The GASB 75 standard for OPEB plans is very similar to the GASB 68 pension accounting standard that was introduced several years ago. GASB 75 significantly alters the measurement and reporting standards that were previously required for OPEB plans under GASB 45. Significant differences between both statements have been summarized below.
Balance Sheet Impact
The most notable change is the reflection of the OPEB liability on the balance sheet and adding the annual OPEB expense on the income statement. Under GASB 45, OPEB related disclosures were reported in the notes to financial statements. Movement of these items from the notes to both the balance sheet and income statement increases focus on the OPEB liability, annual expense and the deferred inflows and outflows.
New Terminology
The following changes in terminology are introduced with GASB 75:
- Actuarial Accrued Liability (AAL) has been replaced with Total OPEB Liability (TOL)
- OPEB plan assets has been changed to Fiduciary Net Position (FNP)
- Unfunded Actuarial Accrued Liability (UAAL) has been replaced with Net OPEB Liability (NOL)
- Deferred Inflows and Outflows. These are amortization amounts based on differences in demographic experience, assumption changes and variations between actual and expected investment return.
Determining the Discount Rate
Similar to GASB 68, the discount rate determination is impacted by the yield on a high grade 20-year municipal bond index. For funded plans both the funding and investment policy are reflected as well. The discount rate for unfunded plans will mostly like lie between 3.5% and 5.0% and for funded plans it will probably range between 6.0% and 7.5%.
The discount rate is determined in the following manner: (1) For years where the projected Fiduciary Net Position is expected to be sufficient to fully fund projected benefit payments, the benefit payments are discounted using the expected long-term rate of return on plan assets; (2) For years where the projected Fiduciary Net Position is not expected to be sufficient to fully fund projected benefit payments, the benefit payments are discounted using the yield of a 20-year tax free municipal bond index rated AA/Aa (or equivalent) or higher. As of December 31, 2018, the yield of the Bond Buyer 20 GO index is 4.10%. The resulting present value from this calculation is then used to develop a single equivalent discount rate that produces the same present value. This single equivalent discount rate is the final discount rate for the GASB 75 valuation.
Required Actuarial Cost Method
There were multiple actuarial cost methods were available under GASB 45. In order to standardize OPEB reporting and increase the comparability of OPEB liabilities between different plans, the GASB decided that only a single actuarial cost method will be available under GASB 75. The Individual Entry Age Normal actuarial cost method is now required in OPEB valuations. Plans switching from the Projected Unit Credit cost method may experience increases in liability as high as thirty percent for the active participants.
Measurement, Valuation and Reporting Dates
Under GASB 75, the measurement date is the date where the plan’s net or total OPEB liability, financial reporting entries and related ratios are determined. The measurement date must be within one year and one day prior to the reporting date. The actuarial valuation date may be any date up to 30 months prior to the reporting date. Actuarial valuation results are projected from the valuation date to the measurement date. The reporting date must be the plan’s fiscal year end. The projection of the valuation results from the valuation date to the measurement date must reflect any material changes that occurred between the valuation date and the measurement date. These changes include expected increase in premiums, material changes in the discount rate and any changes in plan benefits that were adopted prior to the measurement date.
Calculation of the OPEB Expense
The annual OPEB Cost under GASB 45 has been replaced with the annual OPEB Expense under GASB 75. The calculation of the annual OPEB expense is more involved when compared to the annual OPEB Cost under GASB 45. The annual OPEB Expense calculation is very similar to the GASB 68 expense calculation for pension plans. The expense calculation is as follows:
Annual OPEB Expense = Service cost with interest + Interest on the Total OPEB Liability (Net OPEB Liability if the plan is funded) + Changes in plan benefits – Expected earnings on plan investments (if funded) – Employee contributions + Amortization of deferred outflows – Amortization of deferred inflows + Administrative expenses
Actuarially Determined Contribution
While developing GASB 75, the GASB recognized that the Annual Required Contribution (ARC) under GASB 45 was not ideal for plan funding purposes. Consequently, the ARC is no longer used for plan funding. It has been replaced with the Actuarially Determined Contribution (ADC) under GASB 75. The ADC is calculated by the plan actuary. It must be reasonable and based on actuarial principles. It should recognize benefits earned during the present fiscal year and employ reasonable amortization periods for recognition of plan changes, assumption changes and gain or losses associated demographic and investment experience.
New Financial Disclosures
The new financial disclosures under GASB 75 are very similar to those required for pension plan financial reporting under GASB 68. They include:
- A ten-year history showing the changes in the Total or Net OPEB Liability for each fiscal year.
- Sensitivity analysis reflecting the variation of the Total or Net OPEB liability for a 1% increase and decrease in the discount rate and for a 1% increase and decrease in the healthcare trend assumption.
- Detailed display of the deferred outflows/inflows of resources from the plan.
- A ten-year schedule of contributions and for funded plans.
- Detail on the development of the expected long-term rate of return on plan assets.
Changes for Small Employers
Under GASB 45, a plan with less than 200 participants was required to have a valuation performed at least triennially. GASB 75 requires all plans complete a valuation at least biennially, regardless of size. The Alternative Measurement Method is still permitted for plans with fewer than 100 participants.