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Note: Oklahoma does not report implicit subsidy of its retirement plan death and disability benefits as a separate unfunded OPEB. Nebraska and South Dakota do not offer other OPEBs.
Defines more conservative assumptions and variables
Creates broader transparency into total accrued liabilities
Discount rate assumptions will be somewhat more defined
Introduces the concept of ‘depletion’ into the liability discounting process
Significantly increases supplemental information disclosures
Requires participants in multi-employer plans (i.e., school systems that are part of a state-wide pension plan) to report significantly more information, and record a proportional share of the plan
GASB Statement
Required for FY starting after
Generally in Reports for FY
Ending
GASB 74 June 15, 2016 June 30, 2017GASB 75 June 15, 2017 June 30, 2018
$1 million invested on day 1, assuming an annual return of 7%, will grow to $7.6 million at the end of 30 years*
The difference between investing now and investing in 5 years is $2.2 million in lost earnings
Delaying of funding for 10 years could result in $3.8 million in lost earnings
Advantage of Funding Liabilities Now
*Example represents growth of original deposit at an annual earnings rate of 7%, which is an average long-term rate of return for a balanced fixed-income and equity portfolio; assumes no redemptions of funds.
Model returns may not reflect material economic or market factors.
Returns are shown before any fees.
Do not assume that the recommendations made in the future will be profitable or will equal the performance cited.
Growth of Initial $1 million Investment*Invest today vs. 5 years vs. 10 years
Blend the rate based on percentage of the ARC being
contributed
In many cases the actuaries seem to simply apply the investment return rate to the entire liability amount if the plan sponsor is making reasonable progress toward increasing the funded ratio and annual funding of the ARC
The plan and plan sponsor may continue to follow their
previous approach for funding purposes, but the reporting on
the GASB basis will be based on one standard:
The expected rate of return on plan assets, to the extent plan assets
are projected to be available for the payment of future benefits
The yield of 20-year, tax-exempt municipal bonds for the remainder of
future payments – which will be all future payments if there is no Trust
Based on the implementation of the GASB 67/68 standard, plan assets
will be projected to be available for the payment of future benefits if the
plan sponsor has an actual track record of contributing the full ARC
If there is not a track record of contributing the full ARC, as is likely in
the OPEB space, if there are assets the projected cash flows of
benefits, investment returns, employer and employee contributions
based on historical patterns, and the asset levels will be combined to
identify a potential “depletion date”
C u r r e n t S t a n d a r d : G A S B 4 3 / 4 5 N e w S t a n d a r d : G A S B 7 4 / 7 5
The rate is based on facts and circumstances of the client and final determination by the actuary.
We have greater ability to project a depletion date under the new standards, but still require the
particular financial and actuarial data of the client to do so.
For the intermediate term (up to five years), our capital market assumptions derive from our assessment of current economic conditions, including corporate profits, balance sheets, etc, and current valuations for various asset classes. Our long-term assumptions are derived using an economic building block approach that projects economic and corporate profit growth and takes into consideration the fundamental factors driving long-term real economic growth, our expectation for inflation, productivity and labor force growth.
Please refer to PFM’s 2017 Capital Market Assumptions for a complete description of the methodology used to develop these assumptions and important disclosures.
US Equity
International Developed Equity
Em erging M arkets Equity
Core Bonds
Interm ediate Investm ent G rade Corp
Em erging M arkets Debt
High Yield
Bank Loans
REITsPrivate
Equity Real Estate
Com m oditiesHedge Funds
Private Equity
Cash
US Equity 1
International Developed Equity
0.8 1
Em erging M arkets Equity
0.7 0.7 1
Core Bonds 0.3 0.2 0.2 1
Interm ediate Investm ent G rade
0.3 0.2 0.2 0.9 1
Em erging M arkets Debt
0.5 0.5 0.5 0.4 0.4 1
High Yield 0.7 0.5 0.5 0.4 0.4 0.4 1
Bank Loans 0.4 0.3 0.3 0.3 0.3 0.7 0.7 1
REITs 0.5 0.4 0.4 0.3 0.3 0.3 0.4 0.4 1
Private Equity Real Estate
0.4 0.3 0.3 0.3 0.3 0.2 0.4 0.2 0.8 1
Com m odities 0.1 0.1 0.2 0.2 0.2 0.3 0.2 0.2 0.1 0.1 1
GASB Rules for OPEB (1 of 4)Feature GASB 45 GASB 74-75 Potential ImpactOPEB Liability
The difference between the actuarial funding requirement (Annual OPEB Cost, AOC) and what was actually funded is recorded on the Statement of Net Position as a liability (or asset). The full liability is addressed in the notes and as supplemental information.
