Part 2 Where are states in implementing OPEB?

1. Part 2 Where are states in implementing OPEB?

2. Where are States in Implementing OPEB • As of March 15, 2007: • 23 have done either actuarial valuations or preliminary valuation (including Massachusetts,) remainder are in process • 12 have either submitted trust legislation or have already enacted trusts • 8 anticipate funding part or all of ARC in FY08

3. Where are States in Implementing OPEB • Funding Mechanisms being considered by states include: • % of Tobacco Settlement Payments (Massachusetts) • Appropriations (Many states) • % of payroll (Delaware, Florida, Georgia, Nevada, South Carolina) • % of Lottery Net Revenues (North Carolina) • Other Funds and Predecessor Trusts

4. How Large Are These Liabilities? Estimated Unfunded OPEB Accrued Liabilities* * Obtained through publicly available sources. $Billions

5. How Large Are These Liabilities? Estimated Unfunded OPEB Accrued Liabilities as a % of Personal Income* * Obtained through publicly available sources.

6. How Large Are These Liabilities? Estimated Unfunded Per Capita OPEB Accrued Liabilities * Obtained through publicly available sources.

7. Overview of OPEB in Massachusetts • OPEB is retiree health care costs, inclusive of dental / vision and a small amount of life insurance • State is responsible for state workers, not teachers or other municipal employees for OPEB. • Municipalities are responsible for them • State contracts for health insurance through Group Insurance Commission (GIC) • Municipalities contract for health insurance individually • State and municipal employees are unionized

8. Strategies Massachusetts is Considering or has used to deal with OPEB • Measured the Liability • Without information, there can be no strategy • Updated for FY2008 budget • Amortizing Unfunded OPEB obligations over a long time – up to 30 years • Considering OPEB costs in any long – term personnel decision making • Governor has proposed legislation for a Trust • Allows lower cost of funds due to higher return if funded • House has confirmed Governor’s proposal

9. How we are Using Results to Decide Strategy DOES NOT INCLUDE TEACHERS

10. How we are Using Results to Decide Strategy DOES NOT INCLUDE TEACHERS

11. How we are Using Results to Decide Strategy Current PAYGO cost is about $330 MM – OPEB is 2-3x Private industry is 6-10x DOES NOT INCLUDE TEACHERS – note – numbers unofficially updated to FY08 to $763.1M and $1,206M

12. Sensitivity Analysis – 1% ∆ in Health Care Trend Rate – no prefunding ∆ in UAAL + 19.5% / - 15.1% ∆ in ARC + 24.4% / - 18.3% DOES NOT INCLUDE TEACHERS

13. Sensitivity Analysis – 1% ∆ in Health Care Trend Rate – Prefunding ∆ in UAAL + 14.0% / - 11.4% ∆ in ARC + 17.0% / - 13.4% DOES NOT INCLUDE TEACHERS

14. Sensitivity Analysis – Change in Retiree Contribution Rates to 25% ∆ in UAAL - 11.8% ∆ in ARC -11.7% DOES NOT INCLUDE TEACHERS

15. Sensitivity Analysis – Change in Retiree Contribution Rates to 25% ∆ in UAAL - 11.8% ∆ in ARC -11.8% DOES NOT INCLUDE TEACHERS

16. Getting Beneficiaries Involved in Controlling Health Care Costs • 4 categories • Programs offering health assessments and monitoring • Health insurance incentives, ranging from discounts for nonsmokers to financial rewards to workers who reach personal health and fitness goals • Healthy work environment initiatives, such as banning smoking near state office buildings and recognizing healthy worksites with awards • Physical fitness programs, such as fitness challenges and events, walking programs, and pedometer programs Source: State Employee Wellness Initiatives – NGA Brief May 2005

17. Getting Beneficiaries Involved in Controlling Health Care Costs • Examples • Delaware – Health Rewards – proactive approach to health • Kentucky – Health risk assessments offered • North Carolina – Healthy Month established • Oklahoma – Wellness Week proclaimed • South Dakota – Toolkits, goal setting, web initiatives Source: State Employee Wellness Initiatives – NGA Brief May 2005

