Arlington Public Schools

1. Arlington Public Schools Impact of GASB OPEB: Preliminary Results John L. Colberg, FSA Presented: July 21, 2006 Updated: July 27, 2006

2. Topics • GASB Statement Background • How Actuaries Estimate Liability • Postretirement Liability & OPEB Cost • Options for Controlling GASB Impact • Appendix: Results by Benefit

3. GASB Statement History • FAS106 released in 1990 • GASB began work on similar disclosure soon thereafter • Project put on hold in mid-1990’s for other initiatives • Exposure draft released February 2003 • Revised exposure draft released January 2004 • Statement 43 (plan) Issued May 2004 • Statement 45 (employer) Issued July 2004 • Technical Bulletin on Part D Issued March 2006

4. Status • Effective date on employer (Statement 45) based on sponsor’s revenues for 1st FY ending after 6/15/1999 (like GASB 34); first fiscal year beginning after • 12/15/2006 if revenue over $100 million • 12/15/2007 if revenue $10m - $100m • 12/15/2008 if revenue < $10 million • Effective Date for plan (Statement 43) one year earlier (Arlington probably not impacted)

5. Rationale for the GASB standard • Postretirement benefits are offered to attract and retain qualified employees • Therefore, entities should recognize costs while employees are active • Current accounting standards largely based on pay-as-you-go approach • Ignores cost while employee is active (recognize cost when employee retires) • Shifts costs between taxpaying generations

6. Scope of OPEB • Benefits paid by employer but received after employment ends if not part of the pension plan • Healthcare (medical, dental, Rx, vision) • Life insurance • Disability • Group legal • Long-term care • Not part of OPEB • Leave (vacation, sick leave, etc.) • COBRA (Statement 47) • Early Retirement Incentives (Statement 47) • Life insurance, disability, etc. that is part of pension plan

7. Disclosure Requirements • Measurement and recognition of OPEB costs on accrual accounting basis (FY beginning after 12/15/2006) • Valuation done biennially (if 200 or more participants) • Defined benefit OPEB plans (most OPEB plans) • Annual expense = actuarially determined cost • Liabilities (Net OPEB Obligation) = running tally of difference between actual contributions and actuarially determined cost • more about this later • Defined contribution OPEB plans: • Annual expense = required contributions • Liability = unpaid contributions • Fully-insured disability plans: • Annual expense = premium • Liability = unpaid premiums • Information about the plan

8. Plan Information Disclosures • Plan Description • Name of the plan, entity that administers the plan, and identification of plan type (single-employer, agent multiple-employer, or cost-sharing multiple-employer) • Brief description of the types of benefits and the authority under which benefit provisions are established or may be amended • Whether the OPEB plan issues a stand-alone financial report or is included in the report of a PERS or another entity, and, if so, how to obtain the report • Funding Policy • Authority under which contribution requirements are established or may be changed • Required member contribution rates • Required employer contribution rates (and, if significantly different from GASB Annual Required Contribution, how it is determined)

9. Financial Information Disclosures • Annual OPEB actuarial cost and dollar amount of contribution made • If there is a net OPEB obligation (i.e., contributions have been less than actuarial cost), the components of OPEB cost and change in net obligation by year end • Trends in OPEB actuarial cost • Funded status information and trends • Valuation date • Actuarial value of assets • Actuarial accrued liabilities • Unfunded actuarial liabilities • Funded ratio (AVA as a % of AAL) • Covered payroll • Ratio of UAL to covered payroll • Actuarial methods & assumptions • Factors affecting trends in amounts reported • Possible reduced disclosures if part of multiple employer plan

10. How Actuaries Estimate Liability • Data • Age, service, salary, plan election, etc. • Benefits Promised • According to practice (not necessarily what’s written) • Ages of eligibility • Retiree contributions • Assumptions • Demographic • Withdrawal, retirement, mortality, disability, family composition • Economic • Investment return, salary increases, health care inflation

11. From ACERS Retirement Plan Valuation Discount Rate (if actuarially funded) Mortality Withdrawal Retirement* Disability Salary growth New for OPEB Claim costs (based on recent experience & premiums) Election % Family composition Health Care Trends Highlights of Assumptions for Arlington *Retirement rates for VRS employees not in chapter 35 are taken from the VRS actuarial valuation report.

