opeb hands-on training and impact of gasb 75 · a little gasb pension and opeb history •so in...

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OPEB Hands-on Training and Impact of GASB 75

June 21, 2017 Presented By

[email protected]

[email protected]

Florida School Finance Association

Summer Conference

OPEB Training – from the 40,000 foot view

• Other Post-Employment Benefits (OPEB)

Primarily retiree medical, prescription and life insurance

• Governmental Accounting Standards Board (GASB)

Sets the standards for GAAP-basis financial statements (FS); aka, your government-wide FS

• OPEBs are subsidized by the district

Sometimes direct subsidies (to ease the cost)

Always implicit subsidies (built into the premiums)

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• GASB Goals:

recognize the cost of subsidies in advance, while employees are still working

recognize a balance sheet liability for unfunded accrued liabilities

add more transparency; additional disclosures in the Notes to FS and Required Supplemental Information (RSI)

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• The expense and liability numbers for the FS are actuarially calculated

• Actuaries will need:

Employee, retiree and dependent census data

Premium and claims data

Documentation on benefits provisions

Actuarial assumptions

Actuarial methods

Actuarial software

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OPEB Training – data required

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• Source of census data

Gender & birth dates

Retiree dep info

Plan option selected

FRS service credits

Retiree type

Hire dates

Salary

FRS classification

Other, as needed

Insurance Co/TPA

District

• Payroll

• Benefits

FRS

• Actives

• Retirees

OPEB Training – data required

• Plan information needed

Types of plans offered

Premiums currently being charged by ins co

Claims data and other information if self-insured

Any direct subsidies provided to retirees

Type of Medicare coordination

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Implicit Rate Subsidy

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• There is a (hidden) cost you are paying.

• It’s real.

• There are cross-subsidies everywhere Employee rates and retiree rates*

Employee rates and dependent rates

Adults and children

Medicare retiree rates and non-Medicare rates

PPO rates and HMO rates

* This cross-subsidy is what we call the implicit rate subsidy.

Implicit Rate Subsidy (continued)

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Cross-subsidies Between Count

Blended

Ins Co

Monthly

Premium Ext

Active Employees 100 700.00 $ 70,000 $

Retirees (Non-Medicare) 25 700.00 $ 17,500 $

Total 125 700.00 $ 87,500 $

Paying for ees Subsidy

Costing for ees x ees ÷ rets per ret

Overcharge

• BUT . . . Retirees are more expensive to cover

• Source:

Health Care Costs— From Birth to Death, June 2013

• Prepared by Dale H. Yamamoto

• Sponsored by Society of Actuaries

• Data from Health Care Cost Institute


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• Total Enrollment:

125 members

• Average Cost all members: $8,400/year ($700/month)

Active Enrollment

Average Active Member Cost

Retired Enrollment

Average Retired Member Cost

Age Male Female Male Female Male Female Male Female

< 20 0 0 3,887 4,563 20-24 3 4 3,064 4,860 25-29 10 14 3,188 7,171

30-34 16 17 3,976 9,002 35-39 9 7 4,992 9,274

40-44 5 2 6,220 9,492 45-49 3 2 7,853 10,426

50-54 1 1 10,342 12,264 1 5 10,342 12,264 55-59 1 1 13,446 14,178 3 12 13,446 14,178 60-64 1 3 17,254 16,872 1 3 17,254 16,872

65-69 0 0 21,522 20,225 70+ 0 0 25,791 23,850

Total/yr 100 $ 7,000 25 $ 14,000 Monthly 100 $583.33 25 $1,166.67


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Blended

Ins Co

Monthly

Premium Ext

Expected

Actuarial

Monthly

Cost Ext

Active Employees 100 700.00 $ 70,000 $ 583.33 $ 58,333 $

Retirees (Non-Medicare) 25 700.00 $ 17,500 $ 1,166.67 $ 29,167 $

Total 125 700.00 $ 87,500 $ 700.00 $ 87,500 $

Paying for ees 700.00 $ Subsidy

Costing for ees (583.33) $ x ees ÷ rets per ret

Overcharge 116.67 $ 100 25 466.67 $

• Q: What is the benefit provided by the employer? • A: $ 466.67 per month.


