GASB 75: Other Post-Employment Benefits (OPEB) Accounting Guide

GASB 75

GASB 75: Other Post-Employment Benefits (OPEB) Accounting Guide

The adoption of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (effective for fiscal years beginning after June 15, 2017), introduced governments to a new category of financial obligation that, while less discussed than pensions, often rivals or exceeds pension liabilities in magnitude. OPEB—primarily post-retirement healthcare benefits for retirees and their dependents—represents an explicit commitment made to employees that frequently goes unfunded. This comprehensive guide walks practitioners through GASB 75 measurement methodologies, the critical role of healthcare cost trend assumptions, and the distinction between single-employer, agent, and cost-sharing OPEB plans.

What Are OPEB? Understanding the Landscape

Other post-employment benefits are benefits provided to retirees and their beneficiaries—other than pensions—based on the retiree's service to the government during employment. The most common OPEB is healthcare (medical, dental, vision insurance), but OPEB also includes:

  • Retiree healthcare insurance — The government or retiree pays premiums for coverage continuation
  • Life insurance — Death benefits provided to retirees' beneficiaries
  • Disability benefits — Long-term disability coverage for incapacitated retirees
  • Long-term care insurance — Coverage for nursing home or assisted living care
  • Tax-deferred savings accounts — Government contributions to Health Savings Accounts (HSAs) or Medical Savings Accounts (MSAs)
  • Implicit subsidies — Subsidized healthcare premiums for retirees below market rates

Unlike pensions, which are legally required to be funded through established pension trusts, OPEB are often provided on a pay-as-you-go (PAYGO) basis, meaning the government pays retiree healthcare costs from its operating budget as claims are incurred. This lack of prefunding creates large unfunded liabilities that GASB 75 brings to the balance sheet.

The Scope and Framework of GASB 75

GASB 75 applies to all government entities that provide OPEB to employees or retirees. Governments must:

  1. Recognize and measure the total OPEB liability on the balance sheet
  2. Distinguish between single-employer, agent, and cost-sharing OPEB plans
  3. Measure OPEB expense using an actuarial approach similar to pensions
  4. Report deferred inflows and outflows related to OPEB changes
  5. Disclose assumptions and funding status in footnotes

The standard creates a parallel accounting framework to GASB 68 (pensions), but with critical differences due to the unique characteristics of OPEB.

Three Types of OPEB Plans

Single-Employer Plans

A single-employer OPEB plan covers retirees and active employees of one government entity. Examples include:

  • A city's retiree health insurance plan for retired police officers
  • A county's post-retirement medical coverage for general employees
  • A school district's supplemental life insurance for teachers

Measurement approach: The government recognizes the full total OPEB liability (the present value of all future OPEB benefits earned to date) and deducts fair value of OPEB plan assets, if any, to arrive at the net OPEB liability.

Formula:

Net OPEB Liability = Total OPEB Liability − Fair Value of OPEB Plan Assets

Accounting entry (initial recognition or annual remeasurement):

Dr. Net OPEB Liability                       XXX
    Cr. Deferred Outflow of Resources (if assumption changes)
    or
    Cr. OPEB Expense (if current period service)  XXX

Agent Plans

An agent OPEB plan is administered by a plan sponsor or third party, with multiple participating employers. Each employer is responsible only for its own share of liabilities; if one employer's portion becomes insolvent, other employers do not assume the shortfall.

Measurement approach: Similar to agent pension plans, each employer measures its proportionate share of the plan's net OPEB liability.

Common structures:

  • Multi-employer health insurance pools serving several municipalities
  • State-administered OPEB plans where individual agencies participate
  • County employee benefit trusts serving multiple jurisdictions

Cost-Sharing Plans

A cost-sharing OPEB plan is a multiemployer plan where participating employers pool their OPEB liabilities and share the assets. If the plan is underfunded, all employers share the shortfall.

Measurement approach: GASB 75 uses a unique methodology for cost-sharing plans: the employer does not recognize a proportionate share of the plan's net OPEB liability. Instead, the employer measures a total OPEB liability based on the employer's own actuarial valuation, recognizing the benefit obligation attributable to the employer's employees, regardless of whether the employer has contributed to a trust.

This represents a significant conceptual difference from cost-sharing pension accounting under GASB 68, where employers recognize a proportionate share of the collective net pension liability.

