1. The New GASB 74/75 StandardS
Susan Lee, FSA, EA, PhD (Nov 2017)
The New GASB 74/75 StandardS

2. Major Changes To the GASB OPEB Standards
Bolton Partners Inc.
Major Changes To the GASB OPEB Standards
Focuses on balance sheet
Measurements are closer to real time
Less latitude in assumption selection
Increased disclosure
More volatile and possibly negative annual expense
Implications for plan sponsors

3. Could mean a very big hit to the governmental entity’s net worth
Bolton Partners Inc.
Change in Focus
The liability on the financial statements is now the unfunded actuarial accrued liability
Could mean a very big hit to the governmental entity’s net worth
In initial year, difference between unfunded liability and Net OPEB Obligation is immediately recognized as transition liability

4. Bolton Partners Inc.
GASB74 – plan accounting
Generally applies to financial reporting of an OPEB plan in stand-alone financial statements
Effective for financial statements for fiscal years beginning after 6/15/2016
Most MD governmental entities have 7/1 plan year, hence GASB74 is first effective for 7/1/2016-6/30/2017 plan year

5. GASB74 – OPEB Trust Requirements
Bolton Partners Inc.
GASB74 – OPEB Trust Requirements
Contributions and earnings on contributions are non revocable
OPEB plan assets are dedicated to providing OPEB benefits to plan members
OPEB plan assets are legally protected from creditors of employers, non-employer contributing entities, OPEB plan administrator, and creditors of plan members

6. Assets that do not meet trust requirements
Bolton Partners Inc.
Assets that do not meet trust requirements
Report as assets of the employer
If held in fiduciary capacity, report as agency fund
May not be used as part of “crossover test” to determine discount rate
GASB74 OPEB plan reporting is NOT required

7. GASB75 – Employer accounting
Bolton Partners Inc.
GASB75 – Employer accounting
GASB75 is effective for fiscal years beginning after 6/15/2017
Most MD governmental entities have 7/1 fiscal year, hence GASB75 is first effective for 7/1/2017-6/30/2018 fiscal year
Types of employers
Single employer: most MD entities are of this type
Agent employers (multiple ER OPEB plans)
Cost sharing employers

8. Bolton Partners Inc.
Typical MD PLan
If OPEB plan does not issue a stand alone financial statement (OPEB plan is included in the financial report of a governmental entity subject to GASB75), government should present disclosure in a manner that avoids unnecessary duplication
Unfunded plans are subject to GASB 74 if the plan is administered through a trust that meets the requirements mentioned previously

9. Terminology GASB 74/75 GASB 43/45 Total OPEB Liability (TOL)
Bolton Partners Inc.
Terminology
GASB 74/75
GASB 43/45
Total OPEB Liability (TOL)
Actuarial Accrued Liability
Plan Fiduciary Net Position
Actuarial Value or Market Value of Assets
Net OPEB Liability (NOL)
Unfunded Actuarial Accrued Liability
OPEB Expense
Annual OPEB Cost (AOC)
Actuarially Determined Contribution (ADC) – sort of
Annual Required Contribution (ARC)

10. Total OPEB Liability must be EAN accrued liability
Bolton Partners Inc.
Terminology
Total OPEB Liability must be EAN accrued liability
Alternative measurement method permitted if < 100 participants (active and inactive)
Plan Fiduciary Net Position must be MVA
Net OPEB Liability = Total OPEB Liability – Plan Fiduciary Net Position
Net OPEB liability must be measured as of measurement date
Actuarial valuation date can be different from measurement date

11. Bolton Partners Inc.
GASB75 – OPEB Trust
If trust meets requirements mentioned before, recognize net OPEB liability
If trust does not meet requirements mentioned before, recognize total OPEB liability

12. Must be level % of pay EAN
Bolton Partners Inc.
Entry Age NOrmal
Must be level % of pay EAN
If EE does not have projected pay, use inflation rate instead of salary scale
Beginning of attribution period is first period in which EE provides service under benefit terms
End of attribution period is exit from active service
DROP: attribution period continues until EE exits DROP (note different for pensions)

