Bolton Partners, Inc.

Contact Information: 

Kevin Binder, F.S.A
575 South Charles Street
Suite 500
Baltimore, MD 21201
(443) 573-3906
KBinder@BoltonPartners.com

Virginia Clients for GASB 45

Cooperative Procurement Contracts

Fauquier County and Public Schools
Vivian McGettigan, MBA, CPA, CPFO
Director of Finance
(540) 428-8726

Wachovia Retirement Services

Contact Information:

Dan Homan
Vice President
Wachovia Retirement Services
Richmond, VA 23235
(804) 267-3111

Virginia Clients for GASB 45

Alleghany County Public Schools, VA
Campbell County Government and Schools, VA
City of Charlottesville, VA
Chesterfield County Government and Schools, VA
City of Colonial Heights and Public Schools, VA
Fluvanna County Government, VA
Gloucester County Government and Schools, VA
Hampton Roads Sanitation District, VA
Hanover County Government and Schools, VA
City of Harrisonburg and Public Schools, VA
Harrisonburg – Rockingham Co. Service Authority, VA
Henrico County Government and Schools, VA
City of Hopewell, VA
City of Hopewell Public Schools, VA
Isle of Wight Government and Schools, VA
James City County, VA
Loudoun County Government and Schools, VA
Lucy Corr Village Home, VA
Louisa County Government and Schools, VA
Newport News Redevelopment & Housing Authority, VA
Orange County Government and Schools, VA
Powhatan County Government and Schools, VA
Prince George County Government and Schools, VA
Prince William County Government and Schools, VA
City of Richmond, VA
Richmond Metropolitan Authority, VA
Roanoke County Government and Schools, VA
Rockingham County Government and Schools, VA
Washington County Government and Schools, VA
City of Williamsburg, VA
Williamsburg – James City County Public Schools, VA

Cooperative Procurement Contracts

City of Harrisonburg
Lester O. Seal, CPA
Director of Finance
(540) 432-7702

Prince George County
Leigh Primmer, VCO
Procurement Officer
(804) 722-8715

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(click on question to go directly to answer)

 1.  Does GASB 45 require that funds be set aside for paying future benefits?
 2.  How often does an actuarial valuation have to be performed?
 3.  Over how long a period may the OPEB liability be amortized?
 4.  How can the OPEB liability be reduced?
 5.  What benefits are to be included as OPEB?
 6.  If there is no written plan or agreement is there an OPEB obligation?
 7.  If the retirees pay 100% of the premium is there an OPEB liability?
 8.  When must GASB 45 be implemented?
 9.  What is the Actuarial Accrued Liability?
10. What is an Annual Required Contribution (ARC)?
11. Do you have to pay the ARC?
12. What information has to be reported under GASB 45?
13. What is net OPEB obligation?
14. Does GASB 45 require the establishment of a trust fund?
15. What are some of the options for funding OPEB liabilities?
16. What types of trust fund structures are available? 
17. What section of Virginia Code governs trust funds established for OPEB purposes?
18. What governance structures are provided for in the Code of Virginia?

 1. Does GASB 45 require that funds be set aside for paying future benefits?

No, GASB 45 is a financial reporting standard that only requires the identification and disclosure of the liability and funding status. Each municipality needs to carefully consider whether or not it should set funds aside and if so, how.

2. How often does an actuarial valuation have to be performed?

If you have more than 200 participants (active, retired, and other covered participants) a valuation has to be performed every two years, those with 100 to 200 participants must have one every three years and those with fewer than 100 participants can use an alternative valuation method.  Note that the alternative method is very cumbersome.  Even for small governments it may be better to have an actuarial valuation.

3. Over how long a period may the OPEB liability be amortized?

The period may be as long as 30 years, unless the retiree group is closed. FAS 106 impacted corporate entities much like GASB 43 & 45 has affected government entities. FAS 106 however required that the entire OPEB liability be booked in the same year. The result of FAS 106 has been that most corporations have eliminated their non-pension post-employment benefits entirely. Fortunately the governmental requirements allow for a more reasonable period of time that allows governments to react in a thoughtful and measured manner.

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4. How can the OPEB liability be reduced?

