Employees of State and local governmental
entities are compensated for their services in the
form of salary but also may be compensated in the
form of post retirement benefits. While the most common
post retirement benefit is pension, other post employment
benefits (OPEB) may include health, dental, vision
or life insurance benefits. Typically, these OPEB
benefits are funded on a “pay as you go”
basis, with the governmental entity paying only an
amount each year equal to the benefits claimed in
that year. Unfortunately this “pay as you go”
methodology results in the governmental entity understating
and not fully reporting the full cost of the OPEB
benefits earned by their employees
each year.
The Governmental Accounting Standards Board (GASB)
establishes accounting standards for governmental
agencies, but has no enforcement power. Entities that
fail to follow GASB can be subject to audits and could
suffer damage to their bond ratings.
In 2004 GASB issued two statements; GASB 43 and GASB
45, which outlined the accounting, reporting and disclosure
requirements for post employment benefits other than
pensions (OPEB’s). GASB 43 dealt with plans
that provided OPEB’s through trusts and GASB
45 outlined the OPEB reporting and disclosure requirements
for governmental employers. These
GASB statements will substantially increase the expenses
and liabilities reported on the financial statements
of many governmental entities.
According to GASB, the “pay as you go”
approach does not reflect the governmental entity's
true OPEB liablilities since it does not reflect the
cost of the OPEB’s earned by active employees
during their working years. GASB's new statements
seek to recognize OPEB expenses when the benefits
are earned (accrual based accounting) rather than
when they are paid out (cash basis).
The GASB Statement deals exclusively with issues
of disclosure and financial reporting and does not
require that the liability be pre-funded. Governmental
entities are free to continue funding their OPEB's
on a pay as you go basis. However, reporting a substantial
unfunded liability on the income statement may have
a substantial impact on credit and bond ratings. While
it is impossible to predict the public’s perspective
of a published, large unfunded OPEB liability, it
can reasonably be assumed that the public may have
a jaundiced opinion of the scope of the unfunded liability
and the entire issue of broad based governmental retiree
OPEB benefits. Therefore, it is recommended that most
governmental entities should develop liability mitigation
strategies.
The following chart outlines the GASB implementation
schedule. (Annual Revenues are based upon
your Fiscal Year immediately following 6/15/1999.)
Smaller employers with less than 100 employee’s
are subject to the GASB statements, but may utilize
an alternative or “express” method for
calculating their liability.
While Plan Sponsors may have some time before GASB
impacts them, the process for most employers is complex
and will involve a considerable amount of lead time.
For that reason, we strongly suggest that you begin
the process sooner rather than later. In our
opinion, GASB will not go away!
Our value proposition to our governmental customers
is that we are able to provide an integrated
solution. We will provide consulting services,
actuarial evaluations, plan design strategies, funding
strategies and an appropriate trust vehicle, all integrated
with a state of the art eligibility and claims reimbursement
system, linked, real time, with your investment vehicle. |
