Magazine article Government Finance Review

Dispelling OPEB "Urban Legends"

Magazine article Government Finance Review

Dispelling OPEB "Urban Legends"

Article excerpt

Recently, it has become apparent that there are a number of common misconceptions about what GASB Statement No. 45 does and does not require. To avoid potential misunderstandings, this article underscores five important facts about GASB Statement No. 45.

In July 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. States and large local governments will be required to implement the new guidance starting with the fiscal year that ends December 31, 2007. Medium-size and small governments will be required to do the same starting with the fiscal year ending December 31, 2008, and December 31, 2009, respectively.

The main thrust of GASB Statement No. 45 is to require for the first time that public-sector employers recognize the cost of other postemployment benefits (OPEB) over the active service life of their employees rather than on a pay-as-you-go basis. Early indications are that OPEB cost calculated in accordance with GASB Statement No. 45 is likely to be as much (or more) than three times the amount of pay-as-you-go payments, raising understandable concerns about the potential financial, managerial, and public-policy implications of implementing the new guidance.

Naturally, decision makers must have a sound understanding of the requirements of GASB Statement No. 45 if they are to develop an appropriate strategy for dealing with the issues raised by the implementation of that pronouncement. Unfortunately, many in this position appear to be laboring under some serious misapprehensions regarding exactly what the new GASB guidance does and does not require. Indeed, five such misunderstandings have become so widespread as to take on a status akin to an accounting-style "urban legend." This article seeks to dispel such legends so decision makers can focus on the real rather than the imaginary effects of implementing GASB Statement No. 45.


"We have no choice - we have to change how we fund OPEB if we want to keep getting a clean opinion from our auditors."

The GASB's authority is strictly limited to accounting and financial reporting. That is, the GASB cannot tell a government what to do - only how to reflect what it has done. Nothing in GASB Statement No. 45 prevents a government that elects to continue to finance OPEB on a pay-as-you-go basis from receiving an unqualified opinion from its independent auditors on the fair presentation of its financial statements.


"The new accounting for OPEB will wipe out our fund balance overnight!"

"Fund balance" is reported only in funds that use the modified accrual basis of accounting (i.e., "governmental funds"). Under the modified accrual basis of accounting, expenditures for OPEB will continue to be recognized only as funding occurs, regardless of how the amount thus funded is calculated (i.e., advance funding, pay-as-you-go funding). That is, fund balance will only be affected in a given year by the amount actually funded in that year, on whatever basis.


"We are going to have to report a huge liability right away on the face of the financial statements for all of the OPEB we promised in the past. …

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