GASB 75 Accounting for Retiree

Medical Benefits

Recorded by Michele M. Domash, FSA, MAAA

Principal Consulting Actuary, Cheiron

Maine Municipal Employees Health Trust (MMEHT)

July, 20182018 Educational Session Prepared for Participating

Employers in MMEHT

About this Material• Maine Municipal Employees Health Trust (MMEHT) is

making this recorded session available to its participating entities to help address the new GASB 75 requirements, effective in 2018.

• This session will provide some background on retiree medical benefits and the GASB 75 requirements, plus show you how to access your actuarial report that your auditors will use in incorporating GASB 75 into your 2018 financial statements.

• This material applies to those entities already complying with GASB 45 as well as those entities required to comply with GASB 75 for the first time. GASB 75 applies to all participating entities in the MMEHT program to reflect the value that the retiree medical benefits provide and are offered in the MMEHT.

• We hope this session is helpful and thank you for your time.

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GASB 75 for Retiree Medical Benefits• About Retiree Medical Benefits

– The value of retiree medical benefits– Common terms– Projecting costs

• What does GASB 75 mean?– Timing – New concepts

• Access to your GASB 75 reports– Cheiron GASB portal

• What will the GASB 75 reports look like?• Frequently Asked Questions

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About Retiree Medical Benefits• Certain requirements must be met

to be eligible for MMEHT retiree medical benefits:– Employee works until retirement;– Eligible to retire in the employer’s

retirement plan (Many participate in the Maine Public Employees Retirement System, with eligibility at a combination of age/ service);

– If no sponsored plan, attain age 55 with at least 5 years of service.

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• The MMEHT program offers retiree coverage on a blended premium rate basis for actives and retirees resulting in a more stable, pooled cost of health coverage.

• Some entities offer additional defined subsidies for groups of retirees, particularly with union negotiated benefits.

• Bottom line: The MMEHT retiree medical plan delivers value.

About Retiree Medical Benefits The focus of retiree medical benefits is offering insurance coverage

to eligible retirees. When Medicare starts, the MMEHT plan offers coverage on the portion that Medicare does not cover.

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Non-Medicare

Prior to Medicare, MMEHT offers eligible retirees the option to enroll in retiree coverage.Retiree enrolls in one of the active plans offered by the employer.

For the retiree, covered spouse and covered dependent children

Premiums cover medical and prescription drug benefits.

Medicare

Generally Medicare starts at age 65, but does not cover prescription drugs!MMEHT offers a supplemental plan that the retiree can buy.

Available to both the retiree and spouse. MMEHT offers both medical and prescription drug benefits to supplement Medicare.

Some Accounting TermsSome terms commonly used include:• GASB 75, or Governmental Accounting Standards Board

Statement No. 75. This is the accounting standard that impacts requirements for the audited financial statements of public entities. No. 75 focuses on OPEB benefits. – Now applies regardless of size of entity and regardless of community

rating or pooled rates• OPEB, or Other Postretirement Employment Benefits, refers to

retiree medical health coverage. Retiree medical is offered through participation in the MMEHT health benefits program.

GASB 75 looks at the OPEB value of benefits including both implicit or explicit benefits.

– “Implicit” benefits refer to the value of pooling coverages as part of the overall MMEHT program and offering eligible retirees the option to enroll in the group rates in the MMEHT program.

– “Explicit” refers to explicit subsidies paid by the employer group, for example, paying a portion of the premium. Explicit provisions usually relate to bargaining agreements with union employees.

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Projecting Costs of Retiree Medical

• Regardless of whether the accounting standard is GASB 45 (prior) or GASB 75 (new), the focus is on how much the retiree medical benefits cost the plan sponsor over time.