13. Liability Calculations
Bolton Partners Inc.
Liability Calculations
Ad hoc changes, if substantively automatic, must be included in projections
Consider established pattern of practice; legal or contractual benefit caps
Projections of benefit payments must include taxes expected to be imposed on benefit payments (e.g. Cadillac tax)
Must be based on claims costs or age adjusted premiums approximating claims costs
Exclude administrative costs from benefit payments

14. Must be consistently applied from period to period
Bolton Partners Inc.
Measurement Date
Must be consistently applied from period to period
GASB74: must be the OPEB plan’s most recent fiscal year end
GASB75
NO earlier than end of ER’s prior fiscal year
NO later than end of ER’s current fiscal year

15. Measurement Date Example
Bolton Partners Inc.
Measurement Date Example
7/1/2017-6/30/2018 fiscal year
GASB74: measurement date must be 6/30/2018
GASB75
Earliest measurement date: 6/30/2017
Latest measurement date: 6/30/2018
Most clients choose 6/30/2017

16. Actuarial Valuation Date
Bolton Partners Inc.
Actuarial Valuation Date
GASB74 and GASB75: must perform actuarial valuation at least biennially
GASB74: can be up to 24 months earlier than OPEB plan’s most recent fiscal year end
GASB75: can be up to 30 months and 1 day earlier than ER’s most recent fiscal year end
Roll forward liability from valuation date to measurement date if necessary

17. Earliest Actuarial Valuation Date Example
Bolton Partners Inc.
Earliest Actuarial Valuation Date Example
7/1/2017-6/30/2018 fiscal year
GASB74: 7/1/2016
GASB75: 12/31/2015

18. Plan Fiduciary Net Position
Bolton Partners Inc.
Example, FYE 2018
Total OPEB Liability
Plan Fiduciary Net Position
Net OPEB Liability
Balance 6/30/2017
$24,518,674
$13,200,106
$11,318,568
Balance 6/30/2018
$26,199,390
$13,499,271
$12,700,119
Assume GASB75 measurement date is 6/30/2017: $11,318,568 is imputed to be the 6/30/2018 Net OPEB liability
GASB74: $12,700,199 is the 6/30/2018 Net OPEB Liability

19. Less Latitude in assumption setting
Bolton Partners Inc.
Less Latitude in assumption setting
Mandated actuarial funding method (EAN)
Cannot use smoothed assets (no AVA)
Discount rate rules more prescribed
Unfunded plans: index rate for 20 year tax exempt general obligation muni bonds AA/Aa (or higher)
Funded plans: more rigor in setting long term rate of return in assets
More guidance in computation of blended rate
Additional disclosure requirements

20. Discount Rate Rules – PLans with assets
Bolton Partners Inc.
Discount Rate Rules – PLans with assets
See numeric example in implementation guide
Must disclose long term inflation assumption
Must disclose target asset allocation and assumed long term real rate of return by asset class
Must project plan’s assets, using projected benefit payment stream (closed group), projected contributions, assumed rate of return on assets

21. Discount rate – Projected contributions
Bolton Partners Inc.
Discount rate – Projected contributions
Apply professional judgment to project cash flows for ER contributions (open group basis)
Consider most recent 5 year contribution history
Must subtract normal cost of future hires from the projected ER contribution levels

22. Discount rate – PV of benefit payments
Bolton Partners Inc.
Discount rate – PV of benefit payments
Calculate PV of benefit payment stream
Use long term expected rate of return to discount benefit payments while BOY MVA > expected benefit payments for that year
Use bond index as of measurement date to discount benefit payments thereafter
Determine single equivalent discount rate

