specify how contributions to an
active member’s account are to be determined, rather than
the benefits the member or his or her beneficiaries are to
receive at or after separation from employment. For purposes of
a defined contribution plan, “benefits” consist only of the
contributions, earnings on investments of those contributions,
and forfeitures allocated to the member’s account. Consequently,
defined contribution OPEB plans involve simpler reporting
obligations than defined benefit OPEB plans.
GASB accrual standards apply to defined
benefit OPEB plans but NOT to defined contribution OPEB plans.
Defined contribution OPEB plans are considered “funded” as the
employer cost equals the required contribution. By changing the
way you pay for retiree health care benefits can reduce, or
even eliminate, the unfunded OPEB liability.
America's
VEBA Solution will assist you and your advisors in designing an effective solution
to reduce, and more effectively manage your postemployment benefit obligations. Following an
in-depth evaluation process that will reveal areas of potential
improvement, you will develop several strategies
that may include defined benefit funding methods along with a transitional
plan to defined contribution, thereby mitigating the financial
impact of this new, and significant reporting obligation. Contact us
for more details
>>
Request an America's
VEBA Solution Speaker on this Topic
1Simplified alternative measurement method for employers with
fewer than 100 members - Valuation required every three
years
back to where you were >>
2Standard
& Poor's - Reporting &
Credit Implications of GASB 45 Statement on Other Postemployment
Benefits - 12/2004
back to where you were >>
3FitchRatings
- The Not So Golden Years - Credit Implications of GASB 45 -
6/2005
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