In 2004, the Governmental Accounting Standards Board issued Statement 45, requiring government employers of all sizes to measure and disclose the value of nonpension post-employment benefits. These benefits, sometimes collectively referred to as "other post-employment benefits," include medical, dental, vision and other benefits provided to both pre-65 and post-65 retirees.

Large government employers already have come to grips with GASB 45 and have started the process to comply with the new reporting requirement. However, smaller public employers (government entities with fewer than 100 plan members) are only beginning to learn what GASB 45 is all about and how it will affect them.

Many managers of small municipalities, utilities, school districts and other governmental entities are in for a rude awakening once they discover the time, cost and human resource burdens of compliance.

GASB 45 requires the accrual method of accounting (rather than pay-as-you-go), which means that the employer must account for the present value of future OPEB costs, including OPEB for current and future retirees.

The liability on financial statements can be millions of dollars, even for a small entity.

Then there is the considerable cost of the actuarial valuation needed to compute the GASB 45 liability and related values.

This cost will be incurred repeatedly every two to three years, in order to keep assumptions and results current.

An employer that fails to follow GASB standards runs the risk of audit trouble and may risk lower credit ratings.

This is a particular worry for small public employers, which may not have the financial clout of larger public entities.

Bringing the true long-term costs to the light of day is the first step to managing these liabilities wisely and determining how to fulfill longstanding promises.

Reducing the cost of compliance

A traditional actuarial valuation for a small or midsized plan may cost between $5,000 and $20,000. In an effort to reduce costs, similar types of employers from different municipalities may form a purchasing coalition that can negotiate substantial discounts from a single actuarial firm.

Or, a single employer may use a less expensive firm with one or two actuaries. The resulting valuation will be perfectly acceptable, as long as the actuaries are qualified in this specialized field. Employers should choose a firm they feel confident will remain in existence for as long as an audit trail is needed.

Alternative measurement method

A streamlined solution was developed by the GASB with smaller governmental bodies in mind: the alternative measurement method.

This method allows government entities to comply with GASB 45 for a fraction of the cost of a traditional actuarial valuation. It uses the same variables for projecting future benefit costs as other valuation methods, and all of the variables must be set to values appropriate for the particular employer.

However, various elements of the calculation are streamlined, and a number of assumptions are simplified.

Some actuarial assumptions that work for larger groups may not be appropriate for smaller groups. Simplifying those assumptions makes sense for small employers and provides results that are as trustworthy as those produced in a traditional actuarial valuation.

Options under AMM include a do-it-yourself calculation, AMM performed by a nonactuary (e.g., an accountant or financial services firm), AMM performed by an actuary and online self-help tools.

AMM tools are a relatively inexpensive option for those who do not desire high-touch consulting services.

Like self-service tax software, they require the user to key in accurate, employer-specific data. The tools then perform the valuation using the AMM and generate a report containing the information required by GASB 45.

Some AMM tools were created by actuaries with the requisite expertise and thus are not likely to require additional auditing.

The AMM is an acceptable approach for most government entities with fewer than 100 plan members. It has the added benefit of being low-cost, relative to a traditional actuarial valuation, and it can provide necessary information quickly.

This approach typically does not come with the hand-holding that a traditional valuation via a consulting arrangement might provide, but some of the online self-help tools have customer service staffs that can answer questions and provide guidance when questions arise.

End result

Many people new to GASB 45 believe that the statement requires funding of the OPEB liability. In fact, GASB 45 only requires employers to determine and report the value of the OPEB liability. A public employer may continue as before, paying only the current year's cost of providing OPEB. Now, however, the mounting future liability will be transparent as it gets reported as long-term debt in financial statements. In most cases, the prudent thing to do is to fund or otherwise manage the liability to avoid future fiscal crises. Options include cost-sharing, cost-containment and funding set-asides, such as an OPEB trust.

In spite of the many challenges involved, small employers can move beyond viewing GASB 45 as just an accounting requirement and create an OPEB cost-management solution that meets the needs of the organization. While the idea of starting work on GASB 45 might seem daunting, there are certain logical steps that HR professionals and others responsible for this reporting requirement should take:

• Determine if the organization qualifies for the AMM.
• Evaluate the quality and support provided by online tools if the AMM is an option. Assess their cost relative to the cost of a traditional valuation.
• Begin to gather the information needed for the valuation.
• Set a timeline to complete the valuation prior to the deadline.

Following these steps will help small employers overcome the inertia that often exists when new requirements like GASB 45 are introduced. Even the smallest organizations must comply by the end of the fiscal year starting after Dec. 15, 2008, and acting sooner will preserve all of the opinions that exist for their organization.

Michael Westover, CEBS, is a health care consultant with the Hartford office of Milliman and a developer of GASBhelp.com, an online tool that employs the GASB 45 Alternative Measurement Method. Joanne Fontana is a consulting actuary with the Hartford office of Milliman.