Public School Districts with annual revenues between $10 million and $100 million dollars must comply with the requirements of GASB 45 in the 2008-2009 fiscal year.  With the early onset of budget preparation requirements under Act 1 of 2006, preparations for GASB 45 compliance cannot be further delayed.  School Districts with annual revenues less than $10 million have a short reprieve as compliance for these School Districts will not be until the 2009-2010 fiscal year.

The Governmental Accounting Standards Board (“GASB”) is the international accounting standards board established to set the standards of financial accounting and reporting for state and local governmental entities, including public School Districts.  In June 2004, GASB issued Statement Number 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits other than Pensions.  Other post-employment benefits (“OPEB”) generally take the form of health insurance, including dental, vision, prescription or other healthcare benefits, provided to eligible retirees, and in some cases their beneficiaries.  OPEB may also include some types of life insurance, legal services and other benefits.  Prior to GASB 45, public entities typically followed the “pay as you go” accounting approach in which the cost of benefits was not reported on financial statements until after employees retired.  However, this accounting approach significantly underreports the real costs of OPEB to a School District.  GASB 45 requires Districts to report expenses and specific information about OPEB on its financial statements and footnotes.  In order to comply with GASB 45, Districts with 100 or more plan participants must retain a qualified actuary to form an actuarial valuation of the District’s actual OPEB liability. 

GASB 45 compliance could significantly impact a School District’s budget preparation, collective bargaining negotiations, credit rating and bond financing disclosures.  Regarding budget preparation, for those School Districts who offer OPEB to their retirees, the financial impact on the District’s budget could be significant.  The severity of the impact depends on the required vesting periods, if any, and the level of retiree benefits.  For example, if the District has few restrictions on the vesting period to obtain full retiree benefits and provides lifetime health benefits to those retirees who meet the eligibility requirement, the District should not be surprised when the actuary reports a significant OPEB liability.  Actuaries have conservatively estimated that Districts should expect their annual OPEB cost to be three to ten times their “pay as you go” amount.  Therefore, if a District’s current year actual cash payment for retiree health care benefits is $100,000.00, a District should anticipate that its OPEB cost will be anywhere between $300,000.00 to $1,000,000.00.  GASB 45 does not require funding of the OPEB liability, but only establishes the standards for accounting and financial reporting.  The majority of governmental entities, including School Districts, have not pre-funded their OPEB liabilities, which may have severe budget consequences.

Once the actuarial cost of the OPEB liability is established, the School Districts should evaluate their position with respect to offering ongoing OPEB in collective bargaining negotiations.  As many private industries have realized, the ever increasing cost of medical care coverage for retirees may compel School Districts to make significant revisions to the OPEB which they continue to offer their employees or, in fact, whether OPEB will be offered at all.

Regarding a School District’s credit rating, all the major rating agencies, Standard & Poors, Fitch and Moody’s Investor Service, have indicated that they view OPEB liabilities similar to pension obligations and will factor them into their assessment of a District’s credit rating.  Therefore, although GASB 45 does not require pre-funding of the OPEB liability, a District’s management of its OPEB liability might have a bearing on its credit rating.  Further, School Districts with a GASB 45 liability which issue bonds for public financing of school projects must carefully review their disclosure requirements to ensure that they properly reflect disclosure of the District’s OPEB liability.

The most important recommendation which our firm can provide at this time is that Districts immediately retain the services of a certified actuary to complete a GASB 45 compliant actuarial valuation to properly measure the District’s OPEB liability.  Not only is this information required for completion of a District’s financial statements for the 2008-2009 fiscal year, but once the District is armed with the information, it will be able to evaluate the potential advantages, if any,  to the District in pre-funding or placing funds to be held in a trust to satisfy its OPEB obligations.  Districts may have several trust options, including an Internal Revenue Code (“IRC”) Section 401(h) trust, Voluntary Employee Benefit Association (“VEBA”) trusts, and IRC Section 115 trusts.  Depending on the needs of the District, there are several advantages and disadvantages of each of the trusts.  It is strongly recommended that each School District discuss the options with a tax consultant to determine which trust vehicle is the most appropriate under its circumstances.

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Alfred C. Maiello
Alfred Maiello

Alfred C. Maiello is the founding member of MBM and has represented area school districts as solicitor for 50 years. He counsels school districts and educational institutions on leading developments in school law and guiding them through their day-to-day and long-term challenges.