controlling your opeb story

1

Controlling Your Other

Post-Employment

Benefits (OPEB) Story

How employers and

pension plans can

explain OPEB liabilities

to media and taxpayers

2

GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

3

GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

4

GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

5

About Sikich

»Multi-disciplinary: We are a professional

services firm specializing in accounting,

technology, investment banking and advisory

services with clients in the U.S. and around the

world.

»Excellent reputation: With a reputation for

professional excellence, Sikich provides valuable

client service as well as timely and cost-effective

services.

»Strong talent: We employ more than 650

talented people including 87 partners, all of whom

devote their careers to a focused area.

»Award-winning: Sikich has been ranked as the

country’s 31st largest accounting firm, as well as

the seventh-largest value-added technology

provider nationally, both by Accounting Today. PR

practice is frequently honored by industry groups.

89 Total Partners

32 Years Serving Clients

650+ Total Personnel

7,900+ Total Clients

12 Offices Nationwide

1 Collaborative and Positive Culture

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Alex BrownResearch Manager, National Association of State

Retirement Administrators (NASRA)

❯ Co-author of papers on public pensions and retiree

health care, including:

❯ “Strengthening State and Local Government Finances:

Lessons for Negotiating Public Pension Plan Reforms”

❯ “Understanding Finances and Changes in Retiree

Health Care”

❯ NASRA Issue Briefs

❯ Topics include pension spending, hybrid retirement

plans, COLAs

Today’s presenters

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Bill HallmarkConsulting Actuary, Cheiron

❯ Provides actuarial consulting for public pension and

OPEB plans

❯ Nearly 30 years of experience

❯ American Academy of Actuaries

❯ Current chair, Public Plans Subcommittee

❯ Incoming Vice President of Pensions

❯ Provided written comments and oral testimony to

GASB on GASB 67, 68, 74 and 75

❯ Served on the Implementation Guide Advisory

Committee for GASB 67 and 68

❯ Frequent speaker on new GASB standards and

implementation

Today’s presenters

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Mack ReynoldsPartner-in-Charge, Sikich Marketing & Public Relations

❯ Advising public pensions since 2006

❯ Chicago Teachers’ Pension Fund

❯ Illinois Municipal Retirement Fund

❯ Texas County & District Retirement Fund

❯ Fraternal Order of Police (Chicago)

❯ NASRA member since 2009

❯ Presented to conferences

❯ GFOA

❯ IFEBP

❯ NIRS

Today’s presenters

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Fred LantzPartner-in-Charge, Sikich Government Services

❯ Nationally recognized expert advising state and local

governments since 1983

❯ Government Finance Officers Association Technical

Services Center

❯ Liaison to GASB

❯ Task force on GASB Statement No. 43 (OPEB)

Implementation Guide

❯ GASB Pension Roundtable

❯ Presenter to national, state and local conferences

❯ AICPA State and Local Government Expert Panel

Today’s presenters

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GASB Statement Nos. 74 and 75

Fred Lantz, Partner-in-Charge of Sikich Government Services

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What is OPEB?

❯Postemployment benefits other than pensions

❯Benefits are paid after employment❯ Benefits include healthcare (e.g., medical, vision, dental, hearing)

❯ Benefits may also include life insurance, disability, long-term care

unless provided by a pension plan

❯ Includes explicit benefits and implicit benefits❯ Explicit benefits the employer pays a benefit

❯ Benefit is expressed as a specific dollar amount or as a

percentage of age adjusted premiums

❯ Implicit benefits generally result from retirees continuing in the

employers health plan but not paying an age adjusted premium

❯ Required in many states

OPEB Statements: GASB Nos. 74 & 75

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OPEB Statements: GASB Nos. 74 & 75

What is OPEB?❯Exchange of benefits for employee services performed

❯Part of compensation package provided by employer❯All or portion of the cost born by the employer

❯ Special funding situation by non-employer (state)

What is not an OPEB?❯Special termination benefit (GASB S-47)

❯ An offer made by an employer for a period of time to encourage employees to retire

❯ Inducement to leave employment prior to retirement

❯ Includes both voluntary and involuntary early retirement programs

❯Sick leave conversion❯ GASB S-16 compensated absence

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OPEB Statements: GASB Nos. 74 & 75

Why the change from current accounting for OPEB?❯Pension benefits and OPEB benefits are both forms of compensation that employees earn over their service life

❯Pension benefits and OPEB benefits are both paid out after the service life of the employee (after employment)

❯All or portion of the cost is born by the employer

❯GASB is aligning OPEB standards with the new pension standards that are becoming effective now (fiscal years ended June 30, 2015 and thereafter)❯ Impact of pension changes

13©2015 Sikich LLP. All Rights Reserved.

