A Discussion Prepared for

February 10, 2009Presented By

Glen Volk, FSA, MAAAConsulting Actuary

Agenda

• Review of GASB 45 Requirements

• Summary of Key GASB 45 Results

• Options for Managing GASB 45 Expenses

Summary of GASB 45 Requirements

4

GASB 45 Requirements

• Requires accrual accounting for Other Post Employment Benefits (OPEB)

• Conceptually the same as accounting for a defined benefit pension plan

• Primary benefit is retiree medical

• Currently financed on a pay-as-you go basis (2007/08 pay-as-you-go cost $1,088,000)

• Phased in implementation – 2008/09 for Phase 2 employers

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GASB 45 Requirements

1. Perform actuarial valuation

2. Recognize cost (Annual Required Contribution, or ARC) of retiree medical benefits equal to: Value of benefits earned by active employees

[Normal Cost], plus Amortization of existing unfunded actuarial accrued

liabilities [AAL]

3. Disclose information about the plan, including the value of plan assets and liabilities

6

GASB 45 Requirements

Trend

Discount Rate

Retirement Rates

Participation Rates

Retiree Contributions

Valuation Assumptions

Turnover

Actuarial Cost Method

Summary of Key GASB 45 Results

Summary of Key GASB 45 Results

$0

$100

$200

$300

$400

$500

$600

Actual Cost Premium Rate Retiree Contribution

Implicit Subsidy

Explicit Subsidy

Example of Implicit Subsidy

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Summary of Key GASB 45 Results

Unfunded Funded

ARC $2,338,000 $1,886,000

AAL

Implicit

Explicit

Total

$5,262,000

23,405,000

$28,667,000

$4,176,000

15,674,000

$19,850,000

Valuation Results as of July 1, 2007

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Summary of Key GASB 45 Results

Unfunded Funded Difference

Pay as You Go Expense

$1,088,000 $1,088,000 $0

Contribution to Trust

$0 $798,000 $798,000

Total Cash Requirement

$1,088,000 $1,886,000 $798,000

ARC $2,338,000 $1,886,000 ($452,000)

Net OPEB Obligation

$1,250,000 $0 ($1,250,000)

Comparison of Funded and Unfunded Scenarios

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Summary of Key GASB 45 Results

• Based on feedback from auditors

• Unfunded Plan – assume discount rate of 5% (based on long term rate of return on General Fund assets used to satisfy obligation)

• Funded Plan – assume discount rate of 8% (based on assumed long term rate of return on Trust assets)

• Higher discount rate means less value is given to future payments. This is what causes the AAL and ARC to be lower.

Difference in Assumptions for Funded and Unfunded Scenarios

Options for Managing GASB 45 Expense

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Options for Managing GASB 45 Expense

1. Status Quo

2. Make Minimum Annual Required Contributions

3. Reduce Plan Expenses Eligibility Plan Design Contributions Medicare Advantage & PDP

4. Fund All or part of OPEB Liability From Any Legally Available Funds or by Issuing OPEB Bonds

General Approaches/Options

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Options for Managing GASB 45

Expense

1. Limitations: Contracts, State Statutes and Collective Bargaining Agreements.

2. Plan Changes may include:

a. Eligibilityb. Contributions (Most critical)c. Co-pays, deductiblesd. Defined contribution plane. Medicare Advantage & PDP

Reduce Plan Expenses

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Options for Managing GASB 45 Expense

• Advantages of Funding:

• Use higher discount rate (lower AAL and ARC)• More favorable treatment from rating agencies• Higher degree of safety for current and future

retirees

• Disadvantages of Funding

• Ties up more cash• Time and expense required to operate a trust

Funding Considerations

Questions?