City Finance Officers, CPA s and Other Interested Parties. The California Committee on Municipal Accounting

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1 TO: FROM: City Finance Officers, CPA s and Other Interested Parties The Califrnia Cmmittee n Municipal Accunting DATE: January 2008 SUBJECT: CCMA White Paper: ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS The Gvernmental Accunting Standards Bards (GASB) issued Statement 45 (June 2004) (OPEB) t establish measurement, recgnitin, and display standards fr pstemplyment benefits ther than pensins (OPEB) expenditures/expense and related liabilities, assets, nte disclsures, and, if applicable, required supplementary infrmatin in the financial reprts f State and lcal gvernmental emplyers. Reprting requirements fr OPEB trust funds f emplyers are included in related GASB Statement 43 (Financial Reprting fr Pstemplyment Benefit Plans Other than Pensin Plans). The Califrnia Cmmittee n Municipal Accunting is cmprised f representatives f the Califrnia Sciety f Certified Public Accuntants and the League f Califrnia Cities. The primary purpse f CCMA is t serve the public interest by prviding the highest degree f sund financial administratin and ensuring the fullest cperatin between City fficials and members f the Independent Accunting Prfessin. This dcument, prepared by CCMA, is intended t assist Califrnia cities and certain ther lcal gvernments and their auditrs in the accunting and reprting f OPEB, primarily t clarify issues nt addressed in ther publicatins.

2 ACCOUNTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS January 2008 PUBLISHED BY THE: CALIFORNIA COMMITTEE ON MUNICIPAL ACCOUNTING (a jint cmmittee cmprised f representatives f the League f Califrnia Cities and the Califrnia Sciety f Certified Public Accuntants)

3 ACCOUNTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS INDEX Backgrund..1 GASB Ns. 43 and 45 Only Apply t Emplyer Funded Benefits. 1 Cntrls t Ensure Use f OPEB Disbursements... 1 Statement 45 Emplyer Reprting. 2 Defined Benefit Plans..2 Parameters... 3 Initial NOO Calculatin.. 4 Financial Statement Recgnitin...4 Required Ntes t the Financial Statements...5 Required Supplementary Infrmatin. 5 Defined Cntributin Plans. 6 Cnsideratins in Distinguishing Defined Cntributin Plans Frm Defined Benefit Plans.. 6 Statement 43 Trust Fund Reprting... 7 Applicability f GASB Statement N. 43 Accunting Fr Trust Fund Assets... 7 When t Reprt a Fiduciary Fund in the Financial Statements f the Emplyer 8 Recmmendatins f CCMA.11 Entities Engaged Only in Business-type Activities 13 Other Psitins...14 Required Ntes t Financial Statements and Required Supplementary Infrmatin..14 Other Infrmatin Example f Fund Level Allcatins..14 Sample OPEB Nte t Financial Statements...15 Sample Required Supplementary Infrmatin. 18 Guidance n OPEB Sample Actuarial Cnfirmatin Letter fr Pstemplyment Benefits Other than Pensins GASB Statement N. 43 and CalPERS Califrnia Emplyers Retiree Benefit Trust Fund 23

4 ACCOUNTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS BACKGROUND The Gvernmental Accunting Standards Bard (GASB) issued Statement 45 (June 2004) t establish measurement, recgnitin, and display standards fr pstemplyment benefits ther than pensins (OPEB) expenditures/expense and related liabilities, assets, nte disclsures, and, if applicable, required supplementary infrmatin in the financial reprts f State and lcal gvernmental emplyers. Reprting requirements fr OPEB trust funds f emplyers are included in related Statement 43 (Financial Reprting fr Pstemplyment Benefits Plans Other than Pensin Plans). Statement 45 is effective in three phases based n a gvernment s ttal annual revenues in the first fiscal year ending after June 15, 1999: Phase 1 gvernments with ttal annual revenues f $100 millin r mre perids beginning after December 15, 2006 Phase 2 gvernments with ttal annual revenues f $10 millin r mre, but less than $100 millin perids beginning after December 15, 2007 Phase 3 gvernments with ttal annual revenues f less than $10 millin perids beginning after December 15, 2008 Statement 43 fr OPEB plans is effective ne year prir t the implementatin date fr the emplyer (in a single-emplyer plan) r fr the largest participating emplyer in the plan (fr multiple-emplyer plans). Statement 45 prvides accunting and financial reprting requirements fr the financial statements f all gvernmental emplyers prviding OPEB. Statement 43 prvides accunting and financial reprting requirements fr OPEB trust funds included in the financial reprts f plan spnsrs r emplyers, as well as fr the stand-alne financial reprts f OPEB plans, r third parties, that administer them. GASB Ns. 45 and 43 Only Apply t Emplyer Funded Benefits Sme lcal gvernments have arrangements where retiree pstemplyment benefits are funded by emplyee payrll deductins rather than emplyer funds. Such arrangements are nt subject t the prvisins f GASB Ns. 43 and 45. The prvisins f GASB Ns. 43 and 45 nly apply t the emplyer prtin f funding fr pstemplyment benefits. Any emplyee cntributins are excluded frm the determinatin f the ARC r UAAL. 1