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GASB Statement No. 74 (for OPEB plans)

❯Financial Reporting for Postemployment Benefit Plans

Other Than Pension Plans

❯ Requires more extensive disclosures on OPEB liabilities

❯ Includes ten years of required supplementary information

❯ Covers OPEB plans whether or not administered through trusts

❯Effective for fiscal years ending June 30, 2017 and

thereafter ❯ Implement in the OPEB plan report or the employer report if the OPEB plan

does not issue a separate report

❯ Many plans are not administered via separate trusts

OPEB Statements: GASB Nos. 74 & 75

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GASB Statement No. 75 (for employers that

provide OPEB)❯Accounting and Financial Reporting by Employers for

Postemployment Benefits Other Than Pensions

❯ Requires employers to report a net OPEB liability on accrual

basis financial statements

❯ Replaces NOPEBO/NOPEBA

❯ Expense and liability recognition divorced from funding

❯ Employers in cost sharing plans and non employers with

special funding situations may be impacted the most

❯Effective for employers fiscal years ending

June 30, 2018 and thereafter

OPEB Statements: GASB Nos. 74 & 75

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Provide more accurate perspective on

OPEB liabilities, such as health insurance

for retirees ❯ How much do retiree “promises” actually cost?

❯ Greater transparency

❯ Note disclosure and required supplementary information

❯ Greater consistency

❯ Employers will use the same methodology for valuing the liability

and related expense

❯ Need to measure employee benefits when earned in accrual basis

financial statements

❯ Early implementation allowed/encouraged

❯ Negative impact of being first to implement

Why do GASB Nos. 74 & 75 exist?

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Retiree Healthcare Benefits for

State and Local Employees in 2014

Alex Brown, NASRA Research Manager

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Significant variation in the state OPEB

landscape

Some states face significant OPEB liabilities

More states have begun to accumulate assets

to prefund OPEB benefits

OPEB costs are flexible and can be influenced

by a number of factors

❯Benefit changes and legal rulings

❯Assumptions vs. experience

❯Cost of medical services

Spotlight on Retiree Health Care Benefits

for State and Local Employees in 2014

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Actuarial funding vs. pay-as-you-go

Benefit changes and legal rulings

Implications of federal law

❯Affordable Care Act

❯Medicare

Actuarial assumptions vs. experience

❯Investment return

❯Medical inflation

Factors that can influence OPEB

liabilities

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State OPEB UAAL, FY 13

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

NY, CA, NJ, TX, IL, NC,

CT, GA, MA, OH

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State OPEB ARC & Percentage Paid,

FY 13

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State OPEB Assets, FY 13

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Investment return assumption

❯If assets under management

❯Median investment return assumption in FY 13

= 4.9 percent

Medical inflation

❯Most states assume a decrease in the medical

inflation rate

❯Median medical inflation rate assumption in

FY 13 = 7.3 percent

❯Median long-term medical inflation rate

assumption in FY 13 = 5 percent

Key Assumptions

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To the extent possible, states may employ

various strategies to reduce OPEB cost❯Scale back access to retiree health benefits

❯Reduce benefit offerings

❯Modify criteria which must be met to become eligible

for retiree health benefits

❯Use public health insurance exchanges created under

ACA as an alternative means of providing pre-

Medicare retirees with access to health care.

State response

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Percentage of State Governments Offering

Retiree Health Insurance, FY 08 – FY 13

60

65

70

75

80

85

90

08 09 10 11 12 13

Insurance to retirees under 65 Insurance to retirees over 65

Source: Medical Panel Expenditure Survey, HHS

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State OPEB liabilities remained stable in FY

2013

More states are beginning to prefund OPEB

benefits

States continue to address OPEB benefits

and costs, to the extent permitted by

individual state law

New accounting standards will

fundamentally change OPEB reporting

requirements

Observations

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GASB 74 and 75 – Key Changes

from an Actuarial Perspective

Bill Hallmark, Consulting Actuary, Cheiron, Inc.

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Measuring the Total OPEB Liability

❯Liability projected to measurement date

❯Actuarial cost method must be Entry Age

❯Many OPEB valuations currently use Projected Unit

Credit

❯New basis for discount rate

Key Actuarial Changes

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Statement of Net Position

❯Net OPEB Liability = Total OPEB Liability –

Fair value of assets

❯Deferred inflows and outflows = unrecognized

portion of unanticipated changes

Annual Expense

❯Annual Required Contribution (ARC) is gone

❯Recognition of changes is much quicker

❯Annual expense is much more volatile

Key Actuarial Changes

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Funding GASB 43/45 GASB 74/75

Pay-as-you-goLong-term expected return

on unrestricted assets

20-year tax exempt general

obligation bond index

Fully Pre-FundedLong-term expected return

on plan assets

Long-term expected return

on plan assets

Fully Pre-Funded Criteria Contribute ARC Satisfy crossover test

Partially Pre-FundedBlended rate Single equivalent rate from

crossover test

Discount Rate

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Discount Rate – Crossover Test

Are assets (including future contributions for current

members) sufficient to pay all current member benefits if

all assumptions are met?

