California State EmployeesRetiree Healthcare Benefits

GASB 45 ProjectionsDecember 13, 2007

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Agenda – GASB 45 Projections

BackgroundUpdates to valuation as of July 1, 2007Trend sensitivity scenarios

►Closed group projectionsOpen group projections

►Funding policy scenarios

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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

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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

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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%

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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%

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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

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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%

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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

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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%

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.