Transcript Reporting Postemployment Benefits Other Than Pensions: AN

GASB Update
Karl Johnson
Project Manager
Governmental Accounting Standards Board
Norwalk, CT
13th Annual Rutgers Governmental
Accounting & Auditing Update Conference
Piscataway, NJ, December 18, 2006
1
What is the GASB?



An independent, professional standard-setting Board established in
1984 by agreement of sponsoring organizations involved in the
preparation, auditing, or use of financial reports issued by state and
local governments (SLG) in the United States
Operates within an organizational structure provided by the
Financial Accounting Foundation (as does the FASB)
Establishes generally accepting accounting principles (GAAP) for
general purpose external financial reporting by SLG entities


There are 87,000+ SLG entities, but not all issue GAAP financial
statements
GASB is researching how many do and do not—and, if not, why
not—and hopes to encourage broader adoption of GAAP reporting
The views expressed in this presentation are those of the speaker and are not official
representations of the Governmental Accounting Standards Board, which expresses itself
through written pronouncements issued after extensive due process.
2
Other Postemployment
Benefits
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
Statement 45
Related Statements and Other Guidance
3
In a Nutshell:
GASB Statement 45 (for Employers)


Subject: accounting and
reporting by employers
for their OPEB expenses
and obligations—most
notably, for retiree
healthcare benefits
Applies to all employers
that pay all or part of the
cost of the benefits,
including “implicit rate
subsidies”
4
In a Nutshell:
GASB Statement 45 (for Employers)
(continued)

Requires a change from
PAYGO accounting
(expense not recognized
until obligation paid in
years after retirement) to
accrual-basis
accounting (recognition
of expense during years
of active service)
5
In a Nutshell:
GASB Statement 45 (for Employers)
(continued)


Requires measurement and
disclosure of the total and
unfunded actuarial accrued
liabilities for past service
costs—and related information
about the funded status of the
benefits
Requires actuarial valuations
for accounting and financial
reporting purposes—generally,
every 2 or 3 years for OPEB
6
Objective of Statement 45

To faithfully represent (reflect like a good
mirror) the financial effects of the exchange
transaction between an employer and its
employees that creates OPEB—in which an
employer


Acquires employee services, for which it
Pays salaries, active-employee healthcare, etc.,
and promises to pay or provide a pension and
OPEB such as retiree healthcare, as components
of a total compensation package
7
Measurement Approach:
Broad Steps of Process to Develop Information
for Accrual Accounting and Financial Reporting
1. Project cash outflows for benefits
2. Discount projected benefits to present value
(PV)
3. Allocate the PV of projected benefits to
periods using an acceptable actuarial cost
method
8
Employee Age Timeline
Service Period
25
40
62
80
Present age
Age when
Assumed age at
hired
retirement Life Expectancy
9
1) Project Benefits
25
40
62
2) Discount
80
A.P.V.
3) Actuarial cost method
10
How Allocated Cost Information
is Used in Accounting and
Financial Reporting
•
Amounts allocated to past periods ~ actuarial accrued liabilities
•
•
•
Amount allocated to current period ~ normal cost (service cost)
•
•
Total AAL are disclosed in notes to F/S and presented as part of
funding progress trend information in RSI
The amount needed to amortize the total AAL over < 30 years is
included as a component of the ARC (annual required contribution of
the employer) and annual OPEB cost (expense)
Normal cost also is included as a component of the ARC and annual
OPEB cost (expense)
Amounts allocated to future periods ~ future normal cost
•
Contrary to many interpretations in the media, GASB 45 does not
(repeat, not) require employers to report future OPEB costs
11
The Substantive Plan