• Many actuarial assumptions are used to project costs. – Age based claims curves for

non-Medicare (NME) and Medicare (ME)

– Inflation and trend– Demographics (mortality and

retirement and termination)– How much the retiree pays in

premiums

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Expected Net Benefit PaymentsFiscal Year Gross Expected Net

Ending Benefit Employee BenefitDecember 31 Payments Contributions Payments

2017 14,943$ 1,228$ 13,715$ 2018 15,527 1,332 14,195 2019 16,101 1,438 14,663 2020 16,673 1,553 15,120 2021 17,196 1,672 15,524

2022 17,327 1,800 15,527 2023 17,980 1,929 16,051 2024 18,420 2,061 16,359 2025 18,991 2,206 16,785 2026 19,516 2,342 17,174

2027 20,238 2,501 17,737 2028 20,786 2,669 18,117 2029 21,457 2,820 18,637 2030 21,900 2,958 18,942 2031 22,556 3,094 19,462

GASB 75 – Calendar Year Plans

• GASB 75 replaced GASB 45 starting in 2018• If you had GASB 45 in place, important changes:

1. Liability - The prior Net OPEB Obligation (accruals recorded to date on balance sheet) will be modified as of 1/1/2018 to equal the full plan liabilities (referred to as Total or Net OPEB Liability). (Hop on that moving train!)

2. Expense - GASB75 Expense replaces Net OPEB Cost. Plus prior amortization payments included in the Actuarial Required Contribution (ARC) are modified and start over.

• If you are complying with GASB 75 for the first time:1. Liability - Obligation recorded on the Statement of Net Position2. Expense – Starting 2018 part of the Statement of Activities

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2015GASB 45

2016GASB 45

2017GASB 45

2018GASB 75

2019GASB 75

Unfunded Liability to Balance Sheet

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036

In $

Mill

ions

Assets and Liabilities

Act Liab Assets NOO/UAL

When adopting the new GASB 75, the prior accruals on the books are replaced by the Net OPEB Liability. MMEHT entities participating in the MMEHT program do not maintain assets at the local level. As with GASB 45, GASB 75 reports will not include assets.

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• In this example, the NOL (referred to as Net OPEB Liability in GASB 75), is shown in 2018+ as the “gold line”.

• GASB 75 increases the prior accrual amounts (“Net OPEB Obligation” or NOO) to the full liability on the balance sheet.

•The liability also increases due to the discount rate at the Muni 20 Year AA/Aa average rate (illustrated at 3.0%).

•Projections use this base valuation year and assume that all assumptions and methods are exactly realized with no gain/loss.

In $

Tho

usan

ds

• GASB 75 defines the discount rate, which is used to convert year by year projected costs to a single sum present value or “liability” at the measurement date.

• Definition of Discount Rate - A yield or index rate for 20-year, tax- exempt general obligation municipal bonds with an average rating of AA/Aa or higher (or equivalent quality on another rating scale), for plans with no prefunding solely for retiree medical.

Discount Rate

Projected Net Plan Costs by Year

Discount Rate – GASB 759

Present Value of Projected Plan Costs –the “Liability”

20 Year Tax-Exempt Bond Rates• Discount rate is defined as a single rate equal to 20-year, tax- exempt

general obligation municipal bonds with an average rating of AA/Aa.

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4.15%4.32%

5.02%

4.31%

5.08%

3.83%3.68%

4.75%

3.42% 3.45%

3.78%

3.44%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

20-Year Municipal Bond Index

Terminology Differences Reflect New ApproachGASB 45 GASB 75

(OPEB)GASB 68 (Pension)

Actuarial Accrued Liability Total OPEB Liability (TOL)

Total Pension Liability(TPL)

Actuarial Value orMarket Value of Assets

Plan Fiduciary Net Position

Plan Fiduciary NetPosition

Unfunded ActuarialAccrued Liability

Net OPEB Liability (NOL)

Net Pension Liability(NPL)

Annual OPEB Cost OPEB Expense Pension ExpenseAnnual RequiredContribution (ARC)

Actuarially Determined Contribution (ADC)

ActuariallyDeterminedContribution (ADC)

Net OPEB Obligation(NOO)

Net OPEB Liability (NOL)

Net Pension Liability(NPL)

Changes in Terminology11

Expense Compared to GASB 45 and 75GASB 45 GASB 75

Expense =Normal Cost (ER)

