gasb 45 – other post employment benefits gfoa sc october 19, 2010 jack beam, asa, ea, maaa
TRANSCRIPT
GASB 45 – Other Post Employment Benefits
GFOA SCOctober 19, 2010
Jack Beam, ASA, EA, MAAA
What is a consultant?
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What we will do today
GASB 45 in general Implicit vs. Explicit subsidies Actuarial Assumptions Critical issues Key Results in SC
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Retirement today?
A recent Towers Watson survey said 40% of US workers are planning to delay retirement
59% of workers who plan to delay retirement cite healthcare as the cause
Recent GAO Report indicated that healthcare spending has grown from 12% of overall state and local expenditures in 1978 to 20% in 2008
Life expectancy at 65 has increased by about 40% in the last 35 to 40 years
Local governments shed 76,000 jobs from their payrolls. Of those, roughly 50,000 jobs were cut from local schools
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GASB 43 & GASB 45
GASB standards:►Before GASB 45 – Cash Accounting
• OPEB expense equals cash contribution made by employer
• Balance sheet liability equals zero,• Except for self-insured plans
– may have IBNR liability attributable to retirees
►After GASB 45 – Accrual Accounting• OPEB cost accrued during active member’s working
career• Cost “fully accrued” when active member retires• Significant balance sheet liability may accrue if
benefits funded on a pay-as-you-go basis
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GASB 43 & GASB 45
Total Revenues GASB 45 applies for Fiscal Years beginning after
> $100,000,000 12/15/2006
$10,000,000 to $100,000,000
12/15/2007
< $10,000,000 12/15/2008
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GASB 43 & GASB 45
Statement 43 applies to pre-funded OPEB plans►“Plan” usually refers to a trust or agency fund
(that is, to assets under the stewardship of an administering entity) used to administer the financing of OPEB and the payment of benefits—regardless of the financing policy adopted
Statement 45 applies to the employers sponsoring OPEB plans►“Plan” usually refers to an employer’s substantive
commitment or agreement to provide OPEB, may be referred to as a “Program” if there is no trust
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Implications
GASB 43/45 Key Disclosure Requirements►Actual employer contributions►Actuarial liabilities versus actuarial value of
assets►Annual OPEB Cost (Expense)
• Normal cost plus Unfunded Actuarial Accrued Liability amortization plus technical adjustment
►Net OPEB Obligation (Balance sheet liability)
• Cumulative difference between Expense and Employer Contribution
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Explicit Rate Subsidy
When some or all retirees are charged less than the full cost of providing benefits
Often imaginative …►X% per year of service subsidy up to Y% max►A lower charge if retired prior to 10/1/19XX►A lower charge if enrolled in HMO vs. PPO►Retirees pay full active rate
It is clear that GASB would want an accounting of this type of subsidy. Many plans will contain both explicit and implicit rate subsidies.
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Implicit Rate Subsidy – Insured Plans
Part of what is paid for actives is really for retirees
Collecting an average rate, but true incidence of cost is different
Retirees cost more than actives because they are older
So employers are “implicitly” subsidizing the retiree rate
GASB wants a proper accounting of this hidden subsidy
$-
$200
$400
$600
$800
$1,000
$1,200
20 25 30 35 40 45 50 55 60 65
Age
Costing Collecting
Actuarial Assumption Setting
Demographic assumptions similar to pension plan valuation
Election rates Lapse rates – premium may change
after a few years
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Actuarial Assumption Setting
Economic Assumptions are somewhat unique
Discount rate should be the interest rate being earned by the assets that will pay the benefit
Per Capita Claim Cost – insured vs. self-funded
Medical Trend
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Current Trend Assumption – SCEIP June 30, 2009 – inflation 3.0%
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Health Care Trend Inflation Rates
Year Medical Drug Dental
2010 7.5 %
8.9 %
3.0 %
2011 7.5
8.9
3.0
2012 7.5
8.9
3.0
2013 7.0
8.1
3.0
2014 6.5
7.3
3.0
2015 6.0
6.6
3.0
2016 5.5
5.8
3.0
2017 5.0
5.0
3.0
2018 5.0
5.0
3.0
2019 5.0
5.0
3.0
2020 5.0
5.0
3.0
2021 5.0
5.0
3.0
2022 5.0
5.0
3.0
2023 5.0
5.0
3.0
2024 5.0
5.0
3.0
2025 5.0
5.0
3.0
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Payment StreamsTrend Sensitivity – Medical Only
40% difference between Optimistic and Pessimistic Scenario in 2022
Discount Rate
Unfundedo Return on general
assetso Historical returnso Investment horizono 3% to 5% per year
Prefundedo Irrevocable Trusto Little or no assets
to starto Like a pension plano Little payout at firsto 6.0% to 7.5% per
year
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Discount Rate Impact
Unfunded Plan – 3.0% vs. 4.5%
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Unfunded Plan 3.0% Discount Rate 4.5% Discount Rate A. Employer Normal Cost $5,197,507 $3,466,115B. Amortization of UAL $2,369,687 $2,091,217C. Annual Required $7,567,194 $5,557,332 Contribution (ARC) (A+B) Percent Difference -27% D. Active Accrued Liability $56,409,539 $38,870,797E. Retiree Accrued Liability $14,160,143 $11,659,913F. Total Actuarial Accrued $70,569,682 $50,530,710 Liabilities Percent Difference -28%
Discount Rate Impact
Funded plan – 6.0% vs. 7.5%
