It’s been over three years since the adoption of GASB Statement 45, the accounting standard requiring government entities to report their liability for retiree other-than-pension post-employment benefits. The goal of the new standard was to awaken government employers to the magnitude of the liability for those benefits — largely retiree health benefits — and to make them aware of how those liabilities should be managed now, so employers can make good on their promises for the future.

The Governmental Accounting Standards Board recognized that smaller government entities would need a more manageable, less costly process for complying with GASB 45, and created the Alternative Measurement Method, or AMM, for that segment. The AMM valuation allows qualifying employers (i.e., those with fewer than 100 OPEB plan members) to use a standardized process and average assumptions appropriate for smaller groups to simplify the calculations.

By now, even the smallest government entities should have completed or be in the process of completing their first OPEB valuation under GASB 45, many using the AMM. Having seen hundreds of those valuations, what lessons have we learned about GASB 45 and the AMM?

First, we have seen that many employers are still trying to figure out the basics of GASB 45 and its impact on their individual government entities. From both the AMM users and entities pursuing a traditional valuation, confusion around key components of GASB 45 is still prevalent:

Must the annual required contribution actually be funded? (The answer is no; GASB 45 requires reporting of the ARC and actuarial liability, not funding.)

What types of post-employment benefits count as OPEB? (Retiree medical and dental insurance clearly count; other benefits aren't so obvious and a professional should be consulted to get the right answer.)

What discount rate should be used in my valuation? (The answer depends on whether the plan is funded or not.)

If I have funds in a savings account, can't I count those as assets backing my OPEB liability? (Funds must be set aside in an irrevocable trust in order to be used as an offset to the liability.)

Why is my liability so huge even though the retirees pay for most or all of their retiree health premiums? (Sticker shock is common for employers looking at their first GASB 45 valuation results, because it accounts for not just the current year's cash outlay for retiree OPEB, but what needs to be set aside to make good on promises to employees who will retire in the future.)

Second, we have seen that, while the AMM provides a more straightforward method of calculating the liability for a small government employer, it is by no means simple and still requires expert analysis and understanding to do it correctly. While GASB provided general guidelines for the AMM's methodology, as well as a case study example to learn from, the case study was by no means all-inclusive of the types of OPEB benefits, eligibility criteria, employer contribution strategies, and other characteristics seen by real-life small government employers.


It is tempting to just take the simple case example in the GASB handbook and use those calculations across all employers eligible for the AMM. But without consideration of the nuances of each particular employer group, incorrect results will be generated, sometimes drastically so. For example, employers may use different criteria, such as years of service and/or attained age at retirement, for eligibility to receive OPEB; the expected age at which benefits will be paid out for each retiree will differ depending on those criteria.

AMM users must beware of services claiming to apply GASB's methodology but not modifying the simple spreadsheet approach to account for the myriad differences between each employer's plan structure and the sample plan. To ensure appropriate results, an expert is needed who has an in-depth understanding of GASB 45 and the AMM in order to customize the AMM's approach to the specific requirements of an OPEB plan and to comply with the standard.

On a related note, we've learned that, while smaller government employers may have fewer OPEB plan members, their OPEB plans are by no means simple. In fact, we've seen significant variation in how employers using the AMM handle contribution methods and levels toward retiree health premiums, eligibility requirements for OPEB, and the structures of the OPEB plans themselves. Some states provide funding toward retiree premiums in addition to those provided by the employer, which must be accounted for in the valuation. Others use age-banded rating for their OPEB premiums. Still others are required to use community-rated premiums.

All of these variations have implications on how to correctly calculate the OPEB liability, whether using the AMM or a traditional valuation. None are directly addressed in the GASB standard, but are nonetheless expected to be properly considered by the individual completing the valuation. So, again, it is imperative, even when using the AMM, to have someone who understands these complexities and can expand the basic AMM approach to appropriately calculate the liability.


One of the biggest sources of misunderstanding surrounding the GASB 45 liability is the concept of the "implicit rate subsidy." GASB 45 requires that the premiums used to project the liability reflect the true cost of the population receiving the benefits - the retirees. When a blended premium is charged to active employees and retirees, the actives are in a sense subsidizing the retirees, because if retirees had been charged a separate premium, it would have been higher, given that retirees on average generate higher medical costs.

The AMM contains a standard set of age-adjustment factors to be applied to the OPEB plan's population, to adjust the blended premiums to reflect the true expected cost of retirees. The age-adjustment factor - the amount by which the blended premium gets multiplied to reflect a retiree's level of medical costs - is often two or higher.

Here's the rub: Even if an employer contributes zero dollars toward retiree medical premiums (i.e., the retiree is responsible for the entire cost), the employer will still have an OPEB liability, which is due to that implicit subsidy effect. That liability can be surprisingly large in magnitude; with an age-adjustment factor of 2.2, the employer is implicitly responsible for the entire premium, even though on a cash basis nothing is contributed. Here's a somewhat simplified version of the math:

Actual blended premium for actives and retirees: $200;

Age-adjusted premium for retirees: $200 x 2.2 = $440;

Retiree contribution toward premium: $200 (the retiree pays the entire actual premium); and,

Implicit employer contribution toward premium (age-adjusted premium minus retiree contribution): $440 - $200 = $240.

Thus, even though the employer outlay is seemingly zero dollars for retiree benefits, the GASB liability will reflect the fact that, implicitly, the employer is responsible for $240! The reason for this relates to the average premium being charged to the combined active/retiree group. Removing the retirees would lower the cost for the group (which would then have active employees only). The combined group's premium therefore has an implicit rate subsidy whereby the employer's payment for active employees subsidizes the retirees' cost.

In addition, if the employer contribution does not increase in proportion to medical trends in future years - which occurs in the zero employer contribution scenario, as well as any time when the contribution trend is less than the medical trend - the implicit contribution will increase quickly in future years. This is a key potential pitfall of blindly using the case example provided by GASB, in which contributions do increase along with medical trend.

If the AMM valuation is completed by someone not well-versed in how the implicit subsidy works or how future employer contribution patterns different from medical trend patterns will affect the final liability, then the valuation will be inaccurate and the liability likely drastically understated.

Finally, government entities are just beginning to grasp the importance of the GASB 45 valuation results. Reporting the liability and ARC may be viewed as a mere accounting nuisance, but, in reality, the liability represents real information that can be used to assess the financial health of the OPEB program. It's important to get beyond any initial sticker shock at the magnitude of the liability and start thinking about what can be done to ensure that the liability is managed.

While many small government entities are not able to set aside enough money to fully fund the ARC each year, steps can be taken to ensure the viability of the retiree health program. Changes in benefit levels, adjustments in eligibility criteria, putting retirees into a benefit plan with separate self-sufficient premiums, or partial funding arrangements can not only make the GASB 45 liability lower, but can help ensure that promises to employees of future OPEB can be made good on.

Joanne Fontana, FSA, MAAA, is a consulting actuary in the Hartford, Conn., office of Milliman, a global consultancy. Reach her at or at (860) 687-2110.

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