The opinions expressed in this presentation are those of the speaker. The International Foundationdisclaims responsibility for views expressed and statements made by the program speakers.

A Primer for Understanding New Public (GASB) Reporting Guidelines

Mary P. Kirby, FCA, FSA, MAAASenior Vice President and Consulting ActuarySegal ConsultingNew York, New York

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Agenda

• Highlights of the new GASB rules for OPEB• What has changed?• Concerns about the new statements• Redesign strategies

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GASB Statements No. 74 and 75

• Financial Reporting for Postemployment Benefits other than Pension Plans (No. 74)– Gives new standards for the financial reporting of OPEB plans– Effective for fiscal years beginning after June 15, 2016

• Accounting and Financial Reporting for Postemployment Benefits Other than Pensions (No. 75)– Deals with employer reporting– Effective for fiscal years beginning after June 15, 2017

Many provisions required by the new GASB Statements 67 and 68 for pensions have carried over to OPEB.

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Goals and Objectives of GASB

• Financial Reporting Focus– GASB establishes accounting and financial reporting standards,

not funding policies– Focus on OPEB obligation, changes in obligation and attribution

of expense

• Long-Term Nature of Governments– Government financial statements focus on:

• Allocation of resources to government programs• Determination of the cost of services• Provide a long term view of operations

• Employer-Employee Exchange– Employer incurs an obligation to its employees for OPEB benefits– Transaction is in context of a career-long relationship

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Objectives of Statements

• Improve accounting and financial reporting by state and local governments for OPEB

• Improve information provided by state and local government employers about financial support for OPEB that is provided by other entities

• Improve the usefulness of information about OPEB included in the general purpose external financial reports of state and local governmental plans for making decisions and assessing accountability

• Establish standards for measuring liabilities, expenses, and deferred inflow/outflow of resources (a.k.a. gain/loss)

• Does not address funding

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Scope of Statements

• Standards for measuring and recognizing:– Liabilities– Deferred outflow of resources (losses)– Deferred inflow of resources (gains)– Expense/expenditures

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What Are OPEB Benefits?

• Post-employment healthcare benefits– Includes medical, dental, vision, hearing and other

health related benefits

• Other forms of OPEB– Death benefits, life insurance, disability, and long-

term care

• Provided separately from or provided through a pension plan– If provided through a pension plan, would be

accounted for in pensions

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What Are OPEB Benefits?

• Does not include termination benefits or termination benefits for sick leave–When a terminating employee’s unused sick

leave credits are converted to provide or enhance defined benefit OPEB, resulting benefit should be considered

• Includes volunteers that provide services to state and local governments– i.e., firefighters, auxiliary police

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Major Components

• Net OPEB Liability reported on financials• Calculating the OPEB expense• Accounting for cost sharing plans• Expansion of disclosure information

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New Terms vs. Old Terms

• Statement 74/75 Terms and their equivalent 43/45 Terms – Plan Fiduciary Net Position: Market Value of

Assets– Net OPEB Liability: Unfunded Actuarial

Accrued Liability (UAAL)– Deferred Inflow of Resources: Gain– Deferred Outflow of Resources: Loss

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Net OPEB Liability

• Net OPEB liability is to be reported on the financial statement– Defined as OPEB liability less the Plan Fiduciary Net

Position (market value of assets)– ACA excise tax to be included– Age adjusted premium for plans that are not

community rated

• Calculated using a blended discount rate• Entry age normal, using a level percent

of pay• No smoothing of assets

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Trust Requirements

• Contributions from employers and non-employer contributing entities to the OPEB plan and earnings on those contributions are irrevocable

• OPEB plan assets are dedicated to providing OPEB to plan members– Can be used for administrative costs of plan

• OPEB plan assets are legally protected from– Creditors of employers or plan members– Non-employer contributing entities

– OPEB Plan administrator

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What Has Changed

• Based on annual required contribution– Normal cost plus– Amortization of the UAAL• Period not greater than 30 years• Closed or open amortization• Level dollar or level % of payroll

– Can be based on any of 6 actuarial cost methods

• Annual OPEB Cost (AOC)– ARC plus– Interest on Net OPEB Obligation– Adjustment to ARC

• Change in net OPEB liability each year, with deferred recognition of certain elements

