1. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. How are Public Purchasers Responding to the OPEB Liability Disclosures – A Roundtable Discussion Public Sector Healthcare Roundtable – 2006 Annual Conference November 29, 2006 Presented By: Kathleen A. Riley, FSA, MAAA, EA Senior Vice President and Actuary 617.424.7336 kriley@segalco.com

2. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.  OPEB Background - What? Why? Who?  Key Decisions: Three “R”s of Cost Containment  Key Decisions: To Fund or Not?

3. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 2 What is OPEB? The Governmental Accounting Standards Board (GASB) has issued two statements of accounting principles for: Other (than pension) Post Employment Benefits (OPEB) Statement 45 for Employers Statement 43 for Plan Disclosure Requires Disclosure—NOT Funding

4. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 3 What is OPEB? continued Other Post Employment Benefits (OPEB)  Medical benefits  Dental  Vision  Prescription drugs  Life insurance  Legal services

5. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 4 Why OPEB? Enhances reporting, helps to quantify future financial liabilities  GASB discovered most governments do not currently report information needed to assess the long-term financial implications associated with OPEB  The current pay-as-you-go approach to OPEB does not account for the value of benefits accrued over an employee’s working lifetime Provides standards for measurement and disclosure of accrued OPEB obligations  Previously reported as footnotes, if at all, without any consistency  Achieves a comparative approach to reporting OPEB

6. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 5 Who is Covered by OPEB? Employers  State government employers  Local government employers  Public employee retirement systems (staff)  State universities  State hospitals  Utility companies  Public authorities OPEB Plans  Plans of all state and local governments  Dedicated trusts  Other third party acting in the role of sponsor

7. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 6 Disclosure of Other Post Employment Benefits (OPEB)?  Disclosure rules vary for multiple employer cost-sharing, single-employer, and pay-as-you-go plans.  OPEB covers retiree health, dental, vision, prescription drugs, life insurance and legal services  Provides the OPEB, pays all or part of the cost; GASB 45 applies Employer  Trustee or administrator of OPEB, has stewardship of the assets dedicated to OPEB; GASB 43 applies Plan OPEB Requires Disclosure – NOT Funding

8. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 7 Reporting Requirement by Plan Structure Type of PlanStructureActuarial Valuation Single-EmployerOnly one entityA single liability is calculated under GASB 43 & 45 for plan and employer/entity Cost-Sharing Multiple- Employer Multiple-entity pool in which the cost of financing benefits and administering the plan and assets is shared A combined OPEB liability is calculated for the plan; employer/entity liabilities are based on required contributions Agent Multiple-EmployerMultiple-entity plan where administrative costs are shared but there is no pooling of benefit costs. A separate OPEB liability is calculated and reported for each entity; plan liability is based on the sum of entity liabilities.

9. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 8 GASB Timeline Annual Revenues Effective Date (Fiscal Years Beginning After) Plans* (#43)Employers (#45) > $100 million12/15/0512/15/06 < $100 million & > $10 million 12/15/0612/15/07 < $10 million12/15/0712/15/08 * For plans, “revenues” refer to the revenues of largest participating employer.

10. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.  OPEB Background - What? Why? Who?  Key Decisions: Three “R”s of Cost Containment  Key Decisions: To Fund or Not?

11. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 10 US Retiree Healthcare Costs Key Points:  The cost for someone retiring at age 55 is significantly higher than the cost for someone retiring at age 65  While medical costs are reduced significantly (36%) by holding off retirement to age 65, prescription drug costs are not impacted as greatly (17%) DISTRIBUTION OF NET COSTS BY AGE AT RETIREMENT

12. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 11 Note: Collected from state reports and press articles. What States Learned Maryland  $20 billion OPEB liability  $2 billion annual prefunding contribution compared to annual pay-go of $311 million California  $40–$70 billion OPEB liability  $6 billion annual prefunding contribution compared to annual pay-go of $1 billion New Jersey  $20 billion OPEB liability  $5 billion prefunding contribution compared to annual pay-go of $1.2 billion Experience already shows moving from pay-go to pre-funding increases annual costs 4-7 times.

13. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 12 Benefit Design Strategy to Manage Liabilities  The Three “R”s of Cost Containment:  Redefining Eligibility Requirements –Tie eligibility to service levels –Consider institutional goals for work force planning –Review spouse coverage rules  Restructuring Benefits –Create tier for new hires –Review Medicare Part D options – subsidy, PDP, wrap-around, MA-PD –Review Medicare Coordination Method  Rethinking Cost Sharing –Move to a flat dollar employer share –Increase retiree contribution –Tie benefit levels to service levels –Defined Contribution approach

14. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.  OPEB Background - What? Why? Who?  Disclosure Requirements and Timeline  Key Decisions: To Fund or Not?

15. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 14 Key Decision: Pre-funding 1 Debt Financing 3 2 Options Pre-funding Combination

16. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 15 Funding and Savings Options

17. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 16 Trust Establishment and Structure Level of Prefunding  Must determine level of prefunding  Proportion of benefits prefunded will dictate discount rate (no prefunding is risk-free rate; prefunding can use a market rate used in similar retirement trusts)  Model financial statement impact and enterprise cash flows with various scenarios  Can look at ROI to enterprise by prefunding Irrevocable or Not?  If not irrevocable, cannot count assets as OPEB assets in the financial statement  However, full disclosure and discussions with rating agencies mitigate rating risk  Does an irrevocable trust infer a guarantee of a benefit?

18. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 17 Funding Strategy OPEB Obligation Bonds  Trading soft debt for hard debt  First one—Gainesville, Florida  Taxable-municipal bond as they are “arbitrage” bonds  Some employers concerned about having a long term debt with the future of nationalized health care unknown  Insurance Approaches  Life insurance policy purchase for active employees  Usually paired with OPEB bond issue  Perception issues among elected officials re betting people will die as a way to fund retiree health  Complex, multi-tiered funding approach is difficult for taxpayer to understand

19. Copyright © 2006 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved. 18 Factors for Success at Managing OPEB 1. Balance the cost of retiree health benefit with their value in attracting employees and retaining your workforce 2. Approach stakeholders to find and identify reasonable design and financing solutions 3. Find the appropriate mix of solutions to include redesign, cost containment, and pre-funding