A Refresher on the Actuarially Determined Contribution (ADC)

Key Benefit ConceptsActuarial, Services

If you are currently funding your post-employment benefits through a Trust or equivalent arrangement, an important item to consider is how much to contribute annually.  This, of course, can depend on a number of variables and may rely heavily on what you have budgeted for both the current and future fiscal years.  Regardless, your actuary should provide you with an Actuarially Determined Contribution (ADC) amortization schedule that will include a number of potential options of what can be contributed for the current and upcoming fiscal year(s).

As a quick overview, the ADC consists of two parts, one being an amortized portion of the current net accrued liabilities as of the measurement date and the other being the service cost.  The service cost is the amount your current active employees are earning towards their post-employment benefits annually.  The current net accrued liabilities (defined as either the Net OPEB or Pension Liability) can be amortized over a period of 1 to 30 years.  The lower the period that this liability is amortized over, the greater the ADC will be as you are funding the same liability over a shorter period.

It’s important to remind you that the calculated ADC options are not required amounts that you need to contribute since GASB does not require entities to fund their post-employment benefits through a Trust, nor do they provide guidelines on how to fund such benefits.  Rather, these ADC options can provide guidance on what to fund if you want to achieve a $0 Net OPEB or Pension Liability over a specific period.

For reporting consistency, we typically recommend selecting an amortization period and ADC that is at the level you intend to fund for the next two (or more) fiscal years.  However, you do have the ability to select any amortization period or method each year if you so choose.  In other words, you are not limited on what you can contribute next year based on the ADC you selected for this year (and vice versa).  Further, in some cases it may be advantageous to adjust the ADC related to your OPEB/Pension liabilities to maximize state aid (e.g., in the case of Wisconsin School Districts funding their post-employment benefits).

For additional information on funding your post-employment benefits and/or questions on selecting an ADC, contact us today!