1. Copyright © 2016 by The Segal Group, Inc. All rights reserved. MGFOA Annual Meeting 2016 OPEB and GASB 74/75 May 11, 2016 Daniel J. Rhodes, FSA, MAAA Vice President and Consulting Actuary Kathleen A. Riley, FSA, MAAA, EA Senior Vice President and Actuary

2. 2 1.GASB 74/75 Overview 2.OPEB Funding and Discount Rate Topics 2

3. 3 In June 2015, GASB released two Statements related to Other Postemployment Benefits (OPEB)  Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (Released as GASB Statement No. 75)  Supersedes the requirements of GASB Statements No. 45 and No. 57  Concerns employer reporting  Effective for fiscal years beginning after June 15, 2017  Financial Reporting for Postemployment Benefits Other Than Pension Plans (Released as GASB Statement No. 74)  Replaces the requirements of GASB Statement No. 43 and No. 57  Also includes requirements for defined contribution OPEB plans that would replace the requirements for these plans in GASB Statements No. 25, No. 43, and No. 50  Concerns plan reporting  Effective for fiscal years beginning after June 15, 2016 GASB OPEB Statements 3

4. 4 Objectives  Improve accounting and financial reporting by state and local governments for OPEB  Improve information provided by state and local government employers about financial support for OPEB that is provided by other entities  Improve the usefulness of information about OPEB included in the general purpose external financial reports of state and local governmental plans for making decisions and assessing accountability  Establish standards for measuring liabilities, expenses, and deferred inflow/outflow of resources  Does not address funding  GASB took position that funding is a policy decision for government officials to determine GASB 74/75 OPEB Statements Many provisions required by the new GASB Statements 67 and 68 for pensions have carried over to these Statements relating to OPEB.

5. 5 Different plan types, different reporting requirements:  Single Employer Plans  Provide defined benefit OPEB to the employees of one employer  Agent Multiple Employer Plans  Provides defined benefit OPEB to employees of multiple employers  Plan assets are pooled for investment purposes but separate accounts are maintained so each employer’s share of the assets is only available to pay the benefits of its employees  Cost-Sharing Multiple Employer Plans  Provides defined benefit OPEB to employees of multiple employers  OPEB obligations are pooled and plan assets can be used to pay the benefits of the employees of any employer in the plan  Note that there could be a cost-sharing subgroup within an agent plan, if subgroups have separate reporting requirements Distinctions Among Different Types of Plans

6. 6 Major Components Accounting for Cost Sharing Plans Expansion of Disclosure Information Calculating the OPEB expense Net OPEB liability reported on employer financials

7. 7  Net OPEB liability (in GASB 43/45, the Unfunded Actuarial Accrued liability (UAAL))  OPEB liability less market value of assets (Plan Fiduciary Net Position)  Net OPEB Liability is the Unfunded Actuarial Accrued Liability calculated using:  Projected future benefits –Includes projected future service, automatic cost-of-living adjustments, projected ad hoc benefit changes, and salary increases (if benefit connected to compensation)  Blended discount rate for those plans that have assets  Entry Age Normal, using a level percentage of pay  Market Value of Assets Net OPEB Liability Reported on Employer Financials

8. 8 Current OPEB Expense  Based on the Annual Required Contribution (ARC)  Normal Cost plus  Amortization of the UAAL –Period of not greater than 30 years –Closed or open amortization period –Level dollar or level percent of payroll amortization  Can be based on any of six actuarial cost methods  Annual OPEB Cost (AOC)  ARC plus  Interest on Net OPEB Obligation  Adjustment to the ARC New OPEB Expense  The change in net OPEB liability each year, with deferred recognition of certain elements  Components of new OPEB expense  Service Cost  Interest on the total OPEB liability  If there are assets, projected investment returns over the year  Plan amendments  Differences between expected and actual experience, and changes in assumptions (with certain deferrals)  If there are assets, differences between actual and projected earnings over the year (5-year spread) Calculating OPEB Expense GASB specifically states that the new standards are for accounting purposes only and are not for the purpose of establishing funding standards.

