Coming to grips with other post-employment benefits.

• Author: Esser, Jeffrey L.
• Position: From the executive director

Post-retirement healthcare and other post-employment benefits (OPEB) are certainly nothing new to the public sector, where they have long been an important element of employee compensation. All the same, GASB Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits Other Than Pensions, has focused attention now, as never before, on the ultimate cost of such benefits to state and local government employers. The challenge of funding OPEB provides government finance officers with an unparalleled opportunity to assume financial leadership as governments weigh their options and craft a strategy to respond to the challenge.

"JUST THE FACTS"

The first step in effective problem solving, of course, is to correctly identify the problem. As noted previously in this publication (Government Finance Review, "OPEB Urban Legends," June 2006), there are a number of common misconceptions that must be dispelled before the real issues raised by OPEB can be addressed:

* GASB Statement No. 45 does not force governments to change how they fund OPEB. Nothing in GASB Statement No. 45 prevents a government that decides to continue to finance OPEB on a pay-as-you-go basis from receiving an unqualified opinion from its independent auditors.

* GASB Statement No. 45 will not immediately create a fund balance deficit in the general fund. Under GASB Statement No. 45, governments will continue to recognize expenditures for OPEB only as funding actually occurs, regardless of how the amount funded is calculated (i.e., fund balance will only be affected in a given year by the amount actually funded in that year).

* GASB Statement No. 45 will not cause a liability to be reported in the financial statements for benefits earned in the past. GASB Statement No. 45 calls for the cost of OPEB earned as a result of past service to be only gradually amortized (up to 30 years) as part of future OPEB cost. Thus, the financial statements will report no liability at all for OPEB so long as the employer fully funds the actuarially determined annual required contribution (ARC) each year. Moreover, even if this contribution is not fully funded, a liability will be recognized only for the underfunding.

* GASB Statement No. 45 applies even if benefits are "contingent." Because accounting emphasizes economic substance over legal form, employers may have OPEB to report even in the absence of a written plan and even in situations where benefits are legally...