• Components of new expense– Service cost– Interest cost– Differences between expected and

actual experience (w/certain deferrals)

– Difference between actual and expected earnings (5 year spread)

– Projected investment returns over the year (if applicable)

– Employee contributions– Other changes in plan net position

Current OPEB ExpenseCurrent OPEB Expense New OPEB ExpenseNew OPEB Expense

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Immediate Recognition

• Some changes in OPEB liability are recognized immediately– Service cost– Annual interest on OPEB liability– Projected investment returns over the year, if

applicable– Plan amendments– Benefits paid during the year

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Deferred Recognition

• Some changes in OPEB liability are allowed to be deferred– Changes in actuarial assumptions– Actuarial gains and losses– Investment gains and losses

• Deferral periods depend on the type of change

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Expanded Employer Disclosures

• Description of plan and assumptions• Policy for determining contributions• Sensitivity analysis of the impact on the OPEB liabilities

under five different scenarios– Assumed discount rate and current healthcare cost trend rate– Discount rate +/-1% and current healthcare cost trend rate– Assumed discount rate and healthcare cost trend rate +/-1%

• Changes in OPEB liability for the past 10 years• Development of long term earnings assumption• If actuarially determined contribution (ARC) is

calculated, 10 year schedule must be disclosed

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Expanded Employer Disclosures

Note disclosures on the discount rate of return must include:• Description of how rate was determined• Methods and assumptions used• Expected asset allocation• Real rates of return for each major asset class• Whether the rates of return are arithmetic or

geometric means

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Distinctions AmongDifferent Types of Plans

Different plan types, different reporting requirements• Single employer plans• Agent multiple employer plans

– Provide defined benefit OPEB to employees of multiple employers– Plan assets are pooled for investment purposes but separate accounts

are maintained so each employer’s share of assets is only available to pay the benefits of its employees

• Cost-sharing multiple employer plans– Provides defined benefit OPEB to employees of multiple employers– OPEB obligations are pooled and plan assets can be used to pay the

benefits of the employees of any employer in the plan

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Cost Sharing plans

• Each employer must disclose on their balance sheets their proportionate share of:– Net OPEB liability– OPEB expense– Deferred outflows and inflows of resources

related to OPEB

• A description of the basis for determining the proportionate share of net OPEB liability must be disclosed in the notes

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Concerns

• Both the timing and the scope of the new reporting will require greater coordination between the plan and the employer, as well as between actuary and auditor– Especially true for cost sharing agent plans

• Plan will need to determine whether the cost of reporting the financial information that employers will require for their financial statements will be charged to employers or be borne by the Plan

• Having the net OPEB liability on the balance sheet could mean more involvement by the auditor in actuarial results

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Concerns

• The recognition of the net OPEB liability on the balance sheet will force employers to relook at OPEB benefits– Many employer’s OPEB liability is nearly as large as the pension

liability but with no accompanying assets (or very little assets compared to pension plan)

• Will states and local governments be able to raise funds via bonds if the OPEB liability is on the balance sheet?

• How will this affect bond ratings?• The sensitivity analysis required will require four

additional calculations– Will this confuse the reader or make the actual calculation seem

inaccurate?– Is this cost prohibitive for employers and plans?

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Concerns

• Structure of trusts that cover more than OPEBwill need to be reviewed– Trusts must be dedicated to OPEB only

• There is a divorcing of expense and funding– Net OPEB liability is based on market value of assets

but expense will reflect asset smoothing

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Retiree HealthRedesign Strategies

Establish Parameters• What role does the retiree medical program play in

recruitment and retention/total rewards?• Are there key late career hires? If so, what is an appropriate

service requirement for retiree medical eligibility for them?• What promises have been made to current retired and active

employees?• Could/should the program be different for

new hires?• What age should a long term employee target for retirement?

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Retiree HealthRedesign Strategies

• How do you want your program to compare to your peers?

• What aspects of the program are available to change and what are “untouchable”?

• Is the current program sustainable?• What is an acceptable cost for these types of programs

– For the employer? For retirees?

These objectives are critical to managing and have a cost consequence that must be considered in tandem.

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The “Levers” ofRetiree Health Design

• Eligibility and/or Vesting– Who receives the benefit (and for how long)?– How much of a benefit do they receive based on service?