❯ An ARC based on 30-year rolling amortization would not satisfy

this requirement

❯ But, a lower contribution amount based on a longer, closed

amortization may

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GASB 45 – Based on ARC

❯Employer service cost +

❯Amortization payment on unfunded liability

❯ Often, 30 years as a level percentage of payroll

GASB 75 – No ARC

❯Employer service cost +

❯ Interest on net OPEB liability* +

❯Recognition of changes

❯ Plan changes – immediate recognition

❯ Investment experience – 5 years

❯ Liability experience and assumption changes – average future

working life including inactives

Annual OPEB Expense

* Assumes expected return and discount rate are identical

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Annual OPEB expense will generally be higher

❯ Interest on the net OPEB liability is greater than 30-

year, level percentage of pay amortization payment

❯Exception: if discount rate is higher due to satisfying

the crossover test, net OPEB liability and expense

may be lower

And more volatile

❯Shorter recognition periods will result in much more

volatility, possibly even creating OPEB income in

some years❯ Benefit reductions, in particular, may create immediate OPEB income

Annual OPEB Expense

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Mortality has been improving faster than anticipated

❯ More people are living into their 80’s and 90’s

❯ More expensive to provide lifetime OPEB benefits

Health care inflation continues to exceed growth in GDP

and other prices

Other Issues

Probability of a 60-Year Old Today Living To Age:

70 80 90

Male 92% 79% 50%

Female 95% 84% 58%

Based on RP-2014 healthy annuitant mortality projected using scale MP-2015 from 2006

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Now is the time to reconsider OPEB funding

strategies

❯Establish or re-evaluate plan to pay for promised

benefits

❯Consider a pre-funding strategy that satisfies GASB’s

crossover test

❯ May be able to start small and build over time

❯ Immediate accounting relief due to higher discount rate

❯ Investment returns will ultimately pay for some of the benefits

❯ Assets held in trust improve the security of the promised

benefits for plan members

Funding Strategies

36

The Latest GASB (Media) Challenge

Mack Reynolds, Partner-in-Charge of Sikich Marketing & Public Relations

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Key questions

❯Are you ready to be more clear in

the way you report your financial

obligations?

❯Are you ready for questions about

why you weren’t more clear before?

The Latest GASB Challenge

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The Latest GASB Challenge

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The Latest GASB Challenge

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GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

41

GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

42

GASB Nos. 74 and 75 will give reporters a new

set of story leads

The Latest GASB Challenge

43

GASB Nos. 74 and 75 don’t change a plan’s

financial health…

… but they highlight a big benefit to retirees

that may surprise taxpayers

The Latest GASB Challenge

Plan OPEB-Funded

Status

Unfunded liability

owed to retiree

health insurance

Bedrock RHI 15.22% $185M; or, $152K

per employee

City of Mayberry

RHI

0.00% $376M; $192K

per employee

State RHI 0.00% $34.5B; $538K

per employee

Bedrock Falls RHI 0.00% $9M; $7K per

employee

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Reporters will ask

❯ If OPEB benefits are part of a retiree’s pension, why

haven’t you funded this in the past?

❯ How can you lower your OPEB liabilities? Can you stop

providing retiree health insurance?

❯ What else does OPEB include?

❯ Why did GASB decide to change how this number is

reported now?

❯ Why weren’t you more transparent about OPEB, even if

GASB didn’t require it?

❯ What else should we be examining?

The Latest GASB Challenge

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Credible groups challenge sustainability

❯American Enterprise Institute

❯Arnold Foundation

❯The Civic Federation

Academics challenge assumptions

❯Joshua Rauh, Robert Novy-Marx

Wall Street warns of “pensions meltdown”

Legislators seek reform

Ratings agencies publicize their own public

pension guidelines

The Latest GASB Challenge

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“Governments are still failing to make full

contributions. Public pensions are taking

greater investment risk with the money they do

receive. If those investments fail to pan out,

the budget picture for many governments will

once again be grim.”

❯The Wall Street Journal (oped by Andrew Biggs of

the American Enterprise Institute)

Editors form opinions, sway readers

47

“If public pension plans are losing ground on

their funding status in years when the market

is delivering above normal returns, is there any

hope?

“Probably not, but if there is a way to save

public pension funds, it will require the two

parties most responsible for the current sorry

state of affairs: state politicians and

government employee unions.”

