Session Number 806 The Great GASB!

1. Session Number 806The Great GASB! Scott F. Porter, Milliman, Inc. Alisa Bennett, Cavanaugh Macdonald Consulting Wednesday, April 1, 2009 9:45 – 11:00 2009 Enrolled Actuaries Meeting

2. Agenda • Valuation Procedures in determining ARC • Valuation Date vs Fiscal Year • Amortization Period • Interim Valuation Issues • ARC vs AOC • Economic Assumption • Discount Rate • Trend Rates 2009 Enrolled Actuaries Meeting

3. Agenda • Managing and Mitigating OPEB Liabilities • Plan Design Changes • Benefit Design Changes • Funding 2009 Enrolled Actuaries Meeting

4. Valuation Procedures • Valuation Date vs Fiscal year • Amortization Method • Implicit Rate Subsidy • Determining NOO 2009 Enrolled Actuaries Meeting

5. Valuation Date vs Fiscal Year • Valuation Date • Date census collected • Schedule of Funding Progress as of Valuation Dates • Can be up to 24 months prior to BOFY 2009 Enrolled Actuaries Meeting

6. Valuation Date vs Fiscal Year • Fiscal Year • ARC, AOC and NOO for fiscal year • Should ARC be adjusted from vd to fy • Interest at discount rate • % of pay with projected payroll • Roll-forward Do any of these procedures affect ARC in off year? 2009 Enrolled Actuaries Meeting

7. Amortization Method • ASOP 4 states that the method should reflect the obligations…. • ARC should always be greater than PAYG What is appropriate if only value Implicit Rate Subsidy? 2009 Enrolled Actuaries Meeting

8. Implicit Rate Subsidy • Includes value of retiree health costs in excess of active premium • These costs should be reflected in actual contributions in developing NOO • How are these additional contributions determined? • Adjustment to active premiums expensed by employer 2009 Enrolled Actuaries Meeting

9. Amortization Method • Level % of Pay vs Flat Dollar • Level % could produce amortization less than interest on unfunded • How does this affect ARC in off year? • Open or Closed • Decision may not have been required for first valuation, but will impact off year 2009 Enrolled Actuaries Meeting

10. Interim Valuation Issues • Valuations are required biennially or triennially • Unless there are significant changes • How are the costs determined in off year? • Even if changes have occurred, can they be reflected without another full valuation • Depend on procedures established in valuation 2009 Enrolled Actuaries Meeting

11. Interim Valuation Issues • ARC Options • Assumption Adjustments • Experience Adjustments • Plan Changes 2009 Enrolled Actuaries Meeting

12. ARC vs AOC • ARC = Normal Cost + Amortization • AOC = ARC + interest on NOO less amortization of NOO • First year AOC = ARC (no NOO) • Second year AOC < ARC for an unfunded plan 2009 Enrolled Actuaries Meeting

13. ARC vs AOC - Example 2009 Enrolled Actuaries Meeting

14. ARC vs AOC - Example 2009 Enrolled Actuaries Meeting

15. NOO - Example 2009 Enrolled Actuaries Meeting

16. ARC vs AOC • ARC based on unfunded liability • Unfunded liability for an unfunded plan will most likely increase each year • AOC gives the plan sponsor credit for expensing the ARC in the previous year • AOC based on an amortization of the unfunded liability less NOO plus interest on NOO 2009 Enrolled Actuaries Meeting

17. ARC Options in Off Year • ARC set to same dollar amount • ARC increased at discount rate • ARC defined as % of pay and increased at payroll growth • ARC based on a roll-forward approach Based on auditors, but what approach should we recommend? 2009 Enrolled Actuaries Meeting

18. Assumption Adjustments • Demographic • Withdrawal, retirement, mortality • Trend Rates • Discount Rate • Changes in interest rates • Partial funding or lack of funding 2009 Enrolled Actuaries Meeting

19. Experience Adjustments • Changes in medical costs • Changes in health plan options • Changes in underlying benefits • Cost sharing • Asset performance for funded plans 2009 Enrolled Actuaries Meeting

20. Plan Changes • Changes in eligibility requirements • Union negotiations • Retiree contributions 2009 Enrolled Actuaries Meeting

21. Options in Reflecting Changes • Redo prior valuation and determine ARC based on prior options • Ratio liabilities • Significant changes require a new valuation – new census 2009 Enrolled Actuaries Meeting

