County of OnondagaGASB Valuation Presentation

Other Post Employment Benefits (OPEBs)

December 5 , 2007

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Discussion Agenda

What are Other Post Employment Benefits (OPEBs)?

New Governmental Accounting Standards Board Statements on Accounting for OPEBs

Valuation results

Key Assumptions overview

Redesign and cost savings discussion

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Other Post Employment Benefits

What are Other Post Employment Benefits (OPEBs)?– Healthcare Benefits

• Medical • Dental• Rx• Vision

– Other Benefits – if not part of pension plan• Life Insurance• Disability• Group Legal• Long-Term Care

Post Employment relates to any time period when an individual is not actively employed, and usually means retired.

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Other Post Employment Benefits

What are not Other Post Employment Benefits (OPEBs)?– Vacation– Sick Leave

• Sabbaticals• Accrued Sick Days (Statement 16)

– COBRA– Special termination benefits

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Onondaga OPEB Plans

• Onondaga Retiree Healthcare – Healthcare Plans required to be valued under GASB

accounting rules due to subsidization by the County:• Medical for retirees• Prescription Drug for retirees• Survivor Benefits

– Other benefits when paid in full by retirees do not generate GASB liability• No implicit subsidy of these benefits

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Overview of Accounting RulesOverview of Accounting Rules

• Why is GASB implementing 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

• Current accounting rules recognize only “pay as you go” cost

• New Standard creates no obligation to fund the benefits according to the expense measure

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Overview of Accounting Rules

Recognize the cost of benefits in periods when the related services (i.e. active employment) are received by the employer

Provide information about the actuarial accrued liabilities associated with past service

Whether and to what extent these benefits have been funded

Provide information useful in assessing potential demands on the employer’s future cash flows

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Overview of Accounting RulesOverview of Accounting Rules

• OPEB standards are structured like GASB’s Pension accounting & reporting standards– GASB 25 – Plan’s accounting– GASB 27 – Employer’s accounting

• Key financial statement components– Annual OPEB Cost (annual expense) (AOC)– Annual Required Contribution (ARC)– Net OPEB Obligation (balance sheet liability) (NOO)– Actuarial Liability and Funded Status (disclosure notes) (UAAL)

• Advance funding is not required, but if the ARC is fully funded– The Net OPEB Obligation will be close to zero– A potentially more favorable discount rate, depending on

investment strategy, can be used to value the plan– A more favorable discount rate results in a lower ARC

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GASB Valuation for Onondaga

• GASB 45 – for the Employer, for FYE 2006• Valuation results were compiled for GASB 45

– Valuation is one year ahead of mandatory adoption

• GASB 45 Effective Dates (follow GASB 34)

Annual Revenue Effective for PY >

Phase I >$100m 12/15/2006

Phase II >$10m & <$100m 12/15/2007

Phase III <$10m 12/15/2008

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GASB Results

($ in millions) Total County Responsibilities

Present Value of Benefits Earned to Date (Actuarial Accrued Liability) for Actives $388.7

Present Value of Benefits Earned to Date (Actuarial Accrued Liability) for Retirees $277.5

Total Present Value of Benefits Earned to Date (Actuarial Accrued Liability) $666.2

FYE 2006 Annual OPEB Cost (AOC) * + $51.6

FYE 2006 Benefit Premiums + $15.0* The AOC reflects a 30-year, increasing amortization of the Unfunded Actuarial Accrued Liability.

+ No reduction in costs or liabilities for Retiree Drug Subsidy under Medicare Part D .

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GASB Results

($ in millions) County Responsibility

Service Cost (for active employees) $28.0

Unfunded Actuarial Accrued Liability Amortization (of past service)

$23.5

Annual OPEB Cost $51.6

Annual OPEB Cost:

(Amortization increases at 3.83% per year)

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GASB Results

Projected Unfunded Year End Net OPEB Obligation:

$51.6Annual OPEB Cost (AOC)

$35.2

$16.4

$0.0

County

Responsibility

Expected December 31, 2006 Net OPEB Obligation (NOO)

Expected Sponsor Contributions

Beginning Net OPEB Obligation (NOO)

($ in millions)

* Expected Sponsor Contributions are benefit payments and RDS payments

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Demographic Information

– The valuation is based on a census as of January 1, 2006 that was provided by the County.

– The following tables summarize active and retiree demographic information.

Participants Spouses Dependents Total

Actives 4,195 N/A N/A 4,195

Retirees 2,108 841 151 3,100

Survivors N/A 247 N/A 247

Total 6,303 1,088 151 7,542

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Assumptions - Eligibility

• In general, eligibility conforms to the eligibility to receive a retirement benefit from the corresponding pension plan for the participant– Need not commence pension immediately to

receive retiree medical from County– Attainment of age 55 and 5 years of service– 25 years of service and no minimum age with

retirement plan code 89k– 20 years of service and no minimum age with

retirement plan code 89B or 552

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Assumptions – Economic

• Discount Rate– Discount rate based on returns on assets used to

pay benefits– Unfunded plans generate greater liabilities than

identical funded plans– Unfunded discount rate must be consistent with

short term returns – 4.25% assumed

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Summary of OPEB remarksSummary of OPEB remarks

• OPEB standards are structured like GASB’s Pension accounting & reporting standards– GASB 25 – Plan’s accounting– GASB 27 – Employer’s accounting

• Advance funding is not required, pay as you go methods can be maintained

• Adoption by the County is necessary for FYE 2007– Annual OPEB Cost (annual expense)– Net OPEB Obligation (balance sheet liability)– Actuarial Liability and Funded Status (disclosure notes)

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Retiree Medical Redesign Parameters

• Eligibility – who gets the benefit

• Financial Commitment – how much is the cost to the plan sponsor

• Benefit Delivery – what benefit levels are covered by the subsidy

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Eligibility Changes

• Turning the financial commitment “off” for some groups of individuals– Usually new hires are an easy target– Younger groups (e.g. younger than 40)

• Requiring more service, or an older age to commence benefits– For example, 60 versus 55– Can require different retirement definition than the

corresponding pension plan• Hybrid approach – linking financial commitment to

service, usually by a formula

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Typical Company Financial Approaches

• Defined Benefit variations– Frozen/Grandfathered Plan– Points System/Age & Service based premium sharing– Various Coordination Strategies

• Financial Design Alternatives• “No Plan” Alternatives

– Access Only Plan– HSAs while active– HRAs while active– 401(k) increase– Other Pension trading

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Risk+

Responsibility

More

Retiree Medical Financial Models

Defined Benefit

Defined Dollar Benefit

Aggregate Account

True Defined Contribution

Access Only / No Plan

OPEB Vals Stops Here

More

Employer Risk and

Responsibility

Retiree Risk and Responsibility

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Retiree Benefits Delivery Alternatives

• Employer-sponsored plan (current arrangement)– Plan designed by employer– Plan often mirrors active benefits– Administered by employer and TPA/insurer

• Reducing level of benefits a common occurrence in private sector– Virtually every year, small changes– Infrequently, significant changes– Medicare Advantage is being investigated by many

public sector employers as a cost savings mechanism with little cost shift

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Retiree Benefits Delivery Alternatives

• Group Medicare Advantage– Plan replaces both Medicare Parts A + B and current

retiree plan– Employer negotiates with insurance carriers to offer

coverage– Plan can be customized; e.g., to mirror active plan– Rates based on group’s characteristics

• Private Fee For Service garnering significant attention– Not a network-style plan– May reproduce existing plan design at lower cost