Accounting entry for cost-sharing OPEB:

Dr. Total OPEB Liability (or Net OPEB Liability if assets)  XXX
    Cr. Deferred Outflow of Resources                           XXX

Measuring the Total OPEB Liability

The total OPEB liability is the actuarial present value of all future OPEB benefits earned by employees and retirees to date, calculated using assumptions about:

  1. Healthcare cost trends — Annual increases in healthcare costs
  2. Discount rate — The rate used to discount future OPEB payments to present value
  3. Demographic assumptions — Participant age, mortality, retirement age, turnover
  4. Substantive commitment — Whether the government is legally or contractually obligated to provide OPEB, or merely provides them on an ad hoc basis

Healthcare Cost Trend Rates: The Critical OPEB Assumption

The healthcare cost trend rate is the most volatile and judgmental assumption in OPEB accounting. It reflects expected annual increases in healthcare costs, driven by medical inflation, utilization changes, and plan design modifications.

Typical trend rate schedules:

Year Rate
Year 1 (next year) 6.5%
Year 2 6.3%
Year 3 6.1%
Year 4 5.9%
Year 5+ (ultimate rate) 5.0%

This declining trend schedule reflects the assumption that healthcare cost inflation will moderate over time, eventually converging to an "ultimate rate" that approximates long-term economic growth.

Impact on total OPEB liability: Changes in healthcare trend assumptions have a material impact on the OPEB liability. If the trend rate increases by 1.0%, the total OPEB liability typically increases by 5–10%, depending on the plan's maturity and covered lives.

Example: Healthcare Cost Trend Impact

A government provides retiree health insurance to 500 retirees averaging $15,000 in annual premiums. The actuary assumes a 6.5% initial trend rate declining to 5.0% ultimate. The resulting total OPEB liability is $85 million.

If the assumption is updated to a 7.5% initial trend rate (reflecting higher observed medical inflation), the total OPEB liability recalculates to $92 million. The $7 million increase is recognized as a change in assumption.

Discount Rate for OPEB Accounting

The discount rate for OPEB has evolved since GASB 75's adoption:

Initial guidance (GASB 75 issued in 2015):

  • For plans with dedicated OPEB trust funds (like pension trusts), use the expected long-term return on plan assets
  • For plans without dedicated trust funds (PAYGO plans), use the municipal bond rate (Bond Buyer 20-Bond Index)

GASB 87 (2017) and subsequent guidance:

  • Many governments reconsidered their discount rate assumptions, recognizing that PAYGO plans lack a dedicated asset base to generate returns
  • Municipalities increasingly adopted municipal bond rates or blended rates

Current practice (2026):

  • OPEB trusts with assets: 5.5%–6.5% (expected return on equities and bonds)
  • PAYGO OPEB plans: 3.5%–4.5% (municipal bond rate or equivalent risk-free rate)
  • Blended approach: Some governments use a rate between trust and PAYGO rates, particularly if they have partial prefunding

The discount rate has an inverse relationship with the OPEB liability: lower rates increase the liability, higher rates decrease it.

Implicit Rate Subsidy

An implicit rate subsidy occurs when the government subsidizes retiree healthcare by allowing retirees and active employees to participate in the same health insurance pool. The retirees typically have higher healthcare claims than active employees, but the premiums reflect an average cost across both groups.

Example: A government's healthcare plan has:

  • 2,000 active employees with average annual claims of $6,000
  • 300 retirees with average annual claims of $18,000
  • Blended premium for all participants of $8,500

The retirees' implicit subsidy is the difference between their actuarial claims ($18,000) and the blended premium ($8,500), or $9,500 per retiree. Over 300 retirees, this represents an annual implicit subsidy of $2.85 million.

GASB 75 requires the government to measure and disclose the present value of this implicit subsidy as part of the total OPEB liability.

Measurement of implicit subsidy: The actuary calculates the present value of the excess of retirees' expected claims over the blended premiums they will pay, extending over all years retirees are expected to participate in the plan.

Net OPEB Liability vs. Total OPEB Liability

These terms, while related, have different meanings:

Total OPEB Liability (TOL): The actuarial present value of all future OPEB benefits attributed to employee service to date.

Net OPEB Liability (NOL): The total OPEB liability less fair value of OPEB plan assets.

Net OPEB Liability = Total OPEB Liability − Fair Value of OPEB Plan Assets

Governments with funded OPEB trusts reduce the total liability by the trust's assets. Governments with PAYGO plans (no dedicated assets) recognize the full total OPEB liability as the net OPEB liability.

OPEB Expense Measurement

GASB 75 requires governments to measure OPEB expense using an accrual approach, similar to pension expense, consisting of several components:

1. Service Cost

Service cost is the actuarial present value of OPEB benefits earned by employees during the measurement period.

Calculation: Service cost = Projected unit credit service cost based on actuarial valuation

For example, if an employee earns the right to $5,000 in retiree healthcare benefits in the current year, the service cost is $5,000 (in present value).

