GASB AND OPEB OBLIGATIONS – PROPOSING NEW ACCOUNTING STANDARDS TO IMPROVE TRANSPARENCY IN FINANCIAL REPORTING Roberta J. Cable, Patricia Healy and Claudia Li Pace University

Introduction Municipal employers facing health insurance costs of retirees that are increasing more rapidly than both inflation and overall rates of government spending. Other Post Employment Benefits (OPEB) overlooked Pew (2014) – In addition to more than $750B unfunded pension obligations, states had more than $625B unfunded health care obligations. GASB chair, David Vaudt, said that taxpayers, bond analysts, and policymakers need better information about these benefits so they can assess the financial obligations and annual costs.

Introduction GASB – issued 2 exposure drafts: Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions and Financial Reporting for Postemployment Benefit Plans Other Than Pensions. Will become effective December 15, 2015 and December 16, 2016 as new accounting standards. Purpose of this study was to provide an historical perspective of GASB accounting standards relating to OPEB.

GASB’s OPEB Standards – Historical Perspective Prior to May 1990, no GASB statements on OPEB. Recommendation to follow FASB Standard #81 on disclosures of OPEB. In 1990, GASB issued Standard #12, Disclosure of Information on Postemployment Benefits other than Pensions by State and Local Governments, requiring a description of benefits provided, employee groups covered, and employer and employee obligations to contribute.

GASB’s OPEB Standards – Historical Perspective In 1994, GASB issued Standard #26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans, requiring a statement of postemployment healthcare plan net assets, a statement of changes in net assets and notes to the statements. However, unlike Standard #25 for pension plans, no information required on funding progress and employer contribution. In 2004, GASB issued Standards #43 and #45, major updates in reporting requirements. Standards stated how governments determine, account for and report annual cost and outstanding financial obligations.

GASB’s OPEB Standards – Historical Perspective Standard #43 required: Statement of Plan Net Assets – presented all information about composition of assets and liabilities of the plan held in trusts for OPEB. Statement of Changes in Plan Assets – tracked year to date changes in plan assets using most recent actuarial valuation date.

GASB’s OPEB Standards – Historical Perspective Standard #45 required: OPEB expense recognized on a modified accural basis. Accounted for OPEBs on an accrual accounting basis (when employee earned benefits) vs pay-as-you-go basis Valuations of OPEBs performed once every two years except if under 200 employees. Valuations based on certain assumptions about current and future costs: age and life span of retirees, cost of medical claims by retires and active employees and discount rate. Reported Actuarial Accrued Liability (AAL) – PV of future benefits attributable to prior years of service.

GASB’s OPEB Standards – Historical Perspective Unfunded portion of AAL is UAAL. Both AAL and UAAL not reported as a liabilities on balance sheet, but were disclosed in notes to financial statements. However, they became visible to stakeholders. Annually Required Contribution (ARC) reported – composed of liabilities for current retirees plus the present value of future benefits of active employees and the amortized portion of the AAL. AAL and UAAL have increased because of rising healthcare costs and an aging population. This has created concern among stakeholders. Government behavior changed – i.e., cut costs and/or increase taxes.

GASB’s OPEB Standards – Historical Perspective In May 2014, GASB issued 2 Exposure Drafts relating to OPEB. Most significant change is for governments to report the unfunded portion of the OPEB liability on the face of financial statements. Also, significant changes on how government would calculate OPEB liabilities and annual expenses: use a discount rate equal to a 20-year tax-exempt high quality municipal bond and present a ten year schedule including total OBEB liability, net OPEB liability, covered employees. Supersede past standards and will become effective December 15, 2015 and December 15, 2016.

GASB and OPEB – Going Forward State and city OBEB liabilities underfunded and may create future financial burdens. GASB moving away from funding pay-as-you-go orientation to accrual basis of accounting. Achieving more transparency and comparability by improving accounting standards for governments. Results will likely make OPEB obligations appear larger reflecting that relatively few governments have put enough money aside to pay for these benefits. Important step to informed decision making for stakeholders.