Transcript Slide 1

GASB 45 – Other Post
Employment Benefits
GFOA SC
October 19, 2010
Jack Beam, ASA, EA, MAAA
What is a consultant?
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What we will do today
 GASB 45 in general
 Implicit vs. Explicit subsidies
 Actuarial Assumptions
 Critical issues
 Key Results in SC
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Retirement today?
 A recent Towers Watson survey said 40% of US workers
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are planning to delay retirement
59% of workers who plan to delay retirement cite
healthcare as the cause
Recent GAO Report indicated that healthcare spending
has grown from 12% of overall state and local
expenditures in 1978 to 20% in 2008
Life expectancy at 65 has increased by about 40% in the
last 35 to 40 years
Local governments shed 76,000 jobs from their payrolls. Of
those, roughly 50,000 jobs were cut from local schools
GASB 43 & GASB 45
 GASB standards:
► Before GASB 45 – Cash Accounting
• OPEB expense equals cash contribution made by employer
• Balance sheet liability equals zero,
• Except for self-insured plans
– may have IBNR liability attributable to retirees
► After GASB 45 – Accrual Accounting
• OPEB cost accrued during active member’s working career
• Cost “fully accrued” when active member retires
• Significant balance sheet liability may accrue if benefits
funded on a pay-as-you-go basis
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GASB 43 & GASB 45
Total Revenues
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GASB 45 applies for Fiscal
Years beginning after
> $100,000,000
12/15/2006
$10,000,000 to $100,000,000
12/15/2007
< $10,000,000
12/15/2008
GASB 43 & GASB 45
 Statement 43 applies to pre-funded OPEB plans
► “Plan” usually refers to a trust or agency fund (that is,
to assets under the stewardship of an administering
entity) used to administer the financing of OPEB and
the payment of benefits—regardless of the financing
policy adopted
 Statement 45 applies to the employers
sponsoring OPEB plans
► “Plan” usually refers to an employer’s substantive
commitment or agreement to provide OPEB, may be
referred to as a “Program” if there is no trust
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Implications
 GASB 43/45 Key Disclosure Requirements
►Actual employer contributions
►Actuarial liabilities versus actuarial value of
assets
►Annual OPEB Cost (Expense)
• Normal cost plus Unfunded Actuarial Accrued
Liability amortization plus technical adjustment
►Net OPEB Obligation (Balance sheet liability)
• Cumulative difference between Expense and Employer
Contribution
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Explicit Rate Subsidy
 When some or all retirees are charged less than
the full cost of providing benefits
 Often imaginative …
► X% per year of service subsidy up to Y% max
► A lower charge if retired prior to 10/1/19XX
► A lower charge if enrolled in HMO vs. PPO
► Retirees pay full active rate
 It is clear that GASB would want an accounting
of this type of subsidy. Many plans will contain
both explicit and implicit rate subsidies.
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Implicit Rate Subsidy – Insured Plans
 Part of what is paid for
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actives is really for retirees
Collecting an average rate,
but true incidence of cost is
different
Retirees cost more than
actives because they are
older
So employers are
“implicitly” subsidizing
the retiree rate
GASB wants a proper
accounting of this hidden
subsidy
$1,200
$1,000
$800
$600
$400
$200
$20
25
30
35
40
45
50
55
Age
Costing
Collecting
60
65
Actuarial Assumption Setting
 Demographic assumptions similar to
pension plan valuation
 Election rates
 Lapse rates – premium may change after a
few years
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Actuarial Assumption Setting
 Economic Assumptions are somewhat
unique
 Discount rate should be the interest rate
being earned by the assets that will pay
the benefit
 Per Capita Claim Cost – insured vs.
self-funded
 Medical Trend
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Current Trend Assumption – SCEIP
June 30, 2009 – inflation 3.0%
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
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Health Care Trend Inflation Rates
Medical
Drug
7.5 %
8.9 %
7.5
8.9
7.5
8.9
7.0
8.1
6.5
7.3
6.0
6.6
5.5
5.8
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
5.0
Dental
3.0 %
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
Payment Streams
Trend Sensitivity – Medical Only
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40% difference between Optimistic and Pessimistic Scenario in 2022
Discount Rate
 Unfunded
o Return on general
assets
o Historical returns
o Investment horizon
o 3% to 5% per year
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 Prefunded
o Irrevocable Trust
o Little or no assets to
start
o Like a pension plan
o Little payout at first
o 6.0% to 7.5% per year
Discount Rate Impact
 Unfunded Plan – 3.0% vs. 4.5%
Unfunded Plan
A. Employer Normal Cost
B. Amortization of UAL
C. Annual Required
Contribution (ARC) (A+B)
Percent Difference
D. Active Accrued Liability
E. Retiree Accrued Liability
F. Total Actuarial Accrued
Liabilities
Percent Difference
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3.0% Discount Rate
4.5% Discount Rate
$5,197,507
$3,466,115
$2,369,687
$7,567,194
$2,091,217
$5,557,332
-27%
$56,409,539
$38,870,797
$14,160,143
$70,569,682
$11,659,913
$50,530,710
-28%
Discount Rate Impact
 Funded plan – 6.0% vs. 7.5%
Funded Plan
A. Employer Normal Cost
B. Amortization of UAL
C. Annual Required
Contribution (ARC) (A+B)
Percent Difference
D. Active Accrued Liability
E. Retiree Accrued Liability
F. Total Actuarial Accrued
Liabilities
Percent Difference
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6.0% Discount Rate
7.5% Discount Rate
$2,410,351
$1,739,332
$1,885,851
$4,296,202
$1,730,437
$3,469,769
-19%
$27,840,004
$20,627,555
$9,811,134
$37,651,138
$8,408,856
$29,036,411
-23%
Amortization Period
 Maximum of 30 years under GASB 45
 30 years may not be appropriate
 Plan amendment shifts majority of
liability to retirees
 Accounting principles for guidance
 Payout period – retiree life expectancy
