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Frequently Asked Questions about GASB 74/75

  • What is the difference between GASB 74 and GASB 75?

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    GASB 74 addresses the financial reporting for OPEB plans that are administered through irrevocable trusts. In addition, GASB 74 establishes financial reporting standards for governments that hold assets accumulated for purposes of providing OPEB through defined benefit OPEB plans that are not administered through trusts (see paragraphs 58 and 59 of GASB 74). GASB 74 would not apply to employers who do not have assets dedicated to OPEB.

     

    GASB 75 provides the accounting rules and reporting requirements for employers.

     

  • When are the new OPEB standards effective?

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    GASB 74 (plan reporting) is effective for fiscal years beginning after June 15, 2016.

    OPEB plans with fiscal years that end on or between June 30 and December 31 will need to implement GASB 74 in the fiscal year ending in 2017. An OPEB plan whose fiscal year ends in the first half of the calendar year would need to first apply the requirements of GASB 74 in fiscal year ending in 2018.

     

    GASB 75 (employer reporting) is effective for fiscal years beginning after June 15, 2017.

    Employers with fiscal years that end on or between June 30 and December 31 will need to implement GASB 75 in the fiscal year ending in 2018. An employer whose fiscal year ends in the first half of the calendar year would need to first apply the requirements of GASB 75 in fiscal year ending in 2019.

  • Which employers in South Carolina will need to recognize a share of the State’s OPEB liability?

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    Subdivisions of the State - state agencies, school districts, and higher education institutions who participate in the State’s cost-sharing retiree medical plan (paid 5.33% payroll surcharge in FYE16)

    Under the current standard, GASB 45, employers who participate in the State’s cost-sharing retiree medical plan do not report an OPEB liability on their balance sheet. In FYE16, these employers were required to contribute 5.33% of payroll for retiree health benefits. As participants in a cost-sharing multiple-employer plan, these employers currently recognize OPEB expense equal to their contractually required contributions to the plan and no balance sheet liability is generated, provided that the contractually prescribed contributions are made by the employers. Under GASB 75, an employer in a cost-sharing multiple-employer plan will be required to recognize their proportionate share of the unfunded OPEB liability (Net OPEB Liability) on their balance sheet. This transition will be similar to the recent transition made for pension accounting. To summarize, employers who paid the 5.33% surcharge in FYE16 will be required to recognize a portion of the State’s unfunded liability under GASB 75.

     

    The discussion above also applies to employers who participate in the State’s cost-sharing Long Term Disability OPEB plan.

     

    Other Employers

    Employers who did not pay the 5.33% retiree medical surcharge in FYE16 are not in the State’s Retiree Medical OPEB plan and will not receive a portion of the State’s retiree health OPEB liability. These employers currently hire their own actuaries to determine their OPEB liabilities and reporting requirements.

  • How and when will employers receive GASB 75 information?

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    Subdivisions of the State - state agencies, school districts, and higher education institutions who participate in the State’s cost-sharing retiree medical plan (paid 5.33% payroll surcharge in FYE16)

    Each employer’s proportionate share of the Net OPEB Liability and OPEB Expense will be provided on the PEBA website similar to how the proportionate share of the Net Pension Liability and Pension Expense is currently provided for the South Carolina Retirement System (SCRS) and the Police Officers Retirement System (PORS). The initial GASB 75 exhibits for subdivisions of the State are tentatively scheduled to be released in November of 2017.

     

    Other Employers

    South Carolina employers who did not pay the 5.33% retiree medical surcharge in FYE16 are not in the State’s OPEB plan and will not receive a portion of the State’s OPEB liability. They will need to contact their current actuarial consultant to discuss their GASB 74/75 timelines and reporting requirements. Unlike SCRS/PORS accounting, these employers will not receive their GASB 75 information through a PEBA website.

  • What are the major changes that could impact employers?

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    1. Very High-level Summary:

     

    a) Under GASB 45, expense drives the balance sheet liability and the accountability is focused on whether the employer is making the Actuarially Required Contributions.

    b) Under GASB 75, the balance sheet liability drives expense and the accountability is focused on the Net OPEB Liability (entire unfunded liability).

    c) GASB 74 and 75 aim to make OPEB promises more understandable and transparent. The new standards will require a detailed reconciliation of the Total OPEB Liability (changes due to assumption changes, benefit changes and experience gains/losses are shown separately); expanded disclosures regarding assumptions; and a sensitivity analysis based on +/- 1% change to trend and +/- 1% change to discount rate.

