GASB 75 - Crossover Date & Why It Matters
Parker Elmore, ASA, MAAA, EA, FCA | Kurtis Thompson
New accounting rules for public other postemployment benefit plans to replace GASB 45 will take effect in 2018 for most plan sponsors. To ensure a successful transition to the new standards, you will need to understand various new concepts (largely mirroring those found in GASB 67/68) and new terms. Odyssey will be providing a series of white papers on this subject which will review these topics in some detail. We continue with “GASB 75 – Crossover Date & Why it Matters” to provide a detailed explanation of the new crossover date concept (similar to Depletion Date under GASB 67/68).
The Governmental Accounting Standards Board (GASB) has released GASB 75 “Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions” – a new accounting standards for public Other Post Employment Benefit (OPEB) plans which will replace GASB 45.
This GASB 75 white paper is part of the continuing series of white papers discussing the new accounting standards released under GASB 75 for OPEB plans. It will discuss the determination of the plan’s crossover date or depletion date – the projected date that plan assets and contributions are no longer sufficient to satisfy benefit payments, and the calculation of the plan’s equivalent single discount rate based on that crossover date.
Implementation of these Statements is required for fiscal years beginning after June 15, 2017.
Odyssey’s working group is reviewing the new Statements, issuing guidance on how to best transition to the new Statements, determining the impact on our client’s liabilities and expenses and evaluating strategies for pre-funding and financial statement recognition.
Past Work Group Updates
- GASB 75 – Introduction & Notable Changes
Upcoming Work Group Updates
- Long-term expected rate of return & money- weighted rate of return
- Recognition of deferred inflows & outflows
- Calculation of Net OPEB Expense
- Valuation, Measurement & Reporting dates & their interaction
What is the “Crossover Date” or Depletion Date?
The Crossover or Depletion Date is the measurement period where plan assets and expected future contributions are no longer sufficient to pay expected future benefit payments. This date is used to determine the single equivalent discount rate which represents a blended interest rate based on a long term rate of return for those payments prior to the crossover date and a 20-year high grade municipal bond index for all remaining payments after such a crossover date.
A key consideration related to this change is that this change will lead to increased volatility in the calculation of plan liabilities. As most OPEB plans are unfunded or underfunded, the municipal bond index rate will be the predominant rate used to calculate plan liabilities. As this rate is based on market conditions as of the measurement date, the discount rate used to calculate plan liabilities may vary significantly from valuation to valuation. Given that a 1% reduction in the discount rate (e.g., 4.0% to 3.0%) will often increase plan liabilities by 15% to 20% or more, those with unfunded or underfunded plans will see a significant increase in the volatility of disclosed plan liabilities.
As of June 30, 2015, the 20-year high grade municipal bond index yielded 3.73% which is less than the 4.0% discount rate used by many unfunded OPEB Plans. If this rate were in effect for 2015 fiscal year disclosures, many sponsors would see disclosed Actuarial Accrued Liabilities (“AAL”) increase by 4% to 5% (these rates have declined since June 30th).
How do we calculate the Crossover Date?
The first step in calculating the crossover date is to project future benefit payments as of the plan’s measurement date. These payments will be projected using “closed group” assumptions. This means that only the benefit payments projected for the plan’s current active and retired employees will be included and no benefits that are expected for future employees will be considered. The projection of benefit payments will be based on the current plan design as well as expectations of future benefit changes that are considered to be substantively automatic.
The next step is to project the plan’s fiduciary net position (assets). Assets are projected taking into account the current plan assets as well as expected future contributions and expenses related to plan administration. Expected future contributions will be based on the plan’s funding policy. If an ad hoc funding policy is used the average of the last five years of contributions in excess of the pay-as-you-go cost is the maximum contribution that can be projected for future years. For this reason we suggest plans currently using an ad hoc funding policy adopt a formal funding policy prior to implementation of GASB 75. Once future benefit payments and assets have been determined, they are analyzed to determine the crossover date. This is the measurement period during which the projection of assets is no longer sufficient to meet benefit payments. When this date has been determined the single equivalent discount rate can be calculated.
How is the long-term rate of return determined?
The long term rate of return shall be based on the plan sponsor’s investment policy. The actuary will review the plan sponsor’s target asset allocations by investment class and weight the expected real rates of return (net of inflation) for each class to determine an expected long term real rate of return. Once this is determined, it shall be added to the actuary’s long term inflation assumption (a building block approach) to determine the long term rate of return. Below is a sample calculation:
How do we calculate the Single Equivalent Discount Rate?
If it has been determined that there is no crossover date (i.e., assets are projected to be sufficient to cover benefit payment for all periods) then the plan’s assumed long term return on assets is used as the discount rate. If there is a crossover date a single equivalent discount rate must be determined by the plan actuary.
The single equivalent discount rate is determined by first discounting all benefit payments prior to the crossover date by the plan’s assumed long term rate of return on assets. Next, all benefit payments after the crossover date are discounted using the 20-year high grade municipal bond index rate. The total of these two actuarial present values represents the total actuarial present value of projected future benefit payments. Then, we calculate a single discount rate which yields that same actuarial present value. This becomes the plan’s single equivalent discount rate. The single equivalent discount rate is used to calculate the total pension liability for GASB purposes and is the rate disclosed in the financial statement.