Deloitte & Touche LLP Ten Westport Road P.O. Box 820 Wilton, CT 06897-0820 Tel: +1 203 761 3000 Fax: +1 203 834 2200 www.deloitte.com Mr. David R. Bean Director of Research and Technical Activities Governmental Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 Re: Project No. 34-1E Exposure Draft of Proposed GASB Statement Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions Project No. 34-1P Exposure Draft of Proposed GASB Statement Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Dear Mr. Bean: Deloitte & Touche LLP is pleased to comment on the GASB s exposure drafts Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (the employer ED ) and Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (the plan ED ) (collectively, the EDs ). We support the Board s efforts to improve the accounting and reporting standards for state and local governmental entities with respect to postemployment benefits. We specifically support the recognition of the net other postemployment benefits (OPEB) liability of employers defined benefit OPEB plans in the financial statements. The appendix below contains our comments on the proposals. Unless it is otherwise noted or clearly indicated in context, our comments apply to both EDs. ***** Deloitte & Touche LLP appreciates the opportunity to comment on the EDs. If you have any questions concerning our comments, please contact Karen Wiltsie at (203) 761-3607. Yours truly, Deloitte & Touche LLP cc: Robert Uhl W. Michael Fritz
Page 2 Appendix Deloitte & Touche LLP Recognition of the Net OPEB Liability in Government Employer Financial Statements We agree that requiring recognition of the net OPEB liability in an employer s financial statements is an improvement to financial reporting because it provides greater transparency in an employer s financial reporting for its defined benefit OPEB plan obligations and allows users to better assess a government s accountability and interperiod equity. Further, the proposed guidance for measurement and recognition of OPEB liabilities is consistent with recognition and measurement of pension liabilities under Statements 67 1 and 68. 2 We believe that an employer is primarily responsible to its employees for the unfunded portion of an OPEB obligation. We agree that such obligation by the employer is consistent with the employment exchange discussed in Appendix B of the employer ED. We agree that the unfunded portion of an employer s OPEB obligation to its employees represents a present, constructive obligation of the entity. Further, paragraph 19 of Concepts Statement 4 3 notes that an example of a constructive liability incurred by the government is an obligation incurred with respect to services provided by an employee, including services the employee provides with an expectation of deferred compensation, such as OPEB. Measurement of the Total OPEB Liability Projection of Benefits We agree that the measurement approach for the employer s present OPEB obligation should reflect the expected effects of future events (e.g., future service, salary increases, and ad hoc COLAs that are effectively settled) on the ultimate payment of benefits to the employee. The actual or implied contractual or substantive commitments to the employees for services provided include the effects of those future events. We believe that future service credits should be reflected in an employer s determination of both the amount of and eligibility for prospective OPEB in a manner similar to how they are reflected in the assumptions an actuary uses in determining continuation of employment. Employers should take these effects into account when measuring the service costs of the individual periods of employment that constitute an employee s expected career. Discounting Projected Benefit Payments We do not object to the EDs approach of using the long-term expected rate of return on plan investments to discount projected benefit payments to the extent that plan assets will be invested to earn such a return, primarily because this approach is consistent with the approach to be used in measuring pension liabilities under Statements 67 and 68. However, we believe that it is preferable to use a discount rate that is unrelated to the funding for the plan. Entities can do so by applying a settlement rate approach to discounting, under which they would use the 1 GASB Statement No. 67, Financial Reporting for Pension Plans. 2 GASB Statement No. 68, Accounting and Financial Reporting for Pensions. 3 GASB Concepts Statement No. 4, Elements of Financial Statements.
