Transcript Document

Managing OPEB Liability
The Actuarial View:
GASB Statements 43 and 45
June 2007
Presented by
Managing OPEB Liability
David Boomershine
Senior Consulting Actuary
Agenda

Introduction

Overview

Baseline Valuation /Process

Actuarial Basis

Major Cost Drivers

Funding

Plan Design

Bond Rating Agency Views

Conclusions/Questions
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Introduction
 GASB OPEB Exposure Draft – February 2003
 Revised Exposure Draft – January 2004
 Statement 43 – May 2004
 Statement 45 – July 2004

www.gasb.org
 Change “Pay-As-You-Go” to accrual accounting for post
employment medical, dental, and life insurance

Shifts costs between taxpaying generations
 Similar to FAS 106 for private sector
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Overview of GASB Rules
 Effective dates for Statement 45:

Phase I

Phase II

Phase III
Annual Revenue
Effective for FY >
FYE
>$100m
12/15/2006
6/30/2008
12/15/2007
6/30/2009
12/15/2008
6/30/2010
>$10m & <$100m
<$10m
 Effective dates for Statement 43 (if funded): 1 year earlier:
FYE

Phase I
6/30/2007

Phase II
6/30/2008

Phase III
6/30/2009
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Statement 43
Disclosures for Plan include:
(If Plan is funded – i.e., trust fund established)

Plan description

Significant accounting policies

Actuarial methods and assumptions

Contributions and reserves

Funded status: assets vs. actuarial liabilities

Statement of funding progress
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Statement 45
Primary Features/Disclosures – for Plan Sponsor:
 Book actuarial cost as an expense on financial
statements
 Accrue liability on finance statements – actual
contributions vs. expense (Not Actuarial Accrued
Liability)
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Overview of GASB Rules
 Why is GASB proposing a new accounting standard?

Current accounting standards ignore cost while
employee renders service and recognizes cost only after
an employee retires

GASB argues this delayed recognition shifts “costs”
from one taxpaying generation to another.
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Overview of GASB Rules
 GASB #43 and #45 standards are structured like GASB’s
Pension accounting & reporting standards


GASB #25 – Plan’s accounting/disclosures
GASB #27 – Plan Sponsor’s accounting/disclosures
 Primary similarities between Pension and OPEB disclosures

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Valuation process
Annual Actuarial Cost
Net Liability: Cumulative differences between contributions and
costs
 Primary Differences



Benefit types
Healthcare trends, assumptions
Funding
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Overview of GASB Rules
 If the employer does not otherwise contribute to the cost
of retirees’ benefits, an OPEB liability is not required
 However, final Statements require OPEB liability if
implicit rate subsidy exists
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Overview of GASB Rules
 Key financial statement components – GASB #45

Annual Required Contribution (annual expense) – ARC

Annual OPEB Cost (annual expense) – AOC

Net OPEB Obligation (balance sheet liability) – NOO
 Advance funding is not required; however there are some
advantages

The Net OPEB Obligation will be close to zero

The actuary can use a more favorable discount rate to
value the plan
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Case Study Example
Annual Amount
Millions
GASB vs. Pay-As-You-Go (PAYG)
Annual Cost/contributions
$280
$240
$200
$160
$120
$80
$40
$0
2007
2012
2017
GASB
Managing OPEB Liability
2022
2027
2032
Pay As you go
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Actuarial Valuation Process
Primary Inputs
Information Needed From Plan
Sponsor
 Plan Provisions – Substantive Plan Documents/summaries/Employee
Communications
 Participant census data
 Active
 Retiree
Full Listing of basic demographic
data and coverage
 Fund Assets, if any
Financial Statement for Trust Fund,
if any
 Cost experience/premiums
2 or 3 years of claims/premium
experience, usually from carriers
 Actuarial methods and
assumptions
Pension valuation report, input on
discount rate
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Actuarial Valuation Process
 Key steps in Actuarial Valuation Process
 Identify the “Substantive Plan”