• Plan Design– Plan Platform

• Indemnity, HMO, Medigap• Exchange or group coverage

– Cost Sharing• Coinsurance, copays, deductible

• Employer Funding– Level of subsidization– Defined benefit vs. Defined contribution– Pre funded vs. Pay as you go

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Eligibility and Vesting

• In many cases, post retirement eligibility is the same as current pension eligibility– Should the two be the same?

• Changing eligibility can have consequences– Could affect pension expense– People may stay in service longer to get retiree health– People may retire prior to eligibility change to get

better benefit

• Most employers want to reward the long service employee, not a mid-career hire

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Eligibility and Vesting

• Four groups of participants to consider in the retiree medical plan:1. New hires2. Current actives3. Current actives close to retirement4. Current retirees

Eligibility for benefits for each of these groups needs to be explored separately and in tandem.

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Plan Design: Pre Medicare

DEFINED BENEFIT RETIREE MEDICAL

PROGRAMRich Benefit Design

Employer subsidizes a set amount which

increases with trend

DEFINED CONTRIBUTION

RETIREE MEDICAL PROGRAM

Rich Benefit DesignEmployer Caps

contribution

GROUP PRIVATE EXCHANGE

Employer provides an account where plans are purchased in the private marketplace

Could be individual or group coverage

PUBLIC MARKETPLACE

Employer sends retirees to the Public

Marketplace with some DC type subsidy for

premium reimbursement

MOST CURRENT ARRANGEMENTS

EMERGING

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Plan Design: Pre Medicare

• Can do all regular plan management– Financial management

• Contribution strategy

– Plan and network management• High performance networks• Contract negotiation

– Individual health management• Health Risk Reduction• Value Based Design

• Plan wouldn’t need to comply with ACA benefit mandates

Retiree Only Plan

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Pre Medicare:Individual Market “Off Exchange”

Individual Market “Off Exchange” Coverage• Provides mechanism to assist retirees in selecting coverage including the

use of the public exchange as well as premium tax credits• Variety of plans

Plan Sponsor• Determines (annually) how much to contribute towards coverage through

an HRA or other method, if coverage is elected (defined contribution or DC approach)

• Is no longer in the health care business for retirees• In many ways, this could look like an old-time flexible benefits plan, except

the Plan sponsor has minimized involvement

Retirees• Pick plan that best meets their expected needs• Value based design• Patient safety/care coordination

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Health Reimbursement Accounts (HRAs)

● Retirees who are NOT eligible for the federal subsidy would have immediate access to funds in their account

● Distributions are not taxable to the retiree either when credited to the retiree’s account or when distributed from the retiree’s account

● Unused account balances may be used in later years

● Accounts may be used to pay health insurance premiums or medical, dental or vision expenses

● Contributions could continue after the retiree becomes Medicare eligible

● Retirees eligible for the federal subsidy must elect to freeze distributions from their account until the end of the year in which they are no longer eligible for the subsidy

● Unused account balances are forfeited upon death of an unmarried retiree with no covered dependents (or upon the death or loss of eligibility of the spouse and all surviving covered dependents)

AdvantagesAdvantages Disadvantages/LimitationsDisadvantages/Limitations

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Freezing HealthReimbursement Accounts

• Freeze election would defer distributions (but not contributions) until the freeze is no longer in effect

• Retirees may elect to freeze or unfreeze their account on an annual basis before the beginning of each year

• An election to freeze distributions must be irrevocable for the full year

• Unused account balance may be used by the retiree after the freeze ends (generally when the retiree becomes eligible for Medicare) to pay:– insurance premiums (including Medicare

Part B, Medicare Advantage Plan premiums or other insurance) or

– other medical, dental or vision expenses (including copays, coinsurance, deductibles)

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Excepted Benefits

Medical and RX Benefits Are Not Provided by Plan Sponsor• Dental and Vision Coverage

– Hi frequency, low cost coverage which the vast majority of retirees would utilize

– Predictable cost– Benefit levels (and resulting costs) can vary

tremendously• Voluntary Benefits (but not really)

– Paid for by plan sponsor• Rates should be lower than if voluntary• Could this be self-insured?• Tax consequences should be considered

– Excess major medical– Critical illness– Accident– Hospital indemnity– Long-term care (need to confirm if possible)

These would provide a mechanism for a plan sponsor to provide financial and/or health support even if not providing a core health benefit for a cost that could range from $30 per month to over $400 per month or more depending on the coverages offered.