18. Getting Beneficiaries Involved in Controlling Health Care Costs • Examples • Arkansas - $20 per month premium reduction if employees take part in voluntary risk assessment • Maryland – Club Maryland – health screening, family fitness, exercise classes • West Virginia, Alabama, Georgia, Kentucky – lower premiums for non-smokers • Ohio – fitness days and challenges Source: State Employee Wellness Initiatives – NGA Brief May 2005

19. Getting Beneficiaries Involved in Controlling Health Care Costs • Lifecycle Example: Texas – • Blue Cross / Blue Shield of Texas integrates utilization review, wellness programs, disease management • Workplace wellness initiative from Department of State Health Services Source: Controlling Costs and Preventing Fraud in the Texas Employees Group Benefits Program Fiscal Year 2006: The Key to Cost Containment Prepared by The Employees Retirement System of Texas Ann S. Fuelberg Executive Director

20. Funding Strategies – Pros and Cons • Create an Irrevocable Trust • Pros • If funded, affords most rate of return, cutting costs dramatically – biggest bang for the buck • May be a similar structure to current pension system, but separate legal entity • Cons • Inflexible – the only way funds can be removed is for benefits, unless all future costs are paid • Needs to be separate account from pensions for tax purposes

21. Funding Strategies – Pros and Cons • Do Nothing • Pros • No budgetary effect • Cons • Debt ratings may be changed if peers are funding OPEB • Ratios will be downgraded due to increased liabilities

22. Funding Strategies – Pros and Cons • Partially Fund • Pros • Follows the spirit of GASB 45 • Shows management is taking action • Massachusetts Governor has proposed taking this approach using up to 90% of MSA payments • House did not confirm • Cons • Cannot use highest interest rates, thereby lowering liability considerably • Cash flow drain, though not as much as full funding

23. Funding Strategies – Pros and Cons – Partial Funding Millions – Pensions Only

24. Funding Strategies – Pros and Cons – Partial Funding = Governor’s proposal for funding – up to 90% of expected MSA Payments Millions – Pensions and OPEB

25. Other Strategies for Dealing with OPEB that Governments have Done or are Considering • Change the health benefit structure • Increase cost sharing • Think outside the box – • Employee actions • OPEB Bonds • Insurance vehicles

26. Funding Strategies – Pros and Cons • Increase Employee Contributions • Pros • Directly lowers employer obligations • Employees have more of a stake in government’s health care decisions • Cons • May trigger contractual issues with unions • May not have an immediate affect as current employees and retirees may not be effected

27. Funding Strategies – Pros and Cons • Allow greater employee options • VEBA trusts, IRC 401(h) after tax contribution accounts, HSAs, Defined Contribution (DC), Retirement Medical Benefit Accounts • Pros • Employees have more of a stake in government’s health care decisions • Potential Tax Benefits for employees depending on vehicle • Cons • Need to be careful with DC accounts as it creates classes of employees

28. Funding Strategies – Pros and Cons • Using one-time revenues, surpluses, MSA payments • Pros • Gives a quick jolt of funding with minimal pain on taxpayers • Cons • May be one time only – true funding needs to be sustained

29. Funding Strategies – Pros and Cons • Using bonds and insurance vehicles • Pros • Gives a quick jolt of funding with minimal immediate pain on taxpayers • Cons • Bonds – trades a variable liability to a fixed liability • Insurance products need to defease the liability to be effective

30. Funding Strategies – Pros and Cons • The elephant in the room – • Control health care costs through consolidation and aggressive management • Pros • Combined with other strategies has the greatest effect • Cons • May require legislation and breaking down age-old barriers

31. Quick Comparison of Funding Vehicles Source – TIAA CREF – “The Retiree Health Care Challenge” Page 16 – November 2006 1 IRS PLR 200610025

32. Quick Comparison of Funding Vehicles Source – TIAA CREF – “The Retiree Health Care Challenge” Page 16 – November 2006

33. Massachusetts’ Next Steps in GASB 45 Implementation • Legislation needs to be passed on trust and initial funding model needs to be agreed upon • If funding is similar to Commonwealth’s pension model, get Federal approval • Work with 60+ separate auditees to get implemented • Commission to explore future funding

34. Questions