1. 1 GASB 45 Implementation Options ACBO Fall Conference October 16, 2008 Presented by Geoffrey L. Kischuk, FSA, MAAA, FCA Total Compensation Systems, Inc.

2. 2 GASB 45 Implementation Options Must be elected at implementation Should reflect past practices Should reflect future intentions Involve your auditor!

3. 3 Past Practices Some Districts have been accruing liability Some have designated reserves (may or may not match accrued liability) Some have set up “GASB qualifying trust” –Some have funded –Trust may have been set up before implementation date

4. 4 Implementation Options Retroactive Adoption One year Amortization “Short-term differences”

5. 5 Review of Concepts Accrual Cost: –Annual OPEB Cost (AOC) –Annual OPEB Cost (AOC) = Annual Required Contribution (ARC) plus Interest Adjustment minus Amortization adjustment –Annual Required Contribution (ARC) = Normal Cost plus Amortization of Unfunded Actuarial Accrued Liability

6. 6 Review of Concepts Liability: –Net OPEB Obligation (NOO) –If negative, Net OPEB Asset (NOA) –Net OPEB Obligation (NOO) = Cumulative value of AOC’s minus Cumulative plan contributions – Plan Contributions = Benefits paid for retirees plus Deposits to “Qualifying GASB trust”

7. 7 Retroactive Adoption: What Is It? On implementation date, calculate NOO as if GASB 43/45 adopted one or more years ago May apply even if no prior accruals Any accrued liability must be adjusted to match Must have prior actuarial studies to support calc

8. 8 Retroactive Adoption: Illustrations Actuarial Accrued Liability (AAL) on Implementation Date: $30 million Normal Cost on Implementation Date: $1 million NOO on Implementation Date if adopted 10 years retroactively and no funding through GASB Qualified Trust: $15 million (aka “transition obligation”) Assume 7% interest

9. 9 Retroactive Adoption: Illustration #1 Assume no plan assets Annual Required Contribution (ARC) = $3 million Normal Cost (NC): $1 million plus Amortization of initial UAAL: $1 million plus Amortization of additional UAAL: $1 million Annual OPEB Cost (AOC) = $3.05 million ARC: $3 million plus Interest adjustment: $1.05 million (i.e. $15 million NOO times 7%) minus Amortization adj.: $1 million (i.e. $15 million NOO divided by amortization factor) In the absence of retroactive adoption, first year AOC would be equal to ARC

10. 10 Retroactive Adoption: Illustration #1 On the surface, it appears that retroactive adoption has little impact. However, with retro adoption, would be a $15 million liability on District books at implementation. Retro adoption may not be advisable if unfunded liability may cause concerns

11. 11 Retroactive Adoption: Illustration #2 Assume $15 million in trust With retroactive adoption: –NOO = $0 (i.e. $15 million plan assets offsets accumulated AOC’s) –ARC = $2 million (i.e. NC of $1 million plus Initial UAAL Amort of $1 million) –AOC = ARC = $2 million (All prior accruals “funded”, no adjustments) Without retroactive adoption –NOO = negative $15 million (i.e. Net OPEB Asset) –ARC = $3 million (i.e. NC of $1 million plus UAAL Amort of $2 million) –AOC = $1.95 million ARC of $3 million minus Interest adjustment of $1.05 million (i.e. $15 million NOA times 7%) (No amortization adjustment)

12. 12 Retroactive Adoption: Illustration #2 On the surface, it appears that retroactive adoption has little impact. However, without retro adoption, would be a $15 million asset on District books at implementation. Retro adoption may be helpful to avoid impression that plan is overfunded

13. 13 Retroactive Adoption: Illustration #3 No assets in trust, but trust set up prior to Implementation Date Receivable can be set up on Trust books with offsetting payable on District books (“Short-term Difference”) Effect can be the same as Illustration #2

14. 14 Retroactive Adoption: Illustration #4 No assets in trust, trust set up on or after Implementation Date Receivable can be set up on Trust books with offsetting payable on District books (“Short-term Difference”) Effect can be the same as Illustration #2 except in first year AOC will include adjustments

15. 15 One Year Amortization Start with NOO of $0 Accrue entire Initial AAL at end of first year AAL arising from actuarial gains/losses, plan changes, etc. amortized as they arise

16. 16 One Year Amortization: Illustrations Actuarial Accrued Liability (AAL) on Implementation Date: $30 million Normal Cost on Implementation Date: $1 million Assume 7% interest Assume annual “pay-as-you-go” cost of $1 million

17. 17 One Year Amortization: Illustration #1 Assume no plan assets Annual Required Contribution (ARC) = $31 million Normal Cost (NC): $1 million plus Amortization of UAAL: $30 million (i.e one year) First year Annual OPEB Cost (AOC) = ARC Second year ARC consists only of NC ($1 million) Second year AOC: $3.1 million ARC of $1 million plus Interest adjustment of $2.1 million (i.e. NOO of $30 million times 7%)

18. 18 One Year Amortization: Illustration #1 On the surface, it appears that one year amortization has little impact. However, with one year amortization, would be a $30 million liability on District books after the first year. One year amortization may not be advisable if unfunded liability may cause concerns

19. 19 One Year Amortization: Illustration #2 Assume $30 million available to transfer or in trust With one year amortization: –First year ARC still equals $31 million –Second and subsequent years AOC = ARC = $1 million (assuming full future funding) Without one year amortization –Second year NOO = negative $28 million (i.e. Net OPEB Asset) –Second year AOC = $0.90 million ARC of $3 million minus Interest adj. of $1.96 million (i.e. $28 million NOA times 7%) minus Amortization adjustment of $0.14 million

20. 20 One Year Amortization: Illustration #2 On the surface, it appears that one year amortization has little impact. However, without one year amortization, would be a $28 million asset on District books at the end of the first year. One year amortization may be helpful to avoid impression that plan is overfunded

21. 21 Observations Retroactive adoption and one year amortization accomplish much of the same thing One year amortization is helpful when the entire initial AAL has been (or can be) funded and/or accrued Retroactive adoption is helpful when only part of the initial AAL has been (or can be) funded and/or accrued Timing differences can be “finessed” to some extent using “short term differences” May require a restatement of prior accounting statements

22. 22 Short Term Differences Contributions that were not made when intended Contribution must be made by the later of: –The next actuarial valuation; or –One year Can be used to count contributions made in one period toward the ARC in a prior period Auditor can help with appropriate accounting entries

23. 23 Thank you! Questions??