GASB 45 Overview, Ways to Mitigate,

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GASB 45 Overview, Ways to Mitigate, Funding
SolutionsPlusBridging the Gap Between Active
and Retired Employees

• Presented by
• David S. Rubadue, FSA, MAAA, CLU
• Health Welfare Actuary
• Executive Vice President
• CBIZ, Inc.
• 1-800-373-4327
• DRubadue_at_CBIZ.COM

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GASB Statements

• GASB has issued two statements, with GASB 45
  instituted in July, 2004 after a few drafts
  were reviewed and critiqued
• GASB Statement No. 43 addresses the accounting
  and measurement of OPEB Trust or Agency Funds
  (OPEB Other Post Employment Benefits Other
  means Other than Pensions).
• GASB Statement No. 45 addresses the accounting
  and measurement of OPEB State or Local Government
  Employer plans.
• Both will be coordinated and consistent with each
  other.

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Defined Benefit vs. Defined Contribution

• Standards apply to employers sponsoring OPEB
  plans through a defined benefit approach
• But
• Not those sponsoring OPEB plans through a
  defined contribution approach

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What are Other Post Employment Benefits (OPEB)?

• OPEBs are health and dental, vision, Rx, or
  other healthcare benefits.
• It may also include life insurance, legal
  services, and other benefits.

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Other Post Employment Benefits

• Excludes
• Termination offers
• Conversion programs
• Unless
• The terms impact a defined benefit OPEB plan

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How Do Governments Finance Post-employment
Benefits?

• Most Governments are on a Pay-as-You-Go
  approach.
• Under GASB 43/45, such benefits will be accrued
  during the employees active years.

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GASB 45 OPEB Calculation

• Today's Assumptions
• Age 25
• Actuarially determined retirement age 57
• Future benefit promise - 15 years _at_85 premium
  contribution

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GASB 45 OPEB Calculation
Rick
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The Liability Calculation

• In summary, the liability calculation includes
  the following
• The Past Years portion (Past Service Liability,
  Accrued Liability, or Actuarial Liability)
• The Current Years portion (Normal Cost)
• The Future Years portion (Future Service
  Liability)

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The Accounting Cost Annual Expense

• The Accounting Cost includes two pieces
• 1. The Normal Costthe cost of benefits earned
  each year to be accrued in that year.
• 2. Past Service Costa catch-up accrual to
  amortize the past service liability over the next
  10 to 30 years.
• Note All three liabilities (P.C.F.) will be
  disclosed, however, the Expense, e.g.,
  accounting cost being most significant.

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The Liability Calculation ExampleCollege
Education

• Sam has a contract with their new born child Kate
  Sam will take care of Kates college education
  at the finest school in the nation Michigan
  State University. The liability was
  actuarially computed and was 180,000. Sam
  never started funding until CASB issued
  statement 45 after 10 years His child is now 10
  and Sam was on a Pay As You Go Basis of
  accounting
• The Past Years portion 100,000 can amortize
  from a low of 10 years to up to 30 years
• The Current Years portion 10,000 ( Normal
  Cost or Service Cost)
• The Future Years portion 70,000 (Future
  Service Liability)
• Sams Annual Expense is the Amortization of
  Past Service Normal Cost
• Sam does not have to fund this liability, but if
  he does not fund, his liability will grow each
  year and his credit rating may suffer.

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Simple Illustration
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More Complex Illustration
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The Hidden Benefit (Disclosed and Communicated
to All Eligible Employees)
The Hidden Liability Now Disclosed The Unfunded
Accrued Postretirement Liability can be as much
as or more than an entitys yearly payroll.
Funding for a piece of it each year is a small
amount in proportion to the payroll.
The Hidden Benefit Spreading an employees
Postretirement Liability over their working
lifetime increases the cost of their yearly
benefits package. At the time of retirement, the
employees liability will be completely accounted
for.
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The Liability Will Vary by Group

• The variables include
• Turnover rate and retiree rate
• Medical inflation
• Mortality
• Discount rate
• Benefit plan design
• Health care cost factors such as age, gender,
  family size, geographic area, industry
• The promise to retirees

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The Size of the Liability

• What could the liability look like?

Past Service 7,000,000
Future Service 4,000,000
Current Cost 500,000
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(No Transcript)
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Funding of Accounting Cost

• The Accounting Cost or Annual Expenses will have
  to be monitored year to year by keeping track of
  the funding. However, there is NO requirement to
  actually FUND these benefits, but the cumulative
  deficiency will be disclosed on the employers
  financial statements.