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Funded Plan 6.0% Discount Rate 7.5% Discount Rate A. Employer Normal Cost $2,410,351 $1,739,332B. Amortization of UAL $1,885,851 $1,730,437C. Annual Required $4,296,202 $3,469,769 Contribution (ARC) (A+B) Percent Difference -19% D. Active Accrued Liability $27,840,004 $20,627,555E. Retiree Accrued Liability $9,811,134 $8,408,856F. Total Actuarial Accrued $37,651,138 $29,036,411 Liabilities Percent Difference -23%
Amortization Period
Maximum of 30 years under GASB 45
30 years may not be appropriate Plan amendment shifts majority of
liability to retirees Accounting principles for guidance Payout period – retiree life
expectancy
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Amortization Period - Example
Impact of shorter amortization period
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Original Valuation New Plan DesignNew Plan Design w/
Appropriate Amortization
Amortization Period (years) 30 30 16
A. Employer Normal Cost $507,501 $25,501 $25,501B. Amortization of UAL $254,802 $41,556 $70,812C. Annual Required $762,303 $67,057 $96,313 Contribution (ARC) (A+B) Percent Difference -91% 44% D. Total Actuarial Accrued $6,021,867 $982,108 $982,108 Liabilities Percent Difference -84% 0%
2020
Look At Critical Issues Facing Both Member And The Employer
Access to health care coverage when retired
Affordability to the retired member Sustainability of the Plan by the
employer (and subtopic of “velocity”) Equity among the population
segments (equity not necessarily meaning equal)
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Sustainability
Retirees do not want the Plan to vanish To ensure sustainability, the employer
must know the long term ongoing annual commitment and assess whether the resources exist to meet the obligation
The first step in measuring sustainability is to assess the impact on the annual budget of the current program
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Sustainability
Next, the employer should estimate what could be a long term annual budget amount that could be allocated to the retiree medical program
Then, the employer could look at the benefit strategies that could be implemented to bring the rate to a manageable level while keeping benefits as affordable as possible
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General Fund Encroachment Means Less Funding Available for Other Activities
Project NOO assuming cash pay-go funding. Assess impact on: Cost of capital/bond rating Borrowing restrictions that make access to capital
markets more difficult Ability to meet pay-go requirements in all years Some entities are exploring non cash
contributions (refer to formal legal counsel) Example- firefighters just don’t feel they can cut
into training budget- or their capital budgets- so are looking to find the money in the pension plan- how real is that solution?
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Understanding “Velocity”
The speed for change to take effect (e.g. the lowering of the GASB liability and costs) depends on what employee groups can have benefit changes.
► If new hires only, we find it takes a generation to fully feel the impact of the change
► If actives only (prospective benefits), the velocity of change can be sooner, depending on the depth of the change
► Changing for all members (active, retiree and new hire) creates the highest velocity.
A governmental entity may say “the Actuarial Required Contribution must go from 15% to 7% in 7 years”.
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Current Retirees vs. Future Retirees
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
2009 2014 2019 2024 2029 2034 2039 2044
Per
cent of Pay
roll
30 Year Closed Level Percent Amortization (3% Growth)
Current Retirees under current Pay-As-You-Go
Current Active Employees under current Pay-As-You-Go
Future Hires under current Pay-As-You-Go
Contributions underFull Advance-Funding
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ARC per Active Member – Unfunded Discount Rate – 4.5%
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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AAL per Plan Participant – Unfunded Discount Rate – 4.5%
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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ARC per Active Member – Funded Discount Rate – 6.0%
Survey of GASB 43 & 45 reports from GRS South Carolina clients
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AAL per Plan Participant – Funded Discount Rate – 6.0%
Survey of GASB 43 & 45 reports from GRS South Carolina clients
Key findings in SC OPEB work
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The state wide plan is not included in these survey results.
Key findings in SC OPEB work
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Type of Plan Number of Plans Average Unfunded - ARC per active
Benefit varies based on service or points 15 $2,963
Same dollar benefit for all retirees 9 $1,627
Employer pays entire premium 6 $4,203
Other 2 $1,586
Grand Total 32 $2,734
Over half of GRS’s South Carolina clients vary the retiree benefit based on years of service or points at retirement.
Key findings in SC OPEB work
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Type of Benefit Yes No
Subsidized over age 65 27 5
Provides spousal coverage 31 1
Provides explicit subsidy for spouse 17 14
Key findings in SC OPEB work
Average Monthly Cost per Individual
Average claims cost by age and gender for the 32 valuations surveyed
Average Pre-65 Cost per Month
Age Male Female
25-29 $216.85 $368.21
30-34 220.04 371.59
35-39 224.47 372.43
40-44 265.67 375.84
45-49 347.88 411.04
50-54 456.85 470.38
55-59 535.73 533.85
60-64 662.00 610.19
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Healthcare Reform
Early Retiree Reinsurance Program, go to http://errp.gov
Retiree only plans exempt Medicare Advantage and Medicare
Part D plans are exempt
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