1. Aon Consulting Northwest Employee Benefits Consulting How Will the New GASB Other Post Employment Benefits (OPEB) Standard Impact Oregon PEBB August 15, 2006 Dennis Monaghan, F.S.A., E.A. Dennis Tierney, M.A.A.A. Pamela Hodge, J.D. Bd attach. 9

2. Aon Consulting Northwest Employee Benefits Consulting 1 Agenda Overview New GASB Rules Required Financial Data & Funding Options Actuarial Process Requirements –Health Benefit Cost Projection & Trend Issues –Investment Return Assumptions Oregon PEBB Costs Effective Dates & Analyses Cycle Financial Implications Action Steps

3. Aon Consulting Northwest Employee Benefits Consulting 2 New GASB Rules

4. Aon Consulting Northwest Employee Benefits Consulting 3 Overview of Statement 45 Rules What are Other Post Employment Benefits (OPEB)? –Compensation received after employment ends in exchange for employees’ current service –Benefits other than pension benefits –Healthcare Benefits Medical Dental Rx Vision –Other Benefits (if not part of pension plan) Life Insurance Disability Group Legal Long-Term Care Retiree Discounts (PUD)

5. Aon Consulting Northwest Employee Benefits Consulting 4 Overview of Statement 45 Rules What are not Other Post Employment Benefits (OPEB)? –Vacation –Sick Leave –COBRA –Ad Hoc Early Retirement or Termination Incentives –Conversion of unused PTO hours to an individual retiree health care account

6. Aon Consulting Northwest Employee Benefits Consulting 5 Overview of Statement 45 Rules Why did GASB adopt a new accounting standard? –Current accounting standards fail to recognize the cost of OPEB when employee services are rendered –Current accounting standards do not identify the value of OPEB already “earned” or accrued as a result of employees’ past service New OPEB standards are structured like GASB’s pension accounting & reporting standards –GASB #25 – Plan’s accounting –GASB #27 – Employer’s accounting

7. Aon Consulting Northwest Employee Benefits Consulting 6 Required Financial Data & Funding Options What Financial Data Have to be Reported Key financial statement components –Annual OPEB Cost (annual expense) –Net OPEB Obligation (balance sheet liability) What are the Funding Options Advance funding is not required; however, there are some advantages –The Net OPEB Obligation will be close to zero –The actuary can use a more favorable discount rate to value the plan

8. Aon Consulting Northwest Employee Benefits Consulting 7 Health Benefit Cost Projection Issues Must recognize the “Implicit Rate Subsidy” Post-employment healthcare benefits must be projected based on claims costs for retirees or on age-adjusted premiums Use of unadjusted premiums only acceptable in “community-rated plans” Health Claim Trend –If credible, base on employer’s actual experience –Emphasize expected long-term future trends

9. Aon Consulting Northwest Employee Benefits Consulting 8 Illustration of “Implicit Rate Subsidy” Actual CostAverage Cost

10. Aon Consulting Northwest Employee Benefits Consulting 9 Investment Return Assumptions Also called the “Discount Rate” The estimated long-term investment yield on the investments expected to be used to pay the OPEB benefits Investments expected to be used to pay the OPEB benefits are –Plan assets –Employer assets –Or a combination of the two A partially funded plan will use a blended investment return assumption (the discount rate)

11. Aon Consulting Northwest Employee Benefits Consulting 10 Investment Return Assumption - Example Unfunded Plan –Use expected rate-of-return on PEBB assets –5%? Prefunded Plan –Use expected rate-of-return on long-term asset mix –A mix of stocks and bonds –8% Impact on actuarial liabilities of prefunding –Able to use 8% instead of 5% investment return assumption –Actuarial liabilities could be 30% lower due to use of prefunding assumptions

12. Aon Consulting Northwest Employee Benefits Consulting 11 PEBB’s Costs Annual OPEB Cost (AOC – employer’s expense) –Annual Required Contribution (ARC) Normal Cost (NC) based on actuarial cost method selected, equals portion of an active employee’s projected benefits that is recognized in the employer’s fiscal year Amortization of Unfunded Actuarial Accrued Liability (UAAL) over a maximum of 30 years Amortization method for gains or losses and plan changes depends on actuarial cost method selected –Plus Adjustment due to Contributions > or < ARC

