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Overview of GASB 45

Overview of GASB 45. Why did GASB issue a new accounting standard? Current accounting standards ignore cost while employee renders service (and benefits the employer) and recognize cost only after an employee retires

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Overview of GASB 45

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  1. Overview of GASB 45 • Why did GASB issue a new accounting standard? • Current accounting standards ignore cost while employee renders service (and benefits the employer) and recognize cost only after an employee retires • Also, the new standards provide information about liabilities for past service and to what extent these benefits have been funded

  2. Cost Comparison Example GASB 45 vs. Pay-As-You-Go (PAYGO) Annual Costs/Contributions $280 $240 $200 $160 Millions Annual Amount $120 $80 $40 $0 2007 2012 2017 2022 2027 2032 GASB Pay as you go

  3. Overview of GASB 45 • What are Other Post Employment Benefits (OPEB)? • Health care benefits (Medical, Rx, Dental, Vision) • Other benefits (Life insurance, Group legal, Disability, Long-term care) if not part of pension plan • What are not Other Post Employment Benefits? • Vacation, Sick/service leave, Sabbaticals, Accrued sick days, COBRA, Special termination benefits

  4. Overview of GASB 45 • Effective dates Annual RevenueEffective for FY> Phase I >$100m 12/15/2006 Phase II >$10m & <$100m 12/15/2007 Phase III <$10m 12/15/2008

  5. Actuarial Valuation Process • Identify the “Substantive Plan” • Collect data (demographic and claims data) • Determine actuarial assumptions • Project future benefit cash flows • Discount projected cash flows to determine present value of all future benefits (PVB) • Determine Accrued Liability (AL) (i.e. the portion of PVB earned for past service) • Determine Normal Cost (i.e., the value of benefits “earned” during a year) • Produce Valuation Report

  6. Overview of GASB 45 • Key financial statement components – GASB #45 • Annual Required Contribution – ARC • Annual OPEB Cost (annual expense) – AOC • Net OPEB Obligation (balance sheet liability) – NOO • Advance funding is not required; however, there are some advantages • The Net OPEB Obligation will be close to zero • The actuary can use a more favorable discount rate to value the plan • Avoids possible unfavorable credit rating impact

  7. Financial Impact of GASB • National estimate of “new” OPEB liabilities • $600 billion to $1.3 trillion • These liabilities will appear on public employer balance sheets over the next 30 years unless steps are taken to mitigate the liabilities.

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