❯Forbes (oped)

Editors form opinions, sway readers

48

Most employers and public plans have

some PR issues

Illinois is among the worst and most-often

criticized

Editors form opinions, sway readers

49

“The State of Illinois was rated the country’s

most troubled public pension system in a study

of state-administered pension plans, retiree

health care and other post-employment

benefits.”❯Associated Press

Editors form opinions, sway readers

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After pension viability is challenged

After questions are raised

After editorial opinions and public opinions

take shape

After ratings agencies state their cases

After news breaks of inappropriate behavior

Many public pensions are slow to

respond

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Many public pensions miss the chance to tell

their stories

❯Long-term perspective

❯Prudent investment

❯Low cost

❯Secure retirees

❯Economic impact

❯ Short-term

❯ Long-term

Many public pensions are slow to

respond

52

Illinois Municipal Retirement Fund:

How Proactive Media Relations Helps

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Created by General Assembly in 1939 as an

“Agent” multiple-employer pension plan

Locally funded

2,976 municipal employers

287,000 municipal employees + retirees

Second largest public pension in Illinois

❯$34.9 billion in assets

❯93.1 percent funded on market basis

Does not have OPEB obligation

IMRF approach to PR

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Recognized media challenges

❯Reporters are unfamiliar w/ subject and on deadline

❯Embrace conflict and controversy

❯Enlighten readers, effect change

Pensions are complex

❯Keep message simple

❯Foster more accurate story

❯“Pension envy” debate can’t be won

Developed key media messages

❯What should the public understand?

❯What negative issues should we preempt?

IMRF approach to PR

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Public pensions messages

Pensions work.

• Traditional pensions are economical

• It’s not race to the bottom

• Pension costs and benefits are shared

• DB plans are in it for long term

• DB plan gets you more for less

Pension policies have long-term impact.

• Responses should be measured

• We don’t need to break it to fix it

• We should focus on long term

• We should honor our commitments

Retirement security

benefits everyone.

Pensions support our local economies.

• The buck stays here

• Retirees stay in Illinois

• Public pensions make meaningful impact

• Pensions vital to those who don’t receive

Social Security

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IMRF messages

Locally funded.

• Manages pensions for 2,900+

employers

• Able to enforce commitments

Independently managed.

• Elected board of members,

employers, beneficiaries

IMRF is a

good role model.

Focused on long-term.• Consistent, full funding

• 93.1% funded (12/31/14)

• Extremely efficient

• Well-allocated assets

• Non-compounding COLAs

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Develop active PR plan

❯Train media spokespeople

❯ Identify, met with all reporters covering public

pensions

❯ Print, broadcast, online

❯Correct press errors swiftly

❯Accept chances for brief commentary

❯Pursue editorial board meetings

❯ Large and small, across state

❯Address community groups

IMRF approach to PR

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Results

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“Not all Illinois pension funds are in

serious financial trouble… [IMRF is]

not part of the underfunded state

system… How did they do it? IMRF

officials say it’s a combination of good

planning and wise investing.”❯Associated Press

Results

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Results

“IMRF acts as a shining

example of how the often-

maligned traditional defined

benefit plan can work —

provided it’s properly funded

by employees and

government, pursuing a

sound investment approach

and dedicated to weeding

out questionable practices

and corruption.”

❯ State Journal-Register / Better

Government Association

61

How to apply IMRF example to media

interest in OPEB

GASB Statement Nos. 74 & 75

62

Identify your audiences

Taxpayers

Elected officials

Understand what they want and need to

hear

OPEB is pre-funded

Costs were always included in the annual

reports

Develop a PR and media relations strategy

that addresses your audience needs

Craft and control your GASB story

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Craft a message

Why DB plans matter

Why GASB updates rules

How GASB 74 & 75 won’t affect plan’s health

How GASB 74 & 75 will affect plan and employer’s

financial statements

Create a communications plan; commit to it

Establish yourself as media’s best source of

information about GASB Nos. 74 & 75

Anticipate reporter questions

Respond thoughtfully, but promptly to requests

Craft and control your GASB story

64

Media train your spokespeople

Develop proper press materials

Keep them devoid of jargon

Be proactive

Pursue reporters

Teach them pensions “101”

Offer interviews

Develop stories

News releases

Op Eds

Correct errors

By reporters or others

Craft and control your GASB story

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Look for opportunities to tell your story

National pension news

Public service efforts

Retiree profiles

National Save for Retirement Week

Prepare to accept the bitter with the sweet

Become a visible, accessible expert!

Own your GASB story

66

Questions?

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Contact information

Mack Reynolds

mreynolds@sikich.com

312-541-9300; ext. 105

Fred Lantz

flantz@sikich.com

630-566-8557

68

Contact information

Alex Brown

alex@nasra.org

202-624-8461

Bill Hallmark

bhallmark@cheiron.us

877-243-4766; ext. 1113

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