OPEB Communication Resources 10/28/2014 National Conference on Public Employee Retirement Systems OPEB Communication Resources March 13, 2018 Dean Michael Mead, GASB Senior Research Manager & GASAC Coordinator Emily Paul, GASB Project Manager Mr. Mead and Ms. Paul.

Presentation Overview Background Overview of OPEB communication resources Questions

Background on the Standards Pre-agenda research evaluating the effectiveness of existing standards on postemployment benefits began in 2006 Project added to current technical agenda in 2008 Two-phased project Pensions administered through trusts Statements 67 and 68 issued in June 2012 Implementation Guides issued in June 2013 (Statement 67) and January 2014 (Statement 68) OPEB and pensions not within scope of Statements 67/68 Statements 73, 74 and 75 issued in June 2015

When Changes Will Occur Statement 74 (reporting by OPEB plans) is effective for periods beginning after June 15, 2016 First year-end: June 30, 2017 Statement 75 (reporting by employers that provide OPEB) is effective for periods beginning after June 15, 2017 First year-end: June 30, 2018

OPEB Communication Resources Offered to stakeholders to use in communicating financial statement effects of new OPEB standards Focus is on major changes from prior accounting standards and new information that will be provided Question and answer format Nonauthoritative Available on the GASB website (www.gasb.org)

Topics Covered by Materials Did implementing the accounting standards create the OPEB liability? Why did the size of the OPEB liability change? Will governments in cost-sharing OPEB plans report OPEB liabilities? How is the calculation of OPEB expense changed by the new accounting standards? What information is included in notes and required supplementary information? Has the annual required contribution (ARC) disappeared? How does the OPEB liability affect net position?

1. Did Accounting Standards Create the OPEB Liability? Other postemployment benefits (OPEB) Retiree healthcare benefits Other retirement benefits not provided through a pension plan Liability is a result of formal or informal agreement to provide OPEB to its employees New accounting standards did not create the OPEB liability; they improved the approach to measuring the liability that is reported in the financial statements

1. Key Questions and Answers Why does the government report an OPEB liability if the government can modify the benefits it provides at any time? What is an implicit rate subsidy and how is it related to a government’s OPEB liability? What is the relationship between accounting standards for OPEB and a government’s liability for OPEB? What are the benefits of an accounting-based approach for reporting OPEB activities? What are the accounting numbers intended to convey?

1. Fundamental Approach Fundamental approach for OPEB is the same as required for pensions in Statement 68 Viewed in the context of an ongoing, career-long employment relationship Focus on the cost to taxpayers over time of providing government services Accounting-based versus funding-based approach to measurement

2. Why Did the Size of the OPEB Liability Change? New accounting standards include changes in the methods that governments may use to measure their OPEB liability OPEB liability might be significantly larger than the liability previously reported on face of financial statements (net OPEB obligation) OPEB liability might be different than liability previously reported in notes to financial statements (UAAL) New accounting standards improve comparability across governments New accounting standards do not change amount that governments are required to contribute to their OPEB plans or amount needed to pay for benefits as they come due

2. Key Questions and Answers How is the measurement of the OPEB liabilities changing? What are the components of the OPEB liability? What changes in the accounting standards may increase or decrease the size of the total OPEB liability? If the government’s OPEB liability changes, does that mean that governments will need to contribute more or less for OPEB?

2. Changes in Reported Amounts 10/28/2014 2. Changes in Reported Amounts Statement 45 Statement 75 Face of financial statements Net OPEB obligation Net or total OPEB liability Notes to financial statements Information about the unfunded actuarial accrued liability (UAAL) Information about the net or total OPEB liability

2. Components of the OPEB Liability 10/28/2014 2. Components of the OPEB Liability Net OPEB liability Total OPEB liability less OPEB plan net position If OPEB plan is not administered through a trust that meets the specified criteria, total OPEB liability is recognized

2. How Is the Long-Term Obligation Measured? 10/28/2014 2. How Is the Long-Term Obligation Measured? Project cash outflows for benefits Discount projected benefits to actuarial present value (APV) Allocate the APV of projected benefits to periods

2. Key Changes in Measurement 10/28/2014 2. Key Changes in Measurement Statement 45 Statement 75 Discounting Expected long-term rate of return on investments expected to be used to pay benefits Long-term rate if plan assets projected to be sufficient; otherwise, municipal bond rate is incorporated Allocation to periods Choice of six methods, applied as level dollar amount or level percentage of pay One method (entry age) applied as a level percentage of pay Plan assets Actuarial value of assets (smoothed) Fair value of assets (no smoothing) Standards do not address how much governments need to contribute to their OPEB plan or how much they would need to finance their OPEB on a pay-as-you-go basis.

10/28/2014 3. Will Governments in Cost-Sharing OPEB Plans Report OPEB Liabilities? Cost-sharing multiple-employer OPEB plan Administered through a trust that meets the specified criteria Plan assets and liabilities to employees are shared among participating employers Governments in cost-sharing plans will recognize their proportionate share of the collective net OPEB liability for the first time

3. Key Questions and Answers What is a cost-sharing multiple-employer OPEB plan? Do governments in cost-sharing OPEB plans really have an OPEB liability? What do new accounting standards require for cost-sharing OPEB employers? Why are governments in cost-sharing plans required to report their OPEB liabilities?

