GASB 74 is the Governmental Accounting Standards Board rule that sets how postemployment benefit plans other than pensions must report their finances when their assets are held in a qualifying trust. It covers retiree health, dental, vision, and life insurance plans, and it took effect for fiscal years beginning after June 15, 2016.1Governmental Accounting Standards Board. Summary of Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans The point of the standard is comparability: taxpayers, legislators, and bond analysts should be able to look at any government’s OPEB plan and see, on the same terms, whether the promises made to retirees are actually being funded.
Which OPEB Plans Report Under GASB 74
GASB 74 applies to both defined benefit and defined contribution OPEB plans administered through a trust or equivalent arrangement that meets three tests. The plan’s assets must be irrevocable, meaning the employer cannot claw them back. The assets must be dedicated solely to paying benefits to members and beneficiaries. And they must be legally protected from the employer’s creditors.2Governmental Accounting Standards Board. GASB Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
If a plan fails any one of those tests, GASB 74 doesn’t apply. The sponsoring employer instead reports the liability directly on its own financial statements under different rules.
Defined benefit plans promise specific coverage or dollar amounts, usually tied to service and salary. Defined contribution plans hold individual accounts, and the eventual benefit depends on contributions and investment performance. Because defined contribution plans don’t carry an unfunded liability the same way, their GASB 74 reporting is much simpler. The financial statements and disclosures are still required, but the heavy actuarial calculations aren’t.
The Small Plan Alternative
Plans with fewer than 100 total members (active employees plus retirees combined) can use an alternative measurement method rather than commissioning a full actuarial valuation.1Governmental Accounting Standards Board. Summary of Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans The method follows the same broad steps but permits simpler assumptions, which can materially reduce cost for a small municipality with only a handful of retirees.
How GASB 74 Relates to GASB 75
The two standards are often confused. GASB 74 governs the plan’s own financial reporting. GASB 75 governs the employer that sponsors the plan.3Governmental Accounting Standards Board. GASB Publishes New Standards for Reporting Health Insurance and Other Retiree Benefits The plan prepares its statements under GASB 74, and the employer then picks up the net OPEB liability figure and recognizes it on its own books under GASB 75.
Single-employer and agent-employer sponsors recognize the full net OPEB liability. Cost-sharing employers recognize a proportionate share of the collective liability.4Governmental Accounting Standards Board. Summary of Statement No. 75 What that means in practice: an error in the plan’s GASB 74 numbers cascades directly onto every participating employer’s balance sheet.
The Two Required Financial Statements
Every plan in scope prepares two primary financial statements.1Governmental Accounting Standards Board. Summary of Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
The Statement of Fiduciary Net Position functions as the balance sheet. It reports assets (cash, investments, receivables), deferred outflows, liabilities (unpaid claims, administrative debts), and deferred inflows as of the fiscal year-end. The bottom line is the net position held in trust for future benefits.
The Statement of Changes in Fiduciary Net Position covers the year’s activity. Additions are mainly employer and employee contributions plus net investment income. Deductions are mainly benefit payments and administrative costs such as actuarial, audit, and legal fees. The difference explains how the plan’s net position grew or shrank during the year.
Measuring the Net OPEB Liability
The net OPEB liability is the headline number. It is the gap between what the plan owes retirees (the total OPEB liability) and what it has set aside to pay them (the plan’s fiduciary net position). A large gap signals that benefit promises have outrun funding.
Entry Age Normal Cost Method
GASB 74 requires a single actuarial cost method for calculating the total OPEB liability: entry age normal. Each year’s service cost is determined as a level percentage of pay across the employee’s career, starting at hiring age.2Governmental Accounting Standards Board. GASB Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Costs come out steady rather than spiking near retirement, and because every plan uses the same method, liability figures line up across governments.
The Blended Discount Rate
The discount rate translates future benefit payments into today’s dollars, and GASB 74 uses a blended approach. For years in which plan assets are projected to cover benefit payments, the rate reflects the long-term expected return on those investments. For years beyond that crossover point, the rate switches to a yield on 20-year, tax-exempt general obligation municipal bonds rated AA/Aa or higher.2Governmental Accounting Standards Board. GASB Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
A well-funded plan may use its expected investment return across the whole projection. A poorly funded plan ends up leaning on the municipal bond rate, which is typically lower and pushes the reported liability higher. The discount rate is the single most influential assumption in the calculation.
Valuation Timing
Actuarial valuations must be performed at least every two years.2Governmental Accounting Standards Board. GASB Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans In an off year, the plan uses roll-forward procedures to update the prior valuation to the current fiscal year-end. The valuation date cannot be more than 24 months before the fiscal year-end. Actuaries project future payments using assumptions about employment patterns, mortality, and healthcare inflation, then discount those payments back to present value.
Required Note Disclosures
The financial statements need context, and GASB 74 spells out what belongs in the notes. Plans disclose the types of benefits provided, the legal authority under which the plan operates, and who has the power to amend benefits. The total number of members is reported, split between actives and retirees. Investment policies are described, including target allocations across asset classes and the assumed rate of return for each.
Two sensitivity analyses are also required. One shows how the total OPEB liability would move if the discount rate rose or fell by one percentage point. The other shows the same for the healthcare cost trend rate.2Governmental Accounting Standards Board. GASB Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans These tables are among the most informative disclosures in the report. A liability that jumps 30 percent on a one-point discount rate drop signals a very different risk profile than one that moves 10 percent.
Ten-Year Supplementary Schedules
Beyond the statements and notes, GASB 74 requires supplementary schedules that build a decade of history, added one year at a time until the full ten years are in place.1Governmental Accounting Standards Board. Summary of Statement No. 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
One schedule tracks the components of the net OPEB liability and reports the funded ratio (the plan’s net position divided by the total liability). A funded ratio drifting downward year after year tells a very different story than one that holds steady.
A second schedule reports the money-weighted rate of return on plan investments. Unlike time-weighted returns, money-weighted returns account for when contributions and benefit payments actually moved in and out of the portfolio. Comparing those returns against the assumed discount rate over several years is the clearest test of whether the plan’s funding projections are realistic or optimistic.
Why the Numbers Matter Beyond the Plan
GASB 74 data doesn’t stay inside the plan’s report. Credit rating agencies use it to gauge how much fiscal strain OPEB obligations place on a government, typically comparing adjusted liabilities against operating revenues and measuring how much of the budget goes to current benefit payments. Governments where OPEB liabilities dwarf revenues face harder questions about long-term creditworthiness.
Because the plan’s net OPEB liability flows into every participating employer’s balance sheet through GASB 75, the quality of the actuarial work at the plan level directly shapes the sponsor’s reported financial position, its borrowing costs, and the budget conversations that follow. Aggressive discount rate assumptions don’t just distort the plan’s finances; they ripple outward into every bond and budget decision the sponsoring government makes.