Transcript Post Retirement health Care Accounting Rules AKA GASB45

University of Maine System
Retiree Health Care:
Why is this an issue?
Retiree Health Plan Task Force
(RHPTF)
3/13/07
Background

UMS provides medical benefits to disabled and
retired employees and their spouses and dependents

UMS accounts for the benefits on a pay-as-you-go (cash) basis

UMS Cost equals total premiums less required participant contributions

Currently 105 disabled and 1,732 retired employees receiving medical
benefits and growing as retirements occur

2007 Fiscal Year Cost*
•
•
•
*projected
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Premiums
Participant contributions
Net cost
$13.0 million
$4.2 million
$8.8 million
Current UMS Retiree Health Benefits
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
Retirees under age 65 pay full premium [Unless retired under special
incentive]

For retirees 65 and older Medicare is primary

UMS plan supplements Medicare and provides prescription coverage

If retiree had 10 or more years of full-time equivalent service, UMS
pays full premium at age 65 and one-half of dependent premium
Why is Retiree Health Care an Issue?
4

Retiree health care is a human, financial, and public policy issue.

The issue is the ability of public employers, including UMS, to continue
to provide retiree health coverage in light of the growing costs.

Costs on a pay-as-you-go basis are projected to triple in approximately
10 years because of the number of employees close to retirement age
and the increasing costs of health care.

To be responsible we must look at the long-range commitment we are
making to retiree health care and the long-range costs.
Why is Retiree Health Care an Issue?
5

GASB is the Government Accounting Standards Board. Public sector
organizations must follow GASB rules in preparing their financial
statements.

GASB 45 is an accounting rule that requires public employers to put
the value of retiree health insurance for current and future retirees on
our financial statements.
Why is Retiree Health Care an Issue?
6

We all need to work together to determine how UMS can continue to
offer a meaningful retiree health benefit while maintaining the fiscal
integrity of UMS and complying with the GASB requirements.

If no changes are made, retiree health care will consume an increasing
share of the budget, reducing funding for university operations and/or
requiring large tuition increases.
GASB Statement No. 45

Mandates accrual accounting for post-employment benefits other than pensions

Employers must recognize the cost in their financial statement

Requires actuarial valuation to attribute cost to employee years of service

Does not require employers to pre-fund postemployment benefits

Allows employers continued use of the funds, if the employer does not pre-fund
the liability in a trust
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
Calculations must be based on age-based premiums

Will be effective for UMS FY08 (July 1, 2007 – June 30, 2008 fiscal year)

Total post-employment unrecorded liability for current program: $330 million
Age Based Premiums:
Current Program - Implicit Rate Subsidy
$10,000
$9,000
$8,000
Actual Cost
$7,000
$6,000
$5,000
True Cost
$4,000
Premium Rate Charged
$3,000
$2,000
$1,000
$0
20
years
25
years
30
years
35
years
40
years
45
years
AGE
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50
years
55
years
60
years
65
years
GASB Statement No. 45 (continued)

Annual post-employment benefit cost is the Annual OPEB* Cost

Annual OPEB is equal to:

•
the cost of benefits earned in the current year, plus
•
a provision for amortizing the unfunded liability over 30 years
UMS Annual OPEB Cost for FY08 is $42.1 million based on current plan
design and eligibility

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Employer’s Net OPEB Obligation is equal to:
•
Annual OPEB cost, minus
•
UMS pay-as-you-go costs
•
Equals incremental cost of $33.3 million in FY08
*OPEB: Other Post-Employment Benefits
Implications of Funding via a Trust
10

Significant implication to cost – actuarial discount rate would be
higher resulting in lower Annual OPEB Cost

May improve UMS’s ability to raise capital due to Bond Rating
Agency perception

Legal separate entity

Assets dedicated to providing retiree benefits according to the
terms of the plan

Assets legally protected from creditors of UMS or the Plan
Administrator

UMS could include funded contributions as a qualified benefit
expense in determining Federal Benefit Rate charged to grants
and contracts – annual impact approximately $2 million
What is the real impact of GASB 45?
(From Standard and Poors statement, December 2006)
11

GASB 45 does not create any new costs; it points out the longrange costs of existing benefits

GASB 45 is a new way to account for, and report on, these
liabilities

A tool to better manage costs and liabilities over the long-term

Rapidly increasing costs will strain budgets and balance sheets
over the longer term
What is the real impact of GASB 45?
(cont.)
12

Failure to fund the actuarial required contribution or at least
establish a plan to do so over time indicates that the benefit
structure may be unaffordable

This is problematic if protection of benefits and credit quality are
desired outcomes.