5 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Cntrls t Ensure Use f OPEB Disbursements Based n Questin (belw) f the GASB Cmprehensive Implementatin Guide, if a lcal gvernment des nt have cntrls t ensure that the retiree healthcare benefit payments are being used slely fr retiree healthcare csts (by paying health insurance premiums r ther healthcare csts directly, by reimbursing retirees fr dcumented healthcare csts, etc.), then the retiree healthcare benefit is actually a supplemental pensin benefit cvered by GASB N. 27, rather than an OPEB benefit cvered by GASB N. 45: Questin Q A city s defined benefit pensin plan fr firefighters prvides a health insurance subsidy in the frm f an additinal mnthly cash payment t each pensin recipient. Shuld the city and the plan administratr accunt fr the health insurance subsidy (a) as OPEB, because it is described as assisting pensin recipients pay fr health insurance, r (b) as an additinal pensin benefit, because it is in effect additinal fungible retirement incme that recipients culd use either fr healthcare r fr ther purpses? (Q&A 43/45-13). A The use f the health insurance subsidy prvided as an additinal mnthly cash payment t retirees and beneficiaries is effectively nt restricted t payment f health insurance and, therefre, the subsidy shuld be cnsidered retirement incme. It shuld be accunted fr as part f the pensin benefits prvided by the defined benefit pensin plan. (Als see questins ). STATEMENT 45 EMPLOYER REPORTING Statement 45 supersedes r amends all previus authritative guidance. Defined Benefit Plans Fr emplyers with single-emplyer r agent multiple-emplyer plans annual OPEB cst (AOC) equals the annual required cntributin (ARC) plus r minus an adjustment fr the cumulative difference between the emplyer s actual plan cntributins and the ARC. The cumulative difference is called the Net OPEB Obligatin (NOO). 1 The AOC equals the ARC: Plus ne year s interest n the NOO, Minus an amrtizatin f past cntributin deficiencies (r plus an amrtizatin f past excess cntributins) already included in the ARC the amrtizatin equals the beginning f year NOO divided by a present value factr (prvided by the actuary). 1 NOO als refers t Net OPEB Assets. 2

6 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) The GASB requires that, prspectively, the plan s actuary shuld prvide plan spnsrs a single ARC and that cntributins different frm the ARC generate a NOO. The fllwing example illustrates the NOO calculatin: FYE NOO Amrtizatin Interest Ending ARC AOC Cntributins Change** EOY BOY Factr* Rate* 6/30/XO $ 10,000 $ 10,000 $ 8,000 $ - $ 2,000 $ % 6/30/X1 10,200 10, ,200 (100) 1,900 2, % 6/30/X2 10,194 10, ,200 (99) 1,795 1, % *The amrtizatin factr and interest rate shuld be prvided by the plan s actuary each year. ** Change after year XO = AOC Cntributins Parameters (als included in Statement 43) The ARC must be calculated with certain parameters. The mst ntable parameters are: Valuatins: Frequency (as fllws unless significant changes in benefits, ppulatin r ther factrs then a new valuatin shuld be perfrmed): Must be prepared at least every tw years (ttal plan membership 200 r mre) Must be prepared at least every three years (ttal plan membership fewer than 200) The valuatins shuld be actuarial valuatins; hwever, an alternative measurement methd is permitted if an emplyer plan has less than 100 ttal plan members. The alternative methd includes the same step as the required actuarial valuatins; hwever, certain assumptins are permitted t be simplified. The requirements and methdlgy f an alternative measurement methd are described fully in Statements 43 and 45. Current year s ARC calculated using data within 24 mnths f the beginning f the fiscal year f the valuatin. 2 3 AOC XXX1 = ARC+ Beginning f Year * Interest Rate) Beginning f Year / Amrtizatin Factr) = 10,200 + (2,000 *.05) (2,000 / 10) = 10, AOC XXX2 = ARC+ Beginning f Year * Interest Rate) Beginning f Year / Amrtizatin Factr) = 10,194 + (1,900 /.05) (1,900 / 9.8) = 10,

7 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Actuarial methds and significant assumptins, including ecnmic assumptins, used in financial reprting shuld be the same as thse used in determining the plans funding requirements. The ARC calculatin shuld include all benefits prvided in the substantive plan in frce at the valuatin date when the emplyer prvides benefits t bth active emplyees and retirees thrugh the same plan. The benefits t retirees shuld be segregated fr actuarial measurement (including cnsideratin f any implicit rate subsidy). The ARC is the sum f nrmal cst 4 and amrtizatin f unfunded actuarial accrued liability, prvided: Maximum amrtizatin perid 30 years Cntributin deficiencies r excess cntributins amrtized beginning with the next valuatin. Actuarial assumptins shuld be: Selected using actuarial Standard f Practice essentially this standard requires assumptins be explicit (each assumptin stands by itself) Based n a cvered grup s actual experience Cnsistent with each ther One f six actuarial cst methds shuld be used: (1) entry age 5, (2) frzen entry age, (3) attained age, (4) frzen attained age, (5) prjected unit credit, r (6) aggregate. Initial NOO Calculatin When Statement 45 is first adpted the initial NOO shuld be set at zer as f the beginning f the transactin year thus, NOO measurement and recgnitin requirements shuld be applied n a prspective basis. Financial Statement Recgnitin OPEB expense / expenditures, liabilities and assets shuld be presented in accrdance with generally accepted accunting principles fr the type f fund utilized fr reprting. (Gvernmental funds mdified accrual basis; prprietary and fiduciary funds and gvernment-wide financial statements accrual basis. Allcatin based n membership shuld be a cnsideratin - the actuary may be able t assist.) 4 5 Nrmal cst actuarial value f benefits being earned during the year. If trust fund is administered by CalPERS, Entry Age must be used. 4

8 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Required Ntes t the Financial Statements The fllwing items are required financial statement nte disclsure: Basic plan infrmatin: Plan type Benefits prvided Authrity under which benefits were established Whether the OPEB plan issues a separate financial reprt Plan funding / cntributin plicy infrmatin: Required cntributin rates fr active members and emplyers shwn in dllars r as a percent f payrll Plan Funded Status infrmatin: AOC and the dllar cntributins actually made If the emplyer has a NOO, als Cmpnents f the AOC NOO increase r decrease during the year End f year NOO 3-year histry f AOC Percent f AOC cntributed during the year End f year NOO Mst recent year s plan Funded Status Actuarial methds and assumptins used t determine the ARC, AOC, and Funded Status The actuarial cst methd The methd(s) used t determine the actuarial value f assets The assumptins with respect t the inflatin rate, investment return, and, fr pstemplyment healthcare plans, the healthcare cst trend rate. The amrtizatin methd fr the mst recent actuarial valuatin and whether the perid is clsed r pen Required Supplementary Infrmatin (mst recent valuatin and 2 preceding valuatins) The fllwing items are financial statement required supplementary infrmatin: Valuatin dates Actuarial asset values Actuarial liability Unfunded actuarial liability (excess Plan Assets) Plan unfunded rati Annual cvered payrll Rati f unfunded actuarial liability (excess Plan Assets) t annual cvered payrll Factrs that significantly affect cmparing the abve infrmatin acrss the years 5

