This article was written for school districts in Minnesota – but it applies equally well to other government units and states.

YOU HAVE PROBABLY HEARD by now – maybe more than once – about the new Governmental Accounting Standards Board (GASB) Statements No. 43 and 45 for other postemployment benefits (OPEB).

But you may not have heard much about what you need to do now. Here is a quick overview.


So what exactly counts as an OPEB? And which ones do you need to account for?  GASB 45 defines OPEB’s as postemployment benefits provided outside a pension plan. They include:

Retiree medical coverage – which usually generates the biggest OPEB costs,

Other retiree benefits like dental, vision and life insurance coverage, and termination benefits based on years of service – but not those based on unused vacation or sick leave.


Some districts require early retirees to pay the “full” cost of their coverage, i.e. the average employee rate, to remain in the plan. Surprisingly, these districts have an OPEB liability as well.

The reason is known as an “implicit subsidy”. Suppose the average total cost for employee-only health coverage at Lake Wobegon School District is $300 per month, and that’s the amount Jane will pay when she retires. So there’s no employer liability – because Jane will pay the entire cost, right?

Wrong. The true cost for a retiree’s health coverage is almost always higher than the average. If the true cost is $400 per month and Jane pays $300, there’s an “implicit subsidy” of $100 per month. That’s an OPEB the district must account for. The expense is recognized over the rest of Jane’s career, because it’s part of her overall compensation.


You’ll need to know how big it is. For some districts, it’s not a big deal. For others, it’s huge. How big it is depends on your cost-sharing structure and on how generous your OPEB plans are. Knowing how big your OPEB liabilities are is very important for negotiating contracts for teachers and any other groups that work for the district.

An actuarial study will tell you how big your current plans’ OPEB liabilities are, and it will enable you to measure the effect of changing the basic plan or how you share costs with retirees. Our firm has prepared actuarial studies for a number of school districts already, and we have identified opportunities for cost savings.


If your district can afford to continue its OPEB plans “as is”, there may be no need to consider any changes. If not, it’s important to start discussing the possibilities now.

Many cost-saving techniques are available that can make the plans sustainable for the long term: changing the plan’s Medicare coordination, adding service requirements, restricting eligibility or capping employer contributions. The earlier you can discuss them with employee groups, the better the chances will be to keep the benefits at a reasonable cost.


Very few private employers have pre-funded their OPEB benefits, even though the private OPEB accounting standards have been in place for 15 years. Substantial tax disincentives have discouraged it in most cases.

But it’s a different ballgame for government employers. The tax disincentives don’t apply. Pre-funding may actually allow a more favorable measurement of the OPEB liabilities, because the interest rate used to measure liabilities is based on expected investment return. That can be higher in a trust that is not subject to the State’s general fund investment restrictions.

By reducing their unfunded OPEB liabilities, some Minnesota districts have already improved their overall bond ratings by pre-funding.

[March 2008 update: the Minnesota legislature passed a bill to authorize prefunding OPEB benefits, and the governor has signed it.]


Start recognizing the OPEB cost in your financial statements. The statements take effect in 2007 for larger governmental employers, 2008 for midsize and 2009 for smaller units. But, as always for accounting standards, early implementation is encouraged.

The expense to recognize in your financial statements is based on the “Annual Required Contribution” (ARC). That’s an unfortunate term, because the accounting standards don’t require an actual cash contribution. But that’s the term that will be used.

There’s a lot to think about, but the process starts with identifying your OPEB’s and measuring the cost. The plan design and funding decisions flow naturally from that starting point. And starting early will provide the most flexibility for everyone involved.

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