     

    2. GASB 75 will require balance sheet recognition of a liability similar to the unfunded actuarial accrued liability. Under GASB 75, the balance sheet liability will be referred to as the Net OPEB Liability for trusted plans or the Total OPEB Liability for non-trusted plans. Currently, the balance sheet liability or Net OPEB Obligation (NOO) equals the cumulative difference between the OPEB expense and the employer’s contributions. This transition will be dramatic for some employers but not as dramatic for others who are already booking a considerable portion of their unfunded liability. Employers in cost-sharing multiple employer plans (subdivisions of the State, for example) will need to recognize a portion of the overall Net OPEB Liability based on their contributions to the plan relative to all contributions made to the plan.

     

    3. OPEB expense under GASB 75 will be similar to pension expense under GASB 68. The OPEB expense (and deferred inflows and outflows of resources) results mostly from changes to the Net OPEB Liability. The change to the liability attributable to benefit changes is fully recognized in the OPEB expense the year the change is made. Changes to the OPEB liability due to demographic experience, assumption changes, and investment experience will be amortized over periods much shorter than 30 years. Deferred outflows and inflows of resources will be established for amounts not recognized in the current year’s expense. Under GASB 45, OPEB expense is equal to the Annual Required Contribution (ARC) with some technical adjustments. Said another way, the OPEB expense under GASB 45 resembles a funding contribution. This will no longer be the case under GASB 75. GASB 75 represents a divorce from funding. The term ARC is not included in the GASB 75 terminology. Employers should expect considerable volatility in the GASB 75 OPEB expense.

     

    4. Employers will still be allowed to have biennial valuations. However, triennial valuations will no longer be allowed. Employers with biennial valuations will need a more robust report in the off-year. The off-year reports will need to provide a roll-forward and reconciliation of the Total OPEB Liability to a new measurement date. The off-year report will need to consider the change to municipal bond rates along with any other significant changes that occur in the off-year.

     

    5. GASB 75 will require the use of the Entry Age Normal (EAN) Actuarial Cost Method for determining the accrued liability or Total OPEB Liability using GASB 75 terminology. GASB 45 currently allows the use of several actuarial cost methods and many OPEB valuations currently use the Projected Unit Credit (PUC) method. The EAN method will generally produce a higher accrued liability. The increase in liability from using EAN method instead of the PUC method will vary based on plan demographics and will not be as dramatic for plans with older, long-service employees. For example, the impact would likely be very minor for a closed plan with mostly long-service employees. If your OPEB liability is currently determined using the PUC method, your actuarial consultant will be able to provide the impact of changing to the EAN method.

     

    6. The discount rate for non-trusted plans will be based on market yields for high-quality 20-year municipal bonds, which were around 3.4% in May of 2016. This dependence on market interest rates will add a new source of volatility. These rates were 3.7% in May of 2015 and 4.3% in May of 2014. Accrued liability sensitivity is typically 10-14% per 1% in discount rate if there is no post-65 benefit and 14-18% if there is a post-65 benefit. Under GASB 75’s methodology, unfunded plans using a May measurement date could have seen a 5%-9% loss in each of the two prior years due to the changes in the municipal bond market.

     

    7. The discount rate for plans with assets will be determined using a depletion date test. The test will determine a “cross-over” date when the assets are estimated to be depleted. A single equivalent discount rate will be developed by discounting the benefits prior to the cross-over date using the trust’s assumed rate of return and discounting the benefits after the cross-over date using the market rate for high-quality 20-year municipal bonds. Employers with weak funding policies (ie. funding policies based on ad hoc contributions that are less than the ARC or underfunded plans with funding policies based on rolling open periods that provide very slow funding progress) will likely need to use a blended discount rate which is based partly on market discount rates. Employers with a strong funding policy will pass the depletion date test and will use a discount rate equal to the long-term expected rate of return on the trust’s assets. We expect more guidance in February of 2017.

     

    For employers who participate in the State’s cost-sharing retiree medical plan, Question 6 below provides an estimate of the unfunded liability under two different discount rates.

  • How can I estimate the balance sheet impact of GASB 75?

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    Employers with single-employer OPEB plans will need to discuss the impact of GASB 75’s methodology changes with their OPEB actuary. The required use of the Entry Age Normal cost method and the new approach for determining the discount rate could impact the liability measurement. Estimating the impact for unfunded plans has an additional complication because of the dependence on future market rates. For plans with formal assets, the unfunded liability or Net OPEB Liability will be based on the market value of assets without any actuarial smoothing.

