governmental accounting standards board (gasb) other postemployment benefits (opeb)
TRANSCRIPT
Governmental Accounting Standards Board (GASB)Other Postemployment Benefits (OPEB)
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Agenda
• Background
• Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions
• Annual Required Contribution Calculation
• Case Studies
• Potential Responses
• Next Steps
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“Other Postemployment Benefits:” Scope
• The term refers to postemployment benefits other than pensions.
• OPEB include:– Postemployment healthcare benefits (medical, dental,
vision, hearing).– Also, other forms of post-employment benefits when
provided separately from a pension plan (e.g., life insurance, long-term care, long-term disability).
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Substance of the OPEB Transaction
• Post-employment benefits (both pensions and OPEB) are part of the compensation for services rendered by employees; i.e., they are part of an exchange transaction.
• Benefits are “earned,” and obligations accrue or accumulate, during employment.
• Payment is deferred until after employment.
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Objectives of Developingan Accrual-Basis Standard
• Recognize OPEB cost (expense) systematically over employees’ years of service.
• Provide relevant information about (a) the accrued OPEB obligation, (b) the cost of services including the cost of OPEB, and (c) the progress made in funding the plan.
• Report pensions (GASB Statement 27) and OPEB consistently.
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GASB Statement 27 Measurement Approach
• Has been characterized as a “funding based” approach to reporting pensions because it harmonizes financial reporting with funding to the extent appropriate for accrual accounting purposes.
• Although OPEB plans generally are not funded, may be characterized as a “funding friendly” approach to reporting OPEB, because an employer that chooses to fund OPEB, now or later, need not use different measures for each purpose.
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GASB OPEB Scope
• Applies to all state and local government entities that provide or participate in OPEB.
• Includes public benefit corporations and authorities, utilities, hospitals, colleges and universities, and Public Employee Retirement Systems that are employers.
• Applies whether the employer issues separate financial statements or is included in another entity’s statements.
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Effective Dates for Employer Reporting
• $100+ million revenue —FYs beginning after 12/15/06.
• $10+ million to $100 million revenue —FYs beginning after 12/15/07.
• Less than $10 million revenue —FYs beginning after 12/15/08.
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Measurement Approach:Broad Steps
• Gather Plan information / participant data.
• Project cash outflows for benefits.
• Discount projected benefits to present value (PV).
• Allocate the PV of projected benefits to periods using an acceptable actuarial cost method.
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Gather Data• Census Data – not just pension data
– Surviving spouses typically receive medical benefits.– Deferred vested retirees do not.– Plan elections, coverage level (e.g. single, 2
person), life insurance amounts.
• Claims Data– Ideal is to split claims by plan and pre versus post
age 65– Initial step – development of per capita claims cost
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• Implicit Rate Subsidies– Medical plan covers active employees and retirees– Full average cost is charged to retirees– Actual cost for retiree group exceeds the cost charged to
retiree– Employer must value and disclose
Gather Data (continued)
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Projection of Benefits
• Projection of future benefit payments should be based on:– The types of benefits provided under the
substantive plan (plan as understood by the employer and plan members) at the time of each valuation, including any changes made and announced to plan members.
– The established pattern of sharing of benefit costs between the employer and plan members to that point.
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• Interest Rate– Based on return of plan assets if funded– Return on general employer asset if not funded
• Amortization Unfunded Liability– Period generally not longer than 30 years nor shorter than
10 years– Can be level dollar or level percentage of payroll– Open period versus closed period
Assumptions
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• Additional (non-pension) Assumptions– Future Health Care Cost Trend Rates– Age-related morbidity– Future participation– Coverage elections
Assumptions (continued)
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Frequency of Calculations
• Plans with total membership over 200 — actuarial valuations at least biennially.
• Plans with total membership of 200 or less — actuarial valuations at least triennially.
• Alternative measurement method – fewer than 100 members
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• Power Authority with 1,000 retirees in medical plan and 1,500 actives who might someday be eligible.
• Employer pays 100% of retiree premium.
• Generous Indemnity Plan.
Case Studies — Client A
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• Current year employer cash payments — $8 million.
• Total Present Value — $300 million.
• Annual Required Contribution (ARC) using system’s cost method — $30 million.
• OPEB ARC as % of pay — 28%.
Case Studies — Client A (continued)
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Projected OPEB cost will likely exceed Projected Benefit Payments
Projections — Client AClient A
$0
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
Year
Am
ou
nt
Annual OPEB Cost Benefit Payments
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Projections— Client A (continued)Client A
$0
$100,000,000
$200,000,000
$300,000,000
$400,000,000
$500,000,000
$600,000,000
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
Year
Am
ou
nt
Accrued Liability (EOY) Net OPEB oblig. (EOY)
OPEB Liability will be recognized either by funding or on your balance sheet
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• General observations:– Magnitude of Present Value is astounding.– Measuring the Present Value itself involves defining
the substantive plan and calculating per capita costs, which involves collecting data and documents and is not a quick process.
Case Studies
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• Lessons learned from the private sector:– FASB 106 imposed similar requirement beginning
in 1993.– In the early 1990’s employers began to make
significant plan changes to reduce liability and expense.
– Typical changes involved eligibility restrictionsor higher retiree contributions.
– Employees began lawsuits.– Communication and documentation of plans
improved.– Many creative solutions were found to lower retiree
medical liability.
Case Studies
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• Reduce Benefit Costs– Cost sharing (copays, coinsurance)– Utilization management– Coordination of benefits (Medicare, other plan)
Potential Responses
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• Increase Retiree Contributions– Service-based percent of premium– Service-based flat dollar– Capped employer percentage increase– Capped employer dollar amount
Potential Responses
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• Restrict Eligibility– Cutoff based on hire date or age/service– Stricter age/service rules than pension eligibility– Spouses, dependents– Disabled
Potential Responses
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• Change Funding– Pre-fund through retirement system or general assets– Use a Voluntary Employee Benefit Association (VEBA)
Trust– Provide for employee after-tax contributions to a
special 401(a) account
Potential Responses
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What is the Magnitude of Your Liability?
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Next Steps
• Recognize this is here and will have substantial impact.
• Measure liabilities and estimate expense alternatives under GASB.
• Explore alternative benefits, contributions, eligibility, and funding as necessary.
• Review documents and employee communication to ensure they reflect the substantive plan.
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Mellon Contact
Anthony M. Abbazia, F.S.A.
Principal, Consulting Actuary
Mellon’s Human Resources & Investor Solutions
281 Tresser Boulevard, 6th Floor
Stamford, CT 06901
203-352-1614
203-967-3139 (fax)