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Important Note in Regard to Funding

• Although there is no requirement to actually FUND
  the benefits, a potential ramification is that
  bond rating agencies have already indicated that
  attention will be paid to a mismatch may lower
  ratings. For Maryland Schools, this may be
  transferred to the respective Countys financial
  statements.

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SP Rating Important Note in Regard to Funding

• The new GASB 45 reporting may reveal cases in
  which the actuarial funding of post employment
  health benefits would seriously strain
  operations, or, further, may uncover conditions
  under which employers are unable or unwilling to
  fulfill these obligations. In such cases, these
  liabilities may adversely affect the employers
  creditworthiness. All Standard Poors rated
  employers will be monitored closely in terms of
  their reporting under GASB 45. Upon
  implementation of these new standards, we will
  include the new information as part of our
  ongoing analytical surveillance of ratings
• Standard Poors Reporting Credit
  Implications of GASB 45 Statement on Other Post
  employment Benefits 12/2004.

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FitchRating Important Note in Regard to
Funding

• Initially, Fitchs credit focus will be on
  understanding each issuers GASB 45 liability
  and its plans for addressing it. Fitch also will
  review an entitys reasoning for developing its
  plan. An absence of action taken to fund OPEB
  liabilities or otherwise manage them will be
  viewed as a negative rating factor. Steady
  progress toward reaching the actuarially
  determined annual contribution level will be
  critical to sound credit quality
• FitchRatings The Not So Golden Years Credit
  implications of GASB 45 6/2005.

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If You Choose to Fund
Rick

• Only assets segregated in a trust exclusively for
  the purpose of providing the non-pension retiree
  benefits are counted
• Section 501(c)(9) VEBA Trust
• Section 115 Integral Part Trust
• Some question in GASB 43 and 45 about the use of
  a 115 trust

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Co-mingling of the Active and Retired Group

• Many employers blend retiree claims with active
  employee claims and average the cost
• What does this mean under GASB?
• Answer An Implicit Liability
• Example
• If a retiree pays a blended rate of 240 per
  month, but the rate attributable to the retiree
  is 400 per month, the employer is actually
  providing a 160 per month benefit per
  retireeWhat happens under GASB?

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What Happens?

• The proposed standard states that the 160
  (implicit rate) be incorporated in the OPEB
  calculation. Employers must project future
  benefit payments based on actual retiree claim
  costs and/or on an age adjusted basis. This is a
  liability that must be recognized.

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Implicit Rate Illustration

• Employer of 5 employees, three active and two
  retired.
• Employer provides retirement benefits until age
  65 and Retirees pay full cost of coverage.
• Fully insured through BCBS and premium rates are
  a co-mingling of actives and retirees combined
  rate.
• An implicit liability will be recognized in this
  illustration.

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Implicit Rate Illustration
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Implicit Rate Illustration
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Problem Retirees pay full cost Why do I have
to report an Implicit Liability?Illustrative
Solution Redistribute Premium
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Implementation of GASB 45

• In three phases based on total annual revenues in
  first fiscal year ending after June 15, 1999
• Phase 1 annual revenues of 100 million or more
  periods beginning after 12/15/06
• Phase 2 annual revenues of 10 million but less
  than 100 million periods beginning after
  12/15/07
• Phase 3 annual revenues less than 10 million
  periods beginning after 12/15/08
• Earlier implementation encouraged by GASB

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How Frequently are Actuarial Studies Required?

• Defined Benefit retiree health plans
• Plans covering more than 200 employees, every two
  years.
• Plans covering 100 to 200 employees, every three
  years.
• Plans covering under 100 employees may use
  alternative measurement method instead of
  actuarial method.

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Putting the Pieces Together
Rick
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Benefits
Solution
45
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Inventory the Benefits You Provide Determine
Your Base Line Liability Expense
Rick
Identify which benefits have a post- employment
feature

• Exclude pension
• Exclude termination benefits
• Exclude conversion benefits
• Distinguish between defined benefit and defined
  contribution

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10 Minute Break
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Cost Control Mitigation Methods
Rick

• Pre-fund to enable long-term discount rate
• Reduce cost of current benefit offering
• Modify eligibility
• Limit future promise
• Sunset defined benefit promise
• Transition to defined contribution approach

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Pre-funding Discount Rate Strategy
Rick
Reduces Present Value Calculation
General Funds Rate
3
Short-Term Discount Rate
7
Investment Market Rate
Long-Term Discount Rate
57
72
Working Age
Retired Age
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• 47 Year Assumptions
• Investment earnings
• Healthcare costs
• Medicare costs

