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Other Post Employment Benefits. Public Policy Workshop April 24, 2007. Overview . Overview Valuation & Financial Results Funding Options Credit Rating Implications Legislative Initiatives Conclusion. Overview.
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Other Post Employment Benefits Public Policy Workshop April 24, 2007
Overview • Overview • Valuation & Financial Results • Funding Options • Credit Rating Implications • Legislative Initiatives • Conclusion
Overview • GASB 45 – requires accounting for and reporting of the liability related to benefits provided to retirees by State and local governments. • For Mecklenburg County, the effective date is FY 2007-2008. • Liability is not new, but calculating and disclosing the amount of the liability is new. • Private sector has been reporting this since 1993. • Requires reporting of, not funding of the liability.
Valuation & Financial Results • County hired Mercer HR Consulting to prepare actuarial valuation. • Purpose of Valuation:a) Identify the County’s total liability.b) Determine the Annual Required Contribution (ARC). • ARC consists of two components:a) Amortization of the accrued liability.b) Normal Cost.(Includes the current PAYGO portion) • Valuation included three scenarios based on different funding & investment strategies.
Valuation & Financial Results • Funded Plan – Assumes full funding of annual required contributions and assets would be invested in a mix of equities and fixed income investment vehicles (60% stocks, 40% bonds). Discount Rate: 7.5% • 50% Funded Plan – assumes partial funding of the plan and assets would be invested in a mix of equities and fixed income investment vehicles (60% stocks, 40% bonds).Discount Rate: 5.5% • Unfunded Plan: assumes no additional funding and assets would be invested using the guidelines in the County’s existing investment policy.Discount Rate: 3.5%
Credit Rating Implications • All three credit rating agencies have indicated that a government’s management of its OPEB obligations will be part of future credit analysis and ratings. • Unfunded liabilities that continue to grow put pressure on a government’s credit rating. • Government’s are expected to demonstrate a plan to manage this liability for the long term.
Credit Rating Implications • Fitch will view negatively an issuer that chooses not to address the liability in any substantive way. • Moody’s expects government’s to have implemented a plan to address the liability within three years. • S&P will view OPEB liabilities the same way it analyzes unfunded pension obligations. Poorly funded pension plans can constrain the credit quality of an issuer.
Legislative Initiatives • Mecklenburg County Legislation: would permit the County to invest in equities; not permissible under current State law. • State Treasurer’s Legislation: would permit the Treasurer’s office to invest OPEB contributions on behalf of local governments.
Conclusion • The Board of Commissioners will have to consider these funding options as part of budget deliberations. • Can request the actuary to provide different funding options if the Board would like other options to consider.