A full valuation (measurement) of GASB 45 liabilities is required every 2 to 3 years, depending on the size of the employer. In the years when actual measurements are performed, the GASB 45 results (ARC, Annual OPEB Cost, and Net OPEB Obligation) are fairly straightforward to calculate. However, there is often confusion about what to do in the “off-years” when no actual valuation (either full actuarial valuation or AMM) is required. This post gives a brief introduction to some of the issues encountered.
GASB’s guidance about what to do in the off-years is a bit vague and confusing. The GASB 45 implementation guide states that “a given valuation provides the ARC for one, two, or three” years. On the surface, this seems to indicate that the ARC remains level in the off years (i.e., if your ARC is $100,000 in the full valuation for FY10, then the off-year ARC in FY11 will also be $100,000).
However, the implementation guide also includes some language about the off-year ARCs being “derived” from the ARC in the previous full valuation. This seems to imply that the off-year ARC requires some adjustments. And this is where the calculations get a bit tricky. The main ideas are:
- Accounting versus funding. The ARC is really a measure of plan funding (its GASB’s recommended contribution amount), but we are trying to prepare accounting results for GASB 45. There is an inherent disconnect in reflecting the ARC funding requirement (based on cumulative funding shortfalls) in your accounting statements (where you only recognize each gain or loss once).
- Annual OPEB Cost. The true measure of gross OPEB liability accrued each year under GASB 45 is the Annual OPEB Cost (AOC). This amount is essentially equal to the ARC plus some important adjustments to compensate for the funding vs. accounting issues discussed in the previous bullet.
- Impact of Level ARC on AOC. If we use a level ARC in the off years, then the automatic adjustments included in the AOC calculation go haywire.
In order to get the off-year accounting to work correctly, you either need to
– Adjust the ARC (a reasonable interpretation since it will still be derived from the last full valuation); or
– Adjust the AOC calculation (this gets the job done, but may not be acceptable to your auditor since you technically aren’t following the GASB 45 rules).
There isn’t enough space here to go into all of the technical details about how to adjust the ARC in off years, but I have worked up an internal memo on the subject. If you’d like a copy, feel free to send me an e-mail or leave a comment on the blog. The memo also has some examples that demonstrate how the adjustments work.
I’ll admit that using a level ARC in off-years is probably okay if your auditor agrees to it, and many (perhaps most) public pension systems use this same methodology for GASB 27 accounting. As an actuary (not an accountant), the only reason that I am aware of the the off-year ARC issue discussed above is that an auditor took me to task for it.
A final note: Over the past couple of years, I have seen government entities complete their off-year GASB 45 accounting using a variety of methods that range from “reasonable attempt” to “bizarre”. If you have questions about what the Net OPEB Obligation reconciliation should look like in the off-years, ask your actuary. A good GASB 45 actuarial valuation report should even contain an estimate of off-year accounting numbers.