City of Lawrence
Finance Department
MEMORANDUM
|
DATE: |
4/12/07 |
|
TO: |
Health Care Committee |
|
FROM: |
Heidi Nelson |
|
|
|
|
RE: |
OPEB Valuation |
Overview
In 2004, the Governmental
Accounting Standards Board (GASB) released Statement 45
(GASB 45) which issued a new set of accounting rules concerning
health and other non-pension benefits for retired public employees. These
benefits, also referred to as “other
post-employment benefits” (OPEB), include non-pension
benefits such as life insurance, dental coverage, long-term care, as well as
retiree health benefits. GASB 45 strongly encourages
public sector employers to set aside funds for OPEB benefits. Instead of a
"pay-as-you-go" funding method, employers are strongly encouraged to
fully fund OPEB benefits in order to show a more favorable financial statement.
The intent of GASB 45 was to bring governmental accounting
standards more in line with private company standards. Though GASB has no power
to change how governments fund retiree benefits, it does
govern the rules that auditors must follow in providing opinions on the
reliability of governmental financial statements. Audited financial statements,
prepared according to GASB, are scrutinized by investors in state and local
bond and rating agencies that make judgments on the likelihood that bonds will
be paid off.
OPEB Valuation
GASB 45 requires that an actuarial valuation be conducted to determine the annual OPEB liability.
The basis for measurement of annual OPEB cost is the actuarially determined annual required contribution (ARC). The ARC is the amount of money that should be set aside during the year to cover both the value of benefits accrued by active workers during the year (normal cost) and the portion of the unfunded liability that is being paid that year. Unfunded liability is the value in today’s dollars of future benefits that workers have earned based on service to the current date. Although GASB 45 does not require that OPEB obligations be funded, the ARC is the level of employer contribution that would be required on a sustained, ongoing basis to systematically fund the normal cost and to amortize, or pay off, the unfunded liability attributed to past service over a period not to exceed thirty years.
Liability Calculation
The OPEB liability as defined by GASB 45 also includes explicit and implicit costs.
The explicit costs of an OPEB plan are clear – the City must pay that portion of the premiums charged by the insurance company which are not covered by the payments made by the retirees. Currently, the City covers 20% of the premium until age 65 for each qualified retiree and his/her covered dependants.
However, there is an additional implicit cost associated with plans in which the premium rates charged by an insurer are determined based on the combined demographics of the active and retired populations. The rates actually charged to the retirees will be lower than the rates that would be charged if the retiree group were rated separately, due to the higher average age – and associated medical costs – of the retiree group compared to the overall combined population.
To measure this implicit cost, GASB 45 requires that OPEB liabilities be determined based on age-adjusted premium or claim amounts. The total OPEB cost incurred by an employer in a given year for an individual retiree is calculated as the age-adjusted cost for that retiree minus the retiree’s contribution.
Both explicit and implicit costs were calculated and included in the 2008 OPEB liability determined by EFI.
Funding Methods
GASB 45 allows for various funding methods, which are as follows:
1. Full pre-funding of benefits – This implies that the City will consistently contribute an amount equal to the Annual Required Contribution (ARC) as defined by GASB 45.
2. Continuing pay-as-you-go funding – This entails no intended pre-funding, and that all future benefits will be paid from the City’s general assets.
3. Partial pre-funding of benefits – This involves contributing an amount which is higher than the pay-as-you-go cost, but lower than the ARC under full pre-funding. In particular, it is assumed that the City will pre-fund the explicit liabilities of the Plan, but will continue to use pay-as-you-go financing for that portion of the liabilities which are dependent upon the implicit rate subsidy.
City’s 2008 OPEB Liability
The charts below show the City’s 2008 OPEB Liability as determined by EFI Actuaries.
Fully Projected Liability
|
Pay-as-You-Go |
Fully Pre-Funded |
Partially Pre-Funded (Pre-Fund Explicit Benefits) |
|
9,284,261 |
4,912,275 |
7,336,893 |
Projected ARC (FY 2008)
Based on a 30-year Amortization Period
|
Fully Pre-Funded |
Partially Pre-Funded (Pre-Fund Explicit Benefits) |
|
|
527,203 |
357,615 |
452,528 |
Plan Changes
One way of reducing OPEB liabilities is to make changes to the existing OPEB plan. After receiving the valuation results from EFI some plan changes were discussed. The changes discussed at this time are merely meant to demonstrate what the effect of plan changes COULD be on the City’s OPEB liability. The City has not yet determined if any changes will be made to the plan but would like the opportunity to know what impact certain changes may have.
In addition, it has not yet been determined if we will proceed with the additional calculation of plan changes due to the additional cost and time restrictions involving preparation of the 2008 budget. The plan changes may be calculated at a later date.
Below are proposed plan changes that have been discussed with EFI to calculate. After each one of the proposed plan changes is EFI’s estimate of the impact of the change on the City’s current OPEB liability.
|
2006 Flat Dollar Amounts: |
|
Single coverage – health and dental (includes Rx) $222 |
|
Single coverage – health (includes Rx) $207 |
|
Family coverage – health and dental (includes Rx) $664 |
|
Family coverage – health (includes Rx) $619 |
|
|
|
EFI’s estimation of impact: This option would likely have a significant impact on the explicit costs of the plan (which make up about 50% of the total cost). |
|
|
EFI’s estimation of impact: This option would be difficult to analyze without additional information (such as an evaluation of the impact on the premium equivalent by the provider) |
|
|
EFI’s estimation of impact: Not likely to have much impact, as dental costs are quite low. |
|
|
EFI’s estimation of impact: Removing the implicit subsidy would reduce the pay-as-you-go cost by about 50%. |
|
|
EFI’s estimation of impact: This would likely have a similar impact as the prior item, as the current implicit subsidy is about 20% of the total premium. Therefore, charging the retirees 125% of the current premium would be similar to removing the implicit subsidy. |
|
|
EFI’s estimation of impact: Unsure of the impact for these 3; the answer will depend heavily on the demographics of the plan. |
|
|
EFI’s estimation of impact: Again, this would be difficult to analyze without additional information. Not likely to change costs very much if those who are eligible for coverage through another employer are already taking advantage of the alternative coverage. |
Next Steps
The OPEB valuation is still being revised. When revisions are complete, which may or may not include the previously discussed plan changes, EFI will be making four presentations. One of those presentations will be before the Health Care Committee. Although the date of the presentations has not yet been determined, it is our intention that the focus of the presentation be on the impact of possible plan changes.
The next steps for the Health Care Committee are to determine what plan changes if any they would be comfortable implementing. Determine if the Health Care Committee would like to see any other changes calculated by EFI.
The GASB 45 Committee (made up of members from Finance and Administrative Services) will recommend which funding method is most advantageous to the City, along with possible funding methods and present their findings to the Commission.