OPEB – What is the fuss all about?
As a member of a city council, school board or board of directors of a special district you may
have heard horror stories about GASB 45 such as:
This is going to bankrupt the city!
It’s going to cost a lot of money to comply with this - and for what benefit?
We don’t provide any other post-employment benefits so we don’t need to worry about it.
The State of Texas legislature passed a law allowing Texas municipalities to opt
out of this standard, so why can’t we.
So what is all the fuss about?
The governmental accounting standards board (GASB) issued statement 45 because there was
concern that governmental entities have created obligations, in the form of future benefits to be
received by individuals who retire from the government, which have not been reflected in the
financial statements of the government. GASB 45 requires, for the first time, presentation in the
financial statements of a liability that already exists, it just has never been quantified. This
liability is the estimated present value of future benefits to be provided to retirees other than
pension benefits. The liability will appear only in the government-wide financial statements, you
know those front two financial statements that appeared a few years ago that no one understands,
and the full accrual proprietary fund statements.
GASB 45 does not require:
• The liability to be funded
• Any changes in budget preparation
• Any changes in how you account for the cost of providing these benefits in the funds
So why the fuss?
Well, for some municipalities this liability could be huge. It all depends upon what types of other
post-employment benefits are offered and the results of the actuarial valuation on those benefits.
The concern is that by reporting the liability the bond rating of the municipality would decrease
thereby limiting the ability to borrow at favorable interest rates.
Did I just mention actuarial valuation? Yes, unfortunately the standard will require actuarial
valuations to be performed for plans with 100 or more members. If there are more than 200
members the actuarial valuation will have to be done every 2 years and for plans with between
100 and 200 member the valuation can be done every 3 years. For plans will less than 100
members a “simplified” calculation can be performed to arrive at the liability to be reported. In
many cases these smaller plans may want to have actuarial valuations performed as the
simplified calculation is anything but simple. This is where GASB 45 will cost you. The
requirement to have these valuations performed imposes a financial burden on the municipality.
What if we don’t offer any other post-employment benefits?
The likelihood of this being the case is very slim. The reason is found in ORS 243.303(2) which
The governing body of any local government that contracts for or otherwise makes
available health care insurance coverage for officers and employees of the local
government shall, insofar as and to the extent possible, make that coverage available for
any retired employee of the local government who elects within 60 days after the effective
date of retirement to participate in that coverage …
But we make the retirees pay for their health insurance so how does this apply to us?
Under the requirements of GASB 45 if retirees participate in a group insurance plan and pay the
same amount as the cost for active employees there exists an implicit subsidy in the rate paid by
the retirees. Generally speaking, retirees have more health issues and use health services more
than individuals who are still working. Accordingly, retirees should have to pay more for the
same benefits than individuals who are working. By allowing the retirees to continue
participating in the group plan for the same premiums as working individuals there exists an
implicit subsidy. This implicit subsidy is considered to be another post-employment benefit.
We know we need to comply with GASB 45, but what if we decide not to?
If a decision is made to not comply with GASB 45 then a departure from generally accepted
accounting principles (GAAP) will exist. Under auditing standards generally accepted in the
U.S. auditors are required to modify their opinion on financial statements when a departure from
GAAP creates a material misstatement. Given the potential liability, most likely this will be
material. This will most likely result in an adverse opinion your municipality’s financial
OK, we’ll comply. Now what?
You should recognize that this is a financial reporting issue and does not require you to change
the benefits offered or how they are paid for, so no changes need to be made in your budget or
day-to-day accounting. That being said, you should take inventory of what benefits your retirees
receive, determine how many members you have to see how often you need to have actuarial
valuations performed and arrange for the actuarial valuation to be performed. Once this is done,
provide it to your auditor who can assist you in properly reporting the results in your financial
The requirements of GASB 45 are being implemented in 3 phases, with governments having
revenue over $100 million implementing for years ending in 2008, governments with revenue
over $10 million implementing for years ending in 2009 and all other governments implementing
for years ending in 2010.