Benefits should be projected based on:
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The current substantive plan (the plan as understood by the
employer and plan members), including changes made and
communicated to plan members, at the time of the actuarial
valuation, and (or including)
The historical pattern of sharing of costs between employer
and plan members to that point
Anticipated future changes in plan design should not be
included in the projection of benefits
A legal or contractual benefit cap (as distinguished from
a cap on contributions), should be considered in the
projection of benefits if the cap is deemed effective
12
Accounting for Employee and
Retiree Healthcare Benefits in a
Combined Group
Illustrative situation:
•
•
Single-employer plan with 500 plan members (400 actives, 100 retirees)
State law requires employer to allow retirees to participate in healthcare
group with actives at blended premium rates. Employer pays blended rate
for each active employee; retirees pay blended premium rate for their
coverage
Required accounting:
•
•
•
Active and retiree benefits should be accounted for separately, under
GASB 10 and 45, respectively
Employer’s share of the current coverage cost for each group should be
calculated as the difference between (a) the claims costs, or age-adjusted
premiums, for that group and (b) the amount contributed by members of
that group (i.e., it includes “implicit rate subsidies”)
Employer’s share of current-year cost for retiree coverage—determined in
that manner—establishes the starting point for the actuarial projection of
benefits for financial accounting purposes
13
How It Appeared Before:
Nominal (Stated) Employer Contributions
Based on Blended Premiums

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
Blended premium rate = $2,880 / member
Total premiums for group = $1,440,000
Nominal contributions at blended rates:
400 Active
Employees
Total blended premiums
$1,152,000
Less: Member contributions
0
Employer contributions
$1,152,000
100
Retirees
$288,000
288,000
$0
Total
$1,440,000
288,000
$1,152,000
14
How It Looks After:
Employer Contributions Based on AgeAdjusted Premiums Reflective of Claims
Costs


Total premiums for group = $1,440,000
Age-adjusted premiums (determined by actuary):
Retirees: $4,810 / retired member
 Actives: $2,397.50 / active member
Age-adjusted contributions at age-adjusted rates
approximating claims costs:


Total age-adjusted premiums
Less: Member contributions
Employer contributions
400 Active
100
Employees Retirees
$ 959,000
$481,000
0
288,000
$ 959,000
$193,000
Total
$1,440,000
288,000
$1,152,000
15
The Bottom Line:
Implicit Rate Subsidies are Real

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
Note that the employer’s nominal contribution for active-employee
benefits ($1,152,000) exceeds the actual cost of providing
coverage to active employees ($959,000) by $193,000
The $193,000, therefore, has nothing to do with insuring active
employees but reflects the increase in blended rates as a result
of the inclusion of retirees in the group
The $193,000 is an actual cash contribution by the employer
toward the cost of covering retirees in the plan for the current
year


It is the relevant starting point for the projection of future employer
cash outlays for benefits for OPEB accounting purposes
The amount of this contribution might be expected to increase over
time (other things being equal) as the combined result of (a) the
healthcare cost trend and (b) changing demographics (increasing
number and proportion of retirees)
16
Selection of a Discount Rate



The discount rate, for calculating the PV of projected benefits,
should be the estimated long-term yield on the investments
expected to be used to finance the payment of benefits
The relevant investments might be plan investments, employer
investments, or a proportionate combination of the two—
depending on the method of financing
Planning consideration:


The discount rate for unfunded plans (PAYGO) could tend to be
lower than the discount rate for funded plans, because policies and
options for investment of employer assets tend to be more restrictive;
thus, a PAYGO employer generally will get less help from investment
yield in paying promised benefits
A lower discount rate generally will result in a higher UAAL, ARC,
annual OPEB cost, and net OPEB obligation
17
Annual OPEB Cost and Net OPEB
Obligation: Illustration
(Employer in Year 2 of Applying Statement 45)
Normal cost (current service cost)
Amortization of the UAAL (for past services)
Annual required contribution (ARC)*
Interest on beginning net OPEB obligation*
ARC adjustment*
Annual OPEB cost* = expense
Actual employer contribution* (PAYGO method
of financing)
Increase in net OPEB obligation*
Net OPEB obligation—beginning*
Net OPEB obligation—ending*
$ 350,000
600,000
950,000
50,000
(58,500)
941,500
(250,000)
691,500
650,000
1,341,500
* The ARC, the annual OPEB cost and its components, actual
employer contributions, and changes in the net OPEB obligation
are required to be disclosed in the employer’s notes to the
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financial statements.
What Do the ARC and the Net OPEB
Obligation Tell Me as a Reader of the
Financial Report?