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Member Total

Paid (Mo.) Monthly Ext Ext

Active Employees 100 - $ 583.33 $ 58,333 $ 58,333 $

Retirees (Non-Medicare) 25 700.00 $ 466.67 $ 11,667 $ 29,167 $

Total 125 NA 87,500 $


Employer Paid

• Conclusion The insurance company is over-charging you for actives,

And using the excess to supplement the under-priced retiree contribution

The overcharge is the implicit subsidy paid by the employer

And is actuarially measured over the life of the retiree

$ 11,667 NA 70,000 $

A Little GASB Pension and OPEB History

• In November 1994, the GASB issued Statement Nos. 25 and 27 for accounting and financial reporting on pensions

Treating a funding calculation as an accounting expense (the ARC and APC)

Treating the funding shortfall as an accounting liability (the NPO)

• Fortunately for school district participating in FRS, you did not have to learn all these rules

• You just paid and expensed what you were charged

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• Before June 2004, we just ignored OPEB and expensed it as it arose

• GASB concluded that OPEB is similar to pensions and should be accounted for like pensions

• So in June 2004, the GASB issued Statement No. 45 Treating a funding calculation as an accounting expense

(the ARC and AOC)

Treating the funding shortfall as an accounting liability (the NOO)

• We all learned the concepts, terminology and rules for OPEB accounting

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• But then, the GASB started thinking differently about pension concepts Pensions reflect a career-long voluntary exchange

transaction between the taxpayer and the employee

Pensions are part of employee compensation (just deferred)

Ultimately, a pension is a compensation obligation to the employee, not a funding obligation to the plan

The compensation obligation should be expensed over the working life of the employee

The balance sheet liability is the present value owed to employees (net of plan assets), not the funding amount currently owed to the plan

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• So in June 2012, the GASB issued Statement Nos. 67 and 68

• We all had to learn new concepts, new terminology and new rules for pension accounting

• We implemented

GASBS 68 in YE 2015

• YE 2016 marked our 2nd year of GASB 68 compliance!

• It was difficult, time-consuming, paradigm-shifting – and we did it !!

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• But just when we got over the GASBS 68 implementation,

• Just when you thought it was safe to back in the water . . .

• GASB issues Jaws 2

Statement Nos. 74/75


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GASBS 45 vs. GASBS 75

• GASBS 75 has similarities to GASBS 45 – only because they are both about OPEB and both are actuarially measured

• GASBS 75 is very different from GASBS 45 – because GASBS 75 is a lot like GASB 68 for pensions

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GASBS 45 vs. GASBS 75 – Some Differences

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GASBS 45 GASBS 75

Balance sheet liability Funding shortfall (NOO)

Benefit l iability to members (NOL); larger

Expense charge

A funding ARC/AOC offset by employer contrib ution/benefit

Accounting change in NOL from one year to next

Discount rate for unfunded plans

Long - term expected return on pool of assets paying the benefits

Yield on measurement date of 20 - yr tax - exempt GO muni bonds averaging AA/Aa or higher

Discount rate for funded plans

Long - term expected return on pool of assets paying the benefits

Uses the cross - over date blending from GASBS 67/68 of (a) GASBS 45 method and (b) GASBS 75 method for unfunded plans


Many governments will likely be required to use a lower discount rate than in the past.

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Jun

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Fiscal Quarter

Average AA/Aa 20-Year Tax-exempt Municipal Bond Rate

Source: Fidelity Investments


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0

5

10

15

20

25

30

Under 2.875% 2.875% -3.124%

3.125% -3.374%

3.375% -3.624%

3.625% -3.874%

3.875% -4.124%

4.125% -4.374%

4.375% +

Nu

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istr

icts

2016 GASBS 45 Discount Rates Florida School Districts


• Example 1: No post-65 coverage

Individual results will depend on plan provisions and demographic composition of the covered group

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Current

Rate 4.0% 3.5% 3.0% 4.0% 3.5% 3.0%

4.5% 3.2% 6.6% 9.9% 41,298,757 42,621,809 43,963,958

4.0% 0.0% 3.2% 6.5% 40,000,000 41,281,445 42,581,386

3.5% -3.1% 0.0% 3.1% 38,758,333 40,000,000 41,259,589

3.0% -6.1% -3.1% 0.0% 37,575,104 38,778,865 40,000,000

2.5% -8.9% -6.0% -3.0% 36,448,097 37,615,753 38,800,262

Muni Bond Yield Muni Bond Yield

GASB 75 TOL if Old AAL = $40,000,000

Change in Entry Age AAL after implementing GASB 75

Relative change in AAL


• Example 2: Generous lifetime subsidy

Individual results will depend on plan provisions and demographic composition of the covered group