There are a variety of ways to limit and/or reduce the OPEB liability. Each possible approach will require interaction with an actuary; some approaches will also utilize the resources of benefit consultants or management consultants. Popular methods of reducing the liability include:

§  Extending vesting periods. Some Virginia municipalities that previously offered benefits to employees with as little as 2 or 3 years tenure are extending eligibility requirements to 10 or more years of service. This type of change can have very significant affects on OPEB liabilities.

§  Lowering benefits levels and/or increasing the employee/retiree share of costs is another popular method of cost control. While these approaches will have more moderate impact on liabilities they can provide some immediate relief and assist in long-tem budgetary control.

§  Changing from a defined benefit to a defined contribution plan is another possible route to take. While this approach may take significant effort to implement it will eventually enable a government to revert back to a PAYGO approach for funding long term health benefits.

5. What benefits are to be included as OPEB?

Benefits to be included are medical, prescription drug, dental, vision, hearing, life insurance, long-term care benefits, and long-term disability benefits (not covered under a pension plan) that are provided to retirees or after an employee has left service. OPEB does not include pension benefits or termination benefits. However, if a government runs its own pension plan it is possible to transfer some or all of its OPEB costs from the OPEB liability to a pension liability. Since pension structures generally have significant assets set aside to pay future liabilities and have a track record of portfolio returns, such a transfer of liabilities can have the affect of reducing the total liability of both plans without modifying benefits.

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6. If there is no written plan or agreement is there an OPEB obligation?

Yes, the OPEB obligation is to be recognized based on the substantive plan (what is understood by the employees and employer) whether written or not). For governments that are frequent issuers of debt it is suggested that these benefits be documented as a portion of an overall OPEB policy.

7. If the retirees pay 100% of the premium is there an OPEB liability?

There will be a liability if the retires’ rates are the same as current employees.  (“Blending” the retirees and active employees for the purpose of determining premiums creates an implicit rate subsidy).

8. When must GASB 45 be implemented?

When you have to implement is determined by your annual revenues for the Fiscal Year immediately following 6/15/1999.  This earlier date references back to Phases in GASB 34.  The phase year when your government implemented GASB 34 is the Phase year your government must implement GASB 45.  The following table shows the revenue amounts and corresponding implementation dates. 

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9. What is the Actuarial Accrued Liability?

The actuarial accrued liability is the present value of the benefits due employees and retirees as a result of work already performed. However, it should be noted that this is an actuarial, not an accounting liability, and as such is not reported in the fund or government-wide statements.

10. What is an Annual Required Contribution (ARC)?

The ARC is based on the actuarial evaluation and has two parts:

1) The Normal Cost -The portion of the costs incurred each year that applies as long as there are active employees who will receive future benefits based on current service (the reason for this is that the cost of the benefits should be recognized in the year they are earned)

2) Amortized UAAL - The amount required to amortize the Unfunded Actuarial Accrued Liability over up to a 30 year period.

It is important to note that the ARC and each of its components may change between valuation periods due to: benefit modifications, projections of inflation rates of insurance costs, changes in assumed discount rates, and funding of the ARC in an irrevocable trust or other structure.

11. Do you have to pay the ARC?

No, GASB 45 does not require funding of OPEB benefits, but the accumulated difference between pay-as-you -go costs and the ARC contributed to an irrevocable trust has to be reported and disclosed in your financial statements.

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12. What information has to be reported under GASB 45?

GASB 45 requires the calculation and recordation of the expense and liability for OPEB benefits.

The amount of the future benefit is an expense that must be recorded rather than deferred as a liability.  Public entities must account for, and report on their entity-wide financial statements, the annual required contribution (ARC) for OPEB in the same way pension contributions are reported.

Employers annual OPEB expense will be reported based on actuarially determined amounts.  OPEB costs have to be reported over the period the employee works, and the OPEB information shown in the notes to financial statements must include funding (if any), costs, and a description of the OPEB plan. Even though GASB 45 does not require the funding of OPEB liabilities, you do have to disclose the ARC and net OPEB obligations.

Note disclosures should also include accounting policies, the amount of any OPEB reserves, funded status and funding progress.