The ARC expressed as a % of covered payroll
represents the level of employer contribution
effort that would be needed on a sustained,
consistent basis to cover normal cost and amortize
the UAAL over not more than 30 years:



An indicator of the “size” of the employer’s commitment,
expressed in terms of the ongoing contribution effort required
to sustain it
An indicator of potential long-term demands on future
cash flows
The net OPEB obligation indicates whether since
implementation of Statement 45 an employer has
contributed less (more) than the ARC
19
Funded Status Information:
Illustration (Two Employers)
Information Disclosed in Notes to Financial
Statements and Presented in RSI
Actuarial accrued liabilities (AAL) (a)
Actuarial value of plan assets (b)
Unfunded actuarial accrued
liabilities (UAAL) (a-b)
Funded ratio (b/a)
Covered payroll (c)
UAAL as a % of covered payroll (a-b/c)
Govt. A
Unfunded
(PAYGO)
Govt. B
Partially
Funded
$13,500,000
-0--
$13,500,000
9,000,000
13,500,000
0.0%
$7,600,000
177.6%
4,500,000
66.7%
$7,600,000
59.2%
20
What Does the UAAL Tell Me as a
Reader of the Financial Report?
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The UAAL is the portion of the present value of projected
benefits attributed to past periods
It can be thought of as a measure of the value of
employee services that were received by the employer
and tax/rate payers or constituents in past periods but
not paid or funded
Other things being equal, the higher the UAAL, the
higher will be the following going forward:




Amortization component of the ARC
The ARC
Annual OPEB cost, or expense
Demands on future cash flows, or budgets
21
Disclosure of Actual Employer
Contributions as a Percentage of
Annual OPEB Cost


A key factor affecting the funded status of the
benefits is the level of employer contributions
Accordingly, employers also should disclose for
each of the past three years the annual OPEB
cost, the percentage of annual OPEB cost
actually contributed, and the ending net OPEB
obligation
22
Effective Dates and Transition

Staggered implementation of Statement 45 based on a
government’s phase for implementing GASB 34:



Phase 1 ($100M+ revenue)—first fiscal year beginning after Dec.
15, 2006
Phase 2 ($10M to < $100M revenue)—one year setback
Phase 3 (< $10M revenue)—two year setback
Earlier implementation is encouraged
 Employers may apply Statement 45 prospectively—that is,
may report zero beginning net OPEB obligation as of the
beginning of the year of implementation

23
Statement 45 Concluding
Comments


Don’t underestimate what may be involved in planning
for implementation of Statement 45 or wait too long to
start
Planning tasks may include, for example:

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Analyzing and classifying benefits offered
Gathering information about plan terms and covered group
Obtaining an initial actuarial valuation and absorbing results
Separating active-employee and retiring healthcare benefits for
accounting purposes, if combined
If funding or partially funding, establishing a qualifying trust
24
Statement 45 Concluding
Comments (continued)
In the end, the information required to be developed
and reported is intended to provide the diverse users
of governments’ financial reports:



A more transparent accounting for employers’ costs and
obligations associated with OPEB
More decision-useful financial information to better inform
discussion and decision-making about important matters such
as:
1. Benefits and plan design
2. Cost sharing between the employer and plan members
3. The method of financing benefits
25
Related Statements and Other
Guidance

Statement 43—OPEB Plan Reporting
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About stewardship of plan (i.e., trust) assets
Similar to Statement 25
Coordinated with Statement 45 for employers
Statement 47—Termination Benefits

