Post-Employment Benefits: Complying with Governmental Accounting Standards


Post-Employment Benefits: Complying with Governmental Accounting Standards

Steven R. Gerlach

By Steve Gerlach | August 21, 2012

As governmental employers continue to climb out of the economic recession, there are many demands on their resources: old and new programs, salaries and current employee benefits obligations. In light of these ongoing demands, few governmental employers have begun to prefund so-called “other post-employment benefits.” OPEBs are benefits, other than pensions, promised to former employees by their governmental employers — e.g., retiree health benefits. Between 2006 and 2008, Governmental Accounting Standards Board standards came into effect requiring promised OPEB to be recorded in the footnotes of state and municipal financial reports. Unless specific actions are taken, OPEB liabilities are reported as unfunded. Such unfunded liabilities can have a negative impact on the financial health of a government employer, including in such important arenas as bond ratings and union negotiations.

In addition to these existing requirements, GASB is considering further changes to the financial reporting requirements that – if adopted – will require government employers to report on their balance sheets the net present value of any OPEB promises. The total OPEB liability will be projected into the future, discounted to present value and then reported as a liability on the employer’s balance sheet. In June 2012, GASB approved Statement No. 67, Financial Reporting for Pension Plans, which requires net present value accounting for pension liabilities; it is widely believed that similar changes to the accounting rules for OPEB will follow. Such changes would bring significant attention to government empoyers’ underfunded OPEB liabilities.

Earlier this year, the Government Finance Officers Association published guidance on best practices for funding OPEB obligations. This guidance clearly recommends “creating a qualified trust fund to prefund” OPEB obligations and itemizes three options for such funding:

• Voluntary Employees’ Beneficiary Association — established under section 501(c)(9) of the Tax Code, a VEBA is a separate legal entity from the governmental employer and often includes participants in its governance.

• Section 115 Trust — an irrevocable funding mechanism formed as an integral part of the governmental employer.

• 401(h) Trust — formed as a separate account within an existing qualified pension fund.

These three funding mechanisms provide options for governmental employers to meet their OPEB funding obligations under both existing and anticipated future accounting standards. Unless governmental employers proactively fund their OPEBs, they could suffer from the impact of unfunded liabilities. In the long term, these liabilities may cause significant adverse effects to the governmental employer’s overall financial health.

For questions regarding the GASB accounting requirements for OPEB, or the trusts recommended to fund OPEB liabilities, please contact Steve Gerlach at Bernstein Shur at 207 228-7128 or, or Lauren Corey at Macdonald Page & Co LLC at 207 774-5701 or