9. 9  Changes in actuarial assumptions/actuarial gains and losses  Recognized in expense over average expected remaining service lives of active and inactive members (including retirees)  Average remaining service life of inactive members is 0  Resulting amortization periods will be very short  Method must be systematic and rational, using closed period  Massachusetts retirement system experience (GASB 67/68):  Most valuations have shown 5 or 6 years for amortization period  However, these include inactive, non-vested employees only entitled to a return of contributions  These participants would not be included in an OPEB valuation, and thus resulting amortization likely to be greater by one year Deferred Recognition

10. 10  Differences between actual and projected earnings over the year (i.e., investment gain/loss)  Recognized in expense over closed 5 year period  Net OPEB liability on balance sheet will be “market volatile” but expense will reflect asset smoothing Deferred Recognition 10

11. 11 Deferred items are shown as “Deferred Outflows of Resources and Deferred Inflows of Resources Related to OPEB”  “Deferred outflows” are increases in net OPEB liability that have not been recognized through expense  “Deferred inflows” are decreases in net OPEB liability that have not been recognized through expense  For example, if average expected remaining service is 6 years, 1/6 th of demographic actuarial gains/losses would be recognized in OPEB expense for the year; the remaining 5/6 ths would be recorded as deferred inflow/outflow  Includes the impact of any changes in the blended discount rate from one measurement date to the next  Similarly, 1/5 th of investment gains/losses in the fiscal year are recognized in OPEB expense for the year and the remaining 4/5 ths are recorded as deferred inflow/outflow Deferred Items

12. 12  Includes both Notes and Required Supplementary Information  Expanded employer disclosures, including:  Description of plan and assumptions  Policy for determining contributions  Sensitivity analysis of the impact on the OPEB liabilities under five different scenarios –Must calculate and disclose the following: »Baseline scenario at assumed discount rate and healthcare cost trend rate »The assumed healthcare cost trend rate plus 1% and trend rate minus 1% »The assumed discount rate plus 1% and discount rate minus 1%  Changes in the net OPEB liability for the past 10 years (if available)  Development of long-term earnings assumption (if applicable)  If Actuarially Determined Contribution is calculated, 10 year schedule (if available) Additional Disclosure Requirements

13. 13 Note disclosures on the discount rate of return must include:  Description of how discount rate was determined  Methods and assumptions used to determine expected return on assets  Expected asset allocation  Expected real rates of return for each major asset class –Whether rates of return are arithmetic or geometric means Additional Disclosure Requirements continued 13

14. 14  The faster—often immediate—recognition of OPEB changes will introduce greater volatility in the reported expense, as will the change in how the discount rate is selected  OPEB benefits already had a volatile nature to them, the new requirements will exacerbate the issue  This volatility will be reflected on the income statements of plan sponsors  Putting the net OPEB liability on the balance sheet will add a large and unstable element to an employer’s net financial position as presented in the basic financial statements  Both the timing and the scope of the new reporting will require greater coordination between the employer, the actuary, and the auditor  More involvement from auditors in actuarial results? Impact on the Final Statements 14

15. 15 1.GASB 74/75 Overview 2.OPEB Funding and Discount Rate Topics 15

16. 16 Assume 7.5% discount rate, and full funding of the Actuarially Determined Contribution (ADC) each year  In this example, ADC calculated in a similar manner as the Annual Required Contribution (ARC) under GASB 45 (normal cost + 30-year amortization of UAAL) OPEB Funding Fiscal Year Ending June 30, Projected Benefit Payments Actuarially Determined Contribution Additional Funding Assets at End of Year AAL at End of Year 2015$4,493,986$9,202,200$4,708,214$4,892,920$125,728,801 20165,100,5189,630,6664,530,1489,992,221133,621,868 20175,767,68210,079,1314,311,44915,272,187141,609,811 20186,325,42810,548,5314,223,10320,882,740149,821,771 20196,901,44811,039,8464,138,39826,854,109158,264,908

