CERBT Audited vs. Reported Assets

For most California public agencies funding Other Post-Employment Benefits (OPEB) through CERBT, there is a small difference between the 6/30/2017 assets originally reported and the final audited assets (Fiduciary Net Position, or FNP).  Our clients have been asking what to do about it.

Even the State of California has the same issue.  We’ve discussed it with the State Controller’s Office, and they’ve chosen to go with the amount originally reported by CERBT for the State’s CAFR.

Many of our clients have chosen the State’s approach, because their OPEB actuarial valuations were completed before the audited assets were announced by CalPERS in a 3/27/2018 circular letter.

Most of the differences in audited vs. reported assets are quite small.  Your options include:

  1. using the CERBT assets originally reported, or
  2. waiting to finalize your OPEB actuarial valuation until audited CERBT assets are available.

If you ever want to change from option 1 to option 2 (or vice versa), you’ll need a one-time adjustment to your FNP reconciliation.  Either way, you’ll want to check with your auditor.

OPEB Funding Policy Opportunities

New Governmental Accounting Standards Board (GASB) statements 74 and 75 are intended to make accounting for OPEB (Other Postemployment Benefits, usually retiree medical) more transparent by moving the entire unfunded liability to the face of the financial statements. This post discusses some of the OPEB funding policy opportunities that employers should consider as they prepare to implement GASB 74/75 over the next two years.

Opportunity #1: The potential for funded status improvement. Unlike pension plans which are generally pre-funded, most public sector OPEB liabilities are unfunded and benefits are pay-as-you-go. But employers should consider that ANY funding policy is better than nothing – and even a modest level of pre-funding will improve the plan’s funded status and balance sheet impact.

Opportunity #2: A funding policy can help lower the calculated liability. The ultimate cost of retiree medical benefits can never be known exactly until benefits are actually paid in the future. However, the best estimate of those costs in today’s dollars is impacted by how (and if) funds are invested. To the extent that investment returns can help fund future benefit costs, an OPEB trust with higher expected returns can help reduce your calculated OPEB liability.

Opportunity #3: Attention can drive action. OPEB liabilities are becoming front-page headlines – particularly because of their unfunded nature. Employers should harness this increased scrutiny to compel stakeholders (e.g., employers, employees, and taxpayers) to collaboratively review OPEB terms and create a strategy to prudently prefund these promises.

There will be pitfalls along the way. It may be difficult to secure additional funding sources when employers and employees are already trying to eliminate existing pension debt. Plus, OPEB costs are usually more volatile than pensions, so an OPEB funding policy will need to consider strategies to deal with this “moving target”.

There may also be situations where an employer does not want to prefund OPEB. Perhaps they fear that “committing” money towards OPEB will reduce their ability to reduce benefit levels in the future. However, this rationale just skirts the larger issue of knowingly promising benefit levels which are unaffordable.

GASB 74/75 is a catalyst for public employers to revisit their OPEB funding policies. There is a limited timeframe for stakeholders to develop a meaningful funding strategy before the entire unfunded liability goes “on the books”.