9 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Defined Cntributin Plans Emplyers with defined cntributin plans shuld recgnize annual OPEB expense / expenditures equal t their required cntributins, in accrdance with the terms f the plan. An OPEB liability r asset results frm the difference between cntributins required and cntributins made t a plan. The Ntes t the financial statements shuld include the fllwing infrmatin: Plan name, plan administratr, and identificatin f the plan as a defined cntributin plan Brief descriptin f plan prvisins and authrity under which they were established and/r may be amended Cntributin requirements Cntributins actually made by plan members and the emplyer Cnsideratins in Distinguishing Defined Cntributin Plans Frm Defined Benefit Plans If certain strict criteria is met, a lcal gvernment s OPEB benefit can be viewed t be in the frm f a defined cntributin plan. In these very limited situatins, an actuarial valuatin is nt required. Generally, if the lcal gvernment is tracking n an emplyee-by-emplyee basis what has been cntributed and if the lcal gvernment has limited benefit payments t what has been cntributed fr that specific emplyee (plus any investment earnings, etc.), then the prgram wuld be cnsidered t be a defined cntributin pstemplyment benefit plan and wuld nt be subject t the actuarial disclsures required fr ther frms f retiree healthcare prgrams. Retiree healthcare arrangements that d nt meet these strict requirements, are by default classified as defined benefit pstemplyment benefit plans subject t all f the requirements f GASB N. 45. Sme lcal gvernments have what might appear t be a defined cntributin pstemplyment plan, but is nt, in fact, such a plan. Cnsider the situatin where the ttal amunt paid ut in benefits is limited t the ttal amunt cntributed by the lcal gvernment (plus investment earnings) as a whle. In this situatin, the cntributins are cntributed fr a pl f emplyees and then allcated in sme fashin t the emplyees cvered by the pl. There is nt a separate tracking in this case fr specific cntributins fr specific emplyees. Since the lcal gvernment has nt limited retiree benefits t specific cntributed amunts tracked by emplyee, this frm f emplyee wuld be classified fr purpses f GASB N. 45 as a defined benefit pstemplyment plan and wuld (if material) be subject t all f the actuarial and ther reprting requirements f GASB N

10 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) This is emphasized in the answer t Questin f the GASB Cmprehensive Implementatin Guide which states in part: Paragraph 30 f Statement 45 prvides that if a benefit arrangement des nt have the characteristics f a defined cntributin plan, an emplyer shuld apply the requirements f that Statement fr defined benefit plans. A defined cntributin plan is discussed in paragraph 5 f Statement 45 as an arrangement that prvides an individual accunt fr each plan member and specifies hw cntributins t an active plan member s accunt are t be determined. Further, in a defined cntributin plan, the benefits received by a member depend nly n the amunts cntributed t the member s accunt, earnings n investments f thse cntributins, and frfeitures f cntributins made fr ther members that may be allcated t the member s accunt. In the circumstance described in this questin, the plan terms d nt meet the characteristics f a defined cntributin plan because individual accunts are nt maintained, the plan terms d nt specify hw cntributins t individual active emplyees accunts are t be determined, and benefits d nt depend nly n the amunts cntributed r credited t individual accunts. Therefre, the arrangement shuld be accunted fr as a defined benefit plan. STATEMENT 43 TRUST FUND REPORTING Applicability f GASB Statement N. 43 Accunting Fr Trust Fund Assets GASB Statement N. 43 prvides accunting and financial reprting guidance fr OPEBrelated trust funds that meet certain criteria and whse assets are cnsidered t be held by (managed by) the reprting gvernment. GASB N. 43 relates t the accunting requirements fr the trust fund itself, rather than the accunting requirements f the reprting lcal gvernment. [GASB N. 45 prvides the accunting requirements fr the financial statements f the reprting lcal gvernment.] The GASB Mdel fr OPEB reprting mirrrs the GASB mdel fr pensin reprting. This means that the emplyer s gvernment-wide financial statements reprt n liability fr either pensins r OPEB as lng as the emplyer pays int an irrevcable trust the actuarially-determined Annual Required Cntributin (ARC). In rder fr a trust t qualify fr this accunting treatment (i.e., cntributins t the trust are deemed t be a reductin f the emplyer s Net OPEB Obligatin), all three f the fllwing criteria must be met: 1. Emplyer cntributins t the plan are irrevcable 2. Plan assets are dedicated t prviding benefits t plan retirees and their beneficiaries in accrdance with the terms f the plan 3. Plan assets are legally prtected frm creditrs f the emplyer(s) r the plan administratr Fr purpses f this white paper, we will use the term OPEB Trust t refer t OPEBrelated trust funds that meet all three f the afrementined requirements. 7