3. Requirements for Cost-Sharing Employers 10/28/2014 3. Requirements for Cost-Sharing Employers Governments in cost-sharing plans will report their portion of collective net OPEB liability Each participating employer determines their proportion based on a comparison of their contribution effort with the collective contribution effort of all participating employers and nonemployer contributing entities Each employer multiplies the collective Net OPEB Liability, by their proportion to determine their proportionate share The proportionate share of the collective net OPEB liability is what the employer reports in its own financial statements Employer proportionate share $ Employer proportion % Collective amount $

4. How Is Calculation of OPEB Expense Changing? New accounting standards no longer based on a financing approach for postemployment benefits Many events that affect the OPEB liability will be recognized immediately in OPEB expense Effects of other events will be recognized in expense over fewer years than in the past

4. Key Questions and Answers How was the annual OPEB expense measured under prior accounting standards? How do the new accounting standards measure annual OPEB expense? What types of changes in the OPEB liability are recognized immediately? What types of changes in the OPBE liability are recognized in subsequent periods? What is a deferred outflow of resources or deferred inflow of resources? How do contributions or amounts paid for benefits affect OPEB expense?

4. OPEB Expense—Immediate Recognition 10/28/2014 4. OPEB Expense—Immediate Recognition Report in OPEB expense immediately: Service cost interest on the beginning balance of the Total OPEB Liability Effect of changes in benefit terms

4. OPEB Expense—Deferrals Reported initially as a deferred inflow or outflow and introduced into OPEB expense over a period equal to the average remaining service period of all members of the plan, both active and inactive: The effects on the Net OPEB Liability of (1) changes in economic and demographic assumptions and (2) the difference between assumed and actual economic and demographic assumptions (experience gains and losses) For cost-sharing governments, the effects of changes in proportions Reported initially as a deferred inflow or outflow and introduced into OPEB expense over a five-year closed period: The effect on the Net OPEB Liability of the difference between the assumed and actual return on plan investments

4. OPEB Expense v. Employer Contributions 10/28/2014 4. OPEB Expense v. Employer Contributions The amount contributed by the employer not intended to be the OPEB expense amount Even if a government contributes based on an actuarially determined amount (such as the Annual Required Contribution or ARC), generally it is calculated differently from OPEB expense Contributions from employers in cost-sharing plans generally are based on statute or contract, not on actuarial calculations Statutory and contractual contributions are likely to be considerably less than what an actuarially determined contribution would be

5. What Information Will Be Included in Notes and RSI? Expanded note disclosures and RSI will provide more comprehensive reporting of a government’s OPEB liabilities and expense Expanded RSI schedules will provide information for trend analysis

5. Key Questions and Answers How will the new standards enhance the usefulness of information presented in notes? How will the new standards enhance the usefulness of trend information about the OPEB liability? Will users of financial reports still be able to obtain information about plan funding? How will the new standards affect the RSI that was previously required to be reported?

5. Notes: Descriptive Information 10/28/2014 5. Notes: Descriptive Information Members by type Assumptions used to measure the liability Members by type disclosed for single and agent plans

5. Notes: Sensitivity Analysis 10/28/2014 5. Notes: Sensitivity Analysis Cont

5. Notes: Changes in the Net OPEB Liability 10/28/2014 5. Notes: Changes in the Net OPEB Liability Single and agent employers only

5. Notes: Changes in the Total OPEB Liability 10/28/2014 5. Notes: Changes in the Total OPEB Liability If there is no fiduciary net position

5. RSI: Changes in Liability and Ratios 5 years shown for illustrative purposes

5. RSI: Actuarially Determined Contributions 10/28/2014 5. RSI: Actuarially Determined Contributions Covered payroll instead if OPEB is based on a measure of pay 5 years shown for illustrative purposes

6. Has the ARC Disappeared? OPEB accounting is no longer based on the ARC Some governments will continue to present information about contribution measures

6. Key Questions and Answers What happened to the ARC? Why not continue to require governments to provide information on the ARC?

7. How Does the OPEB Liability Affect Net Position? Residual of all other elements presented in a government’s statement of financial position for government-wide activities, proprietary funds, and fiduciary funds Changes in the way government report OPEB-related measures might have a significant effect on net position

7. Key Questions and Answers What is net position and how is it measured? How will recognizing the OPEB liability affect the net position of a government?

Questions? For more information, check out the OPEB pages at www.gasb.org.

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GASB Members David A. Vaudt (Chairman) Jeffrey J. Previdi (Vice Chairman) James E. Brown Brian W. Caputo Michael H. Granof Kristopher E. Knight David E. Sundstrom 7 members, 5-year terms (except chair, who is serving a 7-year term) David A. Vaudt (Chairman) Former State Auditor of Iowa and partner, KPMG Jeffrey J. Previdi (Vice Chairman) Former Director at Standard and Poor’s Ratings Services James E. Brown Former Audit Partner, BKD Brian W. Caputo VP & CFO, DuPage College, former Municipal Government Finance Officer Michael H. Granof EY Distinguished Centennial Professor of the McCombs School of Business at the University of Texas Kristopher E. Knight Deputy Secretary of State of Delaware David E. Sundstrom Former county auditor/controller/treasurer

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