california state employees retiree healthcare benefits
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California State EmployeesRetiree Healthcare Benefits
GASB 45 ProjectionsDecember 13, 2007
2
Agenda – GASB 45 Projections
BackgroundUpdates to valuation as of July 1, 2007Trend sensitivity scenarios
►Closed group projectionsOpen group projections
►Funding policy scenarios
3
Background
Key economic assumption used in GASB 45 valuation includes future healthcare trend
► Long-term GASB 45 projections assume select and ultimate trend pattern
• After 10 to 15 years, ultimate trend rate approaches price inflation plus 100 to 200 basis points
► Based on GDP model• If trend increases by 10% in all future years, healthcare
would comprise a significant portion of GDP• Not sustainable, so long term projections assume
trend decreases to lower ultimate trend► But historical data over the past 15 years indicates
trend increased by approximately 8% to 10% or about five to seven percentage points over price inflation
• Select and ultimate pattern has not materialized
4
Background
Purpose of study is to evaluate the sensitivity of healthcare inflation assumption►Perform 30-year projections of GASB 45
accrual and cash costs under various healthcare trend scenarios
►Based on closed group, i.e. no future hires included in projections
• Alternative is to evaluate sensitivity on an open group basis
Also, adjusted valuation at July 1, 2007, to reflect updated premiums effective as of January 1, 2008
5
Updated Valuation as July 1, 2007
Premiums for calendar year 2008 increased by 5.9% for PPO and 2.8% for HMO►Based on information developed by CalPERS
staff►Recognizes impact of plan design changes
and recent claims experience Updated costs are for illustration
purposes only►FY 07/08 financial reporting based on
valuation released on May 7, 2007►Updated valuation decreases costs by
approximately 3.5%
6
Updated Valuation as July 1, 2007
($ in Billions)
Actuarial Accrued Liability
Annual Required Contribution
At July 1, 2007 For FY 07/08
Pay-As-You-Go Funding (4.5%)
Baseline $47.88 $3.59
After Trend and Design Changes $46.21 $3.47
Decrease $1.67 $0.12
Percentage Decrease 3.50% 3.30%
Full Funding (7.75%)
Baseline $31.28 $2.59
After Trend and Design Changes $30.20 $2.50
Decrease $1.08 $0.09
Percentage Decrease 3.50% 3.50%
7
Trend Sensitivity Scenarios
Trend scenarios include –►Baseline trend
• 9.5% in CY 2009, decreasing by 50 basis points each year until ultimate rate of 4.5% is reached in CY 2017
►Increase trend by 100 basis points• 10.5% in CY 2009, decreasing by 50 basis points
each year until ultimate rate of 5.5% is reached in CY 2017
►Flat trend• 10.0% from CY 2009 to CY 2017, and 6% on and
after CY 2018
8
Trend Sensitivity Scenarios –Actuarial Liabilities
Actuarial LiabilitiesClosed Group PAYGO Full Funding
($ in Billions) 7/1/2007 7/1/2038 7/1/2007 7/1/2038
Baseline trend $46.2 $62.3 $30.2 $47.8
100 basis point increase $54.7 $91.3 $34.5 $68.8
(percent increase over baseline) 18% 47% 14% 44%
Flat trend at 10% for 10 years $63.5 $119.9 $39.0 $89.6
(percent increase over baseline) 37% 92% 29% 87%
9
Trend Sensitivity Scenarios –Actuarial Liabilities
Compounding effect of healthcare trend increases actuarial liabilities
After 30 years, pay-as-you-go baseline actuarial liabilities increase by –►47% if trend increased by 100 basis points►92% if trend is flat at 10% for first 10 years,
and 6% thereafter After 30 years, full-funding baseline
actuarial liabilities increase by –►44% if trend increased by 100 basis points►87% if trend is flat at 10% for first 10 years,
and 6% thereafter
10
Trend Sensitivity Scenarios –Annual Required Contributions
Annual Required Contribution Closed Group PAYGO Full Funding
($ in Billions) 7/1/2007 7/1/2038 7/1/2007 7/1/2038
Baseline trend $3.47 $4.64 $2.50 $0.25
100 basis point increase $4.28 $6.81 $2.93 $0.33
(percent increase over baseline) 23% 47% 17% 32%
Flat trend at 10% for 10 years $5.11 $8.94 $3.38 $0.41
(percent increase over baseline) 47% 93% 35% 64%
11
Trend Sensitivity Scenarios –Annual Required Contribution
After 30 years, pay-as-you-go baseline ARC increase by –►47% if trend increased by 100 basis points►93% if trend is flat at 10% for first 10 years,
and 6% thereafter►Similar to increase in actuarial liabilities
After 30 years, full-funding annual required contribution approaches zero under each scenario►But employer contributions are higher during
