Other Auditor Reports 12/31/2007

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New Accounting and Reporting Standards Other Post - Employment Benefits (GASB Statements No. 45) In the past, most governmental employers offering post employment benefits accounted for them on a pay -as- you -go basis. However, the Governmental Accounting Standards Board (GASB), in July 2004, issued Statement No. 45, Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions, which will make the pay -as- you -go accounting for these benefits a "thing of the past ". Why the change in position by the GASB, you ask? The answer is Tess than nebulous— frequency of occurrence, significance, and disparity. Post employment benefits have become more prevalent in the governmental arena as a means of attracting and retaining talented employees, as a result of legislation, or a combination of the two. Post employment benefits may also comprise a significant cost to the employer, especially if the benefits involve providing healthcare coverage after separation from active employment. Further, these benefits represent a form of compensation, the cost of which should be recognized over the period of time that an employee earns the benefit. Disparity in practice developed as some governmental employers simply followed the pay -as- you -go accounting whereas others opted to report an accrual -basis liability on their financial statements by following the provision of Financial Accounting Standards Board Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, which applies to the private sector. Several bridges must be crossed on the path to adopting GASB Statement No. 45. First, the other post employment benefits or "OPEB" benefits must be identified. Simply speaking, OPEB benefits under the context of the new GASB standard are in essence any type of benefit provided to an employee over a period of time after their separation from service, not necessarily retirement, and obviously not limited to healthcare benefits. Another important aspect is determining the "substantive plan ". The substantive plan is the employers' and the employees' mutual understanding of the OPEB benefit, not necessarily what is written down. In fact, the OPEB plan may not have been previously written down at all! Then one must determine whether the substantive plan is a defined contribution plan or a defined benefit plan: • a defined contribution OPEB plan, under GASB Statement No. 45, is "....plan having terms that (a) provide an individual account for each plan member and (b) specify how contributions to an active plan member's account are to be determined, rather than the income or other benefits the member or his or her beneficiaries are to receive at or after separation from employment." This is similar to a 401(k) plan or a 403(b) plan. • conversely, a defined benefit OPEB plan is one "...having terms that specify the benefits to be provided at or after separation from employment. These 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, prescription drugs or a percentage of healthcare insurance premiums)." The third step is determining the OPEB liability. The OPEB liability for a defined contribution is simply the unpaid contractually required payment, similar to an unpaid invoice. On the other hand, the OPEB liability for a defined benefit pension plan is the cumulative unpaid or unfunded annual required contribution or "ARC ", which will require an actuarial analysis. (9)