13. Aon Consulting Northwest Employee Benefits Consulting 12 PEBB’s Costs (cont.) Net OPEB Obligation (NOO) –Initial Net OPEB Obligation (at implementation) = $0 –Optionally, employers may elect to adopt retroactively if prior actuarial valuations are consistent with standard –NOO will change from year to year Contributions = ARC; NOO = $0 Contributions > ARC; NOO < $0 (an asset) Contributions $0 (a liability) –NOO should be recognized in year-end financial statements

14. Aon Consulting Northwest Employee Benefits Consulting 13 Effective Dates Effective dates for employer’s financials (based on Statement 34): Annual Revenue Effective for FY after Phase I >$100m 2/15/2006 Phase II >$10m & <$100m 12/15/2007 Phase III <$10m 12/15/2008 Effective dates for the Plan’s financials are one year earlier

15. Aon Consulting Northwest Employee Benefits Consulting 14 How Often Do Analyses Have to be Done? Frequency of actuarial valuations –At least biennially – Required for plans with a total membership of 200 or more –At least every three years for smaller plans Required notes to financial statements Required supplementary information

16. Aon Consulting Northwest Employee Benefits Consulting 15 What if PEBB Doesn’t Pay? Underpayments create liabilities Net OPEB Obligation Very low discount rate required Disclosure of large unfunded actuarial liabilities

17. Aon Consulting Northwest Employee Benefits Consulting 16 Impact of Statement 45 Rules

18. Aon Consulting Northwest Employee Benefits Consulting 17 Example GASBPAYG

19. Aon Consulting Northwest Employee Benefits Consulting 18 Where does OPEB Disclosure Fit Into the Rating Scheme OPEB Liabilities Are Not New They’re Already Here – But Generally Not Quantified New OPEB Disclosure Will Affect All Rating Factors – Except Economic

20. Aon Consulting Northwest Employee Benefits Consulting 19 OPEB Rating Impact – Most Analogous To Pension Obligations Debt Factors Types of Obligations Overall Debt Burden Other Long Term Liabilities

21. Aon Consulting Northwest Employee Benefits Consulting 20 Debt Factors (continued) Pension Liabilities Size of UAAL/Funding Ratio Historical Progress Pension Obligation Bond Versus UAAL

22. Aon Consulting Northwest Employee Benefits Consulting 21 Management Factors Pension Perspective How are Pension Liabilities Being Managed Are Liabilities Being Shifted to Future Administrations (Tax Payers)? Are Required Contributions Being Made

23. Aon Consulting Northwest Employee Benefits Consulting 22 Financial Factors Pension Benefits as an Expense How Do Pensions Affect the Employer’s Cost Structure? What is the Trend in Contribution Payments? Will Pension Contributions Jeopardize Debt Service?

24. Aon Consulting Northwest Employee Benefits Consulting 23 OPEB As a Rating Factor Will be Evaluated Like Pensions How Will These Obligations Be Managed? Are the Commitments Sustainable? Impact on Ratings Bond Rating Agencies Will Factor the Implications of OPEB Into Ratings

25. Aon Consulting Northwest Employee Benefits Consulting 24 Are the Commitments Sustainable? Project future retiree healthcare costs Project future revenue expected to be available for retiree healthcare costs Calculate the ratio of costs to revenue Examine the graph of the projected ratios Are the ratios relatively steady? Increasing? Decreasing? Or?

26. Aon Consulting Northwest Employee Benefits Consulting 25 Action Steps

27. Aon Consulting Northwest Employee Benefits Consulting 26 Preparing For New Financial Reporting Perform projection of financial impact –GASB disclosures –Year-by-year future OPEB payments –Expected revenue to support OPEB payments Review opportunities to reduce costs Educate: –Elected officials –Union Leaders –Finance –Administration

28. Aon Consulting Northwest Employee Benefits Consulting 27 New Reporting Deadline Approaching The numbers are material Solutions take time –Bargaining issues –Elected officials –Grandfathering issues –State statutes

29. Aon Consulting Northwest Employee Benefits Consulting 28 GASB Impact Study Calculate GASB cost impact Develop alternatives to reduce cost Consider pre-funding options Price impact of proposed changes

30. Aon Consulting Northwest Employee Benefits Consulting 29 Thank you! Dennis Monaghan, FSA Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2886 Dennis_Monaghan@aon.com Pamela Hodge, J.D. Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2816 Pamela_Hodge@aon.com Dennis Tierney, M.A.A.A. Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2352 Dennis_Tierney@aon.com