Discount Rate Under GASB 74/75 - Deferred Pension Funding
Parker Elmore, ASA, MAAA, EA, FCA | Kurtis Thompson
This case study looks at a town which has adopted a deferred pension funding policy. This funding policy allocates a modest funding amount towards OPEB until the town’s pension becomes fully funded. After this point higher payments are allocated to the OPEB plan based on the cash flow freed up from the completion of pension funding.
Under GASB 74 and 75 the discount rate used to determine disclosed liabilities is based on a combination of a twenty-year municipal bond index and the rate of return expected on plan assets. These rates are blended based on the value of trust assets and trust contributions compared to expected benefit payments.
The town has current assets of $700K and current Total OPEB Liability of $13 million has elected to fund an OPEB trust using the deferred pension funding method. They are funding $50,000 in Fiscal Year 2017, increasing this amount by 2.5% annually until pension funding is complete. In 2034 the Town’s pension is fully funded and $1,000,000, increasing at 2.5% per year, is allocated to fund OPEB benefits over the next sixteen years, until the OPEB plan is fully funded.
What discount rate can they use and why does it matter?
This methodology enables the town to use a 7.5% discount rate for their Fiscal Year 2017 GASB 74/75 valuation rather than the 4% used under GASB 45 or the 2.5% that would be used under GASB 74/75 for an unfunded plan. If the discount rate were 4% liabilities would increase from $13 million to $18 million and if the discount rate were 2.5% liabilities would be $23 million.
This funding method allows the use of a much higher discount rate decreasing disclosed plan liabilities, while requiring relatively small amounts of funding in the early years. For more information on the deferred pension funding strategy see our previous case study on deferred pension funding or give us a call.