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February 2006 New GASB Accounting Standards for OPEB: Finding the bottom line
Stanton Group will host a free GASB OPEB seminar at The Metropolitan in Minneapolis. Please call (763) 278-4196 or toll-free (888) 624-1575 to register. Officials from one of our county clients compared the annual cost increase to a few snowplows and growing. Maybe they’ll decide to go without. Another client, a Minnesota school district, used their analysis during recent teacher contract negotiations. Both the county and school district are proactively addressing the future affects of the new Government Accounting Standards Board (GASB) Statements No. 43 and No. 45, which establish accounting and financial reporting standards for Other Postemployment Benefits (OPEB) offered by public sector employers. OPEB primarily relates to retiree health care, but also includes other benefits offered after employment. Unfortunately, with the ballooning of health care costs and the generation of baby-boomers approaching retirement, OPEB liabilities have been overwhelming employers and will significantly affect their financial statements and credit ratings. But proactive, fiscally responsible cities, counties and school districts are taking steps now to ensure the most positive outcome possible under the new standards, which begin to take effect late in 2006.
What do the new accounting standards mean? Most public sector employers currently report OPEB costs as expenses/expenditures and finance them on a pay-as-you-go basis. GASB sees OPEB similarly to pension benefits in that the cost of the promised benefits should be recognized when the employer receives the services of the employee and not when the benefits are paid after the employee leaves service or retires. Therefore, the new standards require OPEB costs to be measured on an accrual accounting basis over the career of employees; the pay-as-you-go basis will no longer be acceptable.
The standards do not increase the actual cost of employee compensation (which includes benefits). Instead, the standards shift the future cost of benefits provided after employment to the years of employment. This approach increases the understanding and disclosure of employees’ total cost of compensation and addresses issues related to intergenerational inequities. The standards force employers to understand and quantify benefits they have promised to current and future retirees and report this information to taxpayers and bondholders.
Under the new standard, the employer isn’t required to pre-fund these promised benefits, but must determine and disclose how they plan to pay for these benefits in the future. Employers failing to pre-fund will likely experience negative consequences related to their credit ratings, selling of bonds, and borrowing of money.
Who is affected? Public sector employers who follow Generally Accepted Accounting Principles and offer OPEB are affected. Examples include: · Municipalities · Public Educational Institutions · Utilities · Hospitals and Other Health Care Providers We just started working with a local consortium of Minnesota municipalities and some of them mistakenly assumed they have no OPEB liability because they have few employees, don’t currently have retirees, or charge retirees the “full” rate. It’s important to note that virtually all Minnesota public sector employers have an OPEB liability – regardless of their size – thanks to the provisions of Minnesota Statute 471.61. In Minnesota, when a person retires under age 65, the most an employer can charge is the group blended premium, which is less than the retiree’s expected cost. This difference, known as the Implicit Rate Subsidy, is considered an OPEB under the new standards. Some employees will be covered to age 65, others for life. Spouses may also be covered in those same timeframes, creating additional liabilities. Each employer’s situation depends on the promises made to their current and future retirees. So for cities, counties and school districts alike: this is your wake-up call. Big changes are coming to your income statement and balance sheet – and soon.
When are the standards effective? The standards will be phased in based on annual revenue of the employer. The effective dates are as follows:
§ What do employers need to do? § Being proactive is important for every employer – even if the new standards don’t apply until late 2006, 2007, or 2008. While it seems like there is a lot of time to comply with the new standards, there are a number of steps involved:
§ Retain an actuary to value OPEB liabilities and provide reporting requirements. § The actuarial consultant will analyze the impact the standards will have on your organization and provide requirements for financial statements. Choose a consultant with the expertise to provide valuations, plan design analysis, asset/liability projections, union negotiating strategies, and reporting disclosure requirements for OPEB plans.
§ Review existing OPEB plans and research alternative plan designs to control costs.
§ Seek benefit concessions from active and retired employees of collectively bargained plans. This is a highly sensitive topic but one that needs to be addressed. There are some tough times ahead and litigation may be an unavoidable consequence – especially if the issue is not addressed head on.
§ Assess how OPEB liabilities will affect bond credit ratings, selling bonds and the cost of borrowing.
§ Determine whether and how to fund the OPEB liabilities.
§ Report OPEB liabilities on financial statements. § Remember that the new standards affect every Minnesota public sector organization – you’re not alone. So start figuring out the financial impacts, and make plans now for how you’ll adjust to life under this new reality.
Chris Grabrian, Actuarial Consultant, Stanton Group, works with employers on GASB/OPEB. For more information on services provided by Stanton Group’s Public Sector Team, contact Yvonne Johnson at (763) 278-4462 or yjohnson@stanton-group.com.
Stanton Group will host a free GASB OPEB seminar at The Metropolitan in Minneapolis. Please call (763) 278-4196 or toll-free (888) 624-1575 to register. |
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