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Financial managers: GASB proposals on OPEB to have subtle impact

Published Date:
Sep 26, 2014

Schools, municipalities and other public entities will need to radically change how they calculate liabilities for other post-employment benefits (OPEB), if the Governmental Accounting Standards Board (GASB) approves three exposure drafts it simultaneously released this summer. However, experts say the impact will be subtle, with the biggest shifts occurring mostly in how information is presented.

The proposals—“Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions”; “Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans”; and “Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered Through Trusts That Meet Specified Criteria, and Amendments to Certain Provisions of GASB Statements 67 and 68”—were made public on June 16.

OPEB are benefits, outside of pension plans, that state and local governments and public entities provide to their retired employees. The most common type are healthcare benefits, but OPEB can also include legal aid or life insurance, among other things. 

If approved, the most significant effect of the GASB proposals, as a whole, will be the requirement that governmental entities recognize total OPEB liabilities, or the lifetime obligation toward the beneficiary. Currently, entities only recognize the net OPEB obligation—that is, the accumulated difference between the annual required contributions and the amount made toward those annual contributions.

According to Peter A. Baynes, executive director of the New York State Conference of Mayors, some municipal officials have expressed concern that the sudden appearance of a large liability might adversely affect their bond ratings and, by extension, their ability to fund bond issuances. After all, many municipalities are responsible for their own OPEB, unlike pensions, which are run out of the state.

“There is already the large concern cities have as to how they will pay these costs over the long haul,” he said. But with this proposal and its push to put OPEB obligations in the financial report, “all of a sudden, the numbers will be out there staring at people, from the taxpayer to the bond markets,” he added.

However, Joseph E. Sartori Jr., chief financial officer of Chemung County in the Southern Tier, noted that while the primary users of government financial statements are indeed ratings agencies, these organizations already take the long-term view when it comes to OPEB obligations and tend to use a 10-year window in examining governmental entities. Moreover, he felt the new information that entities would have to include would surprise few financial managers; despite the fact that total liability is not currently reported on the face of the financial statements, people with an interest in government obligations are generally aware that the costs are larger than that year’s required payments, he said.

Indeed, Douglas Offerman, senior director of public finance at Fitch Ratings, said that the proposals probably won’t have much impact on public entities’ bond ratings. Offerman said that Fitch and other ratings agencies “have been looking at OPEB for some time” already and “are very much attuned to the commitments we’re making today to retirees in the future and what that will cost.” What’s more, he said, many entities will often put the total liability in the notes anyway.

“I don’t see a lot of changes in the way we look at OPEB or how it affects credit,” he said. “Those obligations were always there.”

The practical impact
The new approach to OPEB will not be universal among all types of governmental entities. During an Aug. 8 webcast about the proposals, GASB Project Manager Scott A. Reeser said that how entities calculate total OPEB liability will vary, depending on how the benefit plan has been set up. If the benefits are provided through a trust, he said, the total OPEB liability will be deduced by recognizing changes in the fiduciary net position of the plan, with the difference being recorded as net. If the benefits are not provided through a trust, however, the total OPEB liability measured by the actuary would be the amount of liability recognized in the financial statements.

Of course, this requires projections of future costs and the criteria used to calculate them. The GASB said that projections of benefit payments would have to be based on claims costs, or age-adjusted premiums approximating claims costs, as well as the benefit terms and legal agreements that exist at the measurement date. Additionally, entities will need to account for the effects of projected salary changes if the OPEB formula incorporates future compensation levels, and service credits, if the OPEB formula incorporates periods of service. Entities would also need to account for projected automatic postemployment benefit changes, such as cost-of-living adjustments.

John Taylor, the executive deputy comptroller for operations at the New York State Office of the State Comptroller, said that while only 25 percent of local governments file using generally accepted accounting principles (GAAP) and would therefore be affected by the new standard, if implemented, the rules would create a standardized method for reporting OPEB liabilities that would increase comparability between entities.

However, he doesn’t foresee the proposals having all that much practical impact on the entities themselves. Moreover, he said, the shift essentially represents a reporting change and would not be “a heavy lift.”

Peter Morris, a spokesperson for the New York State Division of the Budget, which oversees OPEB for state employees, noted that in some senses, business would continue as usual.

“The state continues to finance its share of these costs, along with all other employee health care expenses, on a [pay-as-you-go] basis,” he said. “This dynamic would be unaffected by the GASB proposal, and our cash financial plan would not need to change.”

NYSSCPA President Scott M. Adair, who is the CFO of the Rochester Genesee Regional Transportation Authority, felt that the impact of the proposals would be more understated. Adair noted that the affected entities are aware of their total liabilities, but having that information front-and-center in financial statements can help stakeholders better understand the impact of OPEB agreements and allow citizens to better understand what it actually costs to run a government on a daily basis.

“From the perspective of wanting clarity, as far as financial sustainability for governments goes, it’s really important,” he said. “These particular standards help in clarifying, to someone looking in as a lay person, the implications of what governments are doing in terms of contract settlements and negotiations.”

Baynes made a similar point, saying that the increased visibility of already-existing information could substantially affect decision making for local government entities. Municipalities, he said, are “doing all they can to control the current and out-year costs of health insurance for their employees,” but having increased transparency through the GASB proposal could “hopefully have the positive effect of making sure local officials, when they make their decisions, are fully aware of the legacy cost they will be leaving.” He also expressed a need for education so that residents will understand what the changes would mean.

“When you go from a large liability not being listed to, all of a sudden, being there, you have to make sure the residents and other stakeholders understand it’s a change on paper,” Baynes said. “I’m sure there will be some public education challenges for municipalities.”


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