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Accounting for voluntary and involuntary termination benefits—i.e.,
incentives to end employment, or paid because of early termination of
employment (contrast with postemployment benefits, which by definition
are compensation for services)
Generally requires recognition of liability and expense when offer is
made and accepted, or when a plan of involuntary terminations is
communicated
Measurement and recognition requirements include variations
depending on circumstances—for example, termination benefits that add
to or extend pension benefits or OPEB should be added to pension or
OPEB accounting calculations
26
Related Statements and Other
Guidance (continued)

Technical Bulletin 2004-2
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Includes guidance on modified-accrual recognition of liabilities and
expenditures for employers in a cost-sharing OPEB plan
Technical Bulletin 2006-1
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Provides guidance on accounting for payments received from the federal
government under the Retiree Drug Subsidy option of Medicare Part D
Subsidy should be accounted for as a separate transaction from OPEB
(this option only)
If to plan, account for subsidy as an on-behalf payment (GASB 24)
If to employer, account for subsidy as a voluntary nonexchange
transaction (GASB 33)
27
Related Statements and Other
Guidance (continued)

Implementation Guide to Statements 43 and 45

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Poses and answers 258 questions about the OPEB
Statements—210 of them about Statement 45
Comprehensive Implementation Guide—2006-2007

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Incorporates and adds to the original OPEB Guide, which will not
be updated as a separate guide, as Chapter 8
Includes 14 new OPEB questions and answers
28
Other Notable GASB Projects:
Most Recent Document Issued
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Sales and Pledges of Receivables and Future Revenues—
Statement 48, 9/06
Pollution Remediation Obligations—Statement 49, 12/06
Conceptual Framework: Elements–Exposure Draft, 8/06
Pension Disclosures (Conforming Changes)–Exposure Draft,
12/06
Intangible Assets–Exposure Draft, 12/06
Derivatives and Hedging—Preliminary Views, 4/06
Fund Balance Reporting and Governmental Fund Definitions—
Invitation to Comment, 10/06
29
Statement 48:
Sales and Pledges


Addresses whether an exchange of a government’s
interest in its expected future cash flows from
collecting specific receivables or future revenues for
immediate cash payments is (a) a sale or (b) a
collateralized borrowing
Provides criteria for determining whether proceeds
should be reported as revenue or a liability


Criteria should be used to determine to what extent
government relinquishes control over the receivables or future
revenues (how much continuing involvement?)
If sale criteria not met, account for transaction as a borrowing
30
Statement 48:
Sales and Pledges (continued)
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If receivables are sold, recognize sale price difference in
change statements in period of sale
If future revenues are sold, generally defer and amortize
revenue
Statement also addresses:


Situation where government does not receive immediate cash
payment, but pledges future cash flows
Transfers of assets between components of a common reporting
entity (including between individual funds)
31
Statement 49:
Pollution Remediation
Obligations
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
PRO defined as obligations to address the current or potential
effects of existing pollution by participating in pollution
remediation activities
The following are covered in the PRO Exposure Draft:

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Five specified obligating events upon occurrence of which a
government would be required to estimate the components of a PRO
Use of the expected cash flow technique for measurement of the PRO
(current values of expected outlays, probability-weighted scenarios with
regard to estimated amounts of outlays to be incurred)
Accounting for recoveries
Circumstances where pollution remediation outlays can be capitalized
Required disclosures
32
Exposure Draft (8/06):
Conceptual Framework—Elements
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Fourth in a series of Concepts Statements
Establishes definitions for seven elements of financial
statements:
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Assets
Liabilities
Deferred outflow of resources
Deferred inflow of resources
Net assets
Outflow of resources
Inflow of resources
Central feature in the definitions is “resource”

Item with a present capacity to provide, directly or indirectly, services
33
Exposure Draft (8/06):
Conceptual Framework—Elements
(continued)
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ED respondents’ comments have been received and are
under consideration
Final Elements Concept Statement scheduled to be issued
in June 2007
A related conceptual framework project, Recognition and
Measurement:

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Will determine what information should be reported in financial
statements (measurement focus) and when that information should
be reported (basis of accounting
Will determine appropriate measurement attributes for
governmental financial statements—for example, historical cost or
fair value
Is scheduled to begin deliberations in January 2007
34
Exposure Draft:
Pension Disclosures
(Conforming Changes)
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Project scope limited to proposed amendments to GASB 25 and 27
to conform with more recently adopted versions of disclosure and
RSI requirements in GASB 43 and 45
Proposed changes include:
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Note disclosure of funded status of plan as of most recent AV (plus
multi-AV trend Schedule of Funding Progress as RSI)
Funded status note and schedule of funding progress required of plans
and employers that use aggregate actuarial cost method plans—using
entry age actuarial cost method as a surrogate
Explanatory note disclosures re: the general actuarial measurement
process and identification of specific actuarial methods and
assumptions used
Cost-sharing employer required to present plan RSI if plan does not
Concurrent related project: Pension Accounting Research
35
Exposure Draft (12/06):
Intangible Assets

Proposes accounting and reporting requirements for
intangible assets including:
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Easements (right-of-way, permissive, restrictive)
Land use rights (water, timber, mineral)
Computer software
Creative assets (patents, copyrights, trademarks)
Intangible assets covered under ED would be
classified as capital assets
36
Exposure Draft (12/06):
Intangible Assets (continued)

Specific additional guidance for intangibles is provided in the
following areas:
 Recognition
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Internally-generated intangible assets, including computer software
Amortization
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Indefinite useful life
Useful lives limited by legal or contractual provisions
Impairment
ED generally requires retroactive application of all provisions
ED to be issued in December 2006
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
37
Preliminary Views (4/06):
Derivatives and Hedging


Proposes definition of a derivative
Presents the following preliminary views of the Board:
 Derivatives should be reported at fair value in the statements of
net assets/balance sheets
 Changes in fair value should be reported in the change
statements, except if the derivative is an effective hedge, in
which case, changes in fair value are deferred and reported in
the statements of net assets/balance sheets
 Disclosures generally consistent with TB 2003-1, with additional
disclosures related to hedges
38
Invitation to Comment:
Fund Balance Reporting and
Governmental Fund Definitions

Broad objectives of the project:


To assess whether fund balance reporting
requirements meet the needs of financial statement
users and consider potential changes to improve the
usefulness of fund balance information
Review current definitions of governmental funds to
determine if clarification is needed
39
Invitation to Comment:
Fund Balance Reporting and
Governmental Fund Definitions
(continued)

ITC provides three options for fund balance
reporting:



Model A—Present categories with improvements
Model B—Distinguishing resources available for
appropriation
Model C—Distinguishing restricted resources
40
Invitation to Comment (10/06):
Fund Balance Reporting and
Governmental Fund Definitions
(continued)

ITC provides options for clarification of certain
aspects of SRF definition:


To account for the proceeds of specific revenue
sources that are legally restricted to expenditure for
specified purposes.
ITC also suggests clarification for financial
resources accounted for in CPF and DSF:


Resources restricted or legally limited to expenditure
Resources that gov’t has publicly expressed its
intention to use
41
GASB Research Agenda

The following projects are on GASB’s research agenda:
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Economic Condition—Phase III
Electronic Financial Reporting
Intergovernmental Risk Reporting
Pension Accounting and Reporting—assessment of the
effectiveness of GASB 25 and 27 in meeting financial reporting
objectives
Public/Private Partnerships
Reporting Unit/Statement 14 Reexamination
Service Efforts and Accomplishments
42
GASB Website—
www.gasb.org
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
What’s New
Downloads and ordering information:
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Public comment documents [ED, PV, ITC)
Statements, Interpretations, Technical Bulletins
Implementation Guides [Q&A])
Summaries of standards
Plain language articles
Project pages
Technical inquiry form
Staff contact information
43