Page 3 rate of return on a portfolio of high-quality fixed-income investments that would provide sufficient cash flows to settle the obligations of the pension plan when due. Many OPEB plans differ from pension plans in that they are typically not well-funded. The employer may fund the plan only a few years before benefits are paid. If the discount rate is based on the long-term expected rate of return on plan investments, the obligation is discounted to the current reporting date even when funding and investment of plan assets will occur only in future periods and thus earn the expected rate of return over fewer years than the number of years over which the projected benefits are discounted. Further, determining the discount rate on the basis of the long-term expected rate of return on plan assets is subjective because it requires assumptions about the timing and amount of future contributions, expected future rates of return, and future allocation of plan investments among asset classes. On the other hand, use of a settlement rate approach would result in measuring an OPEB plan obligation that is funded with assets held in a qualifying trust that meets all of the criteria in paragraph 4 of the employer ED on the same basis as the measurement proposed in the EDs for an OPEB plan obligation that is not funded with assets held in a trust that meets all of those criteria. We believe that similar obligations should be measured in a consistent manner that is not affected by how the entity plans to fund them. We do not object to using a single bond rate as a practical expedient for applying a settlement rate approach. However, we believe that a rate for high-quality tax-exempt general obligation municipal bonds with a term equivalent to the weighted-average term of the related OPEB obligation would be a more appropriate rate to use. Attribution Method We agree with the GASB s decision to require a single actuarial method for the accounting and reporting of an employer s total OPEB liability because we believe that it promotes comparability with other governmental entities. We believe that the projected unit credit actuarial cost method best reflects measurement of the total OPEB liability and the attribution of costs to periods of employee service on the basis of the OPEB earned by the employee in those periods. We recognize that the use of the entry age normal actuarial method has some merit with regard to achieving interperiod equity since it results in the accrual of substantially all of the cost of the employee s OPEB in a systematic and rational manner over the period in which the employee provides services. Further, the use of the entry age normal actuarial method is consistent with pension accounting under Statements 67 and 68. However, many OPEB plans, such as retiree medical benefit plans, do not provide OPEB that vary on the basis of salary levels. In those cases, the projected unit credit method better reflects how the employee earns benefits over time. We recommend that the Board consider the use of the projected unit credit method for OPEB even though it differs from the method prescribed for pension benefits in Statements 67 and 68. We also recommend ending the period over which benefit costs are attributed on the date as of which the employee s benefit is fully vested and the amount of the benefit will not be affected by additional years of service being provided by the employee. This approach would avoid recognizing actuarial losses if employee retirements occur earlier than expected.
Page 4 Alternative Measurement Method We have concerns about the alternative measurement method proposed in the EDs for OPEB plans with fewer than 100 employees. We believe that the calculation is complex and that an individual with no actuarial training would have difficulty performing it. If a small plan needs to hire an actuary or accounting firm to accurately calculate the alternative measurement, the benefit of using the alternative measurement method may not outweigh the costs of doing so. Measurement of OPEB Expense Conceptually, we believe that the most supportable approach is recognition in current-period OPEB expense of the effects of transactions and other events that affect the OPEB obligations as they occur each year. Any deferred recognition represents a smoothing mechanism that is not based on the reporting principles outlined in paragraphs 25 27 of Concepts Statement 4. Accordingly, we support the immediate recognition in OPEB expense of both (1) the effect on the total OPEB liability of changes in benefit terms and (2) the effect of differences between expected and actual experience and changes in assumptions. Under the employer ED s proposal, employers would be required to recognize, over a closed period representative of the average expected remaining service lives of all employees who are provided with OPEB, the effect on total OPEB liability of (1) changes in economic, demographic, and other factors affecting the assumptions used to determine OPEB expense and (2) differences between expected and actual experience. Although this proposal is not conceptually ideal, we agree that it is a significant improvement over existing accounting standards. Cost-Sharing Multiple-Employer Plans We agree that each employer in a cost-sharing plan is implicitly responsible for its net OPEB liability and the effects of the net changes therein. However, we have several concerns about the potential operational challenges associated with the employer ED s approach for determining an employer s proportionate share of the collective net OPEB liability and related amounts. In particular, we question the practicality of the proposed use of the employer s projected long-term contribution effort to