Overview of GASB 74/75. The new OPEB accounting standard. Joshua Mayhue, F.S.A. Consulting Actuary

Transcription

1 1 Overview of GASB 74/75 The new OPEB accounting standard Joshua Mayhue, F.S.A. Consulting Actuary

2 GASB 74/75 Implementation 2 GASB 74 Plan Accounting (only applies if plan is funded) Replaces GASB 43 Effective for fiscal years beginning after June 15, 2016 GASB 75 Employer Accounting (applies to funded and unfunded plans) Replaces GASB 45 Effective for fiscal years beginning after June 15, 2017 GASB 74/75 have same concepts as GASB 67/68 (new pension accounting standard) For calendar year plans, GASB 74 would be effective December 31, GASB 75 would be come effective on December 31, For PA Schools who are on a 7/1 fiscal year, implementation for GASB 74 and 75 would be June 30, 2017 and June 30, 2018, respectively.

3 Employer Types 3 Single Employers OPEB plan where benefits are provided to one employer Agent Employers OPEB plan where benefits are provided to multiple employers and the assets of the plan are segregated such that an employer s assets can only be used to pay the benefits of its employees Cost sharing Employers OPEB plan where benefits are provided to multiple employers and the assets are pooled among employers such that plan assets can pay the benefits of any employer Important Notes: Most plans will fall under the Single Employer category. All unfunded plans would be in this category Overall, Single Employer and Agent Employers are treated very similarly. Cost sharing employers have some addition nuances to consider. A typical example of a cost sharing plan would be state wide system plan. For example, PA Schools participates in PSERS which has an OPEB plan that falls under this category.

4 GASB 74/75 Impact 4 Balance Sheet Accrued Liability Discount Rate Cost Method Income Statement Immediate Recognition Deferred Items Timing and Frequency Disclosures

5 Balance Sheet 5 GASB 45 Liability (Net OPEB Obligation) Cumulative sum of Prior Expenses (with adjustments) Benefit Payments In general, expense consists of 1) amortized piece of unfunded accrued liability and 2) normal cost Resulting liability could vary greatly depending on plan characteristics # of Actives vs Retirees Front loaded (retiree benefits are more subsidized than future retirees) GASB 75 Liability (Net OPEB Liability) Unfunded Accrued Liability: Accrued Liability Plan Assets Additional balance sheet items will include deferred assets/liabilities known deferred inflows/outflows of resources

6 Net OPEB Liability 6 What does this mean? In most cases, GASB 75 will result in a higher liability being reported Does not increase the true cost of your OPEB plan Bond rating agencies expect GASB 75 to have little to no impact on bond ratings Accrued liability was already reflected in notes under GASB 45 (not including cost sharing plans) What is the Net OPEB Liability going to look like under GASB 75? Very similar to the unfunded accrued liability under GASB 45 with possibly two changes Discount Rate Cost Method

7 Discount Rate 7 GASB 45 Unfunded Discount Rate Long term expected rate of return on short term assets. Funded Discount Rate Long term expected rate of return on plan assets. Discount Rate for funded plans depends on contributions in relation to the Annual Required Contribution (ARC) If plan contributes at least ARC, the plan can use funded discount rate If plan contributes less than ARC, the plan must use blend of unfunded and funded discount rate GASB 75 Unfunded Discount Rate 20 yr municipal bond rates (AA or higher); current rates are 3.00% 3.50%. Funded Discount Rate Long term expected rate of return on plan assets. (Same as GASB 45) Discount Rate for funded plans determined based on depletion date (i.e. when plan assets are expected to run out) If plan does not have depletion date, the plan can use funded discount rate If plan has depletion date, the plan uses blend of unfunded and funded discount rate

8 Impact of Discount Rate Change 8 Decrease in discount rate results in higher liabilities, and vice versa More likely to have changes in discount rate year to year (more volatile liabilities) Unfunded Plans: Discount rate will change year to year based on index Several different indexes to choose from, but once you pick you need to be consistent Funded Plans: Discount rate should be more stable than unfunded plans but depending on funding status, depletion date may be sensitive to asset returns. Better funded plans are less likely to have discount rate changes. 20-year Municipal Bond Indices 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Jun 2015 Dec 2015 Jun 2016 Dec 2016 Jun 2017 Bond Buyer General Obligation 20-Bond Municipal Bond Index S&P Municipal Bond 20 Year High Grade Rate Index

