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GASB 75 OPEB Solution Strategies
The largest
component of OPEB Cost is retiree healthcare benefits. Continuing with
a “pay-as-you-go” philosophy will create a significant new liability for
employers to deal with. In addition, many states have laws that allow early
retirees to remain on the active health care plan until they become eligible for
Medicare. The cost difference between the blended plan cost (including actives
and retirees) and the actual cost for the retirees must be recognized as an
implicit rate subsidy by the employer. This amount adds additional liability for
the employer, even if the employer is not contributing to the retiree healthcare
plan.
How can the
obligation be reduced?
A well designed
GASB 75 OPEB mitigation strategy involves several different risk management and
funding techniques. First, any defined benefit promise by the employer should be
funded, at least partially, to enable actuaries to use a long-term discount rate
during calculations. Second, consider issuing OPEB obligation bonds to fund all
or a portion of the Actuarial Accrued Liability. Lastly, combine the first two
steps with an effective strategy to migrate to a defined contribution approach
over time. Collectively, OPEB liabilities can be successfully managed.
Defined benefit
OPEB plans are those having terms that specify the benefits to be
provided at or after separation from employment. The benefits may be specified
in dollars (for example, a flat dollar payment or an amount based on one or more
factors such as age, years of service, and compensation) or as a type or level
of coverage (for example, major medical, prescription drugs, or a percentage of
premiums). Defined benefit OPEB plans involve a complicated reporting obligation
making assumptions as to life expectancy, future medical care inflation, and
Medicare availability far into the future.
Defined
contribution OPEB plans are those having terms that (a) provide an individual
account for each plan member and (b) specify how contributions to an active
member’s account are to be determined, rather than the benefits the member
or his or her beneficiaries are to receive at or after separation from
employment. For purposes of a defined contribution plan, “benefits” consist only
of the contributions, earnings on investments of those contributions, and
forfeitures allocated to the member’s account. Consequently, defined
contribution OPEB plans involve simpler reporting obligations than
defined benefit OPEB plans.
GASB standards
apply to defined benefit OPEB plans but NOT to defined
contribution OPEB plans. Defined contribution OPEB plans are considered “funded”
as the employer cost equals the required contribution. By changing the way which
employers pay for retiree healthcare can reduce, or even eliminate, the unfunded
OPEB liability.
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