23. Long term rate of return example
Bolton Partners Inc.
Long term rate of return example
Asset Class
Target Allocation
Long Term Expected Real Rate of Return
Weighted Average
Calculation
Domestic Equity
40%
5.8%
2.3%
Fixed Income
35%
1.0%
0.4%
Private Equity
20%
6.0%
1.2%
Real Estate 3%
5.9%
0.2%
Cash 2%
0.0%
Total
100%
4.1%
Inflation
3.0%
Rate of Return
7.1%

24. Annual Expense - components
Bolton Partners Inc.
Annual Expense - components
Service cost
Interest cost
Minus benefit payments
Minus administrative expenses
Minus expected rate of return on assets
Plan changes <= immediate recognition
Amortizations
Liability Experience Gains or Losses
Asset Experience Gains or Losses
Assumption Changes

25. Annual Expense - Amortization Period
Bolton Partners Inc.
Annual Expense - Amortization Period
Amortize over closed period
Use expected remaining service lives of employees and retirees
Liability Experience Gains or Losses
Assumption Changes
Use 5 years for asset experience gains or losses
Just divide!!
Unrecognized portion reported as deferred outflow or inflow of resources

26. Comparison with FAS GASB 74/75 FAS Entry age normal (level % of pay)
Bolton Partners Inc.
Comparison with FAS
GASB 74/75
FAS
Entry age normal (level % of pay)
Projected unit credit
Market value of assets
Market related value of assets
Flexibility re: measurement date
NO flexibility re; measurement date
Deferred outflows/inflows of resources
Accumulated other comprehensive income
Liability gain/loss amortized over remaining service lives of actives and retirees
Unrecognized gain/loss amortized over average future service to retirement for actives
Asset gain/loss amortized over 5 years
Part of unrecognized gain/loss
Immediate recognition of plan amendments
Prior service cost amortized over average remaining service period of actives
Biennial valuations
Typically annual valuations
N/A
Transition obligation

27. Together with ASOP 6, more disclosure is required than ever before
Bolton Partners Inc.
Increased Disclosure
Together with ASOP 6, more disclosure is required than ever before
Liability sensitivities (trend and discount rate)
10 year histories
Liability reconciliations
Asset reconciliations
Comparison of actual contributions versus Actuarial Determined Contribution

28. If plan is closed to new entrants that must be disclosed
Bolton Partners Inc.
Increased Disclosure
If plan is closed to new entrants that must be disclosed
Date of experience studies
Description of contribution requirements
Source of mortality assumptions
OPEB plan description, including authority under which benefit terms are established or may be amended

29. Implications for Plan sponsors
Bolton Partners Inc.
Implications for Plan sponsors
Generally higher and more volatile amounts on balance sheet
More attention will be paid to OPEB benefits
Increased efforts to limit liabilities
Plan changes
Plan closures
Increased funding
Limiting Volatility
Caps on employer subsidies
Fixed dollar benefits
Funding (possibly with less volatile asset mixes)

30. Major Changes To the GASB OPEB Standards
Bolton Partners Inc.
Major Changes To the GASB OPEB Standards
Focuses on balance sheet
Measurements are closer to real time
Less latitude in assumption selection
Increased disclosure
More volatile and possibly negative annual expense
Implications for plan sponsors

31. Appendix – Expense Illustration
Bolton Partners Inc.
Appendix – Expense Illustration

32. Expense Example – reconcile liability
Bolton Partners Inc.
Expense Example – reconcile liability
2018
2019
2020
OPEB Liability
52,000
41,500
56,500
Plan Fiduciary Net Position (i.e. assets)
25,000
31,000
35,000
3. Net OPEB Liability (1.-2.)
27,000
10,500
21,500
Reconciliation of OPEB Liability
1. Service cost
1,200
1,000
900
2. Interest cost
3,500
3,600
2,900
3. Change in benefit terms -
(8,200)
Difference between expected and actual experience
2,800
5. Changes of assumptions
(6,300)
11,900
6. Benefit payments
(500)
(600)
(700)
7. Net change in total OPEB liability
7,000
(10,500)
15,000
8. OPEB liability beginning
45,000
9. OPEB liability ending

