Are You Ready to Implement GASB 45?

By Barbara Reid

By Barbara Reid

The following is a summary of the GASB 45 session presented at the LGC annual conference on November 8, 2007.

Statement 45 promulgated by the Government Accounting Standards Board (GASB) changes the way government entities account and report post-employment benefits, other than pensions. The benefits covered by this standard most commonly include retiree health insurance, dental insurance or life insurance. Under this new accounting standard, these “other post employment benefits," also known as OPEBs, are to be recognized on an accrual basis when the benefits are earned, regardless of when they are paid. The GASB views these benefits as part of the compensation that employees earn each year and believes that accounting for these benefits on an accrual basis provides more accurate information about the total cost of government operations. This change in accounting methodology will highlight whether the costs of retirement benefits are being deferred, thereby placing cash-flow demands on future taxpayers. Of note, however, is the fact that GASB 45 does not require funding these OPEBs, but rather establishes accounting and financial reporting standards only. How a government finances these obligations is a separate policy decision to be made by local officials.

When to Implement GASB 45?
Implementation dates for GASB 45 vary depending upon the amount of annual revenue in FY 99. Municipalities with revenues greater than $100 million in FY 99 are Phase I, required to implement in the year that began January 1, 2007 or July 1, 2007. Municipalities with revenues between $10 million and $100 million in FY 99 are Phase II, required to implement in the year beginning January 1, 2008 or July 1, 2008. Municipalities with revenues less than $10 million in FY 99 are Phase III, required to implement in the year beginning January 1, 2009 or July 1, 2009.

Explicit vs. Implicit Subsidy
Some municipalities pay a direct subsidy toward their retiree’s health insurance premium. This benefit may have been negotiated in a collective bargaining agreement, or individual contract, whereby the employer agreed to pay either a percentage or a set amount of the insurance premium when that employee retires. This is referred to as an “explicit" subsidy under GASB 45 and will require an actuarial valuation to determine the future costs of that benefit.

In some cases, the municipality does not pay any portion of their retirees’ health insurance premiums, thereby leading many to believe that GASB 45 does not apply. The retiree health insurance premiums are paid entirely by the retiree, or in many cases, paid in part by a subsidy payment from the New Hampshire Retirement System with the retiree paying the remaining balance, if any. However, even with this scenario, GASB 45 may be applicable due to the provision known as the “implicit rate subsidy."

Under the GASB’s definition, an implicit rate subsidy exists when active employees and retired employees are pooled together for rating purposes, thereby resulting in a so-called “blended rate." This is in fact the situation under RSA 100-A:50 that requires that retired employees be “deemed to be part of the same group as active employees of the same employer for purposes of determining medical insurance premiums." It is the GASB’s view that a blended rate such as the one required under RSA 100-A:50 decreases the cost of insurance premiums for retirees and increases the cost for active employees, thereby resulting in the municipality paying a “hidden subsidy" for their retirees via the higher costs for active employees. Just like the explicit subsidy, this implicit subsidy also requires an actuarial valuation of the future cost of that hidden subsidy.

LGC HealthTrust Certification of the Implicit Rate Subsidy
The LGC HealthTrust, through its actuary, is planning to compute and certify the implicit rate subsidies for each member as part of the annual rating process. The initial certification will be completed early in 2008 for those calendar year communities that have a Phase II implementation date. The certification for fiscal year communities will be after that time. These implicit rate subsidies can only be provided for those employee groups fully covered by HealthTrust and where the entity can be discretely identified if it is rated with other municipalities or school units. Groups covered by other providers will also need a similar computation for those employees.

For some very small communities that are rated in the HealthTrust community rating pool, the implicit rate subsidy as computed by the LGC’s actuary may in fact be $0. That is, the small number of participants from a particular municipality may not have an impact on the rating of the entire pool. If this is the case, that is, the implicit rate subsidy is $0, and the municipality does not provide any explicit subsidy as described above, then the municipality may not have any OPEB liability under GASB 45.

The Actuarial Valuation
How often and what type of actuarial valuation is needed depends upon the number of plan members. Per GASB 45, “plan members" is defined as the sum of:

  • employees in active service,
  • terminated employees who have accumulated benefits but are not yet receiving them and
  • retired employees and beneficiaries currently receiving benefits.