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Current

Rate 4.0% 3.5% 3.0% 4.0% 3.5% 3.0%

4.5% 9.3% 19.9% 31.8% 43,719,280 47,967,301 52,709,934

4.0% 0.0% 9.7% 20.6% 40,000,000 43,886,634 48,225,803

3.5% -8.9% 0.0% 9.9% 36,457,569 40,000,000 43,954,889

3.0% -17.1% -9.0% 0.0% 33,177,260 36,400,956 40,000,000

2.5% -24.7% -17.4% -9.2% 30,124,288 33,051,340 36,319,200

Change in Entry Age AAL after implementing GASB 75

Relative change in AAL GASB 75 TOL if Old AAL = $40,000,000

Muni Bond Yield Muni Bond Yield


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GASBS 45 GASBS 75

Expense charge Fairly simple (for an actuarial calculation)

More complex with numerous components

Deferred outflows and inflows of resources

Not applicable Integral part of the process

Terminology Gone are ARC, adj to ARC, AOC, NOO

New are ADC, service cost, TOL, NOL, DOR, DIR, etc.

Initial implementation

Staggered effective dates, based on govt’s size

Effective all during same year, for all govts

Initial implementation

Amortized /phased - in recognition of initial liability over time

Immediate recognition of initial liability in first year by restating beginning balance


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GASBS 45 GASBS 75

Actuarial cost methods allowed

Six possibilities (PUC and EAN were the most common)

Only o ne allowed, for comparability (EAN)

Note disclosures A couple pages of note disclosures

More in number and detail

Frequency of valuations

At least biannual for plans

of 200 members or more,

at least triannual for plans

under 200 members

At least biannual for plans of any size

Triannual no longer available

Measurement date (MD) and period

Not applicable; term not used

Measurement date and period are critical

Timing and linkage

What valuation date

(VD) is linked to what reporting date (RD)?

What VD is linked to what MD?

And what MD is linked to what RD?


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GASBS 45 GASBS 75

Off - years in biannual and triannual valuations

Very l ittle actuarial and accounting work to do in the off - years

Assumption changes and experience gains/losses to measure in the off - years

Funding and accounting

Often used same actuarial calculations and reports for both

V ery different sets of calculations for pre-funding compared to accounting

GASBS 45 vs. GASBS 75 – Some Similarities

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GASBS 45 & 75

Benefits types covered All OPEBs (health, Rx, life insurance, etc.)

Benefits covered Implicit subsidy and any direct subsidies provided

Actuarial services Yes, you still need actuarial services

Financial statements Affects expense, balance sheet, note disclosures and required supplementary information i n government - wide financial statements

OPEB plan liabilities Still have plan liabilities

OPEB trust (a) Contributions are irrevocable, (b) Assets dedicated to paying OPEB benefits, (c) Legally protected from creditors


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GASBS 68 GASBS 75

Funded status Vast majority of pension plans are advance - funded

Majority of OPEB plans are unfunded ; some are being partially funded

Frequency of valuations Vast majority of pension plans have annual valuations

Majority of OPEB plans currently have biannual or triannual valuations

Frequency of assumption changes

Pension plans occasionally have assumptions changes

OPEB plans will regularly

have assumption changes

Sensitivity disclosures NPL calculated at 1% above and below the adopted discount rate

NOL calculated at 1% above and below the adopted discount rate and 1% above and below the adopted benefit trend rate


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GASBS 68 GASBS 75

Alternative measurement method

Not available for pensions

Available for OPEB plans with 100 or fewer members

Restatement of beginning balance

Net pension obligation (NPO) on balance sheet was often zero or small compared to the NPL added upon implementation

Net OPEB obligation (NOO) is much larger, especially for unfunded plans; so the addition of the NOL does not make as much of a difference as with GASBS 68

Disclaimers

• This presentation shall not be construed to provide tax advice, legal advice or investment advice.

• Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation.

• This presentation does not express the views of the sponsoring organization, nor of the presenters’ employer. It may not even express their views.

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ACKNOWLEDGEMENT

Thank you to Mehdi Riazi who peer reviewed this presentation

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opeb hands-on training and impact of gasb 75 · a little gasb pension and opeb history •so in...

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