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OPEB unveiled: GASB 45 requires governmental entities to disclose future liabilities.

Governmental entities will start accruing post-employment benefits other than pensions (OPEB) over the next several years--a major change that, for some, will result in massive financial liabilities. However, the change gives governmental entities the opportunity to plan for these future costs and develop methods for financing these benefits that now will be accounted for similar to the accounting for pension liabilities.

Every CPA should be interested in this change because it affects those who are governmental auditors, on the boards of governmental entities or have clients who sit on these boards. Additionally, as protectors of the public, the impending changes will have a significant impact on counties, cities, school districts, and special districts such as fire and water.


The variety of post-employment benefit plans that entities have adopted is mind-boggling. While pensions are fairly well-defined as a percentage of salary based on years of service, other post-employment benefits are those that are provided separately from a pension plan. The most common such benefit is health care insurance, and some governments also provide life insurance, long-term care and dental insurance for retirees.


There is also variety in how much of the benefits' costs are passed on to retirees. Some governmental entities, for example, will pay part or all of the medical insurance cost until the age when Medicare becomes available, currently 65. Others have the Cadillac of plans, offering retirees and other beneficiaries medical insurance for life--at the same level of benefits that current employees receive--with the entire cost paid by the governmental entity.

Most are defined benefit plans, although some are defined contribution plans. For example, employees can convert sick time to a defined contribution account upon retirement and use this to pay their share of medical insurance until they are eligible for Medicare.

Another factor that can vary widely is how long it takes for these benefits to vest. A five to 10-year period is common, but some government entities require less than a year of service. Adding to the complexity is variation in how vesting is treated when an employee switches from one governmental entity to another.

Whether or not the period of time of service of the former employer will count toward the vesting of the other post-employment benefits of the current employer usually depends on whether or not there is a written agreement on this issue between the entities.

For example, there could be an agreement between a county and city about employees transferring that may include post-employment benefits other than pensions. This contrasts with the most common pension plan for governmental employees, the California Public Employees' Retirement System, which is accounted for on a statewide basis with years of service with one employer accumulated with years of service from another employer if both use CalPERS for their defined benefit plan. Also, most of these plans require the employee to retire from the governmental entity, not just change jobs.



How does a CPA determine whether a governmental entity has any of these benefits? There must be a footnote disclosure in the financial statements of the following: description of the other post-employment benefits provided; employee groups covered; eligibility requirements; and the employer and participant obligations to contribute, quantified in some manner. There also must be a description of the statutory, contractual or other authority under which these provisions and obligations to contribute are established.

The footnote also must include a description of the accounting and financing or funding policies. There are two funding methods available--the more common pay-as-you-go and the seldom-used advance funded on an actuarially determined basis.

Under the pay-as-you-go method, there needs to be disclosure of the expenditure amount for the fiscal year net of participant contributions and the number of participants eligible to receive benefits. However, if a reasonable approximation of the expenditure cannot be made, employers can state that this expenditure cannot be reasonably estimated.


The Governmental Accounting Standards Board issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits Other Than Pensions, with a phased-in effective date format. The Financial Accounting Standards Board established these standards for the private sector when it issued Statement No. 106 concerning accruing post-employment benefits other than pensions, implemented in the early 1990s.

GASB's standard provides for recognizing the cost of benefits in periods when the related services are received by the employer, although there is a period of time of up to 30 years to amortize the liability of the benefits earned prior to implementation. An actuarial valuation is required biennially for employers with membership of 200 or more employees, terminated employees who will be eligible for benefits, and retired employees and beneficiaries receiving benefits. If there are less than 200 plan members, the actuarial valuation can be triennial.

An alternative measurement method, for a sole employer with fewer than 100 members, uses a simplified actuarial valuation method that non-specialists can use. The expense is the employer's annual required contribution (ARC) to the plan, with adjustments for net obligations for past under or over contributions. The ARC is the employer's required contribution and consists of the normal cost for the year and a portion of amortization of the total unfunded actuarial accrued liabilities of the plan over a period not to exceed 30 years.

Normal cost refers to the post employment benefits other than pension that the entity will be responsible for in the future for the current year of service. The net obligation is the cumulative difference between the annual cost and the employer's contributions to a plan. Since retroactive application is not required for most employers, the liability at the beginning of the transition year is zero. Net obligations would be liabilities (or assets) in the government-wide financial statements and in the proprietary or fiduciary funds financial statements as appropriate.

One possible accounting method would be to establish an internal service fund for these obligations, which would allow the expenses/expenditures to be charged to the appropriate fund.

Recording the net OPEB obligation as a liability of the reporting government as required by GASB No. 45 does not mean that the reporting government will have the cash to make necessary future cash payments when employees retire. Governments are not required to set aside funds in advance for these future cash payments. Some governments will continue to fund post-employment benefits out of future operating revenues ("pay-as-you-go"), even though the local government is receiving the economic benefit associated with these future cash flows.

Some governments choose to informally designate a portion of its cash balances toward future payment of the net OPEB obligation recognized as a liability in its financial statements. This designation of cash in the financial statements of the local government will not reduce the net OPEB obligation unless the reporting government commits to placing those funds irrevocably in a trust restricted solely for the payment of retiree benefits.

