OPEB Communication Resources

1. OPEB Communication Resources March 13, 2018 Dean Michael Mead, GASB Senior Research Manager & GASAC Coordinator Emily Paul, GASB Project Manager Mr. Mead and Ms. Paul. National Conference on Public Employee Retirement Systems

2. Presentation Overview • Background • Overview of OPEB communication resources • Questions

3. Background on the Standards • Pre-agenda research evaluating the effectiveness of existing standards on postemployment benefits began in 2006 • Project added to current technical agenda in 2008 • Two-phased project • Pensions administered through trusts • Statements 67 and 68 issued in June 2012 • Implementation Guides issued in June 2013 (Statement 67) and January 2014 (Statement 68) • OPEB and pensions not within scope of Statements67/68 • Statements 73, 74 and 75 issued in June 2015

4. When Changes Will Occur • Statement 74 (reporting by OPEB plans) is effective for periods beginning after June 15, 2016 • First year-end: June 30, 2017 • Statement 75 (reporting by employers that provide OPEB) is effective for periods beginning after June 15, 2017 • First year-end: June 30, 2018

5. OPEB Communication Resources • Offered to stakeholders to use in communicating financial statement effects of new OPEB standards • Focus is on major changes from prior accounting standards and new information that will be provided • Question and answer format • Nonauthoritative • Available on the GASB website (www.gasb.org)

9. Topics Covered by Materials • Did implementing the accounting standards create the OPEB liability? • Why did the size of the OPEB liability change? • Will governments in cost-sharing OPEB plans report OPEB liabilities? • How is the calculation of OPEB expense changed by the new accounting standards? • What information is included in notes and required supplementary information? • Has the annual required contribution (ARC) disappeared? • How does the OPEB liability affect net position?

10. 1. Did Accounting Standards Create the OPEB Liability? • Other postemployment benefits (OPEB) • Retiree healthcare benefits • Other retirement benefits not provided through a pension plan • Liability is a result of formal or informal agreement to provide OPEB to its employees • New accounting standards did not create the OPEB liability; they improved the approach to measuring the liability that is reported in the financial statements

11. 1. Key Questions and Answers • Why does the government report an OPEB liability if the government can modify the benefits it provides at any time? • What is an implicit rate subsidy and how is it related to a government’s OPEB liability? • What is the relationship between accounting standards for OPEB and a government’s liability for OPEB? • What are the benefits of an accounting-based approach for reporting OPEB activities? • What are the accounting numbers intended to convey?

12. 1. Fundamental Approach • Fundamental approach for OPEB is the same as required for pensions in Statement 68 • Viewed in the context of an ongoing, career-long employment relationship • Focus on the cost to taxpayers over time of providing government services • Accounting-based versus funding-based approach to measurement

13. 2. Why Did the Size of the OPEB Liability Change? • New accounting standards include changes in the methods that governments may use to measure their OPEB liability • OPEB liability might be significantly larger than the liability previously reported on face of financial statements (net OPEB obligation) • OPEB liability might be different than liability previously reported in notes to financial statements (UAAL) • New accounting standards improve comparability across governments • New accounting standards do not change amount that governments are required to contribute to their OPEB plans or amount needed to pay for benefits as they come due

14. 2. Key Questions and Answers • How is the measurement of the OPEB liabilities changing? • What are the components of the OPEB liability? • What changes in the accounting standards may increase or decrease the size of the total OPEB liability? • If the government’s OPEB liability changes, does that mean that governments will need to contribute more or less for OPEB?

15. 2. Changes in Reported Amounts

16. 2. Components of the OPEB Liability • Net OPEB liability • Total OPEB liability less OPEB plan net position • If OPEB plan is not administered through a trust that meets the specified criteria, total OPEB liability is recognized

17. 2. How Is the Long-Term Obligation Measured? Project cash outflows for benefits Discount projected benefits to actuarial present value (APV) Allocate the APV of projected benefits to periods

18. 2. Key Changes in Measurement • Standards do not address how much governments need to contribute to their OPEB plan or how much they would need to finance their OPEB on a pay-as-you-go basis.

19. 3. Will Governments in Cost-Sharing OPEB Plans Report OPEB Liabilities? • Cost-sharing multiple-employer OPEB plan • Administered through a trust that meets the specified criteria • Plan assets and liabilities to employees are shared among participating employers • Governments in cost-sharing plans will recognize their proportionate share of the collective net OPEB liability for the first time

20. 3. Key Questions and Answers What is a cost-sharing multiple-employer OPEB plan? Do governments in cost-sharing OPEB plans really have an OPEB liability? What do new accounting standards require for cost-sharing OPEB employers? Why are governments in cost-sharing plans required to report their OPEB liabilities?