+ Interest on BOY NOO

+ UAAL Amortization

- Adjustment to ARC

Expense = Service Cost

+ OPEB Administrative Expenses- Employee Contributions+ Interest on TOL/TPL

- Expected Earnings on Plan Investments+ Recognized Liability for Benefit Changes+ Recognized Out/Inflows- New Assumptions

- Recognized Out/Inflows - LiabilityExperience

- Recognized Out/Inflows - Asset Experience

OPEB Accounting similar to Statement 6812

Deferral Periods for Expense Compared to GASB 45 and 75/68

GASB 45 GASB 75 GASB 68Investmentgains/losses

Up to 30 years 5 years 5 years

Liabilitygains/losses

Up to 30 years Averageworkinglifetime

Averageworkinglifetime

Assumptionchanges

Up to 30 years Averageworkinglifetime

Averageworkinglifetime

Plan changes Up to 30 years (Amortized)

Immediaterecognition(One time!)

Immediaterecognition(One time!)

OPEB Accounting-Amortizations13

How to Download Your GASB 75 Report

• MMEHT will have a special portal for access to your own entity’s GASB 75 actuarial valuation report!– You will receive an email with your

Username and link to this special portal. – Your Username will be established for

you. Following the link, you will be prompted to set up a password that you can choose.

– You will be able to download a pdf of a full report anytime after the system is up and running! You can save and print this report as needed.

• Access will also be provided to obtain census data used in the valuation for your group.– Auditors may need this information.

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GASB Reports Portal15

GASB Report Dashboard16

Selected GASB 75 Exhibits

Summary of ResultsThe table below provides a summary of the key results during this reporting period.

Table 1 Summary of Results

Reporting Date 12/31/2018 12/31/2017 Measurement Date 01/01/2018 01/01/2017 Total OPEB Liability $ 557,378 $ 530,975 Plan Fiduciary Net Position 0 0 Net OPEB Liability $ 557,378 $ 530,975 Deferred Inflows 105,536 0 Deferred Outflows 112,900 0 Net Impact on Statement of Net Position $ 564,742 $ 530,975 OPEB Expense ($ Amount) 44,072 0 OPEB Expense (% of Payroll) 0.7% N/A

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The “Liability”

Reconciliation of ChangesThe table below shows changes in the Change in Net OPEB Liability during the 2017 Measurement Year. Change in Net OPEB Liability Increase (Decrease) Net OPEB

Plan Fiduciary Net OPEB

Liability Net Position Liability (a) (b) (a) - (b)

Balances at 01/01/2017 (Reporting December 31, 2017) $ 530,975 $0 $ 530,975

Changes for the year: Service cost 29,302 29,302 Interest 15,822 15,822 Changes of benefits 0 0 Changes of assumptions 120,613 120,613

Differences between expected and actual experience -129,029 -129,029

Contributions – employer 10,305 -10,305 Contributions – member 0 0 Net investment income 0 0 Benefit payments -10,305 -10,305 0 Administrative expense 0 0 Net changes 26,403 0 26,403

Balances at 01/01/2018 (Reporting December 31, 2018) $ 557,378 $ 0 $ 557,378

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The “Liability”

• We calculate the OPEB expense in two ways to demonstrate and confirm internal report accuracy.

• Both methods yield the same OPEB expense amount.

• In this example, $44,072 is the annual expense.

OPEB Expense Exhibits

Calculation of OPEB Expense Change in Net OPEB Liability $ 26,403 Change in Deferred Outflows -105,536 Change in Deferred Inflows 112,900 Employer Contributions 10,305 OPEB Expense $ 44,072 OPEB Expense as % of Payroll 0.7% Operating Expenses Service cost $ 29,302 Employee contributions 0 Administrative expenses 0 Total $ 29,302 Financing Expenses Interest cost $ 15,822 Expected return on assets 0 Total $ 15,822 Changes Benefit changes $ 0 Recognition of assumption changes -16,129

Recognition of liability gains and losses 15,077

Recognition of investment gains and losses 0

Total $ -1,052 OPEB Expense $ 44,072

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The “Expense” –Done Two Ways