13. What is net OPEB obligation?

Net OPEB obligation (NOO) is determined by calculating the difference between the ARC and the amount actually set aside in an irrevocable trust or similar structure.  It is based on the accumulated contributions and the accumulated ARC. At the end of a year, the current NOO equals the total of the beginning NOO and the annual OPEB cost, minus the contributions made during the year.

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14. Does GASB 45 require the establishment of a trust fund?

No, GASB 45 establishes the accounting for other post retirement benefits; it does not require the establishment of a trust fund or even requiring funding OPEB liabilities at all.

15. What are some of the options for funding OPEB liabilities?

   1. Governmental Financial Statement – Continue pay-as-you-go

                   •  Do Nothing – No funding – No set asides
                   •  Very reasonable Option if liabilities are small (immaterial) to the financial statements.
                   •  General Guideline – if your GASB 45 liability is less than your compensated absences liability
                      (accrued leave payouts) – it is probably immaterial.
                   •  Talk with your financial advisor and rating analyst to discuss your specific government’s situation.

      Advantages:

                   •  Easiest method
                   •  No impact on governmental funds (budget basis funds)
                   •  Impacts only entity-wide conversions and notes

      Disadvantages:

                          •  Highest Liability and Annual Expense -- lowest discount rate
                    •  Be Careful – could impact on bond rating

   2. Internal Service Funds:

  •  Internal Service Funds provide the ability to set aside funds to match liabilities demonstrating Strong Fiscal Management

  •  Higher Discount Rate than the governmental fund option, but lower than the trust option

  •  If your jurisdiction does not elect the pension option, your jurisdiction may decide to earmark funds in an internal service fund.

  •  While the full amount of the Net OPEB Obligation liability will be reported in the internal service fund, the assets will also be reported in the fund so the net impact on the entity-wide net assets’ equity would be zero if the ARC is funded each year

      Advantages:

              •  Trust Fund Process may be too cumbersome for your jurisdiction

              •  Costs Associated with Managing the Trust Fund to be Incompliance with the Law may be More Costly than
           the Earnings from the Higher Interest Rate.

              •  May be difficult to convince Management that irrevocable contributions to a trust fund makes
           sense for governments that only have Implicit Rate Subsidies Liabilities

              •  If policy changes to potentially eliminate the implicit rate subsidy or other program changes are
           considered, establishing a trust may not be in the best interests of the jurisdiction.

              •  Ability to earmark assets and invest in longer term assets historically yielding higher rates of return
            than the  more liquid equity in pooled cash portfolios.

              •  Potential exists that the Federal Government may implement a National Health Care Plan, eliminating
           the need for trust funds

              •  Can’t invest in the higher yielding investments based on Virginia law. (However can invest in long
            term higher yielding government securities)

      Disadvantages:

              •  From an actuarial standpoint there are no plan assets

              •  Increased risk of governing boards redirecting the assets in the future.

         •  Employer contributions are irrevocable.
   •  Plan assets are dedicated to providing benefits
   •  Plan assets are legally protected from creditors (including employer and plan administrations)

      Advantages:

                       •  Higher discount rate = lower annual contributions

                       •  Viewed positively by Rating agencies – demonstrates government’s commitment to fund expenses
                   as services are provided rather than deferring to future tax payers.

      Disadvantages:

                       •  Irrevocable contributions

           •  High level of administration

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16. What types of trust fund structures are available? 

Voluntary Employee’s Beneficiary Association (VEBA) trust:  Requirements can be cumbersome, has IRS requirements.

Section 401 (h) separate account under a pension plan.  Locality must have a pension plan and there are limitations as to the amount of the OPEB contribution.

Section 115 “essential governmental function” trust.  Only available to governments, flexible, does not require IRS rulings or reporting.

17. What section of Virginia Code governs trust funds established for OPEB purposes?

Sections 15.2-1544 through 15.2-1549 of the Code add Article 8 to Chapter 15: “Local trusts to fund postemployment benefits other than pensions.”   This code section allows for the establishment of trust funds and provides options for the governance of these funds.  The Code also allows for School Boards and general government trust funds to be established jointly.

18. What governance structures are provided for in the Code of Virginia?

The governing body may establish a Finance Board to act as the trustee for the trust fund.  The Board shall consist of the Treasurer, Chief Financial Officer and at least one citizen of the Commonwealth.  There are provisions in situations where one or more of the positions either do not exist or are held by the same person.

