University of Maine SystemRetiree Health Care: Why is this an issue?

Retiree Health Plan Task Force

(RHPTF)

3/13/07

2

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*• Premiums $13.0 million• Participant contributions $4.2 million• Net cost $8.8 million

*projected

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Current UMS Retiree Health Benefits

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

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Why is Retiree Health Care an Issue?

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.

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Why is Retiree Health Care an Issue?

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.

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Why is Retiree Health Care an Issue?

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.

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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

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

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Age Based Premiums:Current Program - Implicit Rate Subsidy

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

20years

25years

30years

35years

40years

45years

50years

55years

60years

65years

AGE

Act

ual

Co

st

True Cost

Premium Rate Charged

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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

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

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Implications of Funding via a Trust

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

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What is the real impact of GASB 45?(From Standard and Poors statement, December 2006)

GASB 45 does not create any new costs; it points out the long-range 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

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What is the real impact of GASB 45? (cont.)

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

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Current Program Costs: OPEB andPay-As-You-Go

$0

$20,000,000

$40,000,000

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Year

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al C

ost OPEB Cost - Current

Program

Pay-As-You-Go Cost -Current Program

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GASB-45 as a Percentage of Projected Revenues (State Appropriations + Tuition & Fee Revenue)

GASB-45 Options as a percentage of Projected Revenues (State Appropriations + Tuition & Fee Revenue)

0%

2%

4%

6%

8%

10%

12%

14%

16%

ARC - Current Program/ (State Appropriations+T&F Revenue)

Pay-As-You-Go Cost - Current/ (State Appropriations+T&F Revenue)

CurrentShare

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.

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Range of Employer InvolvementE

mpl

oyer

Res

pons

ibili

ty

High

LowRetiree Responsibility

Free based on age + service

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

Access-only/COBRA/Medicare

High

Slide reproduced from Hewitt NASULGC Annual Meeting 11/12/06

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Possible Plan Design Considerations

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

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Possible Plan Design Considerations

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

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What are other Employers doing?

State of Maine Employees’ Benefit Trust• 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

University System of New Hampshire• Froze plan to new entrants 7/1/1994 (FASB 106)• Changed eligibility to 10 years after age 52• Have been reporting liability

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What are other Employers doing? (cont)

University of Kentucky:• 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

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What are other Employers doing? (cont)

University of Kentucky (cont):

• Will pre-fund• Are still considering alternative designs for new hires• Reduced OPEB Cost to $14.2 million (>50% reduction)

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The Future of Retiree Medical:Defined Contribution Plans

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

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Next Steps:

Chancellor has established the Retiree Health Plan Task Force (RHPTF)

• Multi-disciplinary across represented and non-represented 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

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Retiree Health Plan Task ForceCharge

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

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Retiree Health Plan Task ForceMembership

Co-chairs

• Bill Sullivan, Retiree, former Vice Chancellor for Administration

• Gino Nalli, Assistant Research Professor, Muskie Health Policy Institute

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Retiree Health Plan Task ForceMembership

Trustees:• Jean Flahive• Margaret Weston

President:– Theo Kalikow

CFO:• Charlie Bonin

Retirees:• Charles Fritz• Dick Rice

Union representatives:• Richard Bragg• Sandra Cayford• Christopher Gardner• Betty Hilton• James McClymer• Jennifer Moreau• Ronald Mosley• Dianne Perro• Shannon Smith• Kerry Sullivan

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Retiree Health Plan Task ForceMembership

Non-represented employees:

• Steven Weinberger• Becky Houle

Faculty Representative to BOT:

• Christine Standefer

Liaison with the State of Maine:

• Frank Johnson

PATFA• Jerry Ashlock

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Retiree Health Plan Task ForceStaff

Task Force staff• Tracy Bigney, Tom Hopkins

• 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

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Retiree Health Plan Task ForcePreliminary Timeline and Work Plan

First Task Force meeting 3/13/07

Approximately 6 meetings over March – June

Meetings of ½ day to allow for presentations and in-depth discussions

Actuary available to provide technical assistance and modeling

Other guest experts invited as needed

Recommendations to Chancellor by June 30, 2007