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A Discussion Prepared for. February 10, 2009 Presented By. Glen Volk, FSA, MAAA Consulting Actuary. Agenda. Review of GASB 45 Requirements Summary of Key GASB 45 Results Options for Managing GASB 45 Expenses. Summary of GASB 45 Requirements. GASB 45 Requirements. - PowerPoint PPT Presentation
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A Discussion Prepared for
February 10, 2009Presented By
Glen Volk, FSA, MAAAConsulting Actuary
Agenda
• Review of GASB 45 Requirements
• Summary of Key GASB 45 Results
• Options for Managing GASB 45 Expenses
Summary of GASB 45 Requirements
4
GASB 45 Requirements
• Requires accrual accounting for Other Post Employment Benefits (OPEB)
• Conceptually the same as accounting for a defined benefit pension plan
• Primary benefit is retiree medical
• Currently financed on a pay-as-you go basis (2007/08 pay-as-you-go cost $1,088,000)
• Phased in implementation – 2008/09 for Phase 2 employers
5
GASB 45 Requirements
1. Perform actuarial valuation
2. Recognize cost (Annual Required Contribution, or ARC) of retiree medical benefits equal to: Value of benefits earned by active employees
[Normal Cost], plus Amortization of existing unfunded actuarial accrued
liabilities [AAL]
3. Disclose information about the plan, including the value of plan assets and liabilities
6
GASB 45 Requirements
Trend
Discount Rate
Retirement Rates
Participation Rates
Retiree Contributions
Valuation Assumptions
Turnover
Actuarial Cost Method
Summary of Key GASB 45 Results
Summary of Key GASB 45 Results
$0
$100
$200
$300
$400
$500
$600
Actual Cost Premium Rate Retiree Contribution
Implicit Subsidy
Explicit Subsidy
Example of Implicit Subsidy
9
Summary of Key GASB 45 Results
Unfunded Funded
ARC $2,338,000 $1,886,000
AAL
Implicit
Explicit
Total
$5,262,000
23,405,000
$28,667,000
$4,176,000
15,674,000
$19,850,000
Valuation Results as of July 1, 2007
10
Summary of Key GASB 45 Results
Unfunded Funded Difference
Pay as You Go Expense
$1,088,000 $1,088,000 $0
Contribution to Trust
$0 $798,000 $798,000
Total Cash Requirement
$1,088,000 $1,886,000 $798,000
ARC $2,338,000 $1,886,000 ($452,000)
Net OPEB Obligation
$1,250,000 $0 ($1,250,000)
Comparison of Funded and Unfunded Scenarios
11
Summary of Key GASB 45 Results
• Based on feedback from auditors
• Unfunded Plan – assume discount rate of 5% (based on long term rate of return on General Fund assets used to satisfy obligation)
• Funded Plan – assume discount rate of 8% (based on assumed long term rate of return on Trust assets)
• Higher discount rate means less value is given to future payments. This is what causes the AAL and ARC to be lower.
Difference in Assumptions for Funded and Unfunded Scenarios
Options for Managing GASB 45 Expense
13
Options for Managing GASB 45 Expense
1. Status Quo
2. Make Minimum Annual Required Contributions
3. Reduce Plan Expenses Eligibility Plan Design Contributions Medicare Advantage & PDP
4. Fund All or part of OPEB Liability From Any Legally Available Funds or by Issuing OPEB Bonds
General Approaches/Options
14
Options for Managing GASB 45
Expense
1. Limitations: Contracts, State Statutes and Collective Bargaining Agreements.
2. Plan Changes may include:
a. Eligibilityb. Contributions (Most critical)c. Co-pays, deductiblesd. Defined contribution plane. Medicare Advantage & PDP
Reduce Plan Expenses
15
Options for Managing GASB 45 Expense
• Advantages of Funding:
• Use higher discount rate (lower AAL and ARC)• More favorable treatment from rating agencies• Higher degree of safety for current and future
retirees
• Disadvantages of Funding
• Ties up more cash• Time and expense required to operate a trust
Funding Considerations
Questions?
