RCM Robinson Capital Management LLC

GASB 45 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 45 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. Contact us for more details

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RCM Robinson Capital Management LLC, Securities America, Inc, 27 Reed Boulevard, Mill Valley, CA 94941

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