Upload
job-burns
View
214
Download
1
Embed Size (px)
Citation preview
Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
How Consultants Determine Local Government Liability for OPEB
Public Employee Forum on GASB Statement #45
February 7, 2007
J. Richard JohnsonSenior Vice PresidentPublic Sector Health Practice Leader The Segal Company
2Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What’s Different in GASB Financial Statement Disclosure?
In the past… Annual outlay for retiree health premiums or benefit costs Only took current retirees into account Usually handled as a footnote
Going forward… Actuarial valuation of retiree health liabilities Reporting incorporated into financial statements
– Annual Required Contribution (ARC)– Net OPEB Obligation (NOO)– Required Supplementary Information
Takes into account both active employees and retirees
3Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Financial Statement Disclosure
Income Statement Annual Required Contribution (ARC)
– The Actuarial Accrued Liability (AAL) is the portion of the actuarial present value of total projected benefits allocated to years of employment prior to the measurement date
– The Normal Cost is the portion of the actuarial present value of total projected benefits allocated to the year following the measurement date
– The ARC is equal to the normal cost and the amortization of the unfunded accrued liability.
– There is no requirement that the ARC is funded
Balance Sheet Net OPEB Obligation (NOO)
– The NOO is the cumulative difference between the ARC and the actual contributions made (if any).
– At transition the NOO may be set at zero
Notes to Financial Statements Generally similar to Retirement Supplement Information
4Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What Benefits Are Included in OPEB Valuations?
Medical benefits
Dental
Vision
Prescription drugs
Life insurance
Legal services
5Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What Goes Into the GASB OPEB Valuation?
Employee and Retiree Data
Actuarial Cost Method
Funding and Financial Data
PlanProvisions
Actuarial AssumptionsActuarial
Valuation
Results
Claims and Premium Cost
6Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Calculation Begins with Starting Costs
Monthly claims and enrollment information for recent period of time (one to three years)
Includes active employees and retirees
Consider plan changes during the claim/enrollment period
Determine initial average cost – actives and retirees
True cost increases with age. Project starting costs to reflect “cost curve”
“Starting costs” are the true costs at age 65 for the following: Male, pre-65
Female, pre-65
Male, post-65(post-Medicare)
Female, post-65 (post-Medicare)
7Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What’s Different in Rate Calculations?
Traditional Rate Setting
GASB Rate Determination
POOL:ActivesRetirees
Medicare Retirees
$500/mo
RATES: Total
Active $500Pre-65 Retiree $500Medicare Retiree $300
Active Employees
Pre-65 Retirees
Medicare Retirees
Actual IMPLICITRATES: Total SUBSIDY
Active $375 $125
Pre-65 Retiree $675 ($175)
Medicare Retiree $325 ($25)
8Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Establish Methods and Assumptions
Funding methods Allocate costs between normal cost and accrued liability Methods vary in stability and funding pattern 6 methods available for GASB valuation
Actuarial assumptions Need to match related DB retirement plan assumptions Investment return assumption (discount rate) is dependent on funding
– No pre-funding – use employer’s rate of return on assets (3%-4%)– Pre-funding – use rate of return on funded assets (7%-8%)
Healthcare cost trend assumptions– Based on experience of covered group– Reflects expected long-term future trends– Can differ by benefit– Typically starts at 10%-12%, then decreases 1% each year until ultimate
level is reached (typically 5%)
9Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What Issues are Public Employers Facing?
Health benefit costs are increasing much faster than general inflation
Health costs increase as an employee/retiree gets older
Limited ability to fund liability out of current revenue flow – will OPEB destroy the budget?
Large OPEB liability can impair jurisdiction’s ability to issue bonds
How to explain large retiree health liability to stakeholders and general public
To fund or not to fund?
How to balance competing revenue interests
10Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1999 2000 2001 2002 2003 2004 2005 2006 2007
An
nu
al P
erce
nta
ge
Incr
ease
Non-Network PPO POSHMO HD-PPO Rx RetailMedical Inflation Overall Inflation Workers Earnings
ACTIVES AND RETIREES UNDER AGE 65
Source: 2007 Segal Health Plan Cost Trend Survey and U.S. Bureau of Labor Statistics.
U.S. Projected Medical Trends (with Rx)
Gap
11Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
What are Employers Doing to Address the OPEB Liability?
Getting an early handle on the GASB OPEB liability
Rethinking the programs Eligibility and entitlement for retiree health benefits Plan design changes Looking at different subsidy approaches - separate for actives and
retirees
Investigating pre-funding options Retiree health trust options Redeploying existing fund balances Surcharging current employee and employer rates to build reserves Using retirement plan assets for funding retiree health benefits
Balancing retiree health against other revenue sources and uses
Reviewing total pay and the balance between pay and benefits
12Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 12
June 30, 2009
GASB Timeline/Implementation Plan
June 30, 2006 June 30, 2007 June 30, 2008 June 30, 2010
FY2010 Deliver
Final GASB Valuation
& FinancialReporting
Budget Estimate
for FY2010
Data Collection
Assumptions&
Valuation
FY2009 Deliver
Final GASB Valuation
& FinancialReporting
Budget Estimate
for FY2009
Data Collection
Assumptions&
Valuation
FY2008
Planning&
Analysis
Initial GASB
Liability Estimate
DeliverFinal GASB Valuation
& FinancialReporting
Budget Estimate
for FY2008
Data Collection
Assumptions&
Valuation
13Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Benefit Design Strategy to Manage Liabilities
The Three “R”s of Cost Containment:
Redefining Eligibility Requirements Tie retiree health eligibility to
service levels Consider institutional goals for work
force planning Review spouse coverage rules Eliminate retiree health benefits to get
rid of OPEB liability?
14Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Benefit Design Strategy to Manage Liabilities continued
The Three “R”s of Cost Containment:
Restructuring Benefits Create new tier for new hires Reduce benefits for future retirees Review Medicare Coordination Method Review Prescription Drugs
– Leverage Medicare Part D– PDP vs. Subsidy– Eliminate Rx plan
Establish benefit caps Look at underlying health plan to
manage utilization and claim costs
15Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Benefit Design Strategy to Manage Liabilities continued
The Three “R”s of Cost Containment:
Rethinking Cost Sharing Move to a flat dollar employer share Increase retiree contribution Tie benefit levels to service levels Defined Contribution approach
– Fund while employees are active
16Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Key Decision: Pre-funding
OPEB Requires Disclosure – NOT FundingOPEB Requires Disclosure – NOT Funding
Experience already shows moving from pay-go to pre-funding increases annual costs 3–6 times.
Experience already shows moving from pay-go to pre-funding increases annual costs 3–6 times.
11
Debt Financing
33
22Options
Pre-funding
Pay-As-You-Go
44 Combination
17Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
To Pre-fund or Not to Pre-fund?
No simple solution for all jurisdictions
Opportunity trade-offs Pre-funding
– Lower liabilities, better rating, lower cost of capital, higher current year costs
Pay-Go– Higher liabilities, potential lower rating, higher cost of capital, lower
current year costs
Pre-funding requires clear set aside from jurisdiction accounts Separate retiree health trust Irrevocable trust within an existing
health fund trust
18Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Pre-funding Trade-offs
Level of Pre-funding
Proportion of benefits pre-funded will dictate discount rate Pay-go (no pre-funding) is risk-free rate –
can base on internal ROI Pre-funding can use a market rate
used in similar retirement trusts
Irrevocable or Not?
If funding vehicle is not irrevocable, jurisdiction cannot count assets as OPEB assets in the financial statement
However, full disclosure and discussions with rating agencies may help mitigate rating risk
19Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Debt Financing
OPEB Obligation Bonds
Taxable municipal “arbitrage” bonds
Trading soft debt for hard debt
First one—Gainesville, Florida
Does long term debt for retiree health make sense with future of nationalized health care unknown?
Insurance approaches paired with OPEB bonds Life insurance policy purchase for active employees Perception issues among elected officials re betting people
will die as a way to fund retiree health Complex, multi-tiered funding approach is difficult for
taxpayer to understand
20Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Pre-Funding Vehicle Merits Shortcomings
Employer General Asset Accounts
Simple set-up Considerable flexibility in funding and plan design
Employee contributions only permitted on an after-tax basis Use of account assets not restricted to plan purposes Assets subject to the claims of general creditors. Subject to certain nondiscrimination requirements
State-Law Grantor Trusts (Integral IRC Section 115 Trusts)
Considerable flexibility in funding and plan design Use of trust assets may be limited to the exclusive benefits of the
covered employees and their families
Employee contributions only permitted on an after-tax basis Varying state laws for establishment and governance of trusts Subject to certain nondiscrimination requirements
Voluntary Employees’ Beneficiary Association Trusts (VEBAs)**
VEBA assets and earnings specifically earmarked for the sole purpose of providing the intended benefits (e.g., life, sickness, accident or other benefits) to members of the association or their dependents or designated beneficiaries
Considerable flexibility in funding and plan design
Employee contributions only permitted on an after-tax basis Funding limits differ for bargained and non-bargained employees Limits on types of benefits offered Subject to certain nondiscrimination requirements
Section 401(h) Retiree Medical Accounts within a Pension Plan***
Use of assets restricted to medical purposes Pre-tax employee contributions permitted through a mandatory
“pickup” arrangement in which all eligible employees must participate
On plan termination, excess assets revert to the employer
Possible employee dissatisfaction stemming from mandatory and irrevocable “pickup” arrangement
Additional administration required: separate funding and accounting for pension and medical benefits
Contributions limited to 33 1/3% of total retirement contributions. Sponsors of well-funded pension plans may not be able to make contributions because of this limit.
Health Reimbursement Arrangements (HRAs)
Allows year-to-year carry-over of unused value Encourages careful consumption of health care services
May discourage employee or dependent from seeking needed medical care now, resulting in potentially greater insured costs later
Additional administration required Coordination of HRAs with Medicare may be problematic
Health Savings Accounts (HSAs)
Vehicle for active employees to save for retiree health premiums Account balance carries over and is portable if employee leaves Employer may contribute to savings account to fund part of the
high deductible
Employee/employer contributions are limited (Archer IRA limits) Must be paired with a high deductible health plan ($1, 000 single/$2,000 family),
retiree savings vehicle not available by itself Low paid participants with significant health claims may not be able to have money
left in account to carry over for retiree health premiums later May discourage employee or dependent from seeking needed medical care now,
resulting in potentially greater insured costs later Additional administration required for savings and investment component
Pre-Funding Options
21Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
How Does Retiree Health Fit Into Total Rewards?
Employee Value
Proposition
Direct Financial
Affiliation
WorkContent
CareerIndirect Financial
Organization commitment Organization support Work environment Organization citizenship Title
Base salary Incentives Ownership Cash recognition Premium pay Pay process
Benefits Non-cash
recognition Perquisites
Advancement Personal Growth Training Employment security
Variety Challenge Autonomy Meaningfulness Feedback
22Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Looking Ahead – New Themes in Retiree Health Benefits
What can/should be done to ensure that health benefit promises made to retirees are kept?
What are acceptable trade-offs between generations?
Is it better to have pressure on bond ratings or pressure on current year budget?
How to balance among pay increases, pension benefits and retiree health benefits?
How important are retiree health benefits in light of total compensation?
Copyright © 2007 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.
Questions?
J. Richard [email protected]