33. Expense Example – amortizations
Bolton Partners Inc.
Expense Example – amortizations
Liability
(Gain)/Loss
Period
2018
2019
2020
2,800 7
400
Net increase/(decrease) in expense
Assumption Change
Increase/ (Decrease)
Period
2018
2019
2020 7
(6,300)
(900)
11,900
1,700
Net increase/(decrease) in expense
800

34. Expense Example – Reconcile assets
Bolton Partners Inc.
Expense Example – Reconcile assets
2018
2019
2020
1. OPEB Liability
52,000
41,500
56,500
2. Plan Fiduciary Net Position (i.e. assets)
25,000
31,000
35,000
3. Net OPEB Liability (1.-2.)
27,000
10,500
21,500
Reconciliation of plan fiduciary net position
Contributions
3,500
2,300
2. Net investment income
400
3,200
2,500
3. Benefit payments
(500)
(600)
(700)
4. Administrative expenses
(100)
5. Net change in plan fiduciary net position
3,300
6,000
4,000
6. Plan fiduciary net position beginning
21,700
7. Plan fiduciary net position ending

35. Asset changes recognized in expense
Bolton Partners Inc.
Asset changes recognized in expense
2018
2019
2020
Asset Expense Impact
Contributions
3,500
2,300
2. Net investment income
400
3,200
2,500
3. Expected Investment Income
1,400
1,700
2,000
4. Investment Gain (loss)
(1,000)
1,500
500
5. Current investment gain (loss) recognized
(200)
300
100
6. Past investment gain (loss) recognized -
7. Benefit payments
(500)
(600)
(700)
8. Administrative expenses
(100)
9. Recognized in Expense [3.plus 5. through 8.]
600
1,100
Reconciliation to Net Fiduciary Position
10. Cumulative assets recognized
25,800
30,400
34,100
11. Minus deferred outflows
800
12. Plus deferred inflows
1,200
1,300
13. Net fiduciary position
25,000
31,000
35,000

36. Expense Example – Asset gain/loss
Bolton Partners Inc.
Expense Example – Asset gain/loss
Asset (gain)/ loss
Period
2018
2019
2020
1,000 5
200
(1,500)
(300)
(500)
(100)
Net increase/(decrease) in expense
(200)
2018
2019
2020
Liability (gain)/loss
400
Assumption change
(900)
800
Asset (gain)/loss
200
(100)
(200)
Net increase/(decrease) in expense
600
(600)
1,000

37. Bolton Partners Inc.
Expense Example
2018
2019
2020
Liability Expense Impact (Note: Expected remaining service lives=7)
1. Service cost
1,200
1,000
900
2. Interest cost
3,500
3,600
2,900
3. Change in benefit terms -
(8,200)
4. Difference between expected and actual experience recognized in first year
400
5. Changes of assumptions recognized
(900)
1700
6. Deferred from previous years
400+(900)=(500)
7. Benefit Payments
(500)
(600)
(700)
Recognized in expense
4,600
(4,700)
4,300
Reconciliation to Total OPEB Liability
9 . Cumulative liability recognized
49,600
44,900
49,200
10. Deferred outflows
2,400
2,000
1,600+10,200=11,800
11. Minus deferred inflows
5,400
4,500
12. Total OPEB liability
52,000
41,500
56,500

38. Expense Example – Combined
Bolton Partners Inc.
Expense Example – Combined
GASB 75 expense
2018
2019
2020
1. Service cost
1,200
1,000
900
2. Interest cost
3,500
3,600
2,900
3. Expected investment income
(1,400)
(1,700)
(2,000)
4. Administrative expenses
100
5. Change in benefit terms -
(8,200)
6. Difference between expected and actual earnings recognized in current year
200
(100)
(200)
7. Difference between expected and actual experience recognized in current year
400
8. Changes of assumptions recognized in current year
(900)
800
10. Total Expense (income)
4,000
(5,800)