HOW DO YOU DETERMINE THE DISCOUNT RATE UNDER GASB 67/68 and GASB 74/75?
Future benefit payments are required to be discounted using a single blended rate. The blended rate is based on a “crossover” calculation that takes into account:
- The plan’s current funded status,
- Expected investment return, which depends on the fund’s investment mix,
- Projected future contributions and benefit payments to and from the fund; and
- A municipal bond rate, after the “crossover” point (if any) when pension or OPEB trust assets are depleted.
WHAT TYPE OF PLAN ARE WE: SINGLE EMPLOYER, AGENT MULTIPLE-EMPLOYER, OR COST-SHARING MULTIPLE-EMPLOYER?
Single employer plans only provide benefits to the employees of one employer.
Agent multiple-employer plans pool plan assets of multiple employers for investment purposes, but maintain separate accounts for paying benefits for each individual employer.
Cost-sharing multiple-employer plans pool plan assets of multiple employers for investment purposes, and plan assets can be used to pay benefits to the employees of any employer.
HOW DO I JUDGE IF MY PLAN’S AD HOC COLAS ARE “SUBSTANTIVELY AUTOMATIC” AND HENCE SHOULD BE INCLUDED IN CALCULATING OUR TOTAL PENSION LIABILITY?
In Statement 68, GASB neither defines the term “substantively automatic” nor does it provide a specific list of factors to consider. What it appears they are trying to ascertain is whether the plan sponsors really have any credible discretion to grant or deny the COLA. Here is a list of the common evidence to be examined:
- Historical pattern of always granting (or denying) the COLA
- Oral or written statements by the plan’s sponsors
- Plan member’s expectations
- Routinely applying the same COLA either in dollar terms or relative to an economic indicator ( ie % of CPI)
Given the lack of precision in the definition, the determination of a “substantively automatic” COLA will need to be made on a case-by-case basis.
WHAT DOES THE GASB MEAN BY A “SPECIAL FUNDING SITUATION?
Most of the time, a government employer is totally responsible for the pension and OPEB benefits of its employees. Sometimes, another entity is responsible for all or a part of the benefits. An example of this would be when a county government is responsible for funding half of the required contributions for a city police department’s retirement benefits. A special funding situation only exists if one or both of the following are true:
- The non-employer entity’s required contribution is based on a metric related to the pension or OPEB plan, or
- The non-employer entity is the only one legally required to contribute to the plan.
A special funding situation has implications for both the government employer and the nonemployer contributing entity. GASB 68 and 75 prescribe how both should report their portions of the liability.