An Alternative to the GASB 45 AMM

Many small cities and governmental entities (less than 100 employees) are still figuring out their GASB 45 liability or whether they even have a liability. GASB’s Alternative Measurement Method (AMM) is a simplified alternative to performing a full actuarial valuation, but even the AMM has a cost that some very small entities would prefer to minimize. This post describes a potential alternative to the AMM.

Consider the following situation for a small city:

–        Fewer than 20 employees

–        Only have potential “implicit subsidy” liability (i.e., allow early retirees to stay on active health plan and pay active premiums, but no direct subsidies)

–        Currently have no retirees on the health plan and don’t expect any retirees in the near future to continue health coverage prior to Medicare eligibility.

In this situation, an AMM valuation would likely result in $0 liability. The city’s auditor might request this one-time AMM so that they have documentation about how they determined that the city’s GASB 45 liability was immaterial.

I’d also like to highlight an even lower cost GASB 45 option; what I call the AAMM (the Alternative to the Alternative Measurement Method). If it is acceptable to the auditor, what we can do is develop a rough estimate of the potential GASB 45 liability for the city using comparative data we have collected over the course of many AMM valuations.

The actuary then writes a short letter which describes the liability estimate so that the auditor has documentation they can put in their files. This shows that an expert has reviewed the GASB 45 liability issue and the auditor has a basis for determining that the liability is immaterial. The end result is the same as the AMM scenario (i.e., the auditor has a basis for deciding the GASB 45 liability is immaterial), but an AAMM letter usually costs a fraction of preparing an AMM valuation.

A couple of follow-up thoughts:

–        The AAMM is NOT an actuarial valuation and is only meant to give a rough estimate of potential GASB 45 liability.

–        You could do something similar with the various GASB 45 estimators out on the web, but the AAMM has the advantage of a letter signed by an actuary.

–        Your auditor may offer to do a similar analysis, but this raises the question of independent audits and who is auditing their work?

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