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Florida Electric Cooperative Accounting Association May 2010

Florida Electric Cooperative Accounting Association May 2010. Topics. Retirement Security (RS) Plan Update Form 990 Calculations Post Retirement Benefit Valuation Services New Annuity Option Health Care Legislation BTA Coverage. The RS Advantage. Founded in 1948

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Florida Electric Cooperative Accounting Association May 2010

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  1. Florida Electric Cooperative Accounting AssociationMay 2010

  2. Topics • Retirement Security (RS) Plan Update • Form 990 Calculations • Post Retirement Benefit Valuation Services • New Annuity Option • Health Care Legislation • BTA Coverage

  3. The RS Advantage • Founded in 1948 • Designed to serve the electric cooperative industry • Assists with attracting and retaining employees Designed with the co-op employee in mind • Provides industry portability • Provides a comfortable standard of retirement living for employees who spend their careers with the co-op • 870 participating cooperatives with 63,000 individual participants 3

  4. Funding Calculations Two calculations needed to determine required contributions: • Regular ERISA funding – normal funding calculation needed each year. Benefits funded over the average future working lifetime of employees. • Deficit Reduction Contribution (DRC) – applies only if funded ratio is below a certain level. The DRC requires a shorter funding period. The required contribution is the larger of these two amounts.

  5. Increase in Contribution Rates for 2010 Base contribution rates for 2010 increased by 35%. Actual increase for a co-op will varied with changes in average age for that co-op. Due to 26.4% return on investment plus co-op prepayment of 2010 contributions, the DRC will not apply for 2010.

  6. Investment Return for 2008 - 2009 2008 Actual Return - 27.2 % Expected Return 8.5 % Difference - 35.7 % 2009 Actual Return 26.4 % Expected Return 8.5 % Difference17.9 %

  7. Assets 2008 and 2009 Market Value of Assets 12/31/2007 $4.96 Billion Expected MV of Assets 12/31/2008 $5.19 Billion Market Value of Assets 12/31/2008 $3.47 Billion Unrealized Investment Loss $1.72 Billion Market Value of Assets 12/31/2009 $4.10 Billion

  8. RS Plan Investment Return History YearReturnYearReturn 2009 26.4% 2008 (27.2)% 1995 26.0% 2007 4.9% 1994 (0.1)% 2006 14.9% 1993 15.9% 2005 8.6% 1992 9.7% 2004 13.3% 1991 21.1% 2003 23.7% 1990 (0.9)% 2002 (6.6)% 1989 21.0% 2001 2.2% 1988 16.3% 2000 7.3% 1987 3.0% 1999 5.8% 1986 23.9% 1998 13.8% 1985 26.0% 1997 21.4% 1984 6.0% 1996