To value or not to value? That is the question.
Though Hamlet wasn't exactly filled with optimism when spouting his famous soliloquy, perhaps a Balance Sheet entry was all he needed to mitigate his anxiety and frustration with his perceived plight. As audit season has progressed and reports are being prepared, we have been receiving questions on valuation reports and when one is and one is not needed. To help eliminate confusion and improve compliance, we'd like to clarify the guidelines. This discussion is focused on Other Post Employment Benefits (OPEB), but with the exception of the alternative measurement method information, most everything applies to the Law Enforcement Officer Special Separation Allowance (LEOSSA) benefit as well. Very generally speaking, we are requiring that the liability be valued for all units. The only exception to that is if the unit and auditor agree that the liability is immaterial to the financial statements. More on that later.
Local Government Commission (LGC) staff policy is that unless a cogent case can be made that an OPEB or pension liability will be immaterial to the financial statements, the liability must be valued. This valuation can take two forms - a full-blown valuation or use of the alternative measurement method. The LGC staff has imposed limitations on the use of the alternative measurement method by units of government that report to the LGC under the Local Government Budget and Fiscal Control Act; this method can only be used if the requirements outlined in GASB 75 have been met AND if the only benefit offered is an implicit rate subsidy. For our purposes, an implicit rate subsidy is allowing the retiree to purchase coverage at the unit's group rate (not an age-adjusted rate). The gist of this arrangement is that the unit is not paying anything on behalf of the retiree but the retiree is receiving the benefit of paying a non-age adjusted rate for OPEB benefits.
Most units will need a valuation. If a claim of materiality is not made and if the unit offers any benefit other than an implicit rate subsidy, a full valuation is required. There are many reasons this is important, but we'll highlight only a few here. A valuation gives a good baseline of what the liability is as of the measurement date. Units may find that the amount is immaterial and if so, having a baseline amount will help make the case that the liability might be immaterial in the future. Circumstances can change, of course, but a full valuation lets a unit know where it stands and whether claims of immateriality from the past can reasonably continue. It also can be more cost effective to have a valuation done every year. There can be more cost to the unit if a unit has a valuation one year, skips a year, and has one the third year. Your actuaries will track deferrals and expense for you and skipping years can result in more work for them. This is not the same as having a biennial valuation because in that situation, units receive amounts for two years.
It is important to consider the timeline of the valuation. The LGC staff is not recommending or requiring a specific measurement date for the valuation. Unlike the valuation date, which can change from year to year, the measurement date is chiseled in stone and cannot be changed once established. What is important to remember is that the measurement date, the date on which the liability that is reported in the financial statements is measured, affects the reporting and journal entries that are made. Unlike the rollout of the pension standards, each unit, with the exception of those in the State's cost-sharing plans, will choose their own measurement date. Units should keep in mind that there are two parties involved in this project – the actuaries and the unit.
If at all possible, it is important to adhere to the actuary's deadlines. Not meeting the actuary's deadlines can result in receiving the valuation report late and that can directly affect the timing of the submission to the LGC staff. Though all component units do not report to the LGC, primary governments that must report component unit information in their audited financial statements will be responsible for getting that information from the component unit. There should be communication between primary governments and component units to ensure that the component unit's reporting issues will not adversely affect the primary government, specifically the timing of the submission of the audit report to the LGC staff.
The "I" Word
We expect that the liability will be immaterial for very few units. It is not hyperbole to say that the amounts of the liability have been shocking to many local governments. Given the inconvenience and cost of getting a valuation done, one might be tempted to dismiss this as immaterial, but there are some things to consider. We will expect to see the GASB 75 disclosures for units offering OPEB unless the unit has received an exemption in writing from us. Units considering requesting an exemption will be asked for specific information on the amount of the benefit including, but not limited to, the number of retirees expected to receive the benefit and for how long, the number of members in the plan,the materiality threshold of the auditor, and the total amount of the calculated liability discounted back to present value. If you feel that your liability might be immaterial, please contact us as soon as possible. Reports that claim immateriality and have not been granted this exemption will not be accepted.
There has been some concern about what consequences a unit will have to bear for submitting an audit report late this year due to the implementation challenges of the OPEB reporting standard. Many units have yet to receive their valuation report from their actuaies. Others have yet to submit information to their actuaries and there are some that have not contracted with an actuary yet for a report that will be needed to prepare the 2018 statements. Units in one of the latter two groups should expect that their audit report will not be submitted timely. The LGC staff will look at reports received after December 1 on a case by case basis to determine whether a late letter will be sent. Units are reminded that if they intend to seek debt approval after October 31, 2018, they will need the opinionated 2018 audited financial statements in order to move forward.
Please contact us at (919) 814-4299 with questions or comments.