The plan as understood by the employer and plan members
May include oral and/or written commitment by employer
Data collection and review


Employee/Retiree
Claims/Premiums
 Determine actuarial basis
 Project future benefit cash flows
 Discount projected cash flows back to measurement date to
determine present value of all future benefits (PVB)
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Actuarial Valuation Process
 Key Steps in Actuarial Valuation Process (continued)

Determine Accrued Liability (AL) (i.e.portion of PVB
earned through service-to-date)

Determine Normal Cost (i.e., the value of benefits
“earned” during a year)

Determine Annual Required Contribution (ARC)

Produce Valuation Report
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Actuarial Valuation Process
 Actuarial Basis
 Allowable Cost Methods – 6
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

Projected Unit Credit
Entry Age Normal
Primary Actuarial Assumptions









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Discount Rate
Healthcare Trend Rates
Retirement
Mortality
Termination
Disability
Salary increases
Coverage election
Married Rate
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Baseline GASB Results
Baseline Valuation Results (about 10,000 participants) – Case Study
Fiscal Year Ending June 30, 2007
($ millions)
Normal Cost
$
Unfunded Actuarial Accrued Liability
- Amortization (30 years)
$ 800
60
Annual Required Contribution (ARC)
(also Annual OPEB Cost (AOC) for first year)
$
90
Expected Benefit Payments
$
15
Expected Net OPEB Obligation (NOO) at June 30,
2007
$
75
Note:
30
6% Discount Rate for Baseline
No pre-funding
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Actuarial Valuation Process
Major Cost Drivers
 Assumptions
 Discount rate assumption
 Healthcare trend rate assumption
 Retirement
 Plan Design
 Retiree cost sharing
 Eligibility (Retirement)
 Spousal coverage
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To Fund or Not To Fund?
Discount Rate Basis
Per GASB 45: Basis for setting Discount Rate is determined
by the source of funds used for paying benefits
 Assuming the Plan is pre-funded:
 Benefits paid through Trust Fund
 Investment portfolio similar to pension plans
 Use Discount Rate – about 8%
 Assuming the Plan is not pre-funded:
 Benefits paid through General Fund
 Low fixed interest return
 Use Discount Rate – about 4%
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To Fund or Not To Fund?
Alternative Valuation Results
 Using Level Dollar amortization approach
Discount Rate
Normal cost
6.00%
4.00%
8.00%
($ millions)
($ millions)
($ millions)
$
30
$
40
$
20
Unfunded Actuarial Accrued Liability
- Amortization (30 Years)
800
60
1,100
65
560
50
Annual Required Contribution (ARC)
90
105
70
Expected Benefit Payments/Contributions
15
15
70
Expected Net OPEB Obligation
75
90
0
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To Fund or Not To Fund?
 Projection of Net OPEB Obligation
$2,100
Net OPEB Obligation Balance
($ millions)
$1,800
$1,500
$1,200
$900
$600
$300
$0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Fiscal Year Beginning July 1
Pay-as-you-go
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Pre-Fund OPEB Cost
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To Fund or Not To Fund?
Alternative Valuation Results
 Using Level % of Pay amortization approach
Discount Rate
Normal cost
6.00%
4.00%
8.00%
($ millions)
($ millions)
($ millions)
$
30
$
40
$
20
Unfunded Actuarial Accrued Liability
- Amortization (30 Years)
800
40
1,100
45
560
35
Annual Required Contribution (ARC)
70
85
55
Expected Benefit Payments/Contributions
15
15
55
Expected Net OPEB Obligation
55
70
0
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To Fund or Not To Fund?
 Projection of Net OPEB Obligation
Net OPEB Obligation Balance
($ millions)
$1,750
$1,500
$1,250
$1,000
$750
$500
$250
$0
2007
2008
2009
2 0 10
2 0 11
2 0 12
2 0 13
2 0 14
2 0 15
2 0 16
2 0 17
2 0 18
2 0 19
2020
2021
2022
2023
Fiscal Year Beginning July 1
Pay-as-you-go
Managing OPEB Liability
Pre-Fund OPEB Cost
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To Fund or Not To Fund?
Partial Pre-funding?
 GASB Implementation Guidelines: Partial Pre-Funding
indicates a pro-ration of the Discount Rate
 Example: ½ Pre-Funding indicates a 6% Discount Rate
Phase-in Pre-Funding
 Confirmed verbally with GASB officials
 Typical phase in period is 5 years
 Base on “present value” approach
 Example: 5 year phase in utilizes 7.5% Discount Rate
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To Fund or Not To Fund?
Pre-Funding is cheaper over time
 Discount Rate advantage
 Builds up fund to reduce Unfunded Actuarial Accrued
Liability and amortization costs
 Reduces AOC in future years, which will include