12. We determine the cost per person by age How Actuaries Estimate Liability (cont.) And then subtract retiree contributions

13. How Actuaries Estimate Liability (cont.) • We then project the claims to be paid by the plan (net of retiree contributions) for each age in the future • This payout stream reflects health care trends, age, Medicare status, and the probabilities of reaching retirement and then living to each age The discounted value of all payout streams is the Present Value of Future Benefits (PVFB)

14. What Does PVFB Mean? • If you had this much money in an account and all actuarial assumptions are met, you would never need to contribute any more money for current employees. • Additional money would be required for new hires or new benefits • Not realistic to pay for this at once • Actual experience may result in costs higher or lower

15. How Do We Fund This Liability? • Develop a strategy to fund the liability over time • Normal Cost: What level % of pay will pay for the benefits by retirement • Develop benchmarks to measure progress • Actuarial Liability (AL): What should be in the fund if you always paid normal cost and all assumptions are met

16. Terminology Illustrated Actuarial Liability

17. Additional Benchmarks • Actuarial Value of Assets (AVA): How much money is in the fund (after smoothing for market fluctuations) • Unfunded Actuarial Liability (UAL): Actuarial Liability less Actuarial Value of Assets • Arises from paying less than the normal cost for benefits (e.g., pay-as-you-go funding) or experience worse than assumptions • Funding Ratio (AVA divided by AL) • if <100% plan has UAL • Pay-as-you-go plan has 0% funding ratio

18. OPEB Measures • Annual Required Contribution (ARC) • Normal cost plus • Amortization of UAL over 30 years (or less) • Annual OPEB Cost (AOC) • ARC plus • Adjustment to avoid double counting if contributions have not equaled the ARC • Net OPEB Obligation • Cumulative difference between AOC and actual contributions • No liability appears on the financial statements if contributions always equal the ARC

19. Funding Policy Will Affect Liability Measures • GASB’s required discount rate must represent the expected return on the assets that are expected to fund this plan • If the employer is making actuarially sound contributions, the discount rate is the expected return on assets of the fund to which employer is contributing • If the employer is following a pay-as-you-go approach, the discount rate is the expected return on the jurisdiction’s assets (which could be weighted cost of borrowing) • Usually much lower returns than a dedicated, invested portfolio • Reflects either short-term investments (or municipal bond rates) • Following a pay-as-you-go approach vs an actuarially funded approach, could increase the liability and ARC by more than 50%

20. Actuarial Liability and FY2008 ARCActuarial Funding (8% assumed discount rate)

21. Actuarial Liability and FY2008 ARCPay-As-You-Go Funding (5.5% assumed discount rate)

22. Expect Variations in Liability & ARC Sensitive assumptions could be affected significantly • Discount Rate • Funding and investment policies • Claims costs and healthcare trends • Dynamic healthcare marketplace • New Medicare Part D & Medicare Advantage • Better reporting from vendors could provide more accurate claim cost assumptions • Percent electing • Tracking emerging experience could help assumption • Retiree contributions • Central source of contributions by retiree would help estimate • New hire patterns • Disability experience

23. Sensitivity

24. Options for Reducing OPEB Impact • Contribute the ARC • Reduce or limit benefits • Increase retiree contributions • Add employee contributions • Improve efficiency of healthcare delivery • Change from Part D Subsidy to PDP or Medicare Advantage Note: We recommend you consult with counsel prior to reducing benefits or increasing contributions for existing employees or retirees

25. Common Benefit Reductions / Contribution Increases • Reduce, eliminate, or make thebenefit a self pay for • Dependents • Medicare eligibles • New hires • Increase retiree cost-sharing (deductibles, coinsurance, etc.) • Base pre-Medicare retiree contributions on a percentage based on their cost, rather than the blended active cost • Cap the employer’s cost per person at a future point (e.g., 2x current costs) • Mandate the lowest cost plan, if multiple options Note: We recommend you consult with counsel prior to reducing benefits or increasing contributions for existing employees or retirees

26. Improve efficiency of healthcare • Strengthen medical management • Population / Disease management • Best practice guides • Optimal use of pharmacy benefits • Review provider contracts, especially where the population in concentrated • Consider narrow networks • Consider pay-for-performance contracts • Find best Medicare Advantage / PDP option(s) • Wellness incentives Note: We recommend you consult with counsel prior to reducing benefits or increasing contributions for existing employees or retirees

27. Next Steps • Adopt a funding policy • If pre-funding, need to establish Trust, including structure and investment policies, and ensure meets GASB requirements • Consider healthcare delivery system, benefit, and/or contribution changes • Improve reporting • Regular reporting of claims and enrollment by age/gender, employment status, disability status, contribution level

28. Appendix Results by Benefit

29. Medical/Rx – Pre-MedicareActuarial Liability and FY2008 ARCActuarial Funding (8% assumed discount rate)

30. Medical/Rx – Post-MedicareActuarial Liability and FY2008 ARCActuarial Funding (8% assumed discount rate)

31. Life InsuranceActuarial Liability and FY2008 ARCActuarial Funding (8% assumed discount rate)