11 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Other funds can be used t hld assets set aside by an emplyer fr the payment f its OPEB bligatins. Examples f these funds might be trust funds that d nt meet the abve criteria, special revenue funds, internal service funds, designatins f the General Fund, etc. Accumulatins in these funds must be included in the assets f the primary gvernment (rather than excluded as fiduciary funds) and these accumulatins wuld nt reduce the emplyer s Net OPEB Obligatin reprted in the statement f net assets. It shuld be nted that lcal gvernments nly reprt in the fiduciary funds f their financial statements thse assets f ther parties that are held by that reprting lcal gvernment. If the assets f the OPEB Trust are held by a party ther than the reprting lcal gvernment, then that OPEB trust wuld be excluded frm the fiduciary funds reprted in the basic financial statements issued by the emplyer (the reprting lcal gvernment). When t Reprt a Fiduciary Fund in the Financial Statements f the Emplyer GASB Cd. Sec prvides the fllwing guidance n when t reprt fiduciary activity in the financial statements f a reprting lcal gvernment: Fiduciary funds shuld be used t reprt assets held in a trustee r agency capacity fr thers and therefre cannt be used t supprt the gvernment's wn prgrams. The fiduciary fund categry includes pensin (and ther emplyee benefit) trust funds, investment trust funds, private-purpse trust funds, and agency funds. The three types f trust funds shuld be used t reprt resurces held and administered by the reprting gvernment when it is acting in a fiduciary capacity fr individuals, private rganizatins, r ther gvernments. These funds are distinguished frm agency funds generally by the existence f a trust agreement that affects the degree f management invlvement and the length f time that the resurces are held. Paragraph 19 f GASB Statement N. 14 prvides the fllwing guidance n when t reprt fiduciary activity in the financial statements f a reprting lcal gvernment. The financial data f the primary gvernment (and its blended cmpnent units as discussed in paragraphs 52-54) shuld be reprted in accrdance with the prvisins f Cdificatin Sectin 2200, "Cmprehensive Annual Financial Reprt." This Statement des nt mdify fund reprting requirements referred t in that sectin. Regardless f entity cnsideratins, a primary gvernment shuld reprt its fiduciary funds accrding t Cd. Sec [ ]. Fr example, there may be rganizatins that d nt meet the definitin fr inclusin in the financial reprting entity. They shuld, nevertheless, be reprted as a fiduciary fund f the primary gvernment if the primary gvernment has a fiduciary respnsibility fr them. 8

12 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Paragraph 18 f GASB Statement N. 32 prvides additinal valuable insight n the criteria t be used in determining whether r nt there is sufficient fiduciary respnsibility fr including the trust activity in the financial statements f the reprting lcal gvernment. Althugh this guidance was prvided in the cntext f IRC Sectin 457 plan reprting, the general principles articulated here may be helpful in determining the applicability f emplyer trust fund reprting in ther cntexts as well. Research cnducted by the Bard indicates that, currently, mst spnsrs f Sectin 457 plans have little administrative invlvement and d nt perfrm the investing functin fr thse plans. The Bard acknwledges that gvernments will need t exercise judgment in determining whether they have fiduciary accuntability fr Sectin 457 plans and whether they hld the assets in a trustee capacity. Questin f the GASB Cmprehensive Implementatin Guide prvides the fllwing guidance regarding hw t determine whether r nt a gvernment has fiduciary respnsibility ver an OPEB trust: As the term generally is used in Statement 43, an OPEB plan is a trust r ther fund thrugh which assets are accumulated and benefits are paid. Fr an OPEB plan that is administered as a qualifying trust, r equivalent arrangement, additins t the trust, and t plan net assets, generally will include cntributins frm the emplyer(s), plan members, and ther entities. Als, trust, r plan, assets accumulated in excess f pay-asyu-g requirements generally will be invested, and incme frm the investment f plan assets will be added t the trust. Deductins frm the trust, and frm plan net assets, generally will include benefits paid, r currently due and payable, t r n behalf f plan members r their beneficiaries and plan administrative expenses. Statements 43 and 45 d nt specify hw an OPEB plan shuld be structured administratively. That is, thse Statements d nt prescribe the precise wrkings f the trust, r equivalent arrangement, r the respnsibilities f the trustee(s) in relatin t the respnsibilities f the emplyer, emplyer fficials, r ther entities r persns that may be invlved in administering the preceding financial activities assciated with the functins f financing and paying benefits. A variety f plan structures may arise in practice t fit specific circumstances. Ntwithstanding the pssibility f individual variatins in plan structure, fr an OPEB plan t be cnsidered a qualifying trust, r equivalent arrangement, it is essential that the plan structure and the manner in which assets are held, invested, and disbursed be cmpatible with (a) hlding and managing plan assets, nt as assets f the emplyer, but in trust fr the exclusive benefit f plan members and their beneficiaries and (b) the specific criteria f irrevcability f cntributins, dedicatin f the plan assets (including incme frm the investment f plan assets) t paying benefits in accrdance with the substantive plan, and legal prtectin f the plan assets frm creditrs stated in paragraph 4 f Statement 43. Mrever, fr this purpse it is essential that any and all entities r persns invlved in the functins f the OPEB plan carry ut their respective fiduciary rles and respnsibilities accrdingly. 9

