J.G. Gaston & Associates, Inc. Actuarial Consulting Services for Business, Government, and the Individual

GASB 43 & 45 Actuarial Valuation Services

I. What is GASB 43 and 45?
The Government Accounting Standard Board (“GASB”) issued Statements 43 and 45 in 2004. GASB 43/45 require local and state governments and public agencies to recognize the value of other post-employment benefits (“OPEB”) other than pensions. OPEB obligations pertain to health insurance, dental, vision, prescription or other heath care benefits provided to retirees and their beneficiaries. OPEB reporting is similar to the reporting of retirement pension plan obligations. Under GASB 43/45, OPEB costs are considered part of compensation an employee earns each year, even though the benefits are not received until an employee retirees. GASB 43/45 requires governmental entities to recognize the nature and the size of the OPEB long-term obligation and commitment.

II. How are OPEBs recognized?
The outstanding obligations and commitments of OPEBs are determined by an actuarial valuation performed in accordance with GASB requirements. An actuarial valuation is required every two years for OPEBs covering 200 or more participants (both active and retirees), and at least every three years for plans covering fewer than 200. Except for very small governmental entities, which may use an Alternative Measurement Method, an actuary must perform an actuarial valuation to determine the OPEB cost and the Unfunded Actuarial Accrued Liability (“UAAL”).

The actuarial valuation uses various key actuarial assumptions. Some of these key assumptions include a medical trend rate concerning annual healthcare cost increases, the discount rate, how many employees elect coverage, termination rates, disability rates, mortality rates, and marriage (to determine beneficiary liability).

III. When was compliance with GASB 43 and 45 required?
Compliance with GASB 43/45 is based on the annual revenues of the governmental entity for the first fiscal year ending after June 15, 1999, as illustrated by the following chart:

(first FY ending after 6/15/99)
Fiscal Year beginning after:
Fiscal Year beginning after:
100 million + 12/15/2006 12/15/2005
10 to 100 million 12/15/2007 12/15/2006
Less than 10 million 12/15/2008 12/15/2007

Compliance with GASB 43 may have been required one year earlier for a governmental entity which has previously established a trust. If a trust was established during the fiscal year that GASB 45 is implemented, then GASB 43 would also have been implemented in the same year. GASB 43 applies to trusts established to pre-fund OPEB benefits or used as conduits to pay OPEB benefits.

GASB 45 does not require a plan to be funded and governmental entities may continue to fund OPEB benefits on a pay-as-you-go basis. If OPEB benefits are not funded, the annual OPEB cost and UAAL may be higher.

Once GASB 45 took effect, OPEB costs had to be recognized. These costs may be significant and, if unfunded, may accumulate a liability on the financial statements of the entities which may affect their financial status and credit rating. For this reason, governmental entities should determine their potential costs and liabilities prior to the fiscal year of required compliance. By determining this liability before compliance is required, alternative plan designs may be considered to reduce OPEB costs.