Now that the first round of GASB 75 OPEB valuations are complete (and some are already onto their 2nd or 3rd rounds), it’s time to take a quick look at some common actuarial pitfalls. These are gotchas that employers and auditors may not be expecting, or notice, when reviewing a GASB 75 report.
- Unsupported actuarial assumptions. ASOPs 27 and 35 require actuaries to disclose the rationale for selecting the assumptions used in an actuarial valuation. Look for it in your GASB 75 or OPEB funding reports – it’s helpful for employers and auditors because it provides assurance that the actuary has carefully considered the underlying assumptions.
- Not estimating the “Cadillac Tax” effect on OPEB liabilities. Although this is usually a relatively small adjustment to liabilities, it’s very clear that GASB 75 expects it to be included in an actuarial valuation. Look for it in the actuarial report’s assumption summary section.
- Not updating GASB 75 results in the “off years” between valuations. Many GASB 45 reports used to provide 2 or 3 years of accounting results in a single document. However, the new GASB 75 rules require updated liabilities in the “off years” between biennial valuations.
This means that employers should receive some type of GASB 75 report every year – either a full actuarial valuation or a roll-forward report where the liabilities have been updated for new discount rates and actual prior year payments. For unfunded and partially-funded OPEB plans, the discount rate is based on a municipal bond index rate that will change every year and liabilities must be updated for this change.
- Not calculating an implicit subsidy liability. The implicit subsidy is the additional employer cost incurred when retirees participate in a group health plan but are only required to pay the same blended premium rate as active employees. It may seem like a nebulous cost, but it’s real. For almost all employers, the true cost of health care for non-Medicare retirees is higher than for (younger) active employees. If retirees are paying only the blended rate, then you’ve got an implicit subsidy liability.
GASB 75 (and even GASB 45) defers to actuarial standards of practice (ASOPs) when deciding whether to value an implicit subsidy liability. ASOP 6 was revised to measure an implicit subsidy for community rated plans, effective in 2015. Under the revised ASOP 6, an implicit subsidy exists whenever retirees pay the same non-age-based premiums as active employees.
Bonus: Using the GASB 75 OPEB accounting expense as a funding policy target. The GASB 45 ARC (Annual Required Contribution) was a convenient funding policy target … even if the methods used to determine the ARC weren’t based on sustainable funding practices. Well, surprise, GASB 75 eliminated the ARC so employers that want to prefund their OPEB need to develop their own Actuarially Determined Contribution (ADC).
Although the GASB 75 accounting expense may seem like a convenient successor to the ARC, it’s really not intended for that purpose. If the ARC is extinct and the GASB 75 OPEB expense isn’t appropriate, then what’s a good measure for OPEB funding policy decisions? Stay tuned – we’ll devote a series of future blog posts to this topic. In particular, we’ll discuss several important ways that OPEB funding policies should be approached much differently than pension funding policies.