Hi,
Somewhere on your statement of net position there is a number, often in the millions, that nobody at your entity calculated, approved or has any authority over.
It is your share of the retirement system. If your employees are in a cost-sharing multiple-employer plan, which covers most local governments and school districts, the plan’s actuary calculates the total liability, allocates a proportionate share to each participating employer, and sends you yours. Your share moves with the plan’s investment returns, its discount rate, its mortality assumptions and its funding policy. You do not set any of those. You do have to report the result as your own liability.
That produces effects that look alarming and are routinely misread:
- Unrestricted net position goes deeply negative, often by more than your annual budget, which reads to the public as insolvency when it is an accounting presentation
- The number swings by millions year to year on the plan’s market performance, with no change in anything you did
- Deferred outflows and inflows of resources appear to smooth it, and are close to unexplainable at a public meeting
- The figure is measured at a date before your fiscal year end, so you are always reporting a position that is already out of date
Then there is the other half, and this is the part that surprises people who are certain it does not apply to them. You very likely have a retiree health liability even if you have never offered retiree health as a benefit.
It is called the implicit rate subsidy. If retirees are permitted to stay on your active employee health plan and pay the blended premium, they are being subsidized, because a retiree costs more to insure than the average active employee. That difference is an other postemployment benefit obligation whether or not your entity contributes a dollar toward it. Entities that answer “we don’t provide retiree health” during audit planning frequently end up with an OPEB liability anyway, and it is usually unfunded in full, because there is no trust behind it.
There are two practical consequences worth getting ahead of:
- The actuarial reports arrive late and hold up your audit. The plan’s employer allocation schedules and your own OPEB valuation are prepared on someone else’s timetable. Entities that ask for them in month one close cleanly. Entities that wait are the ones explaining a delayed audit to their board.
- A valuation is required on a cycle, not once. An OPEB valuation goes stale, and an out-of-date one is a finding.
What actually helps, none of which requires changing your benefit structure:
- Know which plans you participate in, and request the audited allocation schedules as soon as your year closes
- Confirm whether retirees remain on your active health plan, because that single fact decides whether you have an OPEB liability at all
- Keep the valuation current and diarised, rather than remembered
- Give your board a one-page explanation of why net position is negative, prepared before someone asks in public rather than during the meeting
This is work we take on directly:
- GASB 68 and GASB 75 reporting, including the allocation schedules, deferred inflows and outflows, and note disclosures
- Coordination with plan actuaries and the timing of valuations so the audit is not held hostage to them
- Audit, Single Audit and Yellow Book engagements, ACFR and AFR preparation
- Fund accounting bookkeeping and board or council ready reporting, including the explanation your members will need
Reply to this email by Friday and we will set up a free 15-minute call with one of our senior government specialists. Tell us which retirement system your employees are in and whether retirees can stay on your health plan, and we will tell you on the call what is most likely sitting on your statements right now.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com