13 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) In sme cases, all plan functins may be carried ut by the persnnel f a single administrative entity, subject t the versight f plan trustees similar t the manner in which many state and lcal gvernmental pensin plans are administered. In ther cases, mre than ne entity r persn may be significantly invlved in carrying ut plan functins. Fr example, the trustees f a particular OPEB plan trust may be principally respnsible fr hlding and investing plan assets, but their respnsibility with regard t paying benefits may be limited t disbursing assets at a time, t parties, and in amunts designated by anther entity fr example, the health benefits department f the emplyer upn receipt f a prperly presented request. In the latter circumstance, the fllwing characteristics shuld be evident fr purpses f applying Statements 43 and 45: The manner in which payments are disbursed is nt incnsistent with the purpse f the trust r with the criteria f irrevcability f cntributins, dedicated purpse, and prtectin f trust assets frm creditrs, and All entities r persns invlved in the disbursement and applicatin f plan assets act in a manner cnsistent with their fiduciary respnsibility with regard t their respective invlvements. A payment arrangement r an actin by an entity r persn invlved in accumulating assets r paying benefits that is incnsistent with the purpses f an OPEB plan trust r with the criteria stated in paragraph 4 f Statement 43 (fr example, any applicatin f plan assets t a purpse ther than paying benefits t retirees r their beneficiaries r paying necessary plan administrative expenses) wuld be evidence that the plan is nt being administered as a qualifying trust, r equivalent arrangement. In that event, assets accumulated in excess f pay-as-yu-g requirements shuld nt be reprted as plan assets, and the emplyer(s) shuld nt reprt payments t the fund as OPEB cntributins. In additin, in view f the different ptential plan structures, an emplyer shuld cnsider the guidance in paragraph 19 f Statement 14 in regard t ptential inclusin f the OPEB plan(s) in which the emplyer participates as a fiduciary fund(s) in its annual financial reprt. GFOA s GAAFR prvides additinal guidance t determine when a lcal gvernment shuld include a trust fund as a part f its financial statements. Page 114 f the 2005 editin f GAAFR states: Nt all fiduciary arrangements are prperly reprted as fiduciary funds. Rather, GAAP explicitly state that trust and agency funds are t be used slely t accunt fr resurces that are held by the gvernment. Fr example, a lcal gvernmental emplyer participating in a statewide, multiple-emplyer pensin plan wuld nt reprt a pensin trust fund t accunt fr its share f assets accumulated by the statewide plan, even thugh that emplyer has fiduciary respnsibilities t its emplyees in cnnectin with its participatin in the statewide pensin plan. Instead, the state agency, which actually hlds the assets, wuld reprt a pensin trust fund. 10

14 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Tw criteria may be used t determine whether a gvernment is, in fact, hlding assets in cnnectin with its fiduciary respnsibilities t individuals, private rganizatins, r ther gvernments. A gvernment is cnsidered t be hlding any assets: (1) fr which it perfrms the investment functin, r (2) with which the gvernment has significant administrative invlvement (fr example, invlvement that ges beynd the remittance f predetermined amunts t a third party). The 2005 editin f GAAFR (page 114) ges n t give an example f hw these tw criteria culd be interpreted by discussing hw these tw criteria might be applied t Sectin 457 plans: In many cases, the gvernments that spnsr such plans remit the amunts withheld frm emplyees directly t a third-party administratr (such as an investment firm r insurance cmpany). In mst situatins invlving third-party administratrs, the spnsring gvernment s practical invlvement in administrating the plan is essentially limited t remitting the amunts cllected frm emplyees t the plan administratr. In that case the use f a fiduciary fund t accunt fr the assets f the deferred cmpensatin plan wuld nt be apprpriate, because the gvernment is nt prperly cnsidered t be hlding the assets. There are instances, hwever, where state and lcal gvernments d, in fact, hld the assets f IRC Sectin 457 plans. Fr example, the state treasurer may directly invest the assets f the state s wn IRC Sectin 457 plan n behalf f emplyees; r a gvernment may hire investment managers t perfrm the investment functin while the gvernment maintains significant versight f the manager s activities [emphasis added]. In that case, the spnsring gvernment is cnsidered t be hlding the plan s assets and wuld need t reprt its stewardship f thse assets in a pensin (and ther emplyee benefit) trust fund. Recmmendatins f CCMA Prfessinal judgment is required in determining when a lcal gvernment has enugh significant administrative invlvement t result in the inclusin f an OPEB Trust in the fiduciary funds reprted by a lcal gvernment in its basic financial statements. CCMA has ffered the fllwing scenaris t help illustrate hw such prfessinal judgment might be applied under varius circumstances: Scenari One The reprting lcal gvernment manages the assets f the OPEB trust and determines the amunt f trust disbursements In this scenari, the reprting lcal gvernment hlds, manages, and invests trust assets n behalf f the emplyees. This might ccur, fr example, if the trust assets are managed by the same individuals that manage the investment prtfli f the reprting lcal gvernment. In this scenari, the lcal gvernment als determines the amunt f disbursements t be made frm the OPEB Trust fr the payment f health insurance and ther health related benefits. In this scenari, the lcal gvernment retains significant administrative 11

15 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) respnsibility regarding the trust assets. CCMA recmmends that in this situatin the OPEB Trust be included in the fiduciary funds reprted in the lcal gvernment s basic financial statements. Scenari Tw Anther agency hlds the assets f the OPEB trust Sme lcal gvernment s may chse t cntribute the assets f their OPEB Trust t an investment pl managed by CalPERS fr OPEB Trusts. Under this arrangement, fiduciary respnsibilities fr the OPEB Trust will be shared between tw units f gvernment. CalPERS will be perfrming the investment management functin fr the OPEB Trust assets f participating agencies. The participating agency will be determining the amunt f eligible trust disbursements t be reimbursed by CalPERS. CalPERS has agreed t accept respnsibility fr presenting in its financial statements the aggregate disclsures that are required t be made by public emplyee retirement systems that administer ne r mre agent multiple-emplyer plans pursuant t paragraph 13 f GASB N. 43. CCMA believes that acceptance f respnsibility by CalPERS t make the required GASB N. 43 disclsures is a strng cnsideratin in identifying which unit f gvernment shuld be identified as the hlder fr financial reprting purpses. CalPERS acceptance f this respnsibility, alng with its investment management respnsibilities, mitigate the lcal gvernment s less significant administrative invlvement in determining the amunt f eligible trust fund disbursements. CCMA recmmends that OPEB Trust assets held by CalPERS be excluded frm the fiduciary funds reprted in the lcal gvernment s basic financial statements. Scenari Three A cmmercial third party administratr manages the assets f the OPEB trust, but the lcal gvernment determines the amunt f trust disbursements. Cnsider the fllwing scenari: 1. The lcal gvernment selects a cmmercial third party administratr t hld the assets n behalf f the eligible emplyees. 2. The lcal gvernment selects ne f the investment prgrams ffered by the administratr. 3. The third party administratr reimburses the lcal gvernment fr qualifying plan disbursements (fr example, fr the payment f medical insurance premiums fr retirees) upn presentatin by the lcal gvernment f dcumentatin supprting the amunt t be disbursed. Prfessinal judgment wuld need t be applied as t whether r nt the duties perfrmed abve wuld cnstitute sufficient administrative invlvement fr the lcal gvernment t be cnsidered t be hlding the assets n behalf f the eligible emplyees (with a resultant reprting f a fiduciary fund in the basic financial statements f the lcal gvernment). 12

16 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) In view f the lcal gvernment s invlvement in determining the amunts f trust disbursements and in the absence f ther significant fiduciary respnsibilities assumed by the cntracted third party administratr (such as accepting respnsibility fr GASB 43 reprting requirements) beynd its management f trust assets, the lcal gvernment may cnclude that it has enugh administrative invlvement with the OPEB Trust in this situatin t include the assets f the OPEB Trust in a fiduciary fund in the basic financial statements f that lcal gvernment (even thugh a cntracted third party is managing the accunts hlding the assets f the OPEB Trust). Scenari Fur A cmmercial third party administratr bth manages the assets f the OPEB trust and determines the amunt f trust disbursements Assume the same facts as Scenari Three, but the third party administratr, rather than the lcal gvernment, is respnsible fr determining the amunt f qualifying disbursements frm the trust. In that situatin, the lcal gvernment may nt have enugh administrative invlvement t be cnsidered t be hlding the plan assets. If the cntracted third party administratr has assumed these significant disbursement respnsibilities, then the lcal gvernment may have s little administrative invlvement with respect t plan assets that it may be prper t cnclude that the lcal gvernment is nt hlding the assets. In that situatin, the OPEB Trust wuld be excluded frm the fiduciary funds reprted in the lcal gvernment s basic financial statements. In evaluating circumstances f each situatin, the preparer shuld evaluate the substance f the relatinships and duties f the parties (i.e., which party is, in fact, the hlder f the trust assets), rather than the legal designatin f the trustee in the trust dcuments. Entities Engaged Only in Business-type Activities Paragraph 138 f GASB Statement N. 34 states: Gvernments engaged nly in business-type activities shuld present nly the financial statements required fr enterprise funds. Sme preparers have interpreted this language t mean that enterprise fund nly entities have the ptin f excluding certain fiduciary funds (pensin fund, OPEB fund, etc.) frm their basic financial statements and instead reprt thse fiduciary funds nly in separate financial statements issued fr thse trusts (even if the reprting entity qualifies as hlding the trust assets). CCMA acknwledges this presentatin as an ptin fr enterprise fund nly entities. This ptinal reprting is nt available fr ther types f gvernment entities (thse with mre fund types than just enterprise funds). Entities whse activities are nt limited slely t business-type activities are required t include their fiduciary funds in their basic financial statements if they are, in fact, hlding the assets f the funds, as described abve. 13

17 ACCOUNTING FOR OPEB BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (Cntinued) Other Psitins The authritative literature allws a certain amunt f preparer s judgment in applying the basic principles cited abve. The recmmendatins prvided in the fur scenaris abve represent the recmmendatins f CCMA. Other preparers might apply these principles in a manner different than has been recmmended abve leading t legitimate cnclusins and frms f presentatin different than has been recmmended in this white paper. Fr thse brderline situatins where it is nt abslutely clear whether r nt the OPEB trust shuld be included in the fiduciary funds f the reprting gvernment, inclusin is generally advisable. Hwever, this is a prfessinal judgment fr which different gvernments might reach different cnclusins. Required Ntes t Financial Statements and Required Supplementary Infrmatin The required disclsures required by Statement 43 are similar t thse prescribed by Statement 45 fr defined benefit plans. Additinal disclsure requirements f Statement 43 include: Classes f emplyees cvered Accunting plicies fr reprting cntributins, benefits paid and refunds paid GASB 45 Example f Fund Level Allcatins Sample City [Scenari: (1) Benefit levels - Safety and miscellaneus (2) Gv't Enterprise (ENT) Emplyees (3) Partial Prefunding ] Gv't Funds ENT Funds Safety Misc. Prgrams Prgrams Water Ttal ARC (annual expense) $ 500 $ 200 $ 300 $ 1,000 Pay as yu g (amunt cash flw) Start phase-in f pre-funding (additinal cash flw depsit t irrevcable trust) Net OPEB liability $ 200 $ 80 $ 120 $ 400 Reprted in financial statements: Gvernment-wide Fund and Gvernment-wide 14

18 Cnfirmatin Pst Emplyment Healthcare Plan Reference Sample OPEB Nte t Financial Statements OPEB Plan Administered by a City (Statement 43) A1 A3 Plan Descriptin: The City administers a single-emplyer defined benefit healthcare plan which prvides medical insurance benefits t eligible retirees and their spuses in accrdance with varius labr agreements. The City reprts the financial activity f the plan as a trust fund, and n separate financial reprt is prepared. Eligibility: Emplyees are eligible fr retiree health benefits if they retire frm the City n r after age 50 with at least 5 years f service, and are eligible fr a PERS pensin. Membership f the plan cnsisted f the fllwing at June 30, 2005, the date f the latest actuarial valuatin: Retirees and beneficiaries receiving benefits 30 Terminated plan members entitled t but nt yet receiving benefits 0 Active plan members 150 Ttal 180 A4 Funding Plicy: The cntributin requirements f plan members and the City are established and may be amended by the City Cuncil. The required cntributin is based n prjected pay-as-yu-g financing requirements, with an additinal amunt t prefund benefits as determined annually by the City Cuncil. Fr fiscal year , the City cntributed $215,000 t the plan, including $215,000 fr current premiums (100% f ttal premiums). Plan members receiving benefits cntributed $21,000 (apprximately 9.8% f ttal premiums) thrugh their required cntributin. The City pays up t the entire cst f health benefits fr eligible retirees and their spuses until age 65 subject t the City s vesting schedule. After age 65, the City pays up t $290 per mnth fr any health cverage, als subject t the vesting schedule. Annual OPEB Cst and Net OPEB Obligatin. The City s annual ther pstemplyment benefit (OPEB) cst (expense) is calculated based n the annual required cntributin f the emplyer (ARC), an amunt actuarially determined in accrdance with the parameters f GASB Statement 45. The ARC represents a level f funding that, if paid n an nging basis, is prjected t cver nrmal cst each year and amrtize any unfunded actuarial liabilities (r funding excess) nt t exceed thirty years. The fllwing table shws the cmpnents f the City s annual OPEB cst fr the year, the amunt actually cntributed t the plan, and changes in the City s net OPEB bligatin: 15

19 Sample OPEB Nte t Financial Statements OPEB Plan Administered by a City (Cntinued) (Statement 43) B1 June 30, 2XXX Annual required cntributin $ 650,000 Interest n net OPEB bligatin 0 Adjustment t annual required cntributin 0 Annual OPEB cst (expense) 650,000 Cntributins made (215,000) Increase in net OPEB bligatin 435,000 Net OPEB bligatin - beginning f year 0 Net OPEB bligatin - end f year $ 435,000 The City s annual OPEB cst, the percentage f annual OPEB cst cntributed t the plan, and the net OPEB bligatin fr 2006 and the tw preceding years were as fllws: Fiscal Percentage f Net Year Annual Annual OPEB OPEB Ended OPEB Cst Cst Cntributed Obligatin 6/30/04 N / A N / A N / A 6/30/05 N / A N / A N / A 6/30/06 $650, % $435,000 B2 Funded Status and Prgress. As f July 1, 2005, the mst recent valuatin date, the plan was 52.9 percent funded. The actuarial accrued liability fr benefits was $5.7 millin, and the actuarial value f assets was $3.0 millin, resulting in an unfunded actuarial accrued liability (UAAL) f $2.7 millin and a funded rati (actuarial value f assets as a percentage f the actuarial accrued liability) f 52.9%. The cvered payrll (annual payrll f active emplyees cvered by plan) was $12.6 millin, and the rati f the UAAL t the cvered payrll was 21.2 percent. Actuarial valuatins f an nging plan invlve estimates f the value f reprted amunts and assumptins abut the prbability f ccurrence f events far int the future. Examples include assumptins abut future emplyment, mrtality, and the healthcare cst trend. Amunts determined regarding the funded status f the plan and the annual required cntributins f the emplyer are subject t cntinual revisin as actual results are cmpared with past expectatins and new estimates are made abut the future. The schedule f funding prgress, presented as required supplementary infrmatin fllwing the ntes t the financial statements, presents multi-year trend infrmatin abut whether the actuarial value f plan assets is increasing r decreasing ver time relative t the actuarial accrued liabilities fr the benefits. 16

20 Sample OPEB Nte t Financial Statements OPEB Plan Administered by a City (Cntinued) (Statement 43) B4 Actuarial Methds and Assumptins. Prjectins f benefits fr financial reprting purpses are based n the substantive plan (the plan as understd by the emplyer and the plan members) and include the types f benefits prvided at the time f each valuatin and the histrical pattern f sharing f benefit csts between emplyer and plan members t that pint. The actuarial methds and assumptins used include techniques that are designed t reduce the effects f shrt-term vlatility in actuarial accrued liabilities and the actuarial assets, cnsistent with the lng-term perspective f the calculatins. The actuarial cst methd used fr determining the benefit bligatins is the Entry Age Nrmal Cst Methd. The actuarial assumptins included a 7.75 percent investment rate f return, which is the assumed rate f the expected lng-term investment returns n plan assets calculated based n the funded level f the plan at the valuatin date, and an annual healthcare cst trend rate f 10 percent initially, reduced by decrements f 1% per year t an ultimate rate f 5 percent after the sixth year. Bth rates included a 3.0 percent inflatin assumptin. The UAAL is being amrtized as a level percentage f prjected payrll ver 30 years. It is assumed the City s payrll will increase 3% per year. 17

21 Sample Required Supplementary Infrmatin OPEB Schedule f Funding Prgress and Schedule f Emplyer Cntributins June 30, 2XXX SCHEDULE OF FUNDING PROGRESS C UAAL as a Actuarial Actuarial Unfunded Percentage f Actuarial Value f Accrued AAL Funded Cvered Cvered Valuatin Assets Liability (AAL)- (UAAL) Rati Payrll Payrll Date (a) Entry Age (b) (b - a) (a / b) ( c ) ([b - a] / c) 6/30/03 N / A N / A N / A N / A N / A N / A 6/30/04 N / A N / A N / A N / A N / A N / A 6/30/05 $3,000,000 $5,670,000 $2,670, % $12,600, % SCHEDULE OF EMPLOYER CONTRIBUTIONS Year Annual Ended Required Percentage June 30 Cntributin Cntributed 2004 N / A N / A 2005 N / A N / A 2006 $650, % 18

22 GUIDANCE ON OPEB 1. Guide t Implementatin f GASB Statements N. 43 and 45 n Other Pstemplyment Benefits, issued in 2005, includes 258 questins addressing implementatin and nging applicatin issues, varius plan and emplyer situatins, and frequently asked questins. This publicatin als includes illustratins f disclsures and certain calculatins. (The infrmatin in this publicatin plus new questins and answers has been included in the GASB Cmprehensive Implementatin Guide, Guides Issued thrugh June 30, 2007.) 2. GASB Technical Bulletin N : Accunting and Financial Reprting by Emplyers and OPEB Plans fr Payments frm the Federal Gvernment Pursuant t the Retiree Drug Subsidy Prvisins f Medicare Part D. 3. Website references that may have pertinent infrmatin: a. American Academy f Actuaries b. American Institute f Certified Public Accuntants c. Califrnia Municipal Finance Officers Assciatin d. CalPERS e. Califrnia Sciety f Certified Public Accuntants f. Califrnia State Teachers Retirement System g. Gvernmental Accunting Standards Bard h. Gvernment Finance Officers Assciatin i. League f Califrnia Cities 19

23 Sample Actuarial Cnfirmatin Letter fr Pstemplyment Benefits Other than Pensins GASB Statements N. 43 and 45 Request fr infrmatin, frm the actuary f a single-emplyer r agent-multiple-emplyer OPEB Plan fr disclsure in the financial reprts f a cntributing gvernmental emplyer. This letter may be edited and used fr cnfirming disclsure infrmatin required by GASB Statements N. 43 and 45. Prepared n cntributing gvernmental emplyer letterhead. (Date) (Name f Actuary) (Address) Dear : In cnnectin with ur auditr s annual audit f ur financial statements, we request yu furnish them the infrmatin described belw as it pertains t the (Name f gvernmental emplyer) participatin in the Example OPEB Plan. If the requested infrmatin is included in the actuarial valuatin reprt, yu may refer t the lcatin f the infrmatin in yur reprt rather than repeating such infrmatin. Yur respnse shuld be sent t (auditr address). An addressed envelpe is enclsed fr yur cnvenience. A cpy f the mst recent actuarial valuatin reprt shuld accmpany yur respnse. A. Please prvide a brief descriptin f the fllwing: 1. Identificatin f the OPEB Plan t which cntributins are made. 2. (Name f gvernmental emplyer) current-year cvered payrll. 3. The types f emplyees cvered, benefit prvisins, emplyee eligibility requirements (including eligibility fr vesting), and the authrity under which benefit prvisins are established. Please identify any such benefit prvisins that had nt taken effect in the year. Please als prvide the date f the mst recent plan amendment included in yur calculatin and identify any participants r benefits excluded frm the calculatin. 4. (Name f gvernmental emplyer), emplyee, and any nnemplyer cntributr bligatins t cntribute and the authrity under which thse bligatins are established. 20

24 (Name f Actuary) (Date) Page 2 B. Please indicate, fr the fiscal year ending June 30, 20XX, the fllwing items used t determine the annual required cntributin (ARC): 1. ARC. 2. Actuarial valuatin date. 3. Des the ARC include all OPEB benefits (included in the plan dcument and/r any statutry r cntractual agreements) prvided thrugh the plan as f the valuatin date? (if nt, please explain.) 4. Summarize the actuarial methds and assumptins. C. Histrical Trend Infrmatin: Please indicate, fr each f the last three years: 1. Actuarial valuatin date; 2. Actuarial value f plan assets; 3. Actuarial accrued liabilities; 4. Ttal unfunded actuarial liabilities; 5. Actuarial assets as a percent f actuarial accrued liabilities; 6. Annual cvered payrll; 7. Rati f unfunded liability t annual cvered payrll; and 8. Factrs significantly affecting trends in items 1-7. D. Please indicate whether r nt the infrmatin yu prvide has been determined in accrdance with the prvisins f Statements N. 43 and 45, Accunting fr Pensins by State and Lcal Gvernment Emplyers, f the Gvernmental Accunting Standards Bard. Explain any exceptins. E. Please describe the nature f any relatinship yu have with the (name f agent) r (name f cntributing gvernmental emplyer) that may impair, r appear t impair, the independence and bjectivity f yur wrk. F. Please prvide any additinal infrmatin which yu feel is apprpriate. 21

25 (Name f Actuary) (Date) Page 3 In rder fr (auditr) t cmplete their audit n a timely basis, it is necessary that yur letter reach them befre (date). Yurs very truly, (Signature and Title f Client Official) Ntes: (1) This illustrative letter is intended fr use in btaining infrmatin, frm the actuary f a sle emplyer an agent multiple-emplyer OPEB Plan fr disclsure in the financial reprts f a cntributing gvernmental emplyer. Disclsures required including supplementary infrmatin are specified in paragraphs 30 and 31 f GASB Statement N. 43 and paragraphs f GASB Statement N. 45, (GASB Cdificatin sectins, respectively). (2) This example is a cmprehensive request letter that shuld be tailred fr the circumstances. Infrmatin available frm a cpy f an actuarial valuatin reprt that has been prvided t the Firm shuld be deleted frm the request. (3) Once prir-year data has been cnfirmed, recnfirmatin in subsequent audit perids is nt necessary. Fr each subsequent perid, the letter shuld be tailred t request infrmatin nly fr the current perid. 22

26 CalPERS - Califrnia Emplyer s Retiree Benefit Trust Fund All Califrnia lcal public agencies may cntract with CalPERS t participate in the Califrnia Emplyers Retiree Benefit Trust Fund (CERBT). CalPERS has established an assumptin mdel t be used in actuarial valuatins fr emplyers participating in the CERBT. The Methds CalPERS requires are: 1. Actuarial Cst Methd 2. Asset Valuatin Methd 3. Amrtizatin Perid (including assumed payrll increases) 4. Rate f Investment Return Assumptin 5. Demgraphic Assumptins 6. Ecnmic Assumptins 7. Health Assumptins In additin CalPERS reprting will include the fllwing: 1. CalPERS will ask all cntracting emplyers t update their ARC and OPEB payment disclsures at the end f each fiscal year. Fr example, emplyers may pay OPEB premiums directly t insurance prviders withut seeking disbursement frm CERBT. In that case, CalPERS will capture that infrmatin at year end and disclse it as part f the Schedule f Emplyer Cntributins. 2. Fr the Schedule f Emplyer Cntributins, CalPERS will aggregate the ARC reprts f cntracting emplyers in accrdance with the GASB Cmprehensive Implementatin Guide questin That is, CalPERS will pr-rate ARCs f thse emplyers with fiscal years different frm that f CalPERS. 3. CERBT participating emplyers shuld rely n the membership size f the CERBT (>=200) rather than that f their wn membership size in rder t determine the required frequency f actuarial valuatins. In effect, all CERBT participating emplyers shuld get an OPEB valuatin at least every tw years. 23