the 30-year projection if trend is increased
12
Actuarial Liabilities – PAYGOClosed Group
Retiree Health Benefits ProgramActuarial Liabilities
Pay-Go Funding
0
20
40
60
80
100
120
140
2007 2012 2017 2022 2027 2032 2037
Year
$
Baseline
Increase Trend by 100 Basis Points
Flat Trend at 10% for 10 Years
$ in
Bil
lion
s
13
Actuarial Liabilities – Full FundingClosed Group
Retiree Health Benefits ProgramActuarial Liabilities
Full Funding
0
10
20
30
40
50
60
70
80
90
100
2007 2012 2017 2022 2027 2032 2037
Year
$
Baseline
Increase Trend by 100 Basis Points
Flat Trend at 10% for 10 Years
$ in
Bil
lion
s
14
Annual Required Contribution – PAYGO Closed Group
Retiree Health Benefits ProgramAnnual Required Contribution
Pay-Go Funding
0
2
4
6
8
10
12
2007 2012 2017 2022 2027 2032 2037
Year
$
Baseline
Increase Trend by 100 Basis Points
Flat Trend at 10% for 10 Years
$ in
Bil
lion
s
15
Annual Required Contribution – Full FundingClosed Group
Retiree Health Benefits ProgramAnnual Required Contribution
Full Funding
0
1
2
3
4
5
6
7
8
9
10
2007 2012 2017 2022 2027 2032 2037
Year
$
Baseline
Increase Trend by 100 Basis Points
Flat Trend at 10% for 10 Years
$ in
Bil
lion
s
16
Benefit PaymentsClosed Group
Retiree Health Benefits ProgramBenefit Payments
0
1
2
3
4
5
6
7
8
9
10
2007 2012 2017 2022 2027 2032 2037
Year
$
Baseline
Increase Trend by 100 Basis Points
Flat Trend at 10% for 10 Years
$ in
Bil
lion
s
17
Open Group Projections
Open group projections assumes stable active population
Based on current trend assumptions with CY 2008 plan design changes
Three funding scenarios –►Pay-as-you-go, full-funding, and
bifurcated funding
18
Open Group Projections
Bifurcated funding policy►Explicit subsidies earned after July 1, 2007,
are fully funded• Represents future normal costs of explicit
subsidy• Explicit subsidy is cash premium paid by
employer►All other benefits funded on a pay-as-you-
go basis• Actuarial accrued liability at July 1, 2007• Future implicit subsidy earned after July 1, 2007
19
Open Group Projections
Key Valuation ResultsPAYGO Full Funding Bifurcated
($ in Billions)7/1/2007 7/1/2038 7/1/2007 7/1/2038 7/1/2007 7/1/2038
Actuarial Liability $46.2 $176.6 $30.2 $118.0 $46.2 $128.2
ARC $3.47 $13.5 $2.50 $6.50 $2.70 $6.86
Employer Contribution $1.36 $7.22 $2.50 $6.50 $1.99 $6.86
20
Open Group Projections
Key observations:►After 30 years,
• Bifurcated policy actuarial liability is 8% higher than full funding actuarial liability
• Funded ratio is 40% under bifurcated policy and 48% under full funded policy
• Balance sheet liability is controlled►Over 30-year projection period,
• Bifurcated ARC is 5% to 10% higher than full funding ARC
►When compared to full funding policy, employer contributions under bifurcated policy are lower during first six years and slightly higher after the sixth year
21
Actuarial Liability – Open Group
Retiree Health Benefits ProgramActuarial Liabilities
0
20
40
60
80
100
120
140
160
180
200
2007 2012 2017 2022 2027 2032 2037
Year
$
Pay-Go Funding
Full Funding
Bifurcated Policy A
$ in
Bill
ions
22
Funded Ratio – Open Group
Retiree Health Benefits ProgramFunded Ratio
0%
20%
40%
60%
80%
100%
2007 2012 2017 2022 2027 2032 2037
Year
Pay-Go Funding
Full Funding
Bifurcated Policy A
23
Annual Required Contribution – Open Group
Retiree Health Benefits ProgramAnnual Required Contribution
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2007 2012 2017 2022 2027 2032 2037
Year
$
Pay-Go Funding
Full Funding
Bifurcated Policy A
$ in
Bil
lion
s
24
Annual Required Contribution – Employer Contributions
Retiree Health Benefits ProgramEmployer Contribution
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2007 2012 2017 2022 2027 2032 2037
Year
$
Pay-Go Funding
Full Funding
Bifurcated Policy A
$ in
Bil
lion
s
25
Balance Sheet Liability – Open Group
Retiree Health Benefits ProgramNet OPEB Obligation
0
20
40
60
80
100
120
2007 2012 2017 2022 2027 2032 2037
Year
$
Pay-Go Funding
Full Funding
Bifurcated Policy A
$ in
Bil
lion
s
26
Summary
Questions and Answers
Thank you
Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor.
This presentation shall not be construed to provide tax advice, legal advice or investment advice.
This presentation expresses the views of the author and does not necessarily express the views of the employer, Gabriel, Roeder, Smith & Company.
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