Other Auditor Reports 12/31/2006

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Now Other Post - Employment Benefits (GASB Statements No. 45) (Continued) • 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. For a defined benefit OPEB plan, the manner of funding the OPEB liability is an important consideration. Under the new GASB standard, an OPEB liability will only be considered as funded to the extent that assets are transferred to an irrevocable trust for the specific benefit of plan members (i.e. covered employees) and their beneficiaries. Assets held in an irrevocable trust can be reported in fiduciary financial statements and thus excluded from the employers' government -wide financial statements. Employer assets that are simply "earmarked" to provide for OPEB benefits but that could otherwise be re- directed to other uses are not considered by the GASB as funding of the OPEB liability. Therefore, these earmarked assets continue to be reported in the government -wide financial statements. Said another way, if the intended assets are not held in an irrevocable trust, the OPEB plan is considered unfunded. Recognizing the complexity of the new requirement, the GASB allowed for a phased -in implementation depending on the employers' size. For instance, the effective date for implementing the OPEB standard is for the first fiscal year beginning after December 15, 2006, 2007 or 2008 depending on whether an employer was a phase 1, 2, or 3 implementer of GASB Statement No. 34, respectively. Based on this schedule, implementation for the City would be required for the year ended December 31, 2008. Given the time allowed before the required implementation dates, there are some important actions and considerations that employers should initiate. First, the employer will need to understand the substantive plan, and would be far the wiser to get it in writing as a formal plan agreement. Qualified and reputable attomeys may need to be engaged for this task. Second, if the OPEB benefit is structured as a defined benefit plan, as opposed to a defined contribution plan, the employer in all likelihood will need to engage an independent actuary to measure the liability. Once the attomeys and the actuaries are engaged, the employer would be wise to study several ad -hoc scenarios —for example, changing assumptions for contribution rates, discount rates, demographics of the covered employee group, duration of coverage, prospective vs. retroactive implementation, etc. —and evaluate the effects on their financial statements. While Statement No. 34 was the most significant accounting standard to be issued by the GASB in the last 20 years, Statement No. 45 is a close second. However, the GASB has allowed a generous amount of time before the required implementation date. Use it wsely! Net Assets Restricted by Enabling Legislation (GASB Statements No. 46) This statement is effective for periods beginning after June 15, 2005 and therefore, was implemented by the City for the year ended December 31, 2006. The provisions of this statement require that limitations on the use of net assets imposed by enabling legislation be reported as restricted net assets. (13)