The effective date for GASB 45 depends on annual revenues for the first fiscal year ending after June 15, 1999.

Phase One Entities - Over $100 Million in annual revenues:

• Applicable to first fiscal year beginning after December 15, 2006.

Phase Two Entities - $10 Million to $100 Million in annual revenues:

• Applicable to first fiscal year beginning after December 15, 2007.

Phase Three Entities - Less than $10 Million in annual revenues:

• Applicable to first fiscal year beginning after December 15, 2008.

Once GASB 45 takes effect, your OPEB costs must be recognized by your auditor. These costs are usually significant and, if unfunded, can accumulate significant liability on your financial statements and affect your financial status and credit rating.

richard Gabriel associates is an actuarial & employee benefits consulting firm serving Pennsylvania clients. With over 22 years’ experience in providing Actuarial Valuations, rGa is working with public entities...

• Educating on GASB 45 and its requirements

• Providing GASB 45 implementation guidance

• Preparing GASB 45 Actuarial Valuations including GASB 43 Actuarial Valuations for the Plans themselves.

richard Gabriel associates’ actuarial expertise will guide your organization through the maze of GASB 45’s requirements and compliance, including implementation.

For more information regarding GASB 45, please contact rGa at (215)773-0900.

Get Ready For GASB 45
By   Charles L. Carfagno, Jr. , Employee Benefits Consultant
        Ronald C. Stokes, FSA, MAAA, EA         
        richard Gabriel associates
        Horsham, Pennsylvania

What is GASB 45?

GASB 45, issued in 2004, is a recent statement by the Government Accounting Standards Board (GASB), located in Norwalk, Connecticut.  This agency establishes accounting parameters for Generally Accepted Accounting Principles (GAAP) purposes.  While it is not an official government agency, the Federal Government does look to GASB as the key reference point for accounting guidelines, which are incorporated into many federal and state tax codes and laws.

As medical technology becomes more sophisticated and life expectancy increases, healthcare costs for future retirees are likely to greatly exceed today’s retiree benefit costs.  GASB 45 requires accrual accounting for these costs in a manner similar to previous statements issued, regarding non-pension postretirement benefits.  These statements include Financial Accounting Standards Board Statement 106 (FAS 106) for publically traded companies, and Statement of Position 92-6 (SOP 92-6) for multiemployer plans that provide postretirement benefits.  This reporting has been in place for some time.

Statement 45 is primarily a response to the increase in number and size of government and government-related plans that provide postemployment retirement benefits other than pensions -- hence, the term OPEB (Other Postemployment Benefits).  To date, most postretirement health care plans for public employees have operated on a pay-as-you-go (cash) basis.  However, this accounting method defers the cost of these benefits for many years and recognizes them only as they are paid to eligible retirees.  GASB 45’s ultimate purpose is to improve the accuracy, usefulness, and consistency of public employers’ financial statements.  These statements have considerable ramifications for government entities, regarding their solvency, financial rating, and capacity to sell bonds; hence, their ability to generally conduct business.

Who Must Comply?

GASB 45 is applicable to state and local governments, public utilities, public hospitals, and state-funded schools.  GASB 45 disclosure is not required in cases where a GASB 43 report by “plans” themselves is already available.  Simply put, GASB 45 applies to the public entity actually offering the benefits, while GASB 43 applies to the plan itself.

Further Clarifying GASB 45

GASB 45 requires governments to disclose the amount of the annual OPEB cost and obligations, but does not require actual funding of this cost.  Although funding the OPEB cost is not requisite, once the entity sees the magnitude of these annual costs (in addition to those for past service), it would be prudent to commence funding in an effort to minimize ongoing liability.

To Fund or Not to Fund; That Is the Question!

In consideration of these established costs, the ultimate question becomes whether or not to fund for them.  If the decision is to fund the costs, the next concern is whether to create a segregated trust or to disburse directly from general assets.  The investment returns ultimately affect the annual OPEB cost.  The success of any funding is directly related to the investment selected and the return on those investments.

If the entity chooses to establish a segregated trust, then an investment allocation strategy is allowed.  This scenario clearly enables a more aggressive investment portfolio (subject to any legislated restrictions), and with it - greater investment returns.  Gabe Zinni, president of richard Gabriel associates, believes any decision to fund will be significantly influenced by investment return expectations and any current restriction on the types of securities allowed in a portfolio.

Employee Attribution Period

Postemployment retirement benefit costs must now be recognized over the full period of an employee’s service.  This process, called attribution, matches the cost of postemployment benefits to the value of the employee’s service while working.  The assumptions involved in estimating OPEB liability are similar to those used for defined benefit pensions, although OPEB liabilities are more difficult to predict.  This difficulty occurs because many plans do not set limits on benefits, and utilization levels can vary widely.  Among these variables are the costs of medical technology, medical inflation, demographics and regional cost variations.  As the cost projections may apply for up to 75 years, the actuary must disclose that the assumptions used are long range estimates only.  They will be periodically reviewed and, if necessary, revised.

A Comprehensive Process

While compliance deadlines for GASB 45 may be a year away, many government entities are getting a head start on the process.  This action may prove to be a worthwhile endeavor, since the annual (and thus far – hidden) OPEB costs are usually considerable.  The costs attributable to employees’ past service can actually be staggering!  As a result, some governments, in conjunction with their auditors, are already engaged with an actuary regarding GASB 45.

It is best to consider working with an actuarial firm possessing the ability to facilitate the entire process regarding GASB Statement 45, including:

1. Education on GASB 45 and its requirements;

2. A thorough and accurate actuarial valuation; and

3. Full implementation guidance.

Mr. Zinni noted that, if public sector agencies start their analysis now, they would be prepared to comply at the prescribed time.  They will avoid surprises. 

The net result should be total compliance, laying a solid foundation for future adherence to GASB 45 disclosure requirements.  For public employers, the purpose of GASB 45 is to provide a more complete disclosure of their plan’s total cost and commensurate benefit obligations.