     

    Subdivisions of the State of South Carolina - State Agencies, School Districts, and Higher Education Institutions who participate in the State’s cost-sharing retiree medical plan

    For employers who participate in the State’s cost-sharing retiree medical plan, the balance sheet liability which will need to be recognized in FYE18 is difficult to estimate at this point. Overall, the ratio of the unfunded actuarial liability as of June 30, 2015 to FYE15 payroll was 125%. The accrued liability determined as of June 30, 2015 was based on a blended GASB 45 discount rate of 5.50%. GASB 75’s methodology may require a lower discount rate due to the State’s ad hoc OPEB trust contribution policy. The State’s actuaries,  its outside auditors, and the State’s Treasurer’s Office will need to discuss the GASB 75 discount rate after the GASB 74 Implementation Guide is released (scheduled for February of 2017). To illustrate the possible impact of using a lower discount rate, the ratio of the unfunded liability to payroll would have been 160% as of June 30, 2015 using a 4.00% discount rate. It is also important to note that the ratio of the unfunded liability to payroll is expected to increase over time for the State. The unfunded liability for the State is currently being valued using the Entry Age Normal cost method, which is the required method under GASB 75.

  • For GASB 74 (plan reporting), what are the differences between the valuation date, the measurement date and the fiscal year ending date?

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    There is no mention of a measurement date in GASB 74. For plan reporting, the Net OPEB Liability is determined as of the end of the plan’s fiscal year. The valuation date can be as of the OPEB plan’s fiscal year-end or update procedures can be used to roll forward the OPEB plan’s fiscal year-end amounts from an actuarial valuation as of a date no more than 24 months earlier than the OPEB plan’s fiscal year end. Note, the maximum lag in valuation date is 30 months for GASB 75 employer reporting and is 24 months for GASB 74 plan reporting.

     

    As a side note, employers who need to report GASB 74 liabilities for the plan will likely use the plan’s fiscal year-end date as the measurement date for their GASB 75 employer reporting in order to avoid having additional actuarial calculations performed. If necessary, a deferred outflow of resources will need to be established for contributions/benefits paid after the measurement date and the employer’s fiscal year-end.

  • For GASB 75 employer reporting, what are the differences between the valuation date, the measurement date and the fiscal year ending date?

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    The Net OPEB Liability that is recognized on the balance sheet is determined as of a measurement date which can be no earlier than the end of the employer’s prior fiscal year and no later than the end of the employer’s current fiscal year. The valuation date can be as of the measurement date, or update procedures can be used to roll forward to the measurement date amounts from an actuarial valuation as of a date no more than 30 months and 1 day earlier than the employer’s most recent fiscal year-end.

     

    For example, an employer that has a June 30 fiscal year end could use a June 30, 2016 valuation rolled forward to June 30, 2017 (measurement date) to determine their Net OPEB Liability (or Total OPEB Liability if they are not-funding) for fiscal year ending June 30, 2018. A June 30, 2018 measurement date could be used but could delay the actuarial valuation since the discount rate as of June 30, 2018 may not be known until late August and then the actuaries would need time to prepare the reports. Actuaries with cooperative purchasing agreements may require a beginning of year measurement date in order to have sufficient time to prepare the reports.

     

    If the measurement date is not as of the end of the fiscal year, a deferred outflow of resources (quasi-asset) is created for contributions and benefit payments made after the measurement date and prior to the end of the fiscal year. Employers without trusts can refer to paragraph 159 of GASB 75 for details.

     

    Subdivisions of the State (cost-sharing employers)

    Subdivisions of the State will be allocated a portion of the State’s Net OPEB Liability which will be determined as of June 30. An employer with a June 30 fiscal year end will need to implement GASB 75 in fiscal year ending June 30, 2018. Such an employer could use June 30, 2017 or June 30, 2018 as the measurement date. The June 30, 2017 allocation of liability should be available in November of 2017. If the employer chooses to use a June 30, 2017 measurement date, they would have their Net OPEB Liability and OPEB expense for fiscal year ending June 30, 2018 months before the end of the fiscal year. Under this option, a deferred outflow or resources will be established for contributions made between July 1, 2017 and June 30, 2018. If the employer chooses to use a June 30, 2018 measurement date, the information would not be available until November of 2018. No deferred outflow of resources would need to be established for contributions made after the measurement date if the measurement date coincides with the end of the fiscal year. Most employers with June 30 year ends will likely choose to have the measurement date equal to June 30, 2017 for the first year of implementation because the disclosure information would be ready by June 30, 2018 and the deferred outflow of resources for contributions made during the fiscal year is easily determined.