The two likely scenarios for managing the pressure are either:
• boosting assets by increasing revenues
• lowering liabilities through benefits modifications
Current Program Costs: OPEB and
Pay-As-You-Go
$160,000,000
$140,000,000
Annual Cost
$120,000,000
$100,000,000
OPEB Cost - Current
Program
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
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Year
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Pay-As-You-Go Cost Current Program
GASB-45 as a Percentage of Projected Revenues
(State Appropriations + Tuition & Fee Revenue)
Current
Share
GASB-45 Options as a percentage of Projected Revenues
(State Appropriations + Tuition & Fee Revenue)
16%
14%
12%
10%
8%
6%
4%
2%
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0%
ARC - Current Program/ (State Appropriations+T&F Revenue)
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Pay-As-You-Go Cost - Current/ (State Appropriations+T&F Revenue)
Note: State appropriation and tuition and fee revenue w ere assumed
to have grow n at a 15-year moving average beginning w ith FY93.
Range of Employer Involvement
High
Free based on age + service
Employer Responsibility
Fixed percentage based on age + service
Service based percentage contribution
Service based dollar contribution
Target age subsidies
Defined contribution approach,
employer funded
Savings account, employee
funded
Accessonly/COBRA/Medicare
Low
Retiree Responsibility
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Slide reproduced from Hewitt NASULGC Annual Meeting 11/12/06
High
Possible Plan Design Considerations

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
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Modify Integration with Medicare to create
parity with Active Employees
Modify Eligibility
Modify Future UMS Contributions
Age-based premiums for pre-Medicare
retirees
Prescription Drug Plan Changes
Possible Plan Design Considerations
17

Eliminate current plan for employees hired on and after a future
date

Eliminate current plan for some group of existing employees
and/or spouses (under age xx with less than yy service)

Replace plan with a Defined Contribution Health Plan to
provide future benefits and to remain competitive in the
employment market
What are other Employers doing?

State of Maine Employees’ Benefit Trust
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
University System of New Hampshire
•
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Unfunded actuarial accrued liability estimated to be $3.2
billion; annual required contribution minimum $275 million
Employees currently protected by law (plan design eligibility
and contribution levels)
Intent is to convert to an irrevocable Trust 7/1/07
Considering legislation to establish funding plan
Froze plan to new entrants 7/1/1994 (FASB 106)
Changed eligibility to 10 years after age 52
Have been reporting liability
What are other Employers doing?
(cont)

University of Kentucky:
•
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Currently have traditional rich retiree health program
Have defined OPEB Cost = $30.5 million
Plan design choices:
 Added an age/service table for retirees who retire prior
to age 65 (10% - 80% premium share)*
 Changed pre-65 premiums to age based
 Change post-65 Rx to Medicare Prescription Drug Plan
* Premium share does not change at age 65
What are other Employers doing?
(cont)

University of Kentucky (cont):
•
•
•
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Will pre-fund
Are still considering alternative designs for new hires
Reduced OPEB Cost to $14.2 million (>50% reduction)
The Future of Retiree Medical:
Defined Contribution Plans
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
Increasing popularity of Defined Contribution funding model

Establishes individual employee accounts with portability

Can be funded with employer and employee dollars

Employer contributes the same amount for all eligible employees
annually – not compensation based

Career approach to providing a benefit – full career employee (25 or
30 years) will have sufficient $’s in their account to purchase health
care
Next Steps:

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Chancellor has established the Retiree Health Plan Task
Force (RHPTF)
• Multi-disciplinary across represented and nonrepresented employee groups
• Inform and educate
• Explore alternatives including Defined Contribution
approach
• Make recommendations to Chancellor by June 30,
2007
Work with the State of Maine and State Legislature
Obtain external auditor sign-off on valuation/assumptions
Consult with a Financial Advisor on implications to Bond
rating
Retiree Health Plan Task Force
Charge
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
Identify problems and issues

Survey what other employers are doing

Consider the most suitable alternatives for UMS

Make recommendations to Chancellor by June 30, 2007 that
will provide for a meaningful Retiree Health Benefit Program for
the future, maintain financial integrity of UMS and meet the
GASB requirements
Retiree Health Plan Task Force
Membership

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Co-chairs
•
Bill Sullivan, Retiree, former Vice Chancellor for
Administration
•
Gino Nalli, Assistant Research Professor, Muskie Health
Policy Institute
Retiree Health Plan Task Force
Membership

Trustees:
•
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President:
–
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Theo Kalikow
CFO:
•

Jean Flahive
Margaret Weston
Charlie Bonin
Retirees:
•
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Charles Fritz
Dick Rice
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Union representatives:
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Richard Bragg
Sandra Cayford
Christopher Gardner
Betty Hilton
James McClymer
Jennifer Moreau
Ronald Mosley
Dianne Perro
Shannon Smith
Kerry Sullivan
Retiree Health Plan Task Force
Membership

Non-represented
employees:
•
•

Steven Weinberger
Becky Houle
•


Faculty Representative
to BOT:
•
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Christine Standefer
Liaison with the State of
Maine:
Frank Johnson
PATFA
•
Jerry Ashlock
Retiree Health Plan Task Force
Staff

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Task Force staff
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Tracy Bigney, Tom Hopkins
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Joanne Yestramski, Frank Gerry and Mark Kamen, as needed as
experts in various aspects.
•
Stuart Rubinstein, actuary and consultant (modeling alternative
options)
Observers:
• John Bracciodieta, Ross Ferrell, Carl Guignard, Jerry Ashlock
Retiree Health Plan Task Force
Preliminary Timeline and Work Plan
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
First Task Force meeting 3/13/07

Approximately 6 meetings over March – June
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Meetings of ½ day to allow for presentations and in-depth discussions
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Actuary available to provide technical assistance and modeling
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Other guest experts invited as needed
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Recommendations to Chancellor by June 30, 2007