Copyright © 2008 GRS – All rights reserved. Health and OPEB Funding Strategies: 2009 National Survey of Local Governments A presentation by Paul Zorn Director of Governmental Research Gabriel Roeder Smith & Company

Presentation Overview  Survey Background  Characteristics of the Respondents  Key Findings ► Economic Environment ► Health Care for Active Employees ► Health Care for Retirees ► Addressing GASB 45 ► Health Care Strategies  Conclusions © 2009 Cobalt Community Research

Disclaimers  The author is not an actuary or an attorney. Consequently, statements made are not meant to offer actuarial or legal advice or opinion.  The opinions offered are those of the author and do not necessarily represent those of his employer or of others who sponsored or participated in the survey. © 2009 Cobalt Community Research

Background In 2004, the Governmental Accounting Standards Board issued Statement No. 45 (GASB 45), “Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions (OPEB).” GASB 45 established a national requirement for the measurement and disclosure of governmental OPEB liabilities, especially in the area of health care for retirees. While several studies have examined OPEB issues for statewide retirement systems or for a limited sample of local governments, this study deliberately targeted a cross- section of local governments – especially smaller ones – across the United States. © 2009 Cobalt Community Research

Background (continued) The study was conducted by Cobalt Community Research and sponsored by: ► Gabriel, Roeder, Smith & Company ► Municipal Employees’ Retirement System of Michigan ► National Conference on Public Employee Retirement Systems ► International Foundation of Employee Benefit Plans ► Government Finance Officers Association ► Employee Benefit Research Institute ► Tegrit Financial Major questions the survey seeks to answer: ► What’s the economic environment for local governments? ► To what extent do local governments provide health care? ► Who is aware of the GASB 45 requirements and has done the valuation? ► Which strategies are local governments using to reduce or fund their liabilities? © 2009 Cobalt Community Research

 The survey questionnaire was sent to a random sample of approximately 7,500 local governments in the United States, drawn from the U.S. Census Bureau’s government database.  Responses were received from 1,534, for a 20% response rate.  Responding governments included counties, municipalities, townships, and special districts as defined by the U.S. Census Bureau.  The 2009 sample is different than the sample used in 2008: ► Oversamples larger governments and does not include governments with populations of 1,500 or less. ► This was done to obtain a greater representation in the survey by the governments that are more likely to provide health care benefits to active and retired employees. Characteristics of the Respondents

© 2009 Cobalt Community Research

Characteristics of the Respondents © 2009 Cobalt Community Research

Key Findings – Economic Environment  The economic environment is having an effect on local government revenue and employment expectations.  The percentage of local governments expecting a decrease in revenue for 2010 rose from 16% to 49%.  The percentage expecting a decrease in employment rose from 5% to 21%.  The percentage expecting more consolidation/shared services increased from 10 to 26%. © 2009 Cobalt Community Research

Revenue & Employment Expectations

© 2009 Cobalt Community Research

Key Findings – Health Care for Active Employees  78% of the respondents provide health care to their active employees and 30% provide health care to retirees.  Of governments that provide health care to active employees, abut two-thirds pay between 81% - 100% of employees’ premiums.  Generally, governments serving larger populations are more likely than smaller governments to provide health care for active employees and retirees.  Many governments that offer heath care do so on a fully insured basis through a commercial carrier. © 2009 Cobalt Community Research

Health Care for Active Employees © 2009 Cobalt Community Research

Health Care for Active Employees

© 2009 Cobalt Community Research Health Care for Active Employees

© 2009 Cobalt Community Research Health Care for Active Employees

© 2009 Cobalt Community Research Health Care for Active Employees

Key Findings – Health Care for Retirees  30% of the respondents provide health care to their retirees. ► Of these, 2/3rds cover both pre-Medicare and Medicare eligible retirees.  Generally, respondents serving larger populations are much more likely to provide retiree health care.  Of governments that provide retiree health care: ► One-third pay benefits between 81% and 100% of the retiree’s premiums, and ► One-third pay none of the retiree’s premiums.  For half of the respondent governments, retirees paid the same premium as active employees. © 2009 Cobalt Community Research

Health Care for Retirees © 2009 Cobalt Community Research

Health Care for Retirees

© 2009 Cobalt Community Research Health Care for Retirees

© 2009 Cobalt Community Research Health Care for Retirees

© 2009 Cobalt Community Research Health Care for Retirees

© 2009 Cobalt Community Research Health Care for Retirees

© 2009 Cobalt Community Research Health Care for Retirees

Key Findings - Addressing GASB 45  81% of the local governments that provide retiree health care are aware of the GASB 45 requirements. Those that aren’t aware are typically smaller governments.  62% report they have already calculated the liability or the calculation is in progress.  Of respondents that have completed their OPEB valuation, 55% have liabilities less than $10 million. However, 13% have liabilities exceeding $100 million.  Of the governments that have completed their OPEB valuation, 40% plan to fully or partially prefund the liability. © 2009 Cobalt Community Research

Addressing GASB 45 © 2009 Cobalt Community Research

Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

© 2009 Cobalt Community Research Addressing GASB 45

Key Findings – Health Care Strategies  With regard to controlling health care costs, the most frequently used methods include: ► Increasing deductibles and co-pays ► Increasing the employees’ share of premium costs ► Implementing wellness programs ► Expanding use of generic drugs ► Implementing HSAs and HRAs ► Negotiating lower costs with current carriers ► Educating employees/retirees to make better health care decisions. © 2009 Cobalt Community Research

Health Care Strategies © 2009 Cobalt Community Research

Health Care Strategies

© 2009 Cobalt Community Research Health Care Strategies

© 2009 Cobalt Community Research Health Care Strategies

Conclusions  Progress has been made with regard to applying GASB 45 and calculating OPEB costs and liabilities.  Additional efforts are needed to understand OPEB prefunding and the vehicles available.  Additional efforts are also needed to understand the best methods of managing health care costs. © 2009 Cobalt Community Research

Additional Disclaimers  Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor.  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 expresses the views of the author and does not necessarily express the views of Gabriel, Roeder, Smith & Company.