Actuarially Determined Retirement Age
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Methods to Mitigate Liabilities
Jeff

• Reduce Cost of Current Benefit Offering
• Cost Shifting Strategies
• Raise Deductibles
• Raise Co-Pays
• Raise Coinsurance and Out-Of-Pocket Limits
• Revise Prescription Drug Benefit, Including
  Integration with Medicare Part D

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Methods to Mitigate Liabilities
Jeff

• Raise Contributions
• Employee Class
• Length of Service
• More Defined- Ee, EeSp, Ee1Ch, etc.
• By Benefit Plan
• If do not participate in Health Assessment Study

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Methods to Mitigate Liabilities
Jeff

• Redistribute Premium to Employees
• Active employees subsidizing retiree costs
  (implicit rate)
• Actives pay lower rates and retirees pay higher
  rates commensurate with their risks
• Raise Rates for All Employees
• Single 250, Family 750 (Average)
• Addl cost for Retirees Single 50, Family 100
• Total Rates Single 300, Family 850

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Methods to Mitigate Liabilities
Jeff

• Change Definition of Eligibility
• Increase service required from 20 years to 30
  years
• Change Spousal Eligibility (Divorce, Death of
  retiree, etc.)
• Change Eligibility Date
• Increase age from 55 to age 60
• Change Benefit Duration
• From Life to age 65

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Methods to Mitigate Liabilities
Jeff

• Change to a Higher Level of Managed Care
• From PPO to HMO
• From PPO to EPO
• From traditional PPO to CDHC Model for Actives
  and Retirees under 65.
• Change Vendors
• Those with greater discounts
• with providers and drug manufacturers

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Methods to Mitigate Liabilities
Rick

• Effectively and efficiently transition from a
  defined benefit approach for retiree health
  benefits to a defined contribution approach.
• Objective is to
• Remove the health care liability risk from the
  employer and shift to
• Actives Retirees
• Create a more secure, more predictable, and a
  much more manageable defined contribution
  approach

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Age-Wheel and/or Service Requirement Mitigation
Strategy
Rick
Defined Contribution
Defined Benefit
Future Hires
Current Retirees
DB 25 DC 75
Defined Benefit
20 - 29
50
30 - 39
40 - 49
DB 50 DC 50
DB 75 DC 25
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Defined Contribution Transition Steps (Summary)

• Step 1 Determine who will be affected, e.g.,
  new hires, actives not eligible yet for
  benefits w/ less than 5 years of service, etc.
• Step 2 Actual Benefit Liability is
  Defined/Determined for the designated group.
• Step 3 Liability is converted to a defined
  contribution amount.
• Step 4 Sensitivity study in regard to results
  are run under various contribution and vesting
  scenarios.
• Step 5 Program is constructed where retirees
  can purchase insurance (Health Plan
  Supermarket)
• Step 6 New plan is approved
• Step 7 Trust is formed for the deposit of
  assets (Generally a VEBA)

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Potential Ways To Fund Your Liability

• Fund the ARC each and every year into a
  Segregated Trust (VEBA Trust, IRC 115) using
  current ongoing funds available.
• Issue a GASB Bond and deposit into Trust
• Purchase Life insurance on all actives and
  retirees similar to BOLI and COLI and upon
  death proceeds deposited into Trust.

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THE Active to Retired BRIDGEActive Employees
Can Prepare Today
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Cradle to Grave Lets Go Shopping For A Plan
That Meets My Needs
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DISTRICT 1 Changes to an VEBA Funded HRA and
Converts their Retirement Plan to a Defined
Contribution Plan
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DISTRICT 2 Changes to an VEBA Funded HRA and
Converts their Retirement Plan to a Defined
Contribution Plan
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DISTRICT 3 Changes to an VEBA Funded HRA and
Converts their Retirement Plan to a Defined
Contribution Plan
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Where do these Districts Retired Members Shop
for Health Care Plans?
The Health Plan Shopping Mall
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A Complementary Tax Advantaged Program
Health Care Program-- Retiree Medical Savings
AccountsAn employee retiring today is faced
with purchasing health care using after tax s
via their pension, 403b, or 457 programs.
Districts should consider the advantages of a
Retiree Medical Savings Account.This account can
be used to- Complement any cutbacks- Used as
a vehicle to deposit unused sick days or
severance pay- Used as the vehicle under a
defined contribution post retirement health
care program.

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The new era - Retiree Medical Savings Accounts

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Retiree Medical Savings Accounts

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Thank You!