Interest on NOO

Amortization of NOO
 Also, reduces NOO liability on balance sheet
 Impact on bond ratings
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Pre-funding – Several Vehicles
 VEBA
 Section 115 governmental trust
 401(h) qualified medical sub-account
 Health Reimbursement Arrangements
 Health Savings Accounts
 Leave conversion plans
 OPEB Obligation Bonds
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Retiree Healthcare Landscape
 Public Sector employers may start to feel significant
pressure in several areas:

Cost pressure in general

GASB putting large liabilities on financial statements

Need to “remove” implicit rate subsidies

Key personnel loss on demographic front

“Graying of America”; post-65 group growing rapidly
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Retiree Healthcare Landscape
 Social “Need” diminished for Medicare-eligible retirees

Prescription drugs now available in individual marketplace

Diminished “need” for employers to continue plans
 New and revitalized Medicare-eligible marketplace

Many Part D vendors (PDPs)

Revitalized and expanded Medicare Advantage (MA),
including PPOs and Private Fee for Service (PFFS) plans
 Social “Need” still exists for early retirees

No viable market for individual coverage
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Retiree medical Plans: A Perspective
 Movement away from traditional “defined benefit”
 From …..Benefit Delivery

Package of benefits provided to claimants, defined by cost
sharing amounts, by claim or by year
 To…..Financial commitment

Type and amount of dollar cost promised to the
postretirement medical program, and what is valued for
FASB 106/GASB 45
 Plan sponsors can set desired link between the two

Depends on promises to employees and retirees and
financial perspective
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Spectrum of Design Changes
Cap Employer
Subsidy
Medicare
Coordination
Tighten
Eligibility
Benefit Delivery
Increase Retiree
Increase
Premiums
Cost Sharing
Managing OPEB Liability
True
DC
Pension
Trade-off
Discontinue
Coverage
Financial Commitment
Defined
Dollar
Subsidy
Aggregate
Account
Access
Only
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Retiree Medical Financial Models
Benefit Delivery
More
Defined Benefit
Defined Dollar Benefit
Employer Risk
and
Responsibility
Aggregate Account
True Defined Contribution
GASB 43/45
Stops Here
Retiree Risk and
Responsibility
Managing OPEB Liability
Access Only
More
Financial
Commitment
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Benefit Delivery – the role of the Employer
can change from …
 Plan-Sponsor (current):
 Designs/communicates/enrolls
 Negotiates with vendors
 Funds (and bears financial risk)
 Administers
TO
 Facilitator:
 Locates external plans
 Communicates/enrolls
 Funds (possibly through insured plans)
TO
 Disengaged:
 Provides fixed financial subsidy directly to retirees
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Potential Impact of Accounting
Bond Rating Agency views
 Looking for “funding plan”; may include:
 Funding annual costs
 Full
 Partial
 Phase In
 Plan design revisions
 Impact may take several years to sort out
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Action Steps

Identify OPEB Plans in force

Determine data needs

Develop census information

Preliminary cost and liability assessment

Determine best options to meet objectives
 Funding
 Plan Design

Disclosure
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Thank you!
Questions?
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