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Amortization Period - Example
 Impact of shorter amortization period
Amortization Period (years)
A. Employer Normal Cost
B. Amortization of UAL
C. Annual Required
Contribution (ARC) (A+B)
Percent Difference
D. Total Actuarial Accrued
Liabilities
Percent Difference
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Original Valuation
New Plan Design
New Plan Design w/
Appropriate
Amortization
30
30
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$507,501
$25,501
$25,501
$254,802
$762,303
$41,556
$67,057
$70,812
$96,313
-91%
44%
$982,108
$982,108
-84%
0%
$6,021,867
Look At Critical Issues Facing Both
Member And The Employer
 Access to health care coverage when retired
 Affordability to the retired member
 Sustainability of the Plan by the employer
(and subtopic of “velocity”)
 Equity among the population segments
(equity not necessarily meaning equal)
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Sustainability
 Retirees do not want the Plan to vanish
 To ensure sustainability, the employer
must know the long term ongoing annual
commitment and assess whether the
resources exist to meet the obligation
 The first step in measuring sustainability
is to assess the impact on the annual
budget of the current program
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Sustainability
Next, the employer should estimate what
could be a long term annual budget amount
that could be allocated to the retiree medical
program
Then, the employer could look at the benefit
strategies that could be implemented to bring
the rate to a manageable level while keeping
benefits as affordable as possible
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General Fund Encroachment Means Less
Funding Available for Other Activities
Project NOO assuming cash pay-go funding. Assess
impact on:
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Cost of capital/bond rating
Borrowing restrictions that make access to capital
markets more difficult
Ability to meet pay-go requirements in all years
Some entities are exploring non cash contributions (refer
to formal legal counsel)
Example- firefighters just don’t feel they can cut into
training budget- or their capital budgets- so are looking to
find the money in the pension plan- how real is that
solution?
Understanding “Velocity”
 The speed for change to take effect (e.g. the lowering of
the GASB liability and costs) depends on what employee
groups can have benefit changes.
► If new hires only, we find it takes a generation to fully feel the
impact of the change
► If actives only (prospective benefits), the velocity of change can
be sooner, depending on the depth of the change
► Changing for all members (active, retiree and new hire) creates
the highest velocity.
 A governmental entity may say “the Actuarial Required
Contribution must go from 15% to 7% in 7 years”.
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Current Retirees vs. Future
Retirees
0.35%
Contributions under
Full AdvanceFunding
Future Hires under
current Pay-As-YouGo
0.30%
Percent of Payroll
0.25%
0.20%
0.15%
0.10%
Current Active
Employees under
current Pay-As-YouGo
0.05%
Current Retirees
under current Pay0.00%
As-You-Go
2009
2014
2019
2024
30 Year Closed Level Percent Amortization (3% Growth)
25
2029
2034
2039
2044
ARC per Active Member –
Unfunded Discount Rate – 4.5%
ARC per Active – Unfunded
$6,000
Mean = $2,734
Median = $2,771
$5,000
$4,000
$3,000
$2,000
$1,000
$0
0%
10%
20%
30%
40%
50%
60%
Percentile
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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70%
80%
90%
100%
AAL per Plan Participant –
Unfunded Discount Rate – 4.5%
AAL per Participant - Unfunded
$60,000
Mean = $23,974
Median = $22,949
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0%
10%
20%
30%
40%
50%
60%
Percentile
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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70%
80%
90%
100%
ARC per Active Member –
Funded Discount Rate – 6.0%
ARC per Active - Funded
$6,000
Mean = $2,161
Median = $2,023
$5,000
$4,000
$3,000
$2,000
$1,000
$0
0%
10%
20%
30%
40%
50%
60%
Percentile
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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70%
80%
90%
100%
AAL per Plan Participant –
Funded Discount Rate – 6.0%
AAL per Participant - Funded
$60,000
Mean = $17,917
Median = $16,173
$50,000
$40,000
$30,000
$20,000
$10,000
$0
0%
10%
20%
30%
40%
50%
60%
Percentile
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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70%
80%
90%
100%
Key findings in SC OPEB work
Size of Plans GRS values in South Carolina
Number of employers of given size
8
7
6
5
4
3
2
1
0
0-99
100-199
200-299
300-399
400-499
500-599
700-800
Number of Plan Participants
The state wide plan is not included in these survey results.
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>800
Key findings in SC OPEB work
Type of Plan
Number of Plans
Average Unfunded ARC per active
Benefit varies based on service or
points
15
$2,963
Same dollar benefit for all retirees
9
$1,627
Employer pays entire premium
6
$4,203
Other
2
$1,586
Grand Total
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$2,734
Over half of GRS’s South Carolina clients vary the retiree benefit based on
years of service or points at retirement.
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Key findings in SC OPEB work
Type of Benefit
32
Yes
No
Subsidized over age 65
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5
Provides spousal coverage
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1
Provides explicit subsidy for spouse
17
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Key findings in SC OPEB work
Average Monthly Cost per Individual
Average claims cost by age and gender for the 32 valuations surveyed
Average Pre-65 Cost per Month
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Age
Male
Female
25-29
$216.85
$368.21
30-34
220.04
371.59
35-39
224.47
372.43
40-44
265.67
375.84
45-49
347.88
411.04
50-54
456.85
470.38
55-59
535.73
533.85
60-64
662.00
610.19
Healthcare Reform
 Early Retiree Reinsurance Program, go to
http://errp.gov
 Retiree only plans exempt
 Medicare Advantage and Medicare Part D
plans are exempt
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