In lieu of a Finance Board the governing body may designate the locality’s retirement board to be the trustee.  This is only available to those localities that have retirement boards or boards managing deferred compensation arrangements.

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Other GASB 45 Information

Bolton Partners, Inc., GASB 45 News, Issue 9-August 2007 (PDF)
Bolton Partners, Inc., GASB 45 News, Issue 11-October 2007 (PDF)
OPEB Plan Document Sample – Prince William County (PDF)

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GASB 45 Sample Entries

Actuarial Information:
						Unfunded	Funded
						4%	7%
Annual Required Contribution						1,446,190	1,151,238
Esimated Pay-as-you-Go (retiree costs in self-insurance fund)						818,959	818,959
Contribution to Trust							332,279
Net OPEB Obligation						627,231	-
Scenario 1:  Assumes nothing transferred to trust or Internal Service Fund
Impact: Entity-wide Entries only: (No fund level impact, assumes no employees in proprietary funds)
The annual required contribution should be pro-rated to the functional expense categories based
covered payroll.
			Example
			Covered	Allocation
			Payroll	Percentage		Debit	Credit
General government			1,000,000	9%		57,021
Judicial administration			2,000,000	18%		114,042
Public safety			3,000,000	27%		171,063
Public works			2,000,000	18%		114,042
Health and welfare			1,000,000	9%		57,021
Education (nothing allocated as actuals will be in the School component unit presentation)
Parks, recreation, and cultural			1,000,000	9%		57,021
Community development			1,000,000	9%		57,021
			11,000,000
	Net Other Post Employment Obligation (liability)						627,231
Scenario 2:  Assumes funds were transferred from General Fund to Internal
Service Fund
			Example
			Covered	Allocation
			Payroll	Percentage		Debit	Credit
General Fund:
Transfer to OPEB Internal Service Fund						627,231
	Cash						627,231
Entity-wide Conversion (eliminate transfer to ISF)
General government			1,000,000	9%		57,021
Judicial administration			2,000,000	18%		114,042
Public safety			3,000,000	27%		171,063
Public works			2,000,000	18%		114,042
Health and welfare			1,000,000	9%		57,021
Education (nothing allocated as actuals will be in the School component unit presentation)
Parks, recreation, and cultural			1,000,000	9%		57,021
Community development			1,000,000	9%		57,021
			11,000,000
	Transfer to OPEB Internal Service Fund						627,231
Internal Service Fund;
Cash						627,231
	Transfer from General Fund						627,231
OPEB Expense						627,231
	Net Other Post Employment Obligation (liability)						627,231
Because cash and Net Obligation net out to zero equity there will be no impact on the entity-wide
financial statements.
Scenario 3:  Assumes a payroll component has been established for OPEB
expense which debits departmental expenses and credits revenue
in an OPEB internal service fund.
General Fund:
OPEB Expense -- department 1						100,000
OPEB Expense -- department 2						100,000
OPEB Expense -- department 3						100,000
OPEB Expense -- department 4						327,231
	Cash						627,231
Because the payroll system is allocating expenses there is no need for an entity-wide functional
expense entry.
Internal Service Fund:
Cash						627,231
	OPEB Revenue						627,231
OPEB Expense						627,231
	Net Other Post Employment Obligation (liability)						627,231
Scenario 4: Assumes funds were contributed to Trust Fund
Assumes that a payroll component will be established that automatically  posts payroll expense
and records payroll liability
General Fund:
OPEB Expense -- department 1						100,000
OPEB Expense -- department 2						100,000
OPEB Expense -- department 3						100,000
OPEB Expense -- department 4						32,279
	Payroll Liability						332,279
Because payroll system is allocating expenses there is no need for an entity-wide functional
expense entry.
Payroll Liability						332,279
	Cash						332,279
Check sent to outside trustee.
OPEB Trust:
Cash						332,279
	Contribution for Beneficiaries						332,279
Contribution sent to outside trust.
Member Benefits						818,959
	Contributions to Beneficiaries						818,959
Employee annual costs related to retiree insurance, imbedded in internal service fund.
There is no need to transfer cashf banck and forth between the internal service fund and the trust.

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New GASB 45 Examples of Virginia Phase I Disclosures - Click HERE