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Plan Design: Medicare Basics

Part AHospital

Insurance

Part AHospital

Insurance

Original Medicare

Combines Part A and Part B

Combines Part A and Part B

Part BMedical

Insurance

Part BMedical

Insurance

MedigapMedicare Supplement

Insurance

MedigapMedicare Supplement

Insurance

Medicare Advantage Plan(such as an HMO or PPO)

Adding Drug Coverage

Part D / EGWP

Medicare Prescription Drug Plan

Part D / EGWP

Medicare Prescription Drug Plan

MAPDMedicare

Advantage + Part D Coverage

MAPDMedicare

Advantage + Part D Coverage

Employer Pharmacy Benefit /

EGWP

Employer Pharmacy Benefit /

EGWP

Part D Medicare

Prescription Drug Plan

Part D Medicare

Prescription Drug Plan

If you join/offer a Medicare Advantage Plan, you don’t

need/can’t take a Medigap Policy

If you join/offer a Medicare Advantage Plan, you don’t

need/can’t take a Medigap Policy

Supplemental Coverage

OR OR

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Plan Design: Spectrum ofMedicare Arrangements

DEFINED BENEFIT RETIREE MEDICAL

PROGRAMRich Benefit Design

Employer subsidizes a set amount which

increases with trend

GROUP MEDICARE PLANS

Employer offers Medicare Advantage or

Medigap plansCould be DB or DC

DEFINED CONTRIBUTION

PLANEmployer provides an

account where plans are purchased in the private marketplace or through

Employer

PRIVATE MEDICARE EXCHANGE

Employer provides an account that retiree uses to purchase an individual Medicare

Supplement or Medicare Advantage plan

MOST CURRENT ARRANGEMENT

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Plan Design: Medicare Advantage

Many times more affordable than Medicare Supplement Plans due to availability of federal subsidies

Many offer supplemental benefits like dental and/or vision

If retiree resides in a coverage area and the doctor is in-network, generally cost sharing will be lower than current plan

Can be designed to mitigate any network limitation issues

Can negotiate rate guarantees

Experienced plans can offer increased member support

Other benefits may be available (gym memberships)

If physician has opted out of Medicare, retiree pays 100% of all costs

If retiree wants to return to a Medigap (supplement) plan, it may not be guaranteed issue

Physician and hospital networks are generally narrower and balance billing could occur

More care management and precertification requirements to receive care

If CMS subsidies to MA plans are cut:− Premiums could increase significantly− Plan designs could require higher

retiree cost sharing− Carrier could pull out of the market

AdvantagesAdvantages Disadvantages/LimitationsDisadvantages/Limitations

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Medicare Advantage Enrollment 2016

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Funding: Defined Benefit vs. Defined Contribution

Employer pays a portion of the cost of the benefit:−Could be service based

Employer and retiree share the burden of medical cost trend

Two Types:1. Defined dollar benefit2. DC accounts funded during

active working lifetime

Employer no longer has risk for increasing medical costs (but still longevity risk)

Flexibility in actual annual dollar amounts

Defined BenefitDefined Benefit Defined ContributionDefined Contribution

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Funding: Defined Contribution Plans

Employer: Better control of budgeting—move away

from unpredictable long term projections of medical inflation

Reduce OPEB liability Flexibility in plan design

Employee/Retiree For Medicare eligible, Part A, Part B and

Part D federal subsidy may now be sufficient to sustain individual retiree market

Amount in “account” is earned during active service and will not change

Accumulation vehicles available to build savings in conjunction with Employer contribution

Choice of plans to meet individual needs

Employer Depending upon how funded, balances

may not revert back to the employer Depending upon how funded, there

could be a significant financial outlay for past service

Amounts granted each year are fixed

Employee/Retiree Retiree will be subject to all of the cost

volatility

AdvantagesAdvantages Disadvantages/LimitationsDisadvantages/Limitations

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Funding: Setting up an OPEB Trust

Net OPEB liability will decrease due to funding and a higher discount rate

Security for active employees that benefit funds will be there

Subject to cost trend volatility Funds are irrevocable Where does the money come from? Diminishes ability to fund other

programs:̶ May compete with ability to

increase compensation Expense of lifetime benefits

AdvantagesAdvantages Disadvantages/LimitationsDisadvantages/Limitations

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What Has Been Considered?