17. 17  What is an “actuarially determined contribution”?  Definition in GASB 74/75:  A target or recommended contribution to a defined benefit OPEB plan for the reporting period, determined in conformity with Actuarial Standards of Practice based on the most recent measurement available when the contribution for the reporting period was adopted.  Definition in ASOP 6*:  A potential payment, other than by a retired participant, to prefund the retiree group benefits program, as determined by the actuary using a contribution allocation procedure. It may or may not be the amount actually paid by the plan sponsor or other contributing entity.  Definition of “contribution allocation procedure” in ASOP 6:  A procedure that uses an actuarial cost method, and may include an asset valuation method, an amortization method, and an output smoothing method, to determine the actuarially determined contribution for prefunding a retiree group benefits program. Actuarially Determined Contribution *Actuarial Standard of Practice No. 6: Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions

18. 18  Based on projected benefits, current assets and projected assets for current members  Projected assets include contributions on behalf of current members and excludes contributions intended to fund service costs for future employees  For projected benefits that are covered by projected assets  Discount using the long-term expected rate of return on assets –Should be net of investment expenses but without reduction for administrative expenses  For projected benefits that are not covered by projected assets  Discount using yield or index rate for 20 year, tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher  Likely to be 3.5% – 4.0%, based on current indexes  Solve for a single rate that gives the same total present value  Use that single equivalent rate to calculate the OPEB liability Blended Discount Rate Under GASB 74/75 For plans with assets, the derivation of the discount rate will require significant additional calculations by the actuary

19. 19 Bond Buyer 20-Bond GO Index*  Using index introduces discount rate volatility  Similar to FASB accounting rules  Will likely require updated disclosure calculations using index rate at fiscal year-end, even in non-valuation year Blended Discount Rate Discount Rate for “Unfunded” Benefits *http://www.bondbuyer.com/marketstatistics/search_bbi.html?details=true DateIndexDateIndex 06/11/20153.87% 10/08/20153.68% 06/18/20153.79% 10/15/20153.68% 06/25/20153.80% 10/22/20153.67% 07/09/20153.76% 10/29/20153.66% 07/16/20153.82% 11/05/20153.69% 07/23/20153.75% 11/12/20153.74% 07/30/20153.75% 11/19/20153.65% 08/06/20153.75% 11/24/20153.63% 08/13/20153.69% 12/03/20153.57% 08/20/20153.73%12/10/20153.57% 08/27/20153.79%12/17/20153.57% 09/03/20153.82%12/24/20153.57% 09/10/20153.82% 12/30/20153.57% 09/17/20153.78%01/07/20163.45% 09/24/20153.71%01/14/20163.45% 10/01/20153.67%01/21/20163.37%

20. 20 How are contributions projected in determining the discount rate?  Is one of the following true?  Contributions are subject to statutory or contractual requirements, or  A formal, written policy related to contributions exists  If so, then use professional judgment to project contributions  Consider the employer’s 5 year history as indicator for future contributions  Reflect all known events and conditions  If neither is true, projected contributions are based on average contributions for the past 5 years  For example, average can be percentage of pay or percentage of actuarially determined contribution made  Matter of professional judgment  Potentially modified for subsequent events Blended Discount Rate Projecting Contributions and Determining Rate Municipal employers without a formal OPEB funding policy may want to adopt one prior to GASB 75 implementation

21. 21 Questions Daniel J. Rhodes, FSA, MAAA Vice President and Consulting Actuary 617.424.7348 drhodes@segalco.com Daniel J. Rhodes, FSA, MAAA Vice President and Consulting Actuary 617.424.7348 drhodes@segalco.com Kathleen A. Riley, FSA, MAAA, EA Senior Vice President and Actuary 617.424.7336 kriley@segalco.com Kathleen A. Riley, FSA, MAAA, EA Senior Vice President and Actuary 617.424.7336 kriley@segalco.com www.segalco.com