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Accounting Today    
June 16, 2008

Reduce Other Post-Employment Benefits Liability with a

By Lance Wallach

Other Post-Employment Benefits

In 1994, the Government Accounting Standards Board (GASB) established
standards for public employee pension plans.  Government and public employers
have to report and account for
pension benefits costs.  

However, until recent years, there was no such standard in place for other post-
employment benefits (OPEBs) for state and local government workers.  

Private sector employers have been required to report OPEBs for over 15 years
under the FASB Standards106/158.  

Government and public sector employers have been required to report OPEBs
since August 2004 after the issuance of GASB Statement 45.  This means that all
government employers must now keep their promise of providing retiree benefits.  
They need to be calculated accurately, accrued during the employee’s years of
work with the employer, and recognized as a financial obligation as OPEB costs.  
These costs are to be reported on financial statements of large public sector
employers beginning with the first financial report period after December 15,
2006, and on small employers beginning in 2008.

The intent of GASB 45 was to bring government and public accounting standards
into line with private company standards.  This requires reporting pensions as
well as non-pension post-employment benefits.  As the name states, OPEBs are
benefits other than pensions.  Many state and local governments, public schools,
public universities and other public and government agencies provide post-
employment benefits that are non-pension-related.  These benefits can include
health care benefits including vision, dental, prescription and health insurance;
life insurance; legal benefits and other non-pension-related work benefits.

Until these changes were put in place with GASB 45 and enforced, readers of
government and public financial statements had incomplete information on the
costs of services provided by state and local governments and public employers,
and were therefore unable to analyze the financial position and long-term health of
these government and public agencies.


Actuarial calculations are used to derive the OPEB cost.  In order to keep the
calculations up to date, they must be recalculated every two to three years
depending on the size of the employer.  For example, employers with less than
100 employees can use a simplified alternative method for measuring the OPEB
cost, but these employers still need to re-evaluate and re-assess every three
years.  The costs and obligations for post-employment benefits are determined
using the actuarial present value of the post-employment benefits -  in other
words, the present value on term of service and the terms of the OPEB plan that
are presently in place.  

There are assumptions that are made in the actuarial evaluations.  They include:

•        Healthcare cost factors: age, industry, family, geography, gender.
•        Expected long-term and/or short term rate of return on plan assets.
•        Projected salary scale.
•        Death rates.
•        Projected inflation of medical care costs.
•        Employee turnover rate.
•        Retirement rates; this can vary extensively from year to year.
•        Any promises made to retirees.
•        Discounts or benefits designed into the plan.

After the actuarial evaluations are completed, each employee gains a different
attribution period, which is based on their period of eligibility – date of hire to date
of full eligibility (i.e. retirement).  With all this said, GASB only requires that
employers report OPEBs; employers are not required or even obligated to fund the
OPEB cost.  However, not doing so can affect significantly an employer’s credit
rating and cost of issuing debt financing.  

The largest OPEB cost for an employer is health care benefits.  The majority of
public sector employers, with more than 200 employees, offer some form of post-
employment health benefits.  Unfortunately, with the uncontrollable increases in
health care costs happening annually, and severe budget cuts being put in place
across nearly all public and government agencies, the continuing use of “pay-as-
you-go” will become more difficult and create new financial liabilities for
employers.  Add to this state laws that require employers to allow retirees to
remain on the active health plan until Medicare steps in, and the reduction in
federal and state subsidies, and employers are struggling to subsidize the gap
between the blended plan cost (active employees and retirees) and the actual
retiree cost.  Even if the employer is not contributing to the retiree health care plan,
this amount adds additional liability.  

In December 2004, a report from Standard and Poor’s, stated that: “The new
[GASB 45] reporting may reveal cases in which the actuarial funding of post-
employment health benefits would seriously strain operations, or, further, may
uncover conditions under which employers are unable or unwilling to fulfill these
obligations. In such cases, these liabilities may adversely affect the employer's
creditworthiness. All Standard & Poor's rated employers will be monitored closely
in terms of their reporting under GASB 45. Upon implementation of these new
standards, we will include the new information as part of our ongoing analytical
surveillance of ratings."

The following year, in June 2005, Fitch Ratings released its report, saying: “Fitch's
credit focus will be on understanding each issuer's [GASB 45] liability and its
plans for addressing it. Fitch also will review an entity's reasoning for developing
its plan. An absence of action taken to fund OPEB liabilities or otherwise manage
them will be viewed as a negative rating factor. Steady progress toward reaching
the actuarially determined annual contribution level will be critical to sound credit

Everyone is working towards a solution that will benefit both employers and
employees.  But it takes constant monitoring by both employers and employees.  

However, one solution that could benefit everyone is considering a
VEBA plan.  

Benefits of a VEBA plan

VEBAs have been successfully established to help reduce health costs and
establish financially sound OPEB plans that have proven to be both efficient and
effective.  The VEBA can help employers develop strategies that can lower their
liabilities.  Many private sector employers have benefited from the introduction and
use of a VEBA for their OPEB plan.

A well designed GASB 45 OPEB involves many different risk management
strategies and funding techniques.  Any benefit promise made by an employer
should be partially or fully funded in a qualified trust to enable actuaries the use of
long-term discount rates during the calculations.  One approach to this funding
source could be issuing OPEB obligation bonds or finance pools.  The employer
can then successfully take these finance strategies and blend a defined-benefit
approach with a defined-contribution strategy to create a successfully managed
OPEB plan with reduced liabilities.  These two basic forms of post-employment
benefit plans specify either the amount of benefits to be provided to an employee
at the end of their employment period, or stipulate only the amount to be
contributed by the employer to a member’s account for each year of active

A defined-benefit OPEB plan is where the terms are specified and the benefits
provided from the time of retirement or other employment separation.  These
benefits can be dollar-specific or the type/level of coverage - for example, a dollar
payment based on a flat rate or years of service, or defined medical coverage,
prescription drugs or a percentage of the premiums.  Unfortunately, the defined
benefit OPEB plan is complicated where the reporting makes assumptions on
future medical costs, mortality rates, the availability of Medicare, and the
probability of future events.  

A defined-contribution OPEB plan considers the individual.  It takes into account
individual contributions while active, rather than the benefits the beneficiaries are
to receive post-employment.  Benefits for the defined-contribution plan consist of
contributions, earnings on investments of these contributions, and forfeitures on
the member’s account.  This makes the plan easier to report on, but does not
specify the amount of benefits received by the employee after retirement.

GASB accrual standards only apply to defined-benefit OPEB plans.  Defined
contributions are considered “funded,” as the employer cost equals the required
contribution.  Therefore, changing the way retiree healthcare and other post-
employment benefits are paid can lower or even eliminate the unfunded other
post-employment benefits liability.

Now that the public sector and government agencies have to report other post-
employment benefits, the VEBA can establish the best plan for the least liability for
employers.  State and local governments and public services can look at the
private sector and see the benefits it has gained from using VEBAs.  They can see
how it can help soften the financial impact of the new, significant reporting

Lance Wallach is a frequent speaker at national conventions and writes for more than 50
publications. He was the National Society of Accountants Speaker of the Year. Lance
welcomes your contact. Email - or call 516-938-5007 for more info.

DISCLAIMER: The information provided herein is not intended as legal, accounting, financial,
or any other type of advice for any specific individual or other entity.  You should contact an
appropriate professional for any such advice.

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