Historically, governmental entities have used other post-employment benefit (OPEB) programs to provide retiree medical and life insurance benefits. However, until recently, these promised benefits have been accounted for using assumptions that did not necessarily reflect current market conditions. As affected entities begin to better understand the financial implications of these promises, there are steps that can be taken to reduce the impact.
New accounting standards
The Governmental Accounting Standards Board (GASB) released Statement No. 75
(GASB 75), which was effective for fiscal years beginning after June 15, 2017. In addition to defining new terminology and requiring additional financial reporting, GASB 75 introduced potential volatility through the use of a market-based discount rate.
For many public entities, their OPEB liabilities and accounting expense increased upon implementation of GASB 75. Without meaningful changes to OPEB plan design or how those benefits are financed, their OPEB liabilities and accounting expense may fluctuate with changes in market-based interest rates. While GASB 75 increases transparency regarding the cost of these types of retirement promises, the volatility brought on by could make budgeting more difficult. It should be noted, GASB 75 does not affect an OPEB’s actual cash outlay in a given year.
With the increase in transparency of post-employment benefit costs, public entities will need to revisit these promises as they attempt to balance employee compensation expectations with the public’s perception of the cost of these benefits. These concerns may be addressed through changes in plan design or benefits delivery, as well as changes in the financing of benefits.
Assessing your current program
The first step all public entities should take is to review their current OPEB program to confirm that it still meets their overall benefits strategy. The result of this review will provide insight on possible benefit design, benefits delivery or financing changes. For example, if the current OPEB program allows employees to retire with full benefits earlier than the employer’s target retirement age, the program’s design may be the most important item to address.
After this assessment, the public entity should identify the OPEB program’s action items and prioritize which ones are attainable. These action items should include the plan’s design, its benefits delivery and its benefits financing. Not all action items may be subject to change. For example, due to employee union contracts, changes in a plan design may not be attainable in the near term.
A plan design review addresses the benefit amount provided by the plan to retirees, but does not directly target the design of the healthcare plans. Changes to the plan design could include the following:
- Closing the plan to new hires
- Limiting benefits to retirees under age 65
- Limiting payments up to a certain number of years (i.e. up to five years of payments)
- Changing the amounts participants pay towards their benefits
Benefit delivery changes can address the underlying healthcare benefits and administration. These changes could include the following:
- Moving retirees to a state system which provides the actual healthcare benefits
- Fully insuring retirees whose premiums are rated without any pre-Medicare active employees
For these examples, the OPEB program could explicitly pay for a portion of retiree premiums and retirees can maintain a similar level of healthcare benefits in retirement. However, this type of change could have a significant impact on financial reporting.
Benefits financing considers the use of a trust to pre-fund future benefit payments. Pre-funding future payments may help stabilize budget cash flows for plan payments and/or the GASB 75 reporting results.
One way to assess the impact of any changes is to use an actuarial projection of future OPEB cash flows, liabilities and expense. These projections are typically completed over a 10- to 20-year time horizon, and they provide a window into the future on the growth of the OPEB plan and can help assist with establishing a funding policy. For OPEB programs that are open to new hires, this may be extremely useful process.
Once a projection is completed, annual updates with current information can help employers monitor progress towards their objectives and provide insight into budgeting.
As public entities with OPEB programs begin to better understand the financial implications of these retirement promises, there should be careful consideration to assess the level of desire and ability to change benefit design or benefit delivery as well as ways to finance future benefits. There is no “one-size-fits-all approach,” as each public entity has their own objectives as well as restrictions. While it may appear prudent to take no action, taking a path of least resistance isn’t a wise strategy without assessing the financial implications of these promises.
Manager, Human Capital Services
+1 312 602 8262
Senior Associate, Human Capital Services
+1 312 602 9178