Journal entry:

Dr. OPEB Expense—Service Cost                 XXX
    Cr. Net OPEB Liability                           XXX

2. Interest Cost

Interest cost is the increase in the total OPEB liability due to the passage of time, calculated as the total OPEB liability multiplied by the discount rate.

Calculation: Interest cost = Total OPEB Liability (beginning of period) × Discount Rate

Example: Total OPEB liability at July 1, 20X0: $250,000,000 Discount rate: 4.0% Interest cost for fiscal year 20X1: $250,000,000 × 4.0% = $10,000,000

Journal entry:

Dr. OPEB Expense—Interest Cost                10,000,000
    Cr. Net OPEB Liability                            10,000,000

3. Contributions to OPEB Trust (Reductions)

When the government contributes to a dedicated OPEB trust, the contribution reduces the net OPEB liability and is not an expense.

Journal entry:

Dr. Net OPEB Liability                        XXX
    Cr. Cash                                        XXX

4. Benefit Payments

Benefit payments made directly from the government's general fund (PAYGO) reduce the net OPEB liability.

Journal entry:

Dr. Net OPEB Liability                        XXX
    Cr. Cash                                        XXX

5. Earnings on Plan Assets and Deferred Gains/Losses

If the OPEB plan has dedicated assets, the difference between expected and actual earnings is recognized as a deferred inflow or outflow and amortized over the expected remaining service lives of plan members.

6. Changes in Assumptions and Plan Provisions

Changes in healthcare cost trend assumptions, discount rate assumptions, demographic assumptions (mortality, retirement age), and plan design (e.g., raising retiree cost-sharing) are recognized as deferred inflows or outflows and amortized over the expected remaining service lives of plan members.

Complete OPEB Expense Example

A city provides retiree health insurance on a PAYGO basis (no dedicated trust). The following actuarial information is available:

Item Amount
At July 1, 20X0
Total OPEB liability $175,000,000
Fair value of OPEB plan assets $0
Net OPEB liability 175,000,000
Fiscal Year 20X1 Activity
Service cost $8,500,000
Interest cost (4.0% × $175M) 7,000,000
Healthcare trend assumption change (+0.5%) 6,200,000
Benefit payments (claims paid from general fund) (4,800,000)
At July 1, 20X1
Total OPEB liability $201,900,000
Net OPEB liability 201,900,000
Deferred Outflows at July 1, 20X1
Prior assumption changes $22,000,000
Recognition of deferred outflows (10-year EARSL) $2,200,000

OPEB Expense Calculation:

Component Amount
Service cost $8,500,000
Interest cost 7,000,000
Recognition of deferred outflows (2,200,000)
Total OPEB Expense $13,300,000

Journal entries for fiscal year 20X1:

Dr. OPEB Expense                              13,300,000
    Cr. Net OPEB Liability                            13,300,000

To record OPEB expense for fiscal year 20X1.

Dr. Net OPEB Liability                         4,800,000
    Cr. Cash                                         4,800,000

To record benefit payments for fiscal year 20X1.

Dr. Deferred Outflow—Assumption Changes        6,200,000
    Cr. Net OPEB Liability                          6,200,000

To record increase in TOL due to healthcare trend assumption change.

Alternative Measurement Method for Smaller Employers

GASB 75 recognizes that detailed actuarial valuations are costly. For employers with fewer than 100 members, GASB 75 permits the use of an alternative measurement method that simplifies calculations:

  1. Estimate expected OPEB contributions for the next fiscal year
  2. Apply a discount factor to estimate the present value of the stream of future contributions
  3. Accumulate the present value to arrive at a net OPEB liability

This method is far less precise than a full actuarial valuation but may be appropriate for small employers with modest benefit obligations.

Comparison of GASB 75 (OPEB) to GASB 68 (Pensions)

While GASB 75 and GASB 68 share a common framework, important differences reflect the unique characteristics of OPEB:

Aspect GASB 68 (Pensions) GASB 75 (OPEB)
Primary assumption volatility Discount rate Healthcare trend rates
Asset prefunding Typically funded through pension trusts Often unfunded (PAYGO)
Discount rate for PAYGO plans N/A (pension plans are funded) Municipal bond rate
Service cost basis Entry age normal cost method Projected unit credit method
Demographic assumptions Mortality, turnover, retirement age Same, plus healthcare utilization
Inflation assumption Salary growth Healthcare cost trend
Plan modifications Rare; protected by law Common (benefit design changes, cost-sharing increases)
Cost-sharing plan treatment Proportionate share of collective net liability Total OPEB liability based on employer's valuation

Deferred Inflows and Outflows in OPEB Accounting

Deferred inflows and outflows arise from:

  1. Changes in actuarial assumptions (healthcare trend rate, discount rate, mortality)
  2. Differences between expected and actual OPEB costs (e.g., lower actual healthcare costs if health plan claims decrease)
  3. Changes in plan design (e.g., increase in retiree cost-sharing from 20% to 30% of premiums)

These items are recognized in OPEB expense over the expected remaining service lives of plan members, typically 10–15 years for OPEB plans with diverse participant ages.

