University of Maine System Retiree Health Care: Why is this an issue?

1. University of Maine SystemRetiree Health Care: Why is this an issue? Retiree Health Plan Task Force (RHPTF) 3/13/07

2. Background • UMS provides medical benefits to disabled and retired employees and their spouses and dependents • UMS accounts for the benefits on a pay-as-you-go (cash) basis • UMS Cost equals total premiums less required participant contributions • Currently 105 disabled and 1,732 retired employees receiving medical benefits and growing as retirements occur • 2007 Fiscal Year Cost* • Premiums $13.0 million • Participant contributions $4.2 million • Net cost $8.8 million *projected

3. Current UMS Retiree Health Benefits • Retirees under age 65 pay full premium [Unless retired under special incentive] • For retirees 65 and older Medicare is primary • UMS plan supplements Medicare and provides prescription coverage • If retiree had 10 or more years of full-time equivalent service, UMS pays full premium at age 65 and one-half of dependent premium

4. Why is Retiree Health Care an Issue? • Retiree health care is a human, financial, and public policy issue. • The issue is the ability of public employers, including UMS, to continue to provide retiree health coverage in light of the growing costs. • Costs on a pay-as-you-go basis are projected to triple in approximately 10 years because of the number of employees close to retirement age and the increasing costs of health care. • To be responsible we must look at the long-range commitment we are making to retiree health care and the long-range costs.

5. Why is Retiree Health Care an Issue? • GASB is the Government Accounting Standards Board. Public sector organizations must follow GASB rules in preparing their financial statements. • GASB 45 is an accounting rule that requires public employers to put the value of retiree health insurance for current and future retirees on our financial statements.

6. Why is Retiree Health Care an Issue? • We all need to work together to determine how UMS can continue to offer a meaningful retiree health benefit while maintaining the fiscal integrity of UMS and complying with the GASB requirements. • If no changes are made, retiree health care will consume an increasing share of the budget, reducing funding for university operations and/or requiring large tuition increases.

7. GASB Statement No. 45 • Mandates accrual accounting for post-employment benefits other than pensions • Employers must recognize the cost in their financial statement • Requires actuarial valuation to attribute cost to employee years of service • Does not require employers to pre-fund postemployment benefits • Allows employers continued use of the funds, if the employer does not pre-fund the liability in a trust • Calculations must be based on age-based premiums • Will be effective for UMS FY08 (July 1, 2007 – June 30, 2008 fiscal year) • Total post-employment unrecorded liability for current program: $330 million

8. Age Based Premiums:Current Program - Implicit Rate Subsidy

9. GASB Statement No. 45 (continued) • Annual post-employment benefit cost is the Annual OPEB* Cost • Annual OPEB is equal to: • the cost of benefits earned in the current year, plus • a provision for amortizing the unfunded liability over 30 years • UMS Annual OPEB Cost for FY08 is $42.1 million based on current plan design and eligibility • Employer’s Net OPEB Obligation is equal to: • Annual OPEB cost, minus • UMS pay-as-you-go costs • Equals incremental cost of $33.3 million in FY08 *OPEB: Other Post-Employment Benefits

10. Implications of Funding via a Trust • Significant implication to cost – actuarial discount rate would be higher resulting in lower Annual OPEB Cost • May improve UMS’s ability to raise capital due to Bond Rating Agency perception • Legal separate entity • Assets dedicated to providing retiree benefits according to the terms of the plan • Assets legally protected from creditors of UMS or the Plan Administrator • UMS could include funded contributions as a qualified benefit expense in determining Federal Benefit Rate charged to grants and contracts – annual impact approximately $2 million

11. What is the real impact of GASB 45?(From Standard and Poors statement, December 2006) • GASB 45 does not create any new costs; it points out the long-range costs of existing benefits • GASB 45 is a new way to account for, and report on, these liabilities • A tool to better manage costs and liabilities over the long-term • Rapidly increasing costs will strain budgets and balance sheets over the longer term

12. What is the real impact of GASB 45? (cont.) • Failure to fund the actuarial required contribution or at least establish a plan to do so over time indicates that the benefit structure may be unaffordable • This is problematic if protection of benefits and credit quality are desired outcomes. • The two likely scenarios for managing the pressure are either: • boosting assets by increasing revenues • lowering liabilities through benefits modifications