22. Economic Assumptions • Discount Rates • Trend Rates • Payroll Growth • Impact on amortization payment • Impact on ARC if adjusted from vd to fy • Impact on ARC in off year 2009 Enrolled Actuaries Meeting

23. Discount Rates • Long-term investment return on assets backing obligation • Unfunded plans use assets of the employer • Interest rates are currently very low 2009 Enrolled Actuaries Meeting

24. Discount Rates • ASOP 27 – Building Block Approach • Price Inflation • Excess return of employer assets over inflation • Inflation should be consistent with underlying trend rates 2009 Enrolled Actuaries Meeting

25. Trend Rates • Typically use select and ultimate approach • Decreases about 0.5% to 1.0% • SOA Getzen Model produces trends for 2012 and beyond • Decreases to ultimate rate are much slower • Ultimate rates lower than typical 2009 Enrolled Actuaries Meeting

26. Trend Rates • SOA Getzen Model Inputs • Inflation • Real GDP • Technology • Other 2009 Enrolled Actuaries Meeting

27. Managing and Mitigating Liabilities • Plan Design • Same basic benefits, but alter cost sharing • Eliminate benefits for Medicare-eligible retirees or change coordination with Medicare • Switch to defined dollar benefits • Benefit Design • Changes to medical plan offerings • Disease management, wellness • Funding • Establish a trust and contribute more than Pay-As-You-Go • Require active employee contributions toward retiree healthcare 2009 Enrolled Actuaries Meeting

28. Plan Design Changes • Can you change plan design? • Statutory and legal requirements • Change plan for current retirees? • Change plan for future retirees? • Change plan for future hires only? 2009 Enrolled Actuaries Meeting

29. Plan Design Changes • Same basic benefits, but alter cost sharing • Base retiree contributions on service at retirement (More like pension plan, reduce impact of early retirees) • Base retiree contributions on retiree-specific full cost rates (not blended rates) • Charge full cost for spouses 2009 Enrolled Actuaries Meeting

30. Plan Design Changes • Cap Employer cost at current level • Hard Cap – no future increases in Employer cost • Soft Cap – Employer costs will increase based on pre-determined amount below medical trend (such as 3% per year) • Significant impact on OPEB liability because it shifts all or much of the future healthcare trend to the retiree • Can result in healthier retirees opting-out as costs increase • If cap is consistently increased, auditors will no longer allow valuation of cap 2009 Enrolled Actuaries Meeting

31. Plan Design Changes • Cost shifting does nothing to lower the overall cost of the plan, just shifts more of the cost burden to the retirees • Lowers OPEB liability • Public perception and communication must be considered – service based contributions may be seen as equitable, while a hard cap may be seen as a cut in benefits 2009 Enrolled Actuaries Meeting

32. Plan Design Changes • Eliminate benefits for Medicare-eligible retirees or change coordination with Medicare • 2/3 – 3/4 of OPEB liability can come from Medicare-eligible retirees • Switch to defined dollar benefits • Same medical plan offerings, but retirees given access only with a defined dollar supplement based on service at retirement • Similar to pension benefits • Supplement can increase from year to year, usually less than medical trend • Above plan changes may be applied to future hires only – no immediate OPEB impact 2009 Enrolled Actuaries Meeting

33. Benefit Design Changes • Change medical plan offerings to achieve cost savings • Consumer Driven Healthcare – High deductible medical plans with HRAs or HSAs • Employer will contribute to HRA or HSA • Hope is to make members more aware of healthcare costs and lead to better consumerism and lower overall cost for same level of care • Preventive care is covered 2009 Enrolled Actuaries Meeting

34. Benefit Design Changes • Medicare Advantage Plans • With or without prescription drug plan (PDP) • With PDP, savings on OPEB liability because of treatment under GASB 45 of Retiree Drug Subsidy • Medical portion has been highly subsidized by Federal government – may not continue at current levels • Disease management, wellness programs • Easier to implement and encourage participation with active employees than retirees • Today’s active employees are tomorrow’s retirees • Have been shown to reduce healthcare costs 2009 Enrolled Actuaries Meeting

35. Funding • Establishment of Trust and pre-funding benefits allows use of higher discount rate and therefore lower liabilities • Basic funding formula B + E = C + IB = benefits paid, E = expenses,C = contributions, I = investment income • Consider requiring active employee contributions toward retiree healthcare • May make it more difficult to change plan in the future 2009 Enrolled Actuaries Meeting

36. Questions 2009 Enrolled Actuaries Meeting