9 Cost Method 9 Process of how liabilities are allocated to different time periods (past and future) through the life of a plan. GASB 45 Allowed to choose from six different cost methods Projected Unit Credit (PUC) and Entry Age Normal (EAN) were most common GASB 75 Must use Entry Age Normal with a level percent of pay Change in cost method could result in higher or lower accrued liabilities Change from PUC to EAN could result in higher or lower liability depending on different factors Higher salary scale in relationship to discount rate, smaller the increase (or larger decrease) Higher discount rate in relationship to salary scale, larger the increase (smaller decrease)

10 Example GASB 75 Balance Sheet 10 Source: Statement No. 75 of the Governmental Accounting Standards Board Appendix C, Illustration 1

11 Net (or Total) OPEB Liability 11 Cost Sharing Employers Multiple employers participate in one plan and assets of the plan can be used to pay the benefits of any employer Specifically applicable to the PSERS Premium Assistance Plan In general, same concepts still apply as previously discussed with some modifications Net OPEB liability is first calculated for aggregate plan, known as the collective net OPEB liability Each Employer recognizes their proportionate share of the liability Proportionate share should be based on a reasonable method that represents how contributions to the plan are made

12 Example for Cost Sharing Employer 12 If contributions are % of pay, then proportionate share may be based on payroll (as it is for PSERS pension liability for GASB 68) For this example, we will assume that proportionate share is based on payroll Collective net OPEB liability Total payroll for the plan Total payroll for the employer $ 1.3 billion $13 billion $10 million Proportionate Share = $10/$13,000 = Employers share of collective net OPEB liability: $1.3 billion x = $1 million

13 Income Statement 13 GASB 45 (Annual OPEB cost) Expense: Amortization of Unfunded Accrued Liability (UAL) + Normal Cost UAL could be amortized up to 30 years Adjustments are made to expense based on liability (Net OPEB Obligation) already booked GASB 75 (OPEB expense) Expense is tied to changes in Unfunded Accrued Liability from year to year Not all changes in liability are recognized immediately Deferred changes are accounted for in deferred inflows/outflows of resources.

14 Income Statement Items Immediately Recognized 14 Service Cost Liability that is accrued over the next year as determined by the cost method. (Known as Normal Cost under GASB 45) Interest Cost The increase in liabilities due to the time value of money Changes in Benefit Provisions Expected Earnings on Investments Other Changes in Liability that are not specifically described

15 Income Statement Items NOT Immediately Recognized 15 Deferred changes in the Unfunded Accrued Liability Gains/(Losses) due to changes in actuarial assumptions Differences between actual and expected plan experience Differences between actual and expected earnings on investments For each year there is a change in assumption, change in plan experience or difference between actual and expected earnings, an amortization base is created for each type of change. Change in assumptions or plan experience bases are amortized over a closed period equal to the average remaining future service of all plan participants (including retirees) Difference between actual and expecting earnings is amortized over a closed 5 year period

16 OPEB Expense 16 Cost Sharing Employers In general, same concepts as previously discussed with some modifications Each In employer should recognize their proportionate share of the expense and deferred inflows/outflows of resources addition, if employer s proportionate share changes, the net effect of this change is recognized but not immediately Amortize over expected remaining service of all plan participants (not just the employer) and includes retirees. (Same method as a change in assumptions/experience) Similarly, any difference between actual versus expected contributions should be amortized the same as a change in proportionate share.

17 Example GASB 75 Income Statement 17 OPEB Expense: Service Cost $250,000 Interest on Total OPEB Liability $130,000 Change in Benefit Provisions $500,000 Expected Earnings ($65,000) Recognition of Deferred Outflows\(Inflows) Differences between expected $60,000 and actual experience Change in Assumptions ($30,000) Differences between expected and actual earnings ($2,000) Total OPEB Expense = $843,000

18 OPEB Data 18 Non School Municipalities Distribution of Accrued Liability as % of Payroll Schools Distribution of Accrued Liability as % of Payroll Number of Employers Number of Employers Accrued Liability as a % of Payroll Accrued Liability as a % of Payroll Average is 155% of payroll; Median is 91% of payroll Average is $15.1 million; Median is $2.15 million Average is 27% of payroll; Median is 17% of payroll Average is $8.0 million; Median is $2.63 million Data above reflects GASB 45 data for CSAct plans. Under GASB 75, unfunded plans will need to use a 20 year municipal bond index rate which is, currently, about 3.0% to 3.5%. Decreasing discount rate from 4.5% to 3.0%, increases liability by about 10 12% for typical CSAct plan Actual increase would depend on specific plan Duration of benefits would play a significant role

19 OPEB Cost Factors 19 OPEB plan costs are influenced by many factors which include but are not limited to: Eligibility (age, service, etc.) Retiree Cost Share or Dependent Cost Share (i.e. % of premium paid by retiree/spouse) Benefit Levels (i.e. QHDHP, Medicare Advantage, etc.) Duration benefits (Most plans reduce or eliminate coverage at Medicare age) Number of retirees who elect to use plan at retirement