21. 3. Requirements for Cost-Sharing Employers Employer proportionate share $ Employer proportion % Collective amount $ • Governments in cost-sharing plans will report their portion of collective net OPEB liability • Each participating employer determines their proportion based on a comparison of their contribution effort with the collective contribution effort of all participating employers and nonemployer contributing entities • Each employer multiplies the collective Net OPEB Liability, by their proportion to determine their proportionate share • The proportionate share of the collective net OPEB liability is what the employer reports in its own financial statements

22. 4. How Is Calculation of OPEB Expense Changing? New accounting standards no longer based on a financing approach for postemployment benefits Many events that affect the OPEB liability will be recognized immediately in OPEB expense Effects of other events will be recognized in expense over fewer years than in the past

23. 4. Key Questions and Answers How was the annual OPEB expense measured under prior accounting standards? How do the new accounting standards measure annual OPEB expense? What types of changes in the OPEB liability are recognized immediately? What types of changes in the OPBE liability are recognized in subsequent periods? What is a deferred outflow of resources or deferred inflow of resources? How do contributions or amounts paid for benefits affect OPEB expense?

24. 4. OPEB Expense—Immediate Recognition • Report in OPEB expense immediately: • Service cost • interest on the beginning balance of the Total OPEB Liability • Effect of changes in benefit terms

25. 4. OPEB Expense—Deferrals • Reported initially as a deferred inflow or outflow and introduced into OPEB expense over a period equal to the average remaining service period of all members of the plan, both active and inactive: • The effects on the Net OPEB Liability of (1) changes in economic and demographic assumptions and (2) the difference between assumed and actual economic and demographic assumptions (experience gains and losses) • For cost-sharing governments, the effects of changes in proportions • Reported initially as a deferred inflow or outflow and introduced into OPEB expense over a five-year closed period: • The effect on the Net OPEB Liability of the difference between the assumed and actual return on plan investments

26. 4. OPEB Expense v. Employer Contributions • The amount contributed by the employer not intended to be the OPEB expense amount • Even if a government contributes based on an actuarially determined amount (such as the Annual Required Contribution or ARC), generally it is calculated differently from OPEB expense • Contributions from employers in cost-sharing plans generally are based on statute or contract, not on actuarial calculations • Statutory and contractual contributions are likely to be considerably less than what an actuarially determined contribution would be

27. 5. What Information Will Be Included in Notes and RSI? Expanded note disclosures and RSI will provide more comprehensive reporting of a government’s OPEB liabilities and expense Expanded RSI schedules will provide information for trend analysis

28. 5. Key Questions and Answers How will the new standards enhance the usefulness of information presented in notes? How will the new standards enhance the usefulness of trend information about the OPEB liability? Will users of financial reports still be able to obtain information about plan funding? How will the new standards affect the RSI that was previously required to be reported?

29. 5. Notes: Descriptive Information Members by type Assumptions used to measure the liability

30. 5. Notes: Sensitivity Analysis

31. 5. Notes: Changes in the Net OPEB Liability

32. 5. Notes: Changes in the Total OPEB Liability

33. 5. RSI: Changes in Liability and Ratios 5 years shown for illustrative purposes

34. 5. RSI: Actuarially Determined Contributions 5 years shown for illustrative purposes

35. 6. Has the ARC Disappeared? • OPEB accounting is no longer based on the ARC • Some governments will continue to present information about contribution measures

36. 6. Key Questions and Answers • What happened to the ARC? • Why not continue to require governments to provide information on the ARC?

37. 7. How Does the OPEB Liability Affect Net Position? • Net position • Residual of all other elements presented in a government’s statement of financial position for government-wide activities, proprietary funds, and fiduciary funds • Changes in the way government report OPEB-related measures might have a significant effect on net position

38. 7. Key Questions and Answers • What is net position and how is it measured? • How will recognizing the OPEB liability affect the net position of a government?

39. Questions? For more information, check out the OPEB pages at www.gasb.org.

40. Website Resources Free download of Statements, Interpretations, Concepts Statements and other pronouncements Free access to the basic view of the Codification of governmental accounting standards Free copies of proposals Up-to-date information on current projects Articles and Fact Sheets about proposed and final pronouncements Form for submitting technical questions Educational materials, including podcasts Electronic newsletter and other resources for users

41. Plain-Language Materials The GASB is committed to communicating in plain language with constituents about its standards and standards-setting activities. Plain-language articles accompany major proposals and final pronouncements Fact Sheets are prepared for complex projects to answer commonly raised questions Articles discussing the Board’s consideration of cost-benefit issues when developing major Statements

42. GASB Members • David A. Vaudt (Chairman) • Jeffrey J. Previdi (Vice Chairman) • James E. Brown • Brian W. Caputo • Michael H. Granof • Kristopher E. Knight • David E. Sundstrom

43. How Is the GASB Funded? 2017