Note that this GASB 45 definition of plan members may differ from the definitions of plan members used to determine eligibility for HealthTrust benefits, for New Hampshire Retirement System benefits or for other benefits provided by the municipality.

An actuarial valuation is required every two years if there are 200 or more plan members, and every three years if there are fewer than 200 members. There is the option of using an “alternative measurement method," that does not require hiring an actuary, for those communities that have fewer than 100 plan members.

Sample requests for proposals (RFPs) for actuarial services from Concord, Dover, Nashua, Berlin and Derry are available on the New Hampshire Government Finance Officers Web site at In addition, the actuarial firm of Demsey, Filliger & Associates has compiled a series of articles titled So You Need A GASB 45 Actuarial Valuation, that address how to select the recipients for the RFP, evaluate the proposals, the data necessary, review and response to the draft report, and what to do with the valuation report once it’s completed.

Generally speaking, the costs for actuarial contracts in New Hampshire have ranged from $7,500 to $17,000. These costs vary based upon a number of factors, including:

  • number of plan members,
  • number of different types of benefits offered (health, dental, life insurance),
  • number of different plans offered (HMO, POS, Indemnity),
  • amount of time or number of meetings with the actuary, and
  • number of alternative options or scenarios to be valued.

There are several actuarial assumptions that need to be considered in order for the actuary to complete the valuation. The major assumptions include the following:

  • actuarial cost method,
  • investment rate,
  • inflation rate,
  • projected salary increases,
  • medical trend rates,
  • post-retirement mortality rate, and
  • New Hampshire Retirement System medical subsidy depletion dates.

The 2007 OPEB actuarial valuation report for the State of New Hampshire, which pays 100 percent of the health premium for retirees and their spouses, is available at Page 18 of that report describes the different assumptions used in the State’s valuation.

Alternative Measurement Method
As previously mentioned, there is an option for small governments (those with fewer than 100 plan members) to determine their OPEB liabilities without hiring an actuary. The tables and procedures to complete this alternative valuation are outlined in Statement 45. Not surprising, several organizations have seized upon the opportunity to offer GASB 45 services to small municipalities by converting these tables and procedures into Web-based applications. For a relatively low fee, that is, less than the cost of hiring an actuary, these services compute the OPEB liabilities based upon inputted demographic data provided for each employee and retiree. The following are Web-based applications for small governments:

Note that this may not be an exhaustive list of Web-based GASB 45 applications for small governments. Additionally, the LGC makes no express or implied endorsement or recommendation regarding the quality and reliability of these services to provide OPEB valuations. Municipalities considering the use of these services should evaluate the vendors as they would any such application.

Funding OPEB Liabilities
Once the actuarial valuation is complete and the municipality has an understanding of the liabilities associated with these retiree benefits, the decision must then be made whether to advance fund the obligations, partially advance fund the obligations, or continue with the current pay-as-you-go method of funding. If the municipality decides to advance fund the benefits, then it needs to decide the mechanism to earmark those funds. OPEB liabilities may be earmarked via a reserve of fund balance, through an expendable trust fund or in a special revenue fund.

Another option, which is not currently authorized under New Hampshire law, is the establishment of an OPEB trust. An OPEB trust would require enabling legislation, and would be pension-like in terms of administration, governance structure and interest rate assumptions. The primary advantage in establishing an OPEB trust is the high assumed interest rate allowed under GASB regulations. A higher assumed rate of return on investment earnings has a significant impact on the OPEB liabilities. In the case of the State of New Hampshire, pre-funding the liabilities in an OPEB trust with an 8.5 percent results in nearly half the liability of continuing with the pay-as-you-go method with a 4.5 percent interest rate. The dollar difference is a $1.5 billion liability versus a $2.9 billion liability.

One of the primary disadvantages of establishing an OPEB trust is the irrevocable nature of the trust as required under GASB regulations. Some Phase I municipalities in other parts of the country have expressed concerns about the inability to retain flexibility over these trusts in the event that state or national universal healthcare is adopted.

As with the extensive discussions that have already taken place regarding the implementation of GASB 45, it is anticipated that similar discussions regarding the options to fund these benefits will also continue into the future. Overall, however, the GASB seems to have met their goal of “highlighting" the cost associated with retiree benefits, bringing this issue to the forefront of public policy discussions.

Barbara Reid is Government Finance Advisor for New Hampshire Local Government Center’s Legal Services and Government Affairs Department.