GASB & FASB
Government / Non-Profit Solutions
BACKGROUND:
FASB is the entity that sets accounting and financial reporting rules to create financial reports for private sector employers.
GASB is the entity that sets accounting and financial reporting rules to create financial reports for public sector employers.
THE PROBLEM:
Accounting rules for retiree healthcare programs have changed significantly over the past 25 years. FASB Statement No. 106 became effective in 1993 to address the concerns over the ability of private sector employers to finance promised retiree healthcare benefits. GASB Statement No. 45 became effective in 2007 to address similar concerns in the public sector, however only requires the reporting of the cost of their retiree healthcare benefits until 2010 at which time they must establish funding for this benefit. Since FASB 106 and GASB 45 concerns are very similar, we will address the GASB situation below to clearly illustrate the problem for both public and private sectors.
GASB 45 EXPLAINED:
In many areas, it has long been true that governmental employers effectively subsidize below-market current compensation with above-market promises of future (retiree) benefits. While for the moment this arrangement creates a sort of "out-of-sight-out-of-mind" peace, all do recognize that post-employment benefits in reality constitute part of the compensation that an employer agrees to provide for current employee services. In current practice, most governmental employers report other post-employment benefits (OPEBs) and expenses on a pay-as-you-go basis and financial statements generally do not report the financial effects of OPEB plans until the time that the promised benefits are paid. Such time could be far in the future.
As a result, the Governmental Accounting Standards Board (GASB) has long been concerned that the current pay-as-you-go financial reporting fails to provide a clear picture of the actuarial accrued liabilities for promised benefits associated with past and current service. GASB was further concerned that pay-as-you-go financial reporting failed to provide adequate information regarding future demands that already-promised OPEBs will have on the cash flows and tax/revenue bases of these employers.
In November 1994, GASB issued a statement (numbers 25 and 27) detailing how state and local governments should account for their pension liabilities. Ten years later, in June 2004, GASB issued two more statement (numbers 43 and 45) governing how these same entities should report the current values of their OPEBs. Post-employment benefits (other than pensions) include such things as medical, dental, vision, hearing, life, disability, and long-term care insurance.
States, cities, counties, school boards, fire districts, special service districts and other public agencies are far from uniform in how they have approached benefits. Some have billions in liabilities, while others have none or very small liabilities because they opted to not provide post-employment benefits or the benefits were trimmed.
Before GASB 45, most public agencies recognized these items as expenses only when retirees received benefits, not when benefits were granted and earned. In this pay-as-you-go (PAYGO) method the government does not set aside funds to meet the growing future OPEB costs. Consequently, they did not quantify the cost of the OPEB promises they had made to their employees.
GASB 45 now requires governments, in most cases, to hire a firm to make an actuarial valuation to determine the actuarially accrued liability (AAL). If a government does not fund its OPEB benefits liability, the financial obligation must be reported on balance sheets. The amount of the unfunded liability must be disclosed in the notes to the financial statement but is not reported as a financial liability. This is where our INSIGHT becomes your BENEFIT.
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THE IBG SOLUTION:
The ARC Trustsm and The ABIL Plansm developed by IBG are low-cost, turn-key, solutions specifically designed to allow funding for the Other Post-Employment Benefits (OPEB) discussed in GASB 45 and FASB 106. They provide a funding vehicle for municipalities, other governmental agencies as well as the private sector which are subject to the new GASB 45 / FASB 106 requirements.
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To find out more about how IBG could assist you with your GASB or FASB situations, please send an email to [email protected].
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