13. Current Program Costs: OPEB andPay-As-You-Go

14. GASB-45 as a Percentage of Projected Revenues (State Appropriations + Tuition & Fee Revenue)

15. Range of Employer Involvement High • Free based on age + service Employer Responsibility Fixed percentage based on age + service Service based percentage contribution Service based dollar contribution Target age subsidies Defined contribution approach, employer funded Savings account, employee funded Access-only/COBRA/Medicare Low Retiree Responsibility High Slide reproduced from Hewitt NASULGC Annual Meeting 11/12/06

16. Possible Plan Design Considerations • Modify Integration with Medicare to create parity with Active Employees • Modify Eligibility • Modify Future UMS Contributions • Age-based premiums for pre-Medicare retirees • Prescription Drug Plan Changes

17. Possible Plan Design Considerations • Eliminate current plan for employees hired on and after a future date • Eliminate current plan for some group of existing employees and/or spouses (under age xx with less than yy service) • Replace plan with a Defined Contribution Health Plan to provide future benefits and to remain competitive in the employment market

18. What are other Employers doing? • State of Maine Employees’ Benefit Trust • Unfunded actuarial accrued liability estimated to be $3.2 billion; annual required contribution minimum $275 million • Employees currently protected by law (plan design eligibility and contribution levels) • Intent is to convert to an irrevocable Trust 7/1/07 • Considering legislation to establish funding plan • University System of New Hampshire • Froze plan to new entrants 7/1/1994 (FASB 106) • Changed eligibility to 10 years after age 52 • Have been reporting liability

19. What are other Employers doing? (cont) • University of Kentucky: • Currently have traditional rich retiree health program • Have defined OPEB Cost = $30.5 million • Plan design choices: • Added an age/service table for retirees who retire prior to age 65 (10% - 80% premium share)* • Changed pre-65 premiums to age based • Change post-65 Rx to Medicare Prescription Drug Plan * Premium share does not change at age 65

20. What are other Employers doing? (cont) • University of Kentucky (cont): • Will pre-fund • Are still considering alternative designs for new hires • Reduced OPEB Cost to $14.2 million (>50% reduction)

21. The Future of Retiree Medical:Defined Contribution Plans • Increasing popularity of Defined Contribution funding model • Establishes individual employee accounts with portability • Can be funded with employer and employee dollars • Employer contributes the same amount for all eligible employees annually – not compensation based • Career approach to providing a benefit – full career employee (25 or 30 years) will have sufficient $’s in their account to purchase health care

22. Chancellor has established the Retiree Health Plan Task Force (RHPTF) Multi-disciplinary across represented and non-represented employee groups Inform and educate Explore alternatives including Defined Contribution approach Make recommendations to Chancellor by June 30, 2007 Work with the State of Maine and State Legislature Obtain external auditor sign-off on valuation/assumptions Consult with a Financial Advisor on implications to Bond rating Next Steps:

23. Retiree Health Plan Task ForceCharge • Identify problems and issues • Survey what other employers are doing • Consider the most suitable alternatives for UMS • Make recommendations to Chancellor by June 30, 2007 that will provide for a meaningful Retiree Health Benefit Program for the future, maintain financial integrity of UMS and meet the GASB requirements

24. Retiree Health Plan Task ForceMembership • Co-chairs • Bill Sullivan, Retiree, former Vice Chancellor for Administration • Gino Nalli, Assistant Research Professor, Muskie Health Policy Institute

25. Trustees: Jean Flahive Margaret Weston President: Theo Kalikow CFO: Charlie Bonin Retirees: Charles Fritz Dick Rice Union representatives: Richard Bragg Sandra Cayford Christopher Gardner Betty Hilton James McClymer Jennifer Moreau Ronald Mosley Dianne Perro Shannon Smith Kerry Sullivan Retiree Health Plan Task ForceMembership

26. Non-represented employees: Steven Weinberger Becky Houle Faculty Representative to BOT: Christine Standefer Liaison with the State of Maine: Frank Johnson PATFA Jerry Ashlock Retiree Health Plan Task ForceMembership

27. Retiree Health Plan Task ForceStaff • Task Force staff • Tracy Bigney, Tom Hopkins • Joanne Yestramski, Frank Gerry and Mark Kamen, as needed as experts in various aspects. • Stuart Rubinstein, actuary and consultant (modeling alternative options) • Observers: • John Bracciodieta, Ross Ferrell, Carl Guignard, Jerry Ashlock

28. Retiree Health Plan Task ForcePreliminary Timeline and Work Plan • First Task Force meeting 3/13/07 • Approximately 6 meetings over March – June • Meetings of ½ day to allow for presentations and in-depth discussions • Actuary available to provide technical assistance and modeling • Other guest experts invited as needed • Recommendations to Chancellor by June 30, 2007