What is GASB 43 and 45?

GASB 43 and 45 are new governmental financial reporting requirements for all state and local governments that sponsor postemployment healthcare benefits. The major covered benefits include medical, dental, life insurance, and disability.

GASB 45 covers the financial reporting for the sponsoring employer. Some employers have set up a trust, agency fund, or fiduciary component fund to accumulate assets to finance retiree health benefits. GASB 43 covers the financial reporting for these funds and not the sponsoring employer.

What is so different from the current disclosure requirements?

Current disclosures are done on a cash accounting basis. The annual expense equals the actual cost for the year. Also, there is no differentiation between expenses for current and retired employees.

Under the new accrual disclosures, the cost of retiree healthcare benefits is treated as current compensation and is expensed during an employee’s active career. See other Q & A’s for other differences.

When do I have to take action?

The effective date varies by size of the government entity and whether GASB 43 or 45 applies.

Why is there a GASB liability if retirees must pay the full COBRA rate?

This is another change created by accrual accounting. The objective is to disclose retiree healthcare liabilities using retiree costs and assumptions. Active healthcare liabilities continue to be accounted for on a cash basis and are not part of the new GASB disclosures.

For most employers, the COBRA rate represents the average cost of participants enrolled in their medical plan. Typically 90% or more of enrollees are actively employed. Continuing with this logic, the COBRA rates are effectively the average cost of the “active population”. Medical costs for a retired population are considerably higher than an active population.

Below is a chart that breaks down the actual medical costs into age-groups using actuarial health factors.

Using the above table for a 60-year old retiree with single coverage, the GAAP implicit employer subsidy is $270 per month ($627 retiree medical cost less the $357 COBRA single-coverage premium). Under the current cash basis, the employer subsidy would be considered $0 ($350 medical cost less $357 COBRA contribution). When measuring the GASB disclosures, it is the implicit subsidy that must be recognized in the calculations.

How will new disclosures affect our bond or credit rating?

Any negative impact will be a function of how large the accounting liabilities are, how much control plan sponsors have over plan design, and the cashflow of any future explicit or implicit subsidies.

Why is the liability so large when there are only a few retirees enrolled in the health plan?

It isn’t only the number of existing retirees that generate the GASB liabilities. Future retirees, spouses of retirees, and healthcare inflation are other factors that generate GASB liabilities.

Will accumulating a dedicated pool of assets reduce the GASB liability?

Accumulating assets in certain trusts or funds will help reduce the GASB liabilities in two ways.

Dedicated assets will reduce the unfunded liabilities and ongoing annual expense. For example, a plan with $10,000,000 in liabilities and $0 assets will have a higher annual expense than a plan with $10,000,000 in liabilities and $4,000,000 in accumulated assets.

Having dedicated assets will allow the actuary to use a higher interest discount assumption than otherwise would have been possible. The interest discount is one of the key assumptions used in the healthcare actuarial projections. Per GASB requirements, this assumption must be based on the underlying investment return of assets used to finance the retiree health benefits. Employers that pay benefits using general account assets, which typically are restricted to very secure low-return investments, will earn a return in the range of 1.5% to 3%. The low return will then translate to a low interest discount assumption. Accumulated assets in certain trusts are able to earn much higher investment returns and, therefore, will have a higher interest discount assumption. Below is a table quantifying the effect on liabilities from using different interest discount assumptions.

What other design options are available?

Some government employers may be restricted by state laws that mandate certain types of health coverages or place restrictions on the maximum percentage of costs that may be passed on to retirees.

What is the process for estimating the liabilities?

You will need to engage an actuary experienced in healthcare benefits and retirement actuarial valuations to prepare an initial measurement of your GASB liabilities. It is to the employer’s advantage to know its GASB liabilities early enough to: