1. OPEBs: Implementation Issues for Public Power Joni Davis, Manager Financial Accounting and Reporting Omaha Public Power District September 27, 2005

2. Agenda Actuarial Valuation Accounting Example Implementation Considerations SFAS 71 Funding Survey of Other Utilities

3. Actuarial Valuation

4. Annual valuation is required at least biennially Valuation based on current substantive plan as understood by employer and retirees Actuarial assumptions must be reasonable Key assumptions include:  Discount rate  Retiree health care trend rates  Amortization period

5. Actuarial Valuation Splits total OPEB present value of benefits into two pieces as of a given valuation date  Past service liability and future service liability Total Projected Payments for OPEBs Total OPEB Present Value Discount for Interest Past Service Liability (a.k.a., Accrued Liability) Future Service Liability Valuation Date

6. Net OPEB Obligation Net OPEB Obligation = Cumulative difference between OPEB cost and employer’s actual contributions Initial OPEB obligation equals $0  No retroactive application  Initial accrued liability is amortized into annual required contribution (ARC) Final OPEB cost for a year equals  ARC  Plus: Interest on the net OPEB obligation  Minus: Adjustment to ARC for past under- or over- contributions (if applicable)

7. Annual OPEB Cost Total Projected Payments for OPEBs Total OPEB Present Value Discount for Interest Accrued Liability Future Service Liability Unfunded Accrued Liability (UAL) Assets Future Service Liability Annual OPEB Cost (“ARC”) = Amortization of UAL + Normal Cost

8. Actuarial Cost Methods GASB 43 and 45 permit six different actuarial cost methods  “Immediate Gain/(Loss)” Methods Projected Unit Credit Attained Age Entry Age  “Spread Gain/(Loss)” Methods Frozen Attained Age Frozen Entry Age Aggregate Once one method is selected, it will be difficult to change to another Usually produces the lowest costs Usually produces the highest costs

9. UAL Amortization Methodology Two types of amortization methodologies are available  Level dollar is the standard “mortgage type” of amortization  Level percentage of payroll assumes amortization payments increase each year in line with projected increases in payroll Minimum and maximum amortization periods  10 to 30 years amortizations  10 year minimum only applies to “significant decrease” in liability

10. Funding When pre-funding is not required, anticipated level of funding has an impact on liability discount rate assumption…which, in turn, has an impact on the size of the OPEB liability Utilities can choose to 1) Continue pay-as-you-go (i.e., no pre-funding), 2) Fund the entire ARC, or 3) Fund something in between

11. Discount Rate Paragraph 13cd of GASB 45: Liability discount rate should be “…the estimated long-term investment yield on the investments that are expected to be used to finance the payment of benefit.”  Return based on plan assets, if the Utility’s policy is to “contribute consistently an amount at least equal to the ARC”  Return based on assets of the employer, “for plans that have no plan assets”  A proportional combination of plan and employer assets, for a partially funded plan Result is discount rate that may be different than the pension interest rate

12. Health Care Cost Increases Health care cost trend rates impact OPEB costs Health care costs have been (and are expected to continue) increase significantly Most FAS 106 assumptions start high, then decline to an ultimate rate Example:  Initial rate = 12% per year  Declining 1% per year to ultimate rate  Ultimate rate = 5% per year

13. U.S. Retiree Health Care Cost Increases

14. Accounting Example

15. Example Assumptions Interest rate7.0% Amortization 20 years (level amount) Trend ratesLow trend assumption Funding No prefunding (pay-as-you-go)

16. Accounting—Year 1

17. Accounting—End of Year 1 Net OPEB Obligation Net Obligation at 1/1/2005$ 0 ARC for 2005 15 Contributions During 2005 (5) Net Obligation at 1/1/2006$ 10

18. Accounting—Year 2

19. Net OPEB Obligation Net Obligation at 1/1/2005$ 10 ARC for 2005 17 Contributions During 2005 ( 5) Net Obligation at 1/1/2006$ 22

20. Financial Impact – Pay as you go (numbers are for presentation purposes only and were not actuarially calculated) 20072008200920102011Total OPEB Expense10.011.312.814.516.465.0 OPEB Liability10.021.334.148.665.0

21. Implementation Considerations

22. GAS 45 not effective until 2007  Benefit changes prior to 2007 will impact initial OPEB cost  Early adoption is encouraged (but not required) Key valuation assumptions  Interest rate  Medical trend rates  Initial amortization period SFAS 71 Plan funding decisions

23. Plan Design Options Increase retiree premium cost Base retiree premiums on “true” retiree costs  (i.e. no blending with active rates) Add age and/or service related subsidy schedule Place “Cap” on level of Utility costs Move to flat dollar or defined contribution type subsidy schedule Change plan options available to retirees Eliminate/reduce subsidy for future employees/retirees Move from Medicare COB approach to Carve Out Approach

24. SFAS 71

25. SFAS 71 – Accounting for the Effects of Certain Types of Regulation Allows for the deferral of costs EITF Issue 92-12 (SFAS 106)  Regulatory authorization  Five year amortization  20 year life

26. SFAS 71 – 5 year amortization (numbers are for presentation purposes only and were not actuarially calculated) No deferral:20072008200920102011Total OPEB Expense10.011.312.814.516.465.0 OPEB Liability10.021.334.148.6 65.0 SFAS 71 deferral: OPEB Expense2.04.36.89.713.035.8 OPEB Liability10.021.334.148.665.0 Regulatory Asset8.015.021.025.829.2

27. FUNDING

28. Funding Generally, insurance not an option Voluntary employee benefit association trusts (VEBAs – 501(c)(9) [tax deductible] Irrevocable grantor trusts Specific assets within retirement plans – 401(h)

29. Funding (numbers are for presentation purposes only and were not actuarially calculated) No funding:20072008200920102011Total OPEB Expense10.011.312.814.516.465.0 OPEB Liability10.021.334.148.665.0 25% funding: OPEB Expense10.011.112.413.815.562.8 OPEB Liability7.515.825.135.547.1 Fund Balance (w/o interest)2.55.38.411.815.7

30. Survey of Other Utilities

31. Funding Discount rates Amortization Period Plan design changes SFAS 71

32. Special Thanks Hewitt Associates LLC