     

    A subdivision of the State of South Carolina with a December 31 fiscal year end would need to use a June 30, 2018 measurement date for their fiscal year ending December 31, 2018 CAFR.  A June 30, 2017 measurement date would not be permitted because June 30, 2017 is before the end of the prior fiscal year. For such an employer, the disclosure exhibits would be on the PEBA website in November of 2018 and a deferred outflow of resources would be established for contributions made between June 30, 2018 and December 31, 2018.

  • Does GASB 75 require employers to pre-fund OPEB trusts?

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    No. However, more employers may consider pre-funding an irrevocable trust as a means to offset the GASB 75 balance sheet liability. Employers may also choose to set aside assets in an internal fund. Assets in an internal fund would not be recognized as an offset to the GASB 75 liability but would be recognized in the Employer’s Statement of Net Position.

  • How significant will the change in discount rate be if an employer chooses to fund?

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    The answer depends on several factors. One factor is the expected rate of investment return of the trust. It is important to consider, especially in South Carolina, the investment restrictions for an OPEB trust. Keep in mind that the discount rate for unfunded plans will be based on yields for high-quality 20-year municipal bonds. These yields ranged from 4.3% in May of 2014 to 3.4% in May of 2016. The expected long-term investment return for the trust may not be much higher than the unfunded discount rate.

     

    Another factor is the strength of the employer’s funding policy. As noted in the answer to question 5 (item 6), employers who establish a trust but who are not committed to meaningful funding progress will likely need to use a blended discount rate.

     

    Employers who are considering funding or employers who are funding and have weak funding policies (ie. funding policies based on ad hoc contributions that are less than the ARC or underfunded plans with funding policies based on rolling open periods that provide very slow funding progress) will need to discuss the likely GASB 75 discount rate with their actuaries and outside auditors.

  • When will the implementation guides for GASB 74/75 become available?

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    Based on GASB’s website in July of 2016, the Implementation Guide for GASB 74 is scheduled to be issued in February of 2017 and the Implementation Guide for GASB 75 is scheduled to be issued in November of 2017. Employers may be hesitant to implement GASB 74 or 75 before the Implementation Guides are issued.

  • How will GASB 74 and 75 impact actuarial valuation fees?

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    For subdivisions of the State of South Carolina, the actuarial valuation fees are incorporated into the employer surcharge. The additional fee for GASB 74/75 reporting will be shared by all participating employers equally and will be roughly $120 per employer per year.

     

    Employers who currently have their own actuarial firms prepare their valuations will need to discuss the additional GASB 74/75 fees with their actuaries.

  • Does an employer who has a trusted plan need to implement GASB 74 a year before GASB 75 if the plan does not issue its own financial report?

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    Some employers with irrevocable OPEB trusts include the GASB 43 plan schedules in their CAFR in lieu of issuing a separate financial report for the OPEB plan. For such cases, it appears GASB will want the plan reporting schedules (GASB 74) prepared based on the effective date of GASB 74 even if the schedules are only shown in the employer’s financial report. The following is paragraph 5 of GASB 74,

     

    “The requirements of paragraphs 19-57 and 60 of this Statement apply to state and local governmental OPEB plans (that is, entities that have all the characteristics of an OPEB plan, as defined in paragraph 63) that are administered through trusts that meet the criteria in paragraph 3. Those requirements apply whether (a) the OPEB plan’s financial statements are included in a stand-alone OPEB plan financial report or (b) the OPEB plan is included in the financial report of another government.”

     

    This may effectively require the employer to implement GASB 74 a year earlier than planned. Employers who include the OPEB plan’s accounting schedules in their financial reports in lieu of having a separate plan audit will need to discuss this issue with their outside auditors and actuaries.

  • Any tips for navigating GASB 75?

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    GASB 75 is a very long document and often sounds repetitious. The reason is that the standard provides guidance for many situations. Factors that influence the guidelines:

    1. Does the employer have a trusted plan?
    2. Is the plan a single-employer plan or does the employer participate in an agent or a cost-sharing multiple employer plan?
    3. Is there a special funding situation where a non-employer entity is legally responsible for providing financial support for OPEB of the employees of another entity?

     

    To avoid confusion when navigating GASB 75, it is important to find the section that applies to your case. When looking for the correct section, it will help to first answer the three questions above.

 

 

 

 

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