1. Governmental Accounting Standards Board (GASB) Other Postemployment Benefits (OPEB)

2. 1 Agenda Background Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions Annual Required Contribution Calculation Case Studies Potential Responses Next Steps

3. 2 “Other Postemployment Benefits:” Scope The term refers to postemployment benefits other than pensions. OPEB include: –Postemployment healthcare benefits (medical, dental, vision, hearing). –Also, other forms of post-employment benefits when provided separately from a pension plan (e.g., life insurance, long-term care, long-term disability).

4. 3 Substance of the OPEB Transaction Post-employment benefits (both pensions and OPEB) are part of the compensation for services rendered by employees; i.e., they are part of an exchange transaction. Benefits are “earned,” and obligations accrue or accumulate, during employment. Payment is deferred until after employment.

5. 4 Objectives of Developing an Accrual-Basis Standard Recognize OPEB cost (expense) systematically over employees’ years of service. Provide relevant information about (a) the accrued OPEB obligation, (b) the cost of services including the cost of OPEB, and (c) the progress made in funding the plan. Report pensions (GASB Statement 27) and OPEB consistently.

6. 5 GASB Statement 27 Measurement Approach Has been characterized as a “funding based” approach to reporting pensions because it harmonizes financial reporting with funding to the extent appropriate for accrual accounting purposes. Although OPEB plans generally are not funded, may be characterized as a “funding friendly” approach to reporting OPEB, because an employer that chooses to fund OPEB, now or later, need not use different measures for each purpose.

7. 6 GASB OPEB Scope Applies to all state and local government entities that provide or participate in OPEB. Includes public benefit corporations and authorities, utilities, hospitals, colleges and universities, and Public Employee Retirement Systems that are employers. Applies whether the employer issues separate financial statements or is included in another entity’s statements.

8. 7 Effective Dates for Employer Reporting $100+ million revenue — FYs beginning after 12/15/06. $10+ million to $100 million revenue — FYs beginning after 12/15/07. Less than $10 million revenue — FYs beginning after 12/15/08.

9. 8 Measurement Approach: Broad Steps Gather Plan information / participant data. Project cash outflows for benefits. Discount projected benefits to present value (PV). Allocate the PV of projected benefits to periods using an acceptable actuarial cost method.

10. 9 Gather Data Census Data – not just pension data –Surviving spouses typically receive medical benefits. –Deferred vested retirees do not. –Plan elections, coverage level (e.g. single, 2 person), life insurance amounts. Claims Data –Ideal is to split claims by plan and pre versus post age 65 –Initial step – development of per capita claims cost

11. 10 Implicit Rate Subsidies –Medical plan covers active employees and retirees –Full average cost is charged to retirees –Actual cost for retiree group exceeds the cost charged to retiree –Employer must value and disclose Gather Data (continued)

12. 11 Projection of Benefits Projection of future benefit payments should be based on: –The types of benefits provided under the substantive plan (plan as understood by the employer and plan members) at the time of each valuation, including any changes made and announced to plan members. –The established pattern of sharing of benefit costs between the employer and plan members to that point.

13. 12 Interest Rate –Based on return of plan assets if funded –Return on general employer asset if not funded Amortization Unfunded Liability –Period generally not longer than 30 years nor shorter than 10 years –Can be level dollar or level percentage of payroll –Open period versus closed period Assumptions

14. 13 Additional (non-pension) Assumptions –Future Health Care Cost Trend Rates –Age-related morbidity –Future participation –Coverage elections Assumptions (continued)

15. 14 Frequency of Calculations Plans with total membership over 200 — actuarial valuations at least biennially. Plans with total membership of 200 or less — actuarial valuations at least triennially. Alternative measurement method – fewer than 100 members

16. 15 Power Authority with 1,000 retirees in medical plan and 1,500 actives who might someday be eligible. Employer pays 100% of retiree premium. Generous Indemnity Plan. Case Studies — Client A

17. 16 Current year employer cash payments — $8 million. Total Present Value — $300 million. Annual Required Contribution (ARC) using system’s cost method — $30 million. OPEB ARC as % of pay — 28%. Case Studies — Client A (continued)

18. 17 Projected OPEB cost will likely exceed Projected Benefit Payments Projections — Client A

19. 18 Projections— Client A (continued) OPEB Liability will be recognized either by funding or on your balance sheet

20. 19 General observations: –Magnitude of Present Value is astounding. –Measuring the Present Value itself involves defining the substantive plan and calculating per capita costs, which involves collecting data and documents and is not a quick process. Case Studies

21. 20 Lessons learned from the private sector: –FASB 106 imposed similar requirement beginning in 1993. –In the early 1990’s employers began to make significant plan changes to reduce liability and expense. –Typical changes involved eligibility restrictions or higher retiree contributions. –Employees began lawsuits. –Communication and documentation of plans improved. –Many creative solutions were found to lower retiree medical liability. Case Studies

22. 21 Reduce Benefit Costs –Cost sharing (copays, coinsurance) –Utilization management –Coordination of benefits (Medicare, other plan) Potential Responses

23. 22 Increase Retiree Contributions –Service-based percent of premium –Service-based flat dollar –Capped employer percentage increase –Capped employer dollar amount Potential Responses

24. 23 Restrict Eligibility –Cutoff based on hire date or age/service –Stricter age/service rules than pension eligibility –Spouses, dependents –Disabled Potential Responses

25. 24 Change Funding –Pre-fund through retirement system or general assets –Use a Voluntary Employee Benefit Association (VEBA) Trust –Provide for employee after-tax contributions to a special 401(a) account Potential Responses

26. 25 What is the Magnitude of Your Liability?

27. 26 Next Steps Recognize this is here and will have substantial impact. Measure liabilities and estimate expense alternatives under GASB. Explore alternative benefits, contributions, eligibility, and funding as necessary. Review documents and employee communication to ensure they reflect the substantive plan.

28. 27 Mellon Contact Anthony M. Abbazia, F.S.A. Principal, Consulting Actuary Mellon’s Human Resources & Investor Solutions 281 Tresser Boulevard, 6 th Floor Stamford, CT 06901 203-352-1614 203-967-3139 (fax) abbazia.a@mellon.com