First, we need to know the Annual Required Contribution. According to GASB, the annual required contribution (ARC) is the amount the employer would be required to contribute for the year, calculated with certain parameters in order to fund the liability over time.
The ARC is the sum of the “normal cost” (the portion of the present value of estimated total benefits that is attributed to services received in the current year) and the amortized unfunded actuarial accrued liability (UAAL—the cost of those same employees for past, unfunded years of service). The ARC recognizes that retiree health benefits are “earned” and are financial obligations accrued during an employee’s entire period of service. The ARC is the annual amount a government or school district would have to pay to fund its liabilities over time.
The net OPEB obligation (NOO) is based on the difference between the ARC and the amount actually contributed.
The NOO is calculated annually and is based on the accumulated contributions and the accumulated ARC. At the end of a year, the NOO equals the summation of beginning of the year NOO and the annual OPEB cost, less the actual contribution made that year.
If the accumulated contributions:
- Equal the accumulated ARC, then NOO is zero, this would imply that the plan is being fully funded.
- Are greater than the accumulated ARC, then NOO is less than zero, this would imply the plan is overfunded, therefore creating an asset on the books of the government.
- Are less than the accumulated ARC, then NOO is greater than zero, this would imply the plan is underfunded, creating a reportable liability for GASB 45 purposes