20 PSERS Premium Assistance 20 Applies to Pennsylvania Schools Only: Based on 6/30/17 GASB 74 Report As of 6/30/17, Liabilities = $2.16 Billion; Assets $123.7 Million Uses 3.13% discount rate (dropped from 7.25% under GASB 43) Prior liability was $1.4 Billion under old standard (GASB 43) Based on contributions, seems reasonable that proportionate share will be based on payroll. Total Covered Payroll as of 6/30/16 was $12.85 Billion Unfunded accrued liability would be about 16% of payroll Based on 6/30/17 GASB 67, net pension liability is about 384% of payroll

21 Timing and Frequency 21 GASB 74 effective for fiscal years beginning after June 15, 2016 (only applicable to funded plans) GASB 75 effective for fiscal years beginning after June 15, 2017 Actuarial Valuations need to be done every 2 years (Change for small employers (<200) who under GASB 45 needed a valuation every 3 years) Timing of Liabilities being reported: Reporting Date: Date of financial statements (ie. fiscal year end) Measurement Date: Date of liabilities and assets that are reflected on the reporting date. Measurement date must be no earlier than the end of prior fiscal year and no later than end of current fiscal year (For GASB 74, measurement date must be the same as the reporting date.) Valuation Date: Date of the actuarial valuation. The liabilities as of the measurement date must be result of a) actuarial valuation on the measurement date or b) a roll forward to the measurement date from an actuarial valuation no earlier than 30 months and 1 day from reporting date. (For GASB 74, valuation date must be within the last 24 months of the reporting date.)

22 Timing and Frequency 22 Example for GASB 75: Reporting Date: 12/31/18 Measurement Date: Any date between 12/31/2017 and 12/31/2018 Valuation Date: Any date between 6/30/16 and measurement date 6/30/ /31/ /31/ /31/2018 Reporting Date Measurement Date Valuation Date

23 Timing and Frequency 23 Example for GASB 74: Reporting Date: 12/31/17 Measurement Date: 12/31/17 Valuation Date: Any date between 12/31/15 and 12/31/17 12/31/ /31/ /31/2017 Reporting Date Measurement Date Valuation Date

24 Disclosures 24 Trend Sensitivity: Show effect of a +/ 1% change in trend rates on Net OPEB Liability Discount Rate Sensitivity: Show effect of a +/ 1% change in discount rate on Net OPEB Liability 10 year schedules showing: Roll forward Net OPEB Liability from year to year For funded plans: Actuarially Determined Contribution Money weighted rate of return Amortization of deferred outflows/(inflows) over the next 5 years

25 General OPEB Topics 25 Funding Considerations Advantages Disadvantages GASB OPEB Implementation Guide Pension vs OPEB benefits (GASB 74 : GASB 75: ) Unused Sick Leave Conversion (GASB 74 : GASB 75: ) Discount Rate (GASB 74 : GASB 75: 4.383) Reflecting Benefit Changes (GASB 74 : GASB 75: )

26 Funding Considerations 26 Schools Funded 4% Non-school Municipalities Funded 7% Not Funded 96% Based on Conrad Siegel Actuaries client data. Not Funded 93% Based on Conrad Siegel Actuaries client data. Accounting standard is no longer a funding based approach For funded plans that relied on the Annual Required Contribution (ARC), will want to discuss how future contributions are determined. GASB 75 offers some additional flexibility for plans with a written funding policy

27 27 Funding Advantages Lower liability reflected on financials since unfunded accrued liability will decrease In general, use a higher discount rate which will result in lower liabilities More stability in discount rate which provide more stability in liabilities Provide benefit security to plan participants

28 28 Funding Disadvantages Can t use trust assets for other purposes Risk of overfunding if benefits are changed in future May need an additional calculation to determine appropriate contribution to make Administrative complexities

29 OPEB vs Pension Benefits Q A city's defined benefit pension plan for firefighters provides a postemployment health insurance subsidy in the form of an additional monthly cash payment to each pension recipient. There is no limitation on the use of the additional cash payment by recipients. Should the health insurance subsidy be classified as OPEB for financial reporting purposes. Answer: No. In this circumstance, the use of the postemployment health insurance subsidy that is provided as an additional monthly cash payment to retirees and beneficiaries is not limited to payment of healthcare costs. Therefore, the subsidy should be considered retirement income. All retirement income should be classified as pensions. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