Schedule of Changes in Net OPEB Liability

Governments are required to present a Schedule of Changes in Net OPEB Liability:

Item Amount
Balance at beginning of fiscal year $175,000,000
Service cost 8,500,000
Interest cost 7,000,000
Changes in assumptions (healthcare trend increase) 6,200,000
Difference in expected/actual costs (2,100,000)
Benefit payments (4,800,000)
Contributions to OPEB trust (1,500,000)
Balance at end of fiscal year $188,300,000

Funding Status and Disclosure

GASB 75 requires disclosure of:

  1. Funding status as of the measurement date, showing:

    • Total OPEB liability
    • Fair value of OPEB plan assets
    • Net OPEB liability or net OPEB asset (if overfunded)
    • Funded ratio (fair value of assets / total OPEB liability)

  2. Schedule of employer contributions over a 10-year period

  3. Actuarial assumptions (healthcare trend rates, discount rate, mortality assumptions, retirement age)

  4. Sensitivity analysis showing the impact of 1% increases and decreases in healthcare trend rates

  5. Discussion of plan design and changes during the year

Example disclosure format:

Measurement Amount (millions)
Total OPEB liability $201.9
Less: Fair value of OPEB plan assets $0.0
Net OPEB liability $201.9
Funded ratio (assets / TOL) 0.0%

Sensitivity to Healthcare Cost Trend Assumption

Healthcare trend rates are the primary driver of OPEB liability volatility. Sensitivity analyses are critical to help stakeholders understand OPEB exposure.

Example sensitivity table:

Healthcare Trend Rate Total OPEB Liability Change from Base
Base case (6.5% initial, 5.0% ultimate) $201,900,000 —
1% increase (7.5% initial, 6.0% ultimate) $227,400,000 +12.6%
1% decrease (5.5% initial, 4.0% ultimate) $178,600,000 -11.5%

A 1% change in healthcare trend rates produces approximately 10–13% changes in the net OPEB liability. Conversely, a 1% change in the discount rate produces roughly 8–10% changes.

Common Challenges and Best Practices

Challenge 1: OPEB as a "Hidden Liability" Because OPEB are often unfunded and paid as claims are incurred, they receive less attention than pensions. Many elected officials and citizens remain unaware of the magnitude of OPEB liabilities.

Best Practice: Develop a comprehensive OPEB communication strategy. Create simple visualizations of the liability trend. Include OPEB in five-year financial forecasts.

Challenge 2: Volatile Assumptions Driving Large Year-to-Year Swings Healthcare trend assumption changes can swing the OPEB liability by 5–15% annually, creating unpredictability in financial statements and bond ratings.

Best Practice: Use consistent, evidence-based assumption methodologies. Document the rationale for any assumption changes. Consider multi-year rolling averages to smooth volatility.

Challenge 3: Lack of Actuarial Data and Experience Unlike pension plans, which have decades of actuarial history, many OPEB plans lack detailed demographic and claims data. Actuaries may be forced to use proxy assumptions.

Best Practice: Invest in OPEB plan data collection and maintenance. Ensure claims data is reconciled and reviewed annually. Over time, build a richer actuarial database.

Challenge 4: Distinguishing Discretionary vs. Substantive Commitments Some governments provide OPEB on a purely discretionary basis (can be eliminated at will), while others have legal or contractual obligations. The distinction affects whether GASB 75 applies.

Best Practice: Conduct a detailed review of plan documents, collective bargaining agreements, and legal opinions. Document the nature of the commitment (legal, contractual, or discretionary).

Conclusion

GASB 75 has brought post-employment benefit obligations into the light, creating transparency around healthcare liabilities that many governments view as more pressing than pensions. Success requires:

  1. Accurate actuarial valuations with well-documented assumptions
  2. Disciplined assumption governance focused on healthcare cost trends and discount rates
  3. Transparent communication with elected officials, stakeholders, and credit rating agencies
  4. Proactive funding strategies to reduce the magnitude of unfunded OPEB liabilities
  5. Regular monitoring and updating of actuarial valuations and assumptions

Governments that develop expertise in OPEB accounting and integrate OPEB funding into long-term financial planning will be better positioned to manage this substantial obligation and maintain strong credit ratings.

AI Disclosure: This article was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.

This article was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.