PRESENTATION TO THE NATIONAL ASSOCIATION OF STATE TREASURERS

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PRESENTATION TO THE NATIONAL ASSOCIATION OF
STATE TREASURERS
Public Resources Advisory Group December 4, 2006
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Many States are confronting the approaching Tidal
Wave
Pay As You Go
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OPEB Financial Reporting Requirements and
Implications

• A State that is able to fund all past, present
  and future costs of its OPEB liability would meet
  its Annual Required Contribution (ARC). The
  required really means, what would be required
  if the OPEB liability was fully funded. In
  general, policy decisions will focus on what
  percentage of the ARC will be funded.
• Any solution to this problem must be balanced
  with the states need to maintain a current,
  stable fiscal condition thus solutions should
  be assessed in light of your states ability to
  pay and other priorities
• Tax burden
• Competing budgetary priorities
• The desire to continue to provide meaningful
  healthcare benefits
• It is important that governments consider all
  aspects of evaluating and addressing issues
  relating to OPEBs, including valuation, benefit
  plan design, structure of trust, organization and
  operation review of benefit plan, funding options
  and rating agency issues.

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A Critical Balance is Involved

• Government Budget Concerns

• Meaningful care for current and future retirees
• The desire to fairly treat active employees,
  retired employees and future generations of
  taxpayers.

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PRAG Approach Evaluate in Phases

• Phase I Valuation of Current Plan
• Phase II Benefit Design
• Phase III Organization and Operation Review
• Phase IV Evaluation of Funding Options

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PRAG Approach Evaluate in Phases

• Phase I Valuation of Current Plan
• Phase II Benefit Design
• Phase III Organization and Operation Review
• Phase IV Evaluation of Funding Options

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Importance of Accurate Initial Assessment of OPEB
Liability

• Phase I
• This is the foundation for the analysis and
  evaluation of any future health insurance benefit
  plan changes.
• The valuation of the current plan may be
  enhanced by bringing in a second, independent
  outside actuary with the goal of assuring a
  complete and comprehensive first valuation.
• Modest changes in some assumptions can produce
  significant changes in liabilities and ultimate
  costs.
• Important assumptions include medical trend
  rates, initial medical cost levels and percentage
  of costs the employer (or retiree) will pay in
  the future, retirement rates, life expectancy,
  probability of working until retirement, coverage
  elections at retirement and discount factor,
  among others.
• Given sensitivity of the public disclosure of
  such a liability and benefit program complexity,
  it is important that the first valuation fully
  recognize and describe the potential cost of
  current plan, but that it not overstate the
  potential liability.

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PRAG Approach Evaluate in Phases

• Phase I Valuation of Current Plan
• Phase II Benefit Design
• Phase III Organization and Operation Review
• Phase IV Evaluation of Funding Options

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State Contribution Levels Not Sustainable

• Although retirees have certain expectations
  regarding their future health care benefits,
  State Governments will find it increasingly
  difficult to pay the costs associated with these
  expectations out of current and future resources.

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Considering Benefit Design

• Phase II
• Using valuation model developed for Phase I,
  along with additional tools, review the current
  plan in light of available benefit plan design
  changes and other similar States.
• The analysis will focus on both plan design
  changes that may have immediate effects on annual
  cost and design changes which will have longer
  term effects.
• Any potential cost savings for redesigned benefit
  plans will be calculated to include potential
  impact on the GASB 45 reported unfunded
  liability.
• Discuss with rating agencies potential impact of
  design changes on unfunded liability.

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Benefit Design Changes

• Defined Contribution versus Defined Benefits
  versus Defined Services.
• Caps on amount paid by State
• Tied to specific amounts
• Inflated by wage inflation instead of health care
  inflation.
• Increases in contribution by employees (cost
  sharing, deductibles, etc.)
• Treat spouses and dependents differently than the
  employee.
• Phase in of benefits based upon Years of Service.
• Medical Assistance and Prescription Drug Plan for
  Medicare Eligible Employees.

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PRAG Approach Evaluate in Phases

• Phase I Valuation of Current Plan
• Phase II Benefit Design
• Phase III Organization and Operation Review
• Phase IV Evaluation of Funding Options

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Organization and Operation Review

• Phase III
• Annual and future cost of healthcare plans are
  influenced by benefit delivery.
• Assessment of trusts and plan types.
• In this phase, organizational and operational
  review of the benefit delivery system will be
  conducted to identify changes to increase
  efficiency.

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PRAG Approach Evaluate in Phases

• Phase I Valuation of Current Plan
• Phase II Benefit Design
• Phase III Organization and Operation Review
• Phase IV Evaluation of Funding Options

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Evaluation of Funding Options

• Phase IV
• Continue pay-as-you-go OPEB funding.
• Increase annual budgeted amount to fund an
  increased portion of the ARC.
• Benefit design changes.
• Utilization of existing reserves, dedicated
  revenue streams, bonds or other solutions.
• Discuss with rating agencies adequacy of
  preliminary funding options.

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Unfunded vs. Funded
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EXHIBIT I - Making Sense of the Terminology
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NAST Treasury Management Conference December 3-6,
2006New Orleans, Louisiana
The OPEB Tidal Wave Monday, December 4, 2006 3
430 PM Presented by Steven A. Goldfield,
Esq. Public Resources Advisory Group 117 Gayley
Street, Suite 200 Media, PA 19063 610-565-5990 sg
oldfield_at_pragny.com