How Will the New GASB Other Post Employment Benefits (OPEB) Standard Impact Oregon PEBB

1. Bd attach. 9 How Will the New GASB Other Post Employment Benefits (OPEB) Standard Impact Oregon PEBB August 15, 2006 Dennis Monaghan, F.S.A., E.A. Dennis Tierney, M.A.A.A. Pamela Hodge, J.D.

2. Agenda • Overview New GASB Rules • Required Financial Data & Funding Options • Actuarial Process Requirements • Health Benefit Cost Projection & Trend Issues • Investment Return Assumptions • Oregon PEBB Costs • Effective Dates & Analyses Cycle • Financial Implications • Action Steps

3. New GASB Rules

4. Overview of Statement 45 Rules • What are Other Post Employment Benefits (OPEB)? • Compensation received after employment ends in exchange for employees’ current service • Benefits other than pension benefits • Healthcare Benefits • Medical • Dental • Rx • Vision • Other Benefits (if not part of pension plan) • Life Insurance • Disability • Group Legal • Long-Term Care • Retiree Discounts (PUD)

5. Overview of Statement 45 Rules • What are not Other Post Employment Benefits (OPEB)? • Vacation • Sick Leave • COBRA • Ad Hoc Early Retirement or Termination Incentives • Conversion of unused PTO hours to an individual retiree health care account

6. Overview of Statement 45 Rules • Why did GASB adopt 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 • New OPEB standards are structured like GASB’s pension accounting & reporting standards • GASB #25 – Plan’s accounting • GASB #27 – Employer’s accounting

7. Required Financial Data & Funding Options What Financial Data Have to be Reported • Key financial statement components • Annual OPEB Cost (annual expense) • Net OPEB Obligation (balance sheet liability) What are the Funding Options • Advance funding is not required; however, there are some advantages • The Net OPEB Obligation will be close to zero • The actuary can use a more favorable discount rate to value the plan

8. Health Benefit Cost Projection Issues • Must recognize the “Implicit Rate Subsidy” • Post-employment healthcare benefits must be projected based on claims costs for retirees or on age-adjusted premiums • Use of unadjusted premiums only acceptable in “community-rated plans” • Health Claim Trend • If credible, base on employer’s actual experience • Emphasize expected long-term future trends

9. $7,000 $6,000 $5,000 $4,000 Annual Amounts $3,000 $2,000 $1,000 $0 36 56 86 26 46 76 66 96 61 91 31 41 51 71 81 Age Actual Cost Average Cost Illustration of “Implicit Rate Subsidy”

10. Investment Return Assumptions • Also called the “Discount Rate” • The estimated long-term investment yield on the investments expected to be used to pay the OPEB benefits • Investments expected to be used to pay the OPEB benefits are • Plan assets • Employer assets • Or a combination of the two • A partially funded plan will use a blended investment return assumption (the discount rate)

11. Investment Return Assumption - Example • Unfunded Plan • Use expected rate-of-return on PEBB assets • 5%? • Prefunded Plan • Use expected rate-of-return on long-term asset mix • A mix of stocks and bonds • 8% • Impact on actuarial liabilities of prefunding • Able to use 8% instead of 5% investment return assumption • Actuarial liabilities could be 30% lower due to use of prefunding assumptions

12. PEBB’s Costs • Annual OPEB Cost (AOC – employer’s expense) • Annual Required Contribution (ARC) • Normal Cost (NC) based on actuarial cost method selected, equals portion of an active employee’s projected benefits that is recognized in the employer’s fiscal year • Amortization of Unfunded Actuarial Accrued Liability (UAAL) over a maximum of 30 years • Amortization method for gains or losses and plan changes depends on actuarial cost method selected • Plus Adjustment due to Contributions > or < ARC

13. PEBB’s Costs (cont.) • Net OPEB Obligation (NOO) • Initial Net OPEB Obligation (at implementation) = $0 • Optionally, employers may elect to adopt retroactively if prior actuarial valuations are consistent with standard • NOO will change from year to year • Contributions = ARC; NOO = $0 • Contributions > ARC; NOO < $0 (an asset) • Contributions < ARC; NOO > $0 (a liability) • NOO should be recognized in year-end financial statements

14. Effective Dates • Effective dates for employer’s financials (based on Statement 34): Annual RevenueEffective for FY after Phase I >$100m 2/15/2006 Phase II >$10m & <$100m 12/15/2007 Phase III <$10m 12/15/2008 • Effective dates for the Plan’s financials are one year earlier

15. How Often Do Analyses Have to be Done? • Frequency of actuarial valuations • At least biennially – Required for plans with a total membership of 200 or more • At least every three years for smaller plans • Required notes to financial statements • Required supplementary information

16. What if PEBB Doesn’t Pay? • Underpayments create liabilities • Net OPEB Obligation • Very low discount rate required • Disclosure of large unfunded actuarial liabilities

17. Impact of Statement 45 Rules

18. GASB vs. Pay-As-You-Go (PAYG) $14 $12 $10 $8 $6 Annual Amount $4 $2 $0 2003 2008 2013 2018 2023 2028 Example GASB PAYG

19. Where does OPEB Disclosure Fit Into the Rating Scheme • OPEB Liabilities Are Not New • They’re Already Here – But Generally Not Quantified • New OPEB Disclosure Will Affect All Rating Factors – Except Economic

20. OPEB Rating Impact – Most Analogous To Pension Obligations Debt Factors • Types of Obligations • Overall Debt Burden • Other Long Term Liabilities

21. Debt Factors (continued) Pension Liabilities • Size of UAAL/Funding Ratio • Historical Progress • Pension Obligation Bond Versus UAAL

22. Management Factors Pension Perspective • How are Pension Liabilities Being Managed • Are Liabilities Being Shifted to Future Administrations (Tax Payers)? • Are Required Contributions Being Made

23. Financial Factors Pension Benefits as an Expense • How Do Pensions Affect the Employer’s Cost Structure? • What is the Trend in Contribution Payments? • Will Pension Contributions Jeopardize Debt Service?

24. OPEB As a Rating Factor Bond Rating Agencies Will Factor the Implications of OPEB Into Ratings • Will be Evaluated Like Pensions • How Will These Obligations Be Managed? • Are the Commitments Sustainable? • Impact on Ratings

25. Are the Commitments Sustainable? • Project future retiree healthcare costs • Project future revenue expected to be available for retiree healthcare costs • Calculate the ratio of costs to revenue • Examine the graph of the projected ratios • Are the ratios relatively steady? Increasing? Decreasing? Or?

26. Action Steps

27. Preparing For New Financial Reporting • Perform projection of financial impact • GASB disclosures • Year-by-year future OPEB payments • Expected revenue to support OPEB payments • Review opportunities to reduce costs • Educate: • Elected officials • Union Leaders • Finance • Administration

28. New Reporting Deadline Approaching • The numbers are material • Solutions take time • Bargaining issues • Elected officials • Grandfathering issues • State statutes

29. GASB Impact Study • Calculate GASB cost impact • Develop alternatives to reduce cost • Consider pre-funding options • Price impact of proposed changes

30. Thank you! Dennis Tierney, M.A.A.A. Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2352 Dennis_Tierney@aon.com Dennis Monaghan, FSA Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2886 Dennis_Monaghan@aon.com Pamela Hodge, J.D. Vice President Aon Consulting 1211 SW Fifth Avenue, Suite 600 Portland, OR 97204 503-306-2816 Pamela_Hodge@aon.com