Sample Disclosures in Footnotes20

Sensitivity of Net OPEB Liability to Changes in Discount Rate 1% Discount 1% Decrease Rate Increase 2.44% 3.44% 4.44% Total OPEB Liability $ 677,583 $ 557,378 $ 469,234 Plan Fiduciary Net Position 0 0 0 Net OPEB Liability $ 677,583 $ 557,378 $ 469,234

Plan Fiduciary Net Position as a Percentage of the Total OPEB Liability 0 0 0

Sensitivity of Net OPEB Liability to Changes in Healthcare Cost Trend

1% Healthcare Cost 1% Decrease Trend Rates Increase Total OPEB Liability $ 465,294 $ 557,378 $ 684,984 Plan Fiduciary Net Position 0 0 0 Net OPEB Liability $ 465,294 $ 557,378 $ 684,984

Plan Fiduciary Net Position as a Percentage of the Total OPEB Liability 0 0 0

These are tables that the auditors will use to complete the footnote to the financial statements of each entity:

Sample Required Supplementary Information21

Schedule of Deferred Inflows and Outflows

Deferred Outflows of Resources

Deferred Inflows of Resources

Differences between expected and actual experience $ 105,536 $ 0 Changes in assumptions 0 112,900

Net difference between projected and actual earnings on OPEB plan investments 0 0

Total $ 105,536 $ 112,900

Amounts reported as deferred outflows and deferred inflows of resources will be recognized in OPEB expense as follows:

Year ended December 31,: 2018 -1,052 2019 -1,052 2020 -1,052 2021 -1,052 2022 -1,052 Thereafter -2,104

These are tables that the auditors can refer to that document the “deferred inflows and outflows”:

Frequently Asked Questions

• Why do employers now need to report OPEB liability and expense on financial statements?– GASB 75 requires that all entities, regardless of size

and regardless of community rates, show the value of offering retiree medical benefits.

– MMEHT includes retiree medical benefits in its package of benefits.

• If we have been applying GASB 45, will OPEB expense under GASB 75 be larger or smaller?– That will vary from entity to entity. Expense is

generally similar under GASB 75 and GASB 45. However, recording the full value of the liability on the balance sheet is new under GASB 75 versus GASB 45.

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Frequently Asked Questions• If we make a change in our collectively

bargained benefits before fiscal yearend, does that impact our GASB 75?– Yes, if the changes impact retiree medical benefits.

• What about plan changes or other changes announced after fiscal yearend?– Not recognized until the next GASB 75 report.

• What is the deadline for GASB 75 implementation?– 2018

• How often do I need an actuarial valuation?– Full valuations are generally required by GASB 75

every 2 years.

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Frequently Asked Questions• What should I have ready when my auditors

are here to complete GASB 75?– Please start with downloading your valuation

report with the certification letter and your census. Or you may choose to provide your auditors with access to the MMEHT GASB 75 portal by sharing your login information.

Thank you for your time today. Please contact Assistant Director Kristy Gould at the Health Trust with further questions about obtaining your report.

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Disclaimer25

This analysis was prepared exclusively for MMEHT for educational purposes ofunderstanding the new accounting standards under GASB 75.

I hereby certify that, to the best of my knowledge, this analysis has been prepared inaccordance with generally recognized and accepted actuarial principles and practices whichare consistent with the Code of Professional Conduct and applicable Actuarial Standards ofPractices set out by the Actuarial Standards Board. Furthermore, as a credentialed actuary, Imeet the Qualification Standards of the American Academy of Actuaries to render the opinioncontained in this report.

To the extent any legal issues are involved in any determinations, we recommend you consultappropriate counsel regarding contractual and legal issues identified in this presentation. Weare not attorneys and our firm does not provide any legal services or advice.

This analysis was prepared exclusively for MMEHT for the purposes as stated above. Otherusers of this presentation are not intended users as defined in the Actuarial Standards ofPractice, and Cheiron assumes no duty or liability to such other users.

Michele Domash, FSA, MAAAPrincipal Consulting Actuary