The entire net, or unfunded, portion of the OPEB liability will be recognized in the Statement of Net Position in the government’s financial statements.
Combined with the other changes from pronouncements 67, 68, 74 and 75, many governments that previously had a positive Net Position could be in a negative position following implementation.
Cost Allocation/ Expense Recognition
Six methods allowed including Projected Unit Credit, which is the prevailing standard for private pensions
The present value of projected future benefit payments will be attributed only through the entry age actuarial cost method using level percentage of payroll
The entry age actuarial cost method may result in a higher liability measure than the other measures that were previously allowed
GASB Rules for OPEB (2 of 4)Feature GASB 45 GASB 74-75 Potential Impact
Discount rate for Measuring Liability
A policy rate selected based on expected long-term investment returns
A hybrid of the current practice and the more conservative rules for private sector accounting, which are based on the cost of debt/other liabilities. The portion of benefit payments not expected to be funded by trust assets must be discounted using a high-quality tax-exempt 20-year general obligation municipal bond rate.
An increase in reported liability for the majority of plans that continue to fund OPEB as a pay-as-you-go expense, and for plans that are projected to deplete their funds.
Amortization of Accrued Liability
Unfunded liability could be recognized over open or closed periods of up to 30 years
The net unfunded liability accrued to date will be recognized immediately. Issuers and plans may continue to use alternate amortization methods for their funding policy.
The reported liability will increase significantly
GASB Rules for OPEB (3 of 4)Feature GASB 45 GASB 74-75 Potential Impact
Amortization of Changes in Expense/ Liability
Open or closed periods of up to 30 years
Depending on the cause of the change, either immediate, five years, or a closed period based on the average expected remaining service life for actives and inactives
Increased amount and volatility of expense
Calculation of Expense
The AOC adjusts the ARC, based on normal cost and the amortization of accrued liability on an open or closed period of up to 30 years, for any cumulative unpaid ARC to date
The expense or change in net position is equal to a number of factors (service cost, interest, changes of benefit terms or assumptions, experience, etc.)
The ARC will no longer be a required calculation, and plans will have to set funding on an Actuarial Determined Calculation based on their choice of assumptions.
Annual expense will be more volatile. Funding policy will be separated from accounting, and more responsibility for setting funding policy and reporting funding progress will be placed with the plan and issuer
GASB Rules for OPEB (4 of 4)Feature GASB 45 GASB 74-75 Potential ImpactReporting for Cost-Sharing Multiple-Employer Plans
Report only the contractual or statutory amount contributed to the OPEB plan as an expense
Will report OPEB expense, net liability, and the supporting actuarial data based on their proportionate share of the collective amounts for all governments in the plan
In conjunction with the similar requirement from GASB 67 and 68 this will be a major change for these employers and will provide information that the bond rating agencies have not been able to consistently incorporate into their ratings previously.
Asset Valuation
OPEB trust fund values can be smoothed over up to a 30-year period
Plan assets must be measured at market value as of the end of the reporting period
Net Liability and expense will be more volatile
Note Disclosures
Information on the plan, benefits, total Unfunded Actuarial Liability, and actuarial assumptions
Significantly expanded detail of actuarial assumptions, as well as sensitivity analyses for projected costs and investment returns, and ten-year historical data on liabilities, expenses, funding.
More extensive information on plan trends and financial position.