1 What is GASB? The Governmental Accounting Standards Board (GASB) is an independent, non-profit organization organized in 1984 by the Financial Accounting.

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Presentation transcript:

1 What is GASB? The Governmental Accounting Standards Board (GASB) is an independent, non-profit organization organized in 1984 by the Financial Accounting Foundation (FAF) to establish standards of financial accounting and reporting for state and local governmental entities. The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will: Result in useful information for users of financial reports and Guide and educate the public, including issuers, auditors, and users of those financial reports. The GASB’s function is important because external financial reporting can demonstrate financial accountability to the public and is the basis for investment, credit and many legislative and regulatory decisions.

2 New GASB Accounting and Disclosure Requirements In July, 2004, the Governmental Accounting Standards Board (GASB) released a pair of statements of standards for accounting for such “other post-employment benefits” (“OPEB”). The GASB standards for OPEB accounting will soon require California community college districts to begin to accrue the cost of retiree health benefits. Annual Required Contribution. The new GASB standards will require a district to calculate an “annual required contribution” (“ARC”). The ARC consists of 2 components: a normal cost (the portion of the present value of total projected benefits assigned to the current year by the actuarial cost method used by the employer) plus an amortization component (the amount necessary to amortize the total unfunded actuarial accrued liability for its OPEB obligations).

3 New GASB Accounting and Disclosure Requirements (cont.) Long-Term Liability. GASB requires that districts recognize an expense in the amount of the “annual OPEB cost”. The cumulative difference between the amounts expensed (annual OPEB cost) and the amounts contributed to a plan creates a net OPEB obligation, which will be reported as a general long-term liability. GASB does not propose that the entire unfunded actuarial accrued liability be immediately recognized as a liability on a district’s balance sheet; but it will be required to be disclosed in the notes to the district’s financial statements. Irrevocable Commitment of Assets. Any or all of the following will qualify as contributions to a plan under the new GASB standards: (a) provide benefits directly to an OPEB plan (e.g. self-funding claims and expenses), (b) pay insurance premiums to insure the payment of benefits (e.g. HMO premiums), or (c) irrevocably transfer or commit assets to a trust that is dedicated to the payment of benefits arising from the terms of the plan and is protected from potential claims by the employer’s creditors (e.g. the League’s proposed JPA).

4 New GASB Standards Implementation Schedule GASB allows a phased implementation schedule, based on a district’s total annual revenues in FY The standards would be effective in FY for districts with revenues of $100 million or more, in FY for districts with revenues between $10 million and $100 million, and in FY for districts with revenues of less than $10 million.

5 Effects of GASB Standards on California Community College Districts Accruing retiree health benefits costs has important consequences. For those districts that currently operate their retiree healthcare benefits programs on a “pay-as-you-go” basis, implementation of the proposed GASB standards will require (1) increasing annual expenditures and (2) disclosing the magnitude of the underfunding of their retiree health benefits obligations. For all districts implementation of the standards will require periodically performing an actuarial analysis and calculation of their unfunded liability and annual OPEB cost. There are compelling advantages for accumulating assets in trust for future demands, and for effectively investing those assets. Because retiree health benefits cost accruals will be mandatory, districts will not be able to suspend or reduce prefunding contributions without expensing those costs as a future liability. The higher costs could prompt proposals to restrict retiree health benefits, with resulting effects on employee relations and collective bargaining.

6 What Happens if a District Chooses not to Comply with GASB? The possible consequences of not fully funding retiree health benefits in future years are several, including: 1.Audit consequences. District auditors are required, beginning in FY for CCCD, to report on the status of funding of post- employment benefits. 2.Credit consequences. Negative audit reports can impact the ability of districts to borrow funds or issue bonds at advantageous rates. 3.Chancellor’s Office “Watch List”. It is possible in the years ahead that the Chancellor’s Office will add districts with significant accumulated financial liabilities to the “Watch List.” 4.Accreditation. Accreditation standards require districts to identify and plan for payment of liabilities and future obligations.

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Proceed with care when hiring any new employee from outside the District. Slow down the retiree pool for future by increasing vesting years for retirement. Modify the existing medical plan to control current and future cost of the plan. Collect better data to identify the true cost of active employees and retirees for the future. May offer only HMO after retirement to minimize future cost. Have employee contribute more for their coverage and have specific funding dollars for employer. Review all plans and effectiveness for the future. Continue investing the available assets in the plan more prudently. Recommendations to Mitigate Future Liabilities 15