By Timothy Dennie
In 2008 the Governmental Accounting Standards Pronouncement number 45 (“GASB 45”) went into effect. Since then we’ve seen some changes in actuarial practice, but no significant changes to the accounting guideline itself. But with 2017 that changes, as GASB 45 is being eliminated and replaced with a new standard, GASB 75.
GASB 45 vs. GASB 75
GASB 45 and GASB 75 serve the same purpose, which is to value an entity’s Other Postemployment Benefits (“OPEBs”). Both Standards require a calculation of a present liability for future non-pension benefits for employees and retirees, also known as the “Actuarial Accrued Liability” in GASB 45 and the “Total OPEB Liability” in GASB 75. The two standards differ in how the liability is disclosed on financial statements.
GASB 45 recognizes the liability within a footnote of the financial statements, with only a portion of the total liability going on the book through the Net OPEB Obligation. GASB 75 does away with the Net OPEB Obligation, requiring the full liability to be recognized immediately on the balance sheet.
Other differences between GASB 45 and GASB 75:
Selecting the Discount Rate. The discount rate is the rate at which future benefit payments are “brought back” to the present when calculating the liabilities. A lower discount rate therefore results in a higher liability. GASB 45 was vague when it came to choosing a discount rate, referring to general rates of return and leaving this to the actuary’s best estimate. This led most actuaries to use a rate of about 4%. GASB 75 eliminates this ambiguity, providing a specific external index to set the discount rate. As of January 1, 2017 this rate would be about 3.81%, which would result in a roughly 5% increase in liabilities from a 4% discount rate.
Scheduling of valuations. Another change is in the scheduling of valuations. Under GASB 75,
- Triennial valuations are no longer an option for very small plans.
- Valuations in interim years are required.
- Larger employers are encouraged (but not required) to have annual valuations.
When does GASB 75 take effect?
GASB 75 goes into effect for fiscal years beginning after June 15, 2017. GASB 75 does not make any provisions for late adoption.
Are there advantages to adopting early?
Any employer preparing a full GASB valuation in a fiscal year beginning after June 15, 2016 and before June 15, 2017 should consider adopting GASB 75 a year early, due to actuarial fees.
An interim GASB 45 valuation in 2017-2018 would not meet the requirements of GASB 75. In this case an entity would complete a full GASB 45 valuation for 2016-17, then complete a full GASB 75 valuation for 2017-18. This forces the entity to pay actuarial fees for 2 full valuations in back-to-back years.
Employers who adopt GASB 75 a year early, however, would only need to have an interim GASB 75 valuation done for the 2017-18 fiscal year, reducing fees over that 2 year period.
Note that larger employers, who plan/expect to have a full GASB 75 valuation performed annually, would not see any cost savings for early adoption.
Drawbacks of Early Adoption. An employer that adopts GASB 75 early could see an increase in their liabilities due to the change in discount rate, and would need to move the OPEBs liability to the balance sheet one year early.
If you would like to discuss the transition from GASB 45 to GASB 75 further, or how Burke Group can help you with GASB 75 valuations, please feel free to contact Vince Cassano at (585) 641-7246 or Tim Dennie at (585) 641-7247.