Managing OPEB Liability June 2007 Presented by David Boomershine Senior Consulting Actuary Managing...
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Transcript of Managing OPEB Liability June 2007 Presented by David Boomershine Senior Consulting Actuary Managing...
Managing OPEB Liability
June 2007
Presented by
David BoomershineSenior Consulting Actuary
Managing OPEB Liability
The Actuarial View:GASB Statements 43 and 45
2Managing OPEB Liability
Agenda
Introduction
Overview
Baseline Valuation /Process
Actuarial Basis
Major Cost Drivers
Funding
Plan Design
Bond Rating Agency Views
Conclusions/Questions
3Managing OPEB Liability
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
4Managing OPEB Liability
Overview of GASB Rules
Effective dates for Statement 45:
Annual Revenue Effective for FY > FYE Phase I >$100m 12/15/2006 6/30/2008 Phase II >$10m & <$100m 12/15/2007 6/30/2009 Phase III <$10m 12/15/2008 6/30/2010
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
5Managing OPEB Liability
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
6Managing OPEB Liability
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)
7Managing OPEB Liability
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.
8Managing OPEB Liability
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 Valuation process Annual Actuarial Cost Net Liability: Cumulative differences between contributions and
costs
Primary Differences Benefit types Healthcare trends, assumptions Funding
9Managing OPEB Liability
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
10Managing OPEB Liability
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
11Managing OPEB Liability
Case Study Example
GASB vs. Pay-As-You-Go (PAYG)Annual Cost/contributions
$0
$40
$80
$120
$160
$200
$240
$280
2007 2012 2017 2022 2027 2032
An
nu
al A
mo
un
t M
illi
on
s
GASB Pay As you go
12Managing OPEB Liability
Actuarial Valuation Process
Primary InputsInformation Needed From Plan Sponsor
Plan Provisions – Substantive Plan Documents/summaries/Employee Communications
Participant census data Active Retiree
Full Listing of basic demographic data and coverage
Fund Assets, if any Financial Statement for Trust Fund, if any
Cost experience/premiums 2 or 3 years of claims/premium experience, usually from carriers
Actuarial methods and assumptions
Pension valuation report, input on discount rate
13Managing OPEB Liability
Actuarial Valuation Process
Key steps in Actuarial Valuation Process Identify the “Substantive Plan”
The plan as understood by the employer and plan members May include oral and/or written commitment by employer
Data collection and review Employee/Retiree Claims/Premiums
Determine actuarial basis Project future benefit cash flows Discount projected cash flows back to measurement date to
determine present value of all future benefits (PVB)
14Managing OPEB Liability
Actuarial Valuation Process
Key Steps in Actuarial Valuation Process (continued)
Determine Accrued Liability (AL) (i.e.portion of PVB earned through service-to-date)
Determine Normal Cost (i.e., the value of benefits “earned” during a year)
Determine Annual Required Contribution (ARC)
Produce Valuation Report
15Managing OPEB Liability
Actuarial Valuation Process
Actuarial Basis Allowable Cost Methods – 6
Projected Unit Credit Entry Age Normal
Primary Actuarial Assumptions Discount Rate Healthcare Trend Rates Retirement Mortality Termination Disability Salary increases Coverage election Married Rate
16Managing OPEB Liability
Baseline GASB Results
Baseline Valuation Results (about 10,000 participants) – Case Study
Fiscal Year Ending June 30, 2007($ millions)
Normal Cost $ 30
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: 6% Discount Rate for BaselineNo pre-funding
17Managing OPEB Liability
Actuarial Valuation Process
Major Cost Drivers
Assumptions Discount rate assumption Healthcare trend rate assumption Retirement
Plan Design Retiree cost sharing Eligibility (Retirement) Spousal coverage
18Managing OPEB Liability
To Fund or Not To Fund?
Discount Rate BasisPer 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%
19Managing OPEB Liability
Alternative Valuation Results Using Level Dollar amortization approach
Discount Rate 6.00% 4.00% 8.00%
($ millions) ($ millions) ($ millions)
Normal cost $ 30 $ 40 $ 20
Unfunded Actuarial Accrued Liability- Amortization (30 Years)
80060
1,10065
56050
Annual Required Contribution (ARC) 90 105 70
Expected Benefit Payments/Contributions 15 15 70
Expected Net OPEB Obligation 75 90 0
To Fund or Not To Fund?
20Managing OPEB Liability
Projection of Net OPEB Obligation
To Fund or Not To Fund?
$0
$300
$600
$900
$1,200
$1,500
$1,800
$2,100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Fiscal Year Beginning July 1
Net
OP
EB
Ob
ligat
ion
Bal
ance
($ m
illio
ns)
Pay-as-you-go Pre-Fund OPEB Cost
21Managing OPEB Liability
To Fund or Not To Fund?
Alternative Valuation Results Using Level % of Pay amortization approach
Discount Rate 6.00% 4.00% 8.00%
($ millions) ($ millions) ($ millions)
Normal cost $ 30 $ 40 $ 20
Unfunded Actuarial Accrued Liability- Amortization (30 Years)
80040
1,10045
56035
Annual Required Contribution (ARC) 70 85 55
Expected Benefit Payments/Contributions 15 15 55
Expected Net OPEB Obligation 55 70 0
22Managing OPEB Liability
To Fund or Not To Fund?
Projection of Net OPEB Obligation
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Fiscal Year Beginning July 1
Net
OP
EB
Ob
ligat
ion
Bal
ance
($ m
illio
ns)
Pay-as-you-go Pre-Fund OPEB Cost
23Managing OPEB Liability
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
24Managing OPEB Liability
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
To Fund or Not To Fund?
25Managing OPEB Liability
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
26Managing OPEB Liability
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
27Managing OPEB Liability
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
28Managing OPEB Liability
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
29Managing OPEB Liability
Spectrum of Design Changes
Benefit Delivery Financial Commitment
Medicare Coordination
Increase Cost Sharing
Increase RetireePremiums
TightenEligibility
Cap EmployerSubsidy
PensionTrade-off
TrueDC
DiscontinueCoverage
DefinedDollar
Subsidy
AggregateAccount Access
Only
30Managing OPEB Liability
Benefit Delivery
Aggregate Account
Defined Dollar Benefit
Defined Benefit
True Defined Contribution
Access OnlyGASB 43/45Stops Here
Retiree Risk andResponsibility
More
More
Employer Risk and
Responsibility
FinancialCommitment
Retiree Medical Financial Models
31Managing OPEB Liability
Benefit Delivery – the role of the Employer can change from …
Plan-Sponsor (current): Designs/communicates/enrolls Negotiates with vendors Funds (and bears financial risk) AdministersTO
Facilitator: Locates external plans Communicates/enrolls Funds (possibly through insured plans)TO
Disengaged: Provides fixed financial subsidy directly to retirees
32Managing OPEB Liability
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
Potential Impact of Accounting
33Managing OPEB Liability
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
Action Steps
34Managing OPEB Liability
Thank you!Thank you!
Questions?