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What’s Been Done . . .

• Total replacement of Medicare Supplement Plans with Medicare Advantage Plans

• Termination of ALL non-Medicare plans replaced with a small monthly, taxable stipend

• Advanced announcement regarding termination of prescription drug coverage for Medicare retirees in 2020

• Elimination of any retiree health coverage for new hires • Introduction of Medicare Retiree Exchanges with a fixed

dollar HRA• Increase in required contributions for all spouses

The above is a small sample of changes that we have seen. Every situation has their own set of facts and circumstances

that must be considered.

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Case Study: Description of Situation

Large public sector employer with a $542M OPEB liability in 2015 that is expected to reach $1B by 2020

No assets, only a small trust that was not specific to OPEB Population of approximately 19,000 active employees,

5,000 of which are eligible to retire Capped benefit rate When measured against their peers,

this employer had a very generous eligibility requirement for OPEB– 60 and 5; 55 and 10

Contributions were based on years of service

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Eligibility: Close Plan to New Hires

0

500

1,000

1,500

2,000

2,500

3,000

Impact of Closing Plan to New Hires(in millions)

Current

Closed to New Hires

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Plan Design: Total Replacement

With Medicare Advantage

0

50

100

150

200

250

Impact on Over 65 Retiree Liabilityby Moving to MAPD

(in millions)

Current

MAPD

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Plan Design: Total Replacement

With Medicare Advantage

0

5

10

15

Impact on Over 65 Retiree Cash Payments by Moving to MAPD

(in millions)

Current

MAPD

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Plan Funding: DC for Non-Grandfathered Actives

0200400600800

10001200

Impact of Defined Contributionon Active Liability

(in millions)Current

Defined Contribution

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Case Study: Results

Closed plan to new hires Grandfathered current retirees and those that reached

age 60 with 20 years of service by effective date Moved all Medicare eligible retirees to Medicare

Advantage plans with same or similar benefits Eligibility for OPEB was changed to 60 and 20 All others received a defined contribution

plan where the employer subsidy is based on years of service

Moved to creating an OPEB trust with a desire to fully fund benefits in 40 years

Reduced the 2020 liability by half

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Session #PE2

A Primer for Understanding New Public (GASB) Reporting Guidelines

• New GASB accounting and reporting rules for OPEB will place OPEB liabilities out of the notes section and into the body of financial statements

• If funded, review your trust documents to ensure they meet the requirements for OPEB fund assets

• Redesign alternatives are many, but need to be balanced with objectives. Focus on:– Eligibility– Plan design– Funding

Website Resourceshttps://www.ifebp.org/news/featuredtopics/gasbpensionstandards/Pages/default.aspxhttps://www.ifebp.org/Resources/infoquick/Pages/default.aspx GASB Postemployment Benefits Other Than Pensions (OPEB) (Members Only)

62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, Florida

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2017 Educational ProgramsPublic Plans

63rd Annual Employee Benefits Conference October 22-25, 2017 | Las Vegas, Nevadawww.ifebp.org/usannual

Public Sector Benefits InstituteHeld in conjunction with Trustees and Administrators Institutes

February 20-22, 2017Lake Buena Vista (Orlando), Floridawww.ifebp.org/psbinstitute

Benefits Conference for Public EmployeesSystem Highlight: Ohio Public Employees Retirement System (OPERS) April 25-26, 2017 | Columbus, Ohiowww.ifebp.org/publicemployee

Certificate of Achievement in Public Plan Policy (CAPPP®)Part I and Part II, June 13-16, 2017 San Jose, CaliforniaPart II Only, October 21-22, 2017 Las Vegas, Nevadawww.ifebp.org/cappp

Fraud Prevention Institute for Employee Benefit PlansJuly 17-18, 2017 | Chicago, Illinoiswww.ifebp.org/fraudprevention

Related ReadingVisit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

Employee Benefits Glossary, 13th EditionItem #7570www.ifebp.org/glossary

816

NEW!

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