the OPEB plan... as compared to the total projected long-term contribution effort of all employers and all nonemployer contributing entities to determine each employer s proportionate share of the collective net OPEB liability. An individual employer participating in a cost-sharing plan will most likely not have access to verifiable and reliable information to make such projections. The multipleemployer plan s management would be in a better position to obtain and verify the information necessary to make such projections. We therefore recommend that the Board require the cost-sharing multiple-employer plan to include information about each employer s proportionate share in the plan s basic financial statements or required note disclosures. However, we are concerned that the plan s management may nevertheless need to make subjective assumptions about the participating employers future contribution efforts. Agent Multiple-Employer Plans The plan financial statements and disclosures prepared in accordance with the plan ED for an agent multiple-employer plan would not provide each participating employer with information about its share of
Page 5 the plan net position. We recommend that the Board require that information about each employer s share of fiduciary net position be included in the plan financial statements. Note Disclosures and Required Supplementary Information We suggest that the GASB consider the feedback it receives from users and preparers (both employers and plans) in evaluating the costs and benefits of providing the proposed disclosures and required supplementary information. In particular, the Board should further consider whether the net OPEB liability measurements that are calculated by using nine combinations of rates to present the effects of hypothetical changes in the discount rate and health care cost trend rate provide users with sufficiently valuable information to justify the incremental cost of performing the multiple calculations. Special Funding Situations (Employer ED) Generally, we agree with the proposed accounting for special funding situations related to OPEB since it is similar to the accounting for special funding situations related to pensions. However, we do not agree that the employer s financial statements should reflect a net OPEB liability, together with deferred outflows and inflows of resources related to OPEB, that is net of the nonemployer government s proportionate share resulting from an unconditional funding obligation. Since a central premise of the employer ED is that the OPEB liability arises from the exchange transaction between employer and employee, we believe that the employer s financial statements should present the entire net OPEB liability and related amounts. The nonemployer s contribution should be treated as a nonexchange transaction between the two governments in a manner consistent with the principles of Statement 33. 4 If criteria consistent with those in Statement 33 are met, the employer should be permitted to record a receivable for the nonemployer government s proportionate share. This approach is consistent with the requirement to present the entire OPEB cost as an expense/expenditure in the employer s financial statements, with revenue recognized for the proportion being funded by the nonemployer government. Defined Benefit OPEB Plans Not Administered Through Trusts That Meet the Specified Criteria For OPEB plans not administered through trusts that meet the criteria in paragraph 4 of the employer ED, we support the use of the ED s proposed approach under which OPEB liabilities, OPEB expense, and related deferred outflows and inflows of resources would be accounted for in a manner consistent with the measurement approach for OPEB plans that are administered through trusts meeting paragraph 4 s criteria. In particular, we agree that if an OPEB plan is administered through a trust that does not meet all of the criteria in paragraph 4 of the employer ED, assets in the trust should not be treated as plan assets. In addition, we support the use of a discount rate for measuring the liability that reflects the yield on, or an index rate related to, high-quality tax-exempt general obligation municipal bonds. (As noted above, we prefer the use of a high-quality bond rate as the discount rate regardless of whether plan assets are accumulated in a trust that meets the criteria in paragraph 4 of the employer ED.) We also agree with the proposal to require disclosure of (1) the fact that no assets are being accumulated in a trust that meets the criteria in paragraph 4 of the employer ED and (2) each of the criteria that are not met by the trust through which the OPEB plan is being administered. 4 GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions.
Page 6 Defined Contribution Plans We agree with the Board s continuation of the current financial accounting and reporting approach for defined contribution plans under existing GASB standards. In addition, we believe that the guidance in the employer ED is helpful in (1) clarifying that the required expense/expenditure is the amount defined by the plan s terms as being attributable to employee services provided during the period and (2) addressing accounting for forfeitures. Effective Date and Transition We recommend that the Board consider deferring the EDs effective dates to one year later than the effective dates stated in the EDs since entities are still gaining experience with applying the new pension guidance under Statements 67 and 68. We believe that deferring the effective dates would enable entities to acquire the additional experience they need before they are required to adopt the proposed OPEB standards. We agree that earlier application should be encouraged.