Funds committed irrevocably to such a trust are excluded from the government-wide financial statements of the local government and result in a reduction of the net OPEB obligation liability.

There is much discussion of what types of trusts would qualify with many still in the process of being evaluated and developed by CalPERS and others. In analyzing these trusts any restrictions and actuarial assumption requirements should be considered.

An advantage to an irrevocable trust is that it may be able to invest in equity markets that are not allowed for governmental entities under California law, thus providing the potential for a greater return on the investments and helping to meet the other post-employment benefits obligations. Local governments should seek legal counsel with respect to this issue.


A disadvantage is that the funds are not available for other expenses of the governmental entity and there is some concern of what would happen to these funds if a national or state health care system was established. Some governments will not have the funds to set aside and will fund only part or continue to pay-as-you-go and accept the net obligation liability on the financial statements.

GASB No. 45 also requires extensive note disclosure, including a description of each plan in which they participate, similar to the information being given in the current standards, including the funding policy. In addition, the standard requires comparison of contributions made to annual other post-employment benefits cost, changes in the net other post-employment benefits obligation (as of the most recent actuarial date the funded status of each plan) and a description of the actuarial valuation process with significant methods and assumptions used. There also must be required supplemental information consisting of a schedule of funding progress for the most recent valuation and two preceding valuations with notes on significant factors and trends.

This standard is phased in depending on a government's annual revenue in the first fiscal year ending after June 15, 1999, which was the basis for implementation of another important GASB statement on basic financial statements implemented in a similar phased-in fashion. For governments with annual revenue of $100 million or more, it is effective for fiscal years beginning after Dec. 15, 2006; for ones with revenue of $10 million to $100 million, it is effective for fiscal years beginning after Dec. 15, 2007; and for governments with annual revenue less than $10 million, the standard is effective for fiscal years beginning after Dec. 15, 2008.


Even though the effective date may be years away, it's time to start planning. A government should have a good understanding of the post-employment benefits other than pensions that it is offering and should begin educating public officials to ensure a timely and accurate response to the effect of the standard on its operations and plans. Whether or not it should have an actuarial valuation prior to when it is required will be dependent on several factors.

If there are significant other post-employment benefits obligations and the government has debt, it should consider the potential effect of the obligations on bond ratings. If nothing is done and the government just takes the position that this is an accounting issue, bond-rating agencies may not agree with this position and view this as an inherent problem.

Also, all debt obligations must be reviewed carefully to ensure that there will not be any conflicts with bond covenants. For example, a government might find that due to the increased expense of the other post-employment benefits obligations, it must raise fees to ensure that it meets the requirements of a bond covenant. However, the level of increase required might not be politically feasible and the government should start to develop an action plan now to handle the issue appropriately.

Also, if a government is about to enter into salary contract negotiations with unions or other employee groups, it might want to have the information on its obligations available for all parties.

Governments should start identifying the actuary that they will hire and discuss what documents and data they will need to provide to perform the valuation. Many obligations were entered into years ago and it may take a considerable amount of time to accumulate the complete information and involve the accounting and human resource departments. Contracts for retiree benefits other than pension also might have been entered into with retroactive inclusion of current retirees. Cities and counties could have many component units that they will have to work with to get the appropriate information.

So, practitioners take note: preparation is key. Now is the time to evaluate the impact of GASB Statement No. 45 and determine a course of action. And the new standard affects more than just CPAs working in governmental ccounting--concerned citizens will soon see its impact on the bottom line of their state, county, city, school district or special district.


CalCPA's Governmental Accounting and Auditing Committee works with the California Committee on Municipal Accounting, a joint committee of CalCPA and the League of California Cities, to produce white papers that help apply GASB standards to California cities. The white papers are free to CalCPA members and can be accessed at

A white paper addressing the accounting and financial statement presentation issues for GASB Statement No. 45 is scheduled to be issued in 2007, following some clarification from GASB. In the meantime, GASB Statement No. 45 resources, prepared by Bartel Associates, LLC, an actuarial firm that is working with the committee on its white paper, are available on the website.

The California Legislative Analyst's Office has prepared Retiree Health Care: a Growing Cost for Government, a report that estimates "state government liabilities are likely in the range of $40 billion to $70 billion--and perhaps more." This is because governmental entities are driven by the current year operating budget and, as available resources shrank, many governments offered their employees retiree benefits in lieu of larger salary increases because these would not significantly affect the current operating budget.

The report also briefly discusses other governments in the state, such as educational institutions, counties, cities and special districts. You can view the report at


Richard Teaman, CPA, is a partner with Riverside-based Teaman, Ramirez & Smith Inc. and is chair of CalCPA's Government Accounting and Auditing Committee. You can reach him at Michael Moreland, CPA, is owner of Newport Beach-based Moreland & Associates Inc. and is chair of the California Committee on Municipal Accounting. You can reach him at
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Author:Moreland, Michael
Publication:California CPA
Article Type:Cover story
Date:Aug 1, 2006
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