Opeb cost control siia may 2008

OPEB Cost ControlStrategies

May 15, 2008

OPEB Cost Control Techniques

Zero liability (for small employers)

Plan “tweaks”

Funding

Defined contributionaccounts

Zero Liability for Small Groups

AgeActual Cost

Blended Cost

Implicit Subsidy

20 $200 $40030 300 40040 400 40050 500 40060 600 400 200

Most employers charge retirees the blended costSmall fully-insured employers (<50 employees)

can charge retirees the actual (not blended) costIf they do, there’s no implicit subsidy!

Plan tweaks: many optionsPrescription drugs – lower generic & OTC copays, higher name brandEligibility: service requirements for full benefitsDifferent benefits for new employeesDefined dollar benefit (DDB)Medicare integration method: COB, exclusion or carve-outMedicare Part D strategies

Medicare Part DDifferent strategies for public vs. private employersPDP subsidy often better than 28% direct subsidy, especially for public employers

Higher value for most plansBetter accounting treatmentDirect-subsidy tax advantage irrelevant for public employers

Funding

• Potential higher discount rate (lower liabilities)• Possible greater flexibility in investments• Smaller ARC and Net OPEB Obligation• Better credit rating

* Note that pre-funding is NOT required

OPEB Funding

GASB’s requirements for a funded plan• Employer contributions irrevocable• Assets dedicated to providing retiree benefits• Assets protected from creditors

Funding vehicles• 501(c)(9) trust, aka VEBA • Section 115 Trust

• Insurance Contract

Funding - with Higher Discount Rate

With pre-funding &

No pre- higherfunding discount

Present Value of OPEB Benefits $5,000,000 $4,000,000Actuarial Accrued Liability 3,000,000 2,400,000Plan Assets 0 1,000,000Unfunded Actuarial Accrued Liability 3,000,000 1,400,000Normal Cost 250,000 200,000

Annual Required Contribution – Year 1Normal Cost $250,000 $200,000Amortization of Unfunded Accrued Liability 173,490 80,962Total $423,490 $280,962

Defined Contribution Accounts

What they do

• Replace open-ended liabilities with known cost

• Potentially more secure benefits for employees

Defined Contribution Accounts

Transition from defined benefit: Anaheim• Preserve current benefits for those near retirement• Evaluate benefits for eligible employees• Set up an individual account for each with:

• a starting balance for past-service benefits• regular payroll contributions

• Invest in default or chosen funds• Web-based claim and premium payments

Cost Control Examples

City of Duluth – a little of everything

• Prescription drugs – new copay schedules

• Start to pre-fund existing OPEB liabilities

• Defined contribution accounts for new hires

Questions??

James A. Van Iwaarden, FSAwww.vaniwaarden.com612.596.5961, 888.596.5960