Transcript Funding Other Post-Employment Benefit (OPEB) Liabilities

Strategy Session for Negotiating for
Other Post-Employment Benefit (OPEB)
Liabilities
Table of Contents
 Lack of Employer Planning
 Why Negotiate for OPEB Funding
 Understanding an OPEB Report
 Negotiation Considerations
 Funding Sources
 How Much Should be Funded
 Case Studies
 OPEB Funding Trends
 Q&A
1
Getting Started
“
The future ain’t what it used to be.
- Yogi Berra
”
2
Lack of Employer Planning
 You can’t start saving for retirement when you are in your sixties!
 Reducing Benefits
– Frozen benefits
– Defined contribution plans
– Benefit caps
– Restrictive service requirements
– Benefit buyouts
 Higher Costs
– High co-pays
– High deductibles
– Dependent elimination
3
Action Plan
“
”
Hard work never killed anybody,
but why take a chance?
- Edgar Bergen
4
Why Negotiate for OPEB Funding
 Employers will most likely delay funding unless they are forced or
enticed to fund OPEB liabilities
– GASB 45 does not legally obligate employers to fund OPEB liabilities,
only to size them
 Early start allows you to benefit from compounding investment
returns, which can significantly reduce program expenses even with
below average returns
– 5.00% average return means deposit grows by 332% over 30 years
– 7.00% average return means deposit grows by 661% over 30 years
 Lack of funding will eventually lead to rating downgrades for
employers – making it more difficult to fund OPEB liabilities
– “…an absence of action taken to fund OPEB liabilities or otherwise
manage them will be viewed as a negative rating factor” (Fitch)
5
Understanding an OPEB Report
 Typically consolidated
 Packed with assumptions
– Inflation
– Mortality Rates
– Discount Rate
– Health Care Cost
 Annual required contribution is not required
6
Negotiation Considerations
 What does funding mean?
– Deposits into a trust
– Withdrawals
– Borrowing cost
 Potential use of Taft Hartley trust guidelines for
governance
– Equal representation of employee and employers
on governing board
– Full fiduciary responsibility assumed by the board
7
Negotiation Considerations
 Ensuring employer follow through
– Can not be pay-go
– Can not permit immediate depletion
– Specific funding targets
• Asset Balance
• Cash Deposits
 Setup and administrative cost can be excessive
– Fee based
– Asset based
– Embedded cost
8
Funding Sources
 Employer contributions/Employee contributions
– Share costs at point of service
• Increased co-pays, deductibles, etc.
– Direct contributions to the trust
 Federal reimbursement of OPEB expenses
– Certain entities that provide federally funded services
can apply for OPEB expense reimbursement for
certain employees
9
Funding Sources
 Debt can be used to supplement funding efforts
– Conservative uses of debt can kick start funding efforts
– Debt can insure that contributions are paid
– Interest is the responsibility of the employer
– Debt can also be used to capitalize on short term reimbursement
opportunities
10
How Much Should be Funded
 OPEB funding doesn’t have to be an all or nothing proposition
– Funding the Annual Required Contribution is the goal, but any funding
amounts above pay-go expenses will have long term benefits
– Funding can be done using a scaled in approach, increasing annually
as General Fund revenue growth allows
– Over funding can lead to diminished federal
reimbursement opportunities by decreasing your
overall liability
– Under funding can lead to the trust expiring
prematurely, leaving retirees without promised benefits
11
Case Study #1: Misleading Report
“
42.7% of all statistics are made up.
- Larry, the Cable Guy
”
12
Case Study #1: Misleading Report
 Large NE School District with approximately 5,000 active employees
and an Annual Required Contribution of approximately $16.2 million
 District officials claimed that in order to have enough money to
provide the benefit, employees had take a 15% pay cut for a period
of 20 years
 Overwhelming vote to strike
13
Case Study #1: Misleading Report
 Holes in District analysis
– 60% AFT
– 4% earnings rate
– Exaggerated inflation well above wage increases
– Implicit subsidy
 Union and District officials reach a compromise to contribute 3.52%
of annual salary to OPEB trust, splitting the cost approximately
50/50 between Union members and the District
– Union agreed to a higher deductible
– District agree to cash deposits into a trust
14
Case Study #2: Mortality Gains
“
Light travels faster than sound. That
is why some people appear bright
until you hear them speak.
- Anonymous
”
15
Case Study #2: Mortality Gains
 Midsize NE city with a $50 million total liability
 Insure the lives of workers to recover death benefits to pay for
OPEB cost
 Employees expect that there is a contract for lifetime benefit
Outcome
 Excessive costs
 Unrealistic assumptions
 Betting on the early death of employees
16
Case Study #3: Desired Outcome
“
”
It’s better to have tried and failed,
than not to have tried at all.
- Spunky Tuna
17
Case Study #3: Desired Outcome
 Midwestern County with an initial liability of approximately $369 million
 Established guidelines
– Initial needs defined
– Regular due diligence
– Mutual oversight
 Develop concessions in exchange for funding
– Reduced spousal and dependent benefit
– Medicare supplement plan
– Increase service requirement for benefit eligibility
– County contributes 2.5% of premiums to a trust
 Funding and concessions reduced liability to approximately $225 million
18
OPEB Funding Trends
 Few trusts have been formed and funding levels remain
low nationwide
 Public sector entities are making or contemplating aggressive
changes to benefit plans in an effort to reduce expenses:
– Increase employee premiums and co-pays
– Eliminate or reduce spousal and/or dependent
coverage
– Cap employer contributions and implement a
defined contribution plan
 Negotiated concessions should come with firm
commitments
19
Disclaimer
“
”
I never said most of the things I said.
- Yogi Berra
20
Q&A
21