Another Way to "Spend" Your Net Assets
by Pamela W. Baker, CPA
All
school districts are familiar with the costs of providing pension
benefits to their employees. Those costs are measured as employees earn
the future benefit and a determination is made at the statewide level
of how much funding is necessary for each district to currently
recognize that future benefit. These costs are therefore budgeted and
funded by each district as they are accumulated for the payment of
benefits at some point in the future.
Another
form of benefit provided to employees by school districts are
post-employment benefits such as health and dental, vision,
prescription or other healthcare benefits (OPEB). Districts might also
include as OPEB some types of life insurance, legal services and other
benefits. However, the costs of these benefits are typically recognized
on a "pay-as-you-go" basis. That is, once a benefit is distributed or
claimed (upon termination or retirement of an employee) it is recorded
as an expenditure.
In
its recently issued exposure draft, the Governmental Accounting
Standards Board (GASB) has addressed the issue of other post-employment
benefits. It is the view of the GASB that, like pension benefits, OPEB
are a part of the compensation that employees earn each year, whether
paid currently or after retirement. Therefore, to measure and report
the true costs associated with providing services today, it is
necessary to report the costs associated with all benefits earned in
the period in which they are earned.
Of
course, we all know that the future amounts, which will be due and
payable, are not easily determinable. In fact, to currently reflect
the costs of future payments due would require estimates and
assumptions including projections based on certain economic and
demographic assumptions. Projected cash flows would then have to be
discounted to their actuarial present value - the estimated value if
paid out currently. In other words, OPEB will now be recorded similarly
to pension benefits, where the actual costs to be recorded will need to
be calculated actuarially.
In
Pennsylvania, since all employees participate in the statewide pension
plan, the actuarial valuation is conducted by the pension plan and
translated for all districts into a current percentage contribution
requirement to be paid annually. Therefore, districts do not incur a
liability for unpaid and/or unfunded pension costs. However, for OPEB,
it will be the responsibility of each district to engage actuarial
services to determine the current costs, including allowances for past
service and future projected service. These costs will then be required
to be recorded as an expenditure and a liability for those benefits
earned but not yet paid. Similar to accrued compensated absences, most
districts will be recording a current and long-term liability for
accrued but not paid employee benefits.
It is
the opinion of GASB, that without reporting the accrued costs of OPEB,
governments are providing incomplete information from which to assess
the cost of public services and therefore, to make informed decisions
based on analysis of financial position and long-run financial health
of a government.
In order to implement, districts will now be
faced with the current costs (real dollars) of engaging the services of
an actuary to assist in determining the liability and related costs
associated with OPEB. The proposed statement will provide actuaries
with six different methods for determining the liability associated
with OPEB, but the burden for engaging the services and recording the
results of the valuation will rest with each district.
Recognizing
the burden to small governments, GASB has proposed that actuarial
valuations be conducted at least every two years for plans that
administer OPEB for 200 or more plan members (both active employees and
retirees) or at least every three years for plans with fewer than 200.
A special provision for plans with fewer than 100 members would allow
them to estimate the actuarial assumed liability using simplified
methods and assumptions.
In addition to recording a liability
and expenditure for accrued unpaid OPEB, the new exposure draft would
require certain other information to be disclosed in the footnotes and
in required supplementary information. This information will assist
readers of the financial statements in fully assessing the financial
impact to the district of employee costs and will enable School Boards
to make informed decisions regarding employee benefit plans.
Implementation
of the proposed new standard will be phased in based on thresholds
similar to those identified with implementation of GASB No. 34 with
earliest implementation for school districts with fiscal years ending
June 30, 2007 (those with annual revenues at June 30, 2003 in excess of
$100 million). Those with revenues between $10 and $100 million will
report effective June 30, 2008, and all others June 30, 2009.
If
your district will be affected, or potentially affected, by the new
reporting standard, now is a good time to ensure that the plan
requirements are clearly defined and formalized in a Board-approved
OPEB plan. It is also a good time to begin the process of educating
your School Board for the eventual recording of another potentially
unfunded liability.