30 OPEB vs Pension Benefits Q The terms of a postemployment benefit plan provide that those who retire from service will receive an amount, defined in terms of dollars or a formula, that may be used only (a) to offset the retiree's cost of premium payments for participation in the employer's healthcare insurance group with active employees or (b) for reimbursement of other healthcare costs, if the retirees provide proof of healthcare insurance costs or direct healthcare claims that are not reimbursed by others. Should the benefit be classified as OPEB for financial reporting purposes? Answer: Yes. Even though the benefit is defined in terms of a dollar amount or formula because the benefit is limited to the provision of postemployment healthcare, it should be classified as OPEB for financial reporting purposes. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

31 Unused Sick Leave Conversion Q If an employer converts employees' unused sick leave balances to individual healthcare accounts at the conclusion of active service to be applied to postemployment healthcare premiums or claims costs, do any of the following activities constitute OPEB: the establishment of the accounts, the payment of cash equal to the account balances to a third party administrator, or cash payments form the accounts for premiums or benefits if the employer retains administration? Answer: No. None of the activities mentioned constitute OPEB. Conversion of unused sick leave to an individual healthcare account is an example of a termination payment of sick leave, as discussed in footnote 6 of Statement No. 16, Accounting for Compensated Absences, as amended. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

32 Unused Sick Leave Conversion Q Instead of converting an employee's unused sick leave hours to an individual retiree healthcare account at a rate based on the employee's salary at the time of termination of employment, an employer has an ongoing arrangement to provide, as part of the total compensation to the employee, postemployment healthcare benefits. The amount of the postemployment healthcare benefit for each employee is determined based on the employee's unused sick leave balance in hours at the time of termination of employment. Unused sick leave is converted to postemployment healthcare benefits at the rate of one month of healthcare premiums, up to a stipulated maximum monthly amount, for each eight hours of unused leave. The employer does not otherwise provide postemployment healthcare benefits and does not otherwise compensate employees for unused sick leave. How should the benefits provided under these terms be classified for financial reporting purposes? Answer: The benefits to which unused sick leave is converted in this case employer paid postemployment healthcare benefits for the specified number of months for which each terminating employee is eligible are defined benefit OPEB. Footnote 5 of Statement 75 specifies that in circumstances in which a terminating employee's unused sick leave credits are converted to provide defined benefit OPEB (for example, defined benefit postemployment healthcare benefits), the resulting benefit or increase in benefit should be included in the measures of OPEB liabilities for purposes of Statement 75 [ ]. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

33 Discount Rate Q As of what date should the municipal bond yield or index rate that is used as the discount rate be determined the valuation date or the measurement date? Answer: The municipal bond yield or index rate should be determined as of the measurement date. If the actuarial valuation to determine the total OPEB liability is performed earlier than the measurement date, consideration should be given to changes in the municipal bond yield or index rate to evaluate whether those changes should be reflected in the total OPEB liability at the measurement date, either through update procedures or through a new actuarial valuation [ ]. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

34 Reflecting Benefit Changes Q A collective bargaining agreement that includes a provision for a postemployment benefit change has been made prior to the measurement date of the total OPEB liability. However, the change does not go into effect until after the current measurement date. Should the change in projected benefit payments as a result of this agreement be included in the measurement of the total OPEB liability? Answer: Yes. The actuarial present value of projected benefit payments should include benefits to be provided pursuant to a contractual agreement, including a collective bargaining agreement, that is in effect at the measurement date. In other words, the issue is whether the agreement is in effect at that date, not whether the benefits included in the agreement will begin to accrue or begin to be paid by that date. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

35 Reflecting Benefit Changes Q A collective bargaining agreement that includes a provision for a postemployment benefit change has been made after the employer's June 30, 20X7 measurement date. Should the change in projected benefit payments as a result of that agreement be included in the measurement of the total OPEB liability at June 30, 20X7? Answer: No. Paragraph 149 of Statement 75 requires that projected benefit payments include "all benefits to be provided to current active and inactive employees through the OPEB plan in accordance with the benefit terms and any additional legal agreements to provide benefits that are in force at the measurement date." Because the agreement was not in effect at June 30, 20X7, the effect of the change of benefit terms should not be included the total OPEB liability measured as of that date [ }. Source: Implementation Guide No. 201X Z Accounting and Financial Report for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Exposure Draft

36 36 Where we ve been and where we re going District Specific Plan PSERS Premium Assistant Plan Prior to GASB 45 Pay as you go Pay as you go Under GASB 45 Under GASB 75 Slowly build towards unfunded liability Unfunded liability Pay as you go Proportion share of unfunded liability

37 37 GET ANSWERS Have a specific question regarding the transition to GASB 75 and how it might impact your school district? Contact: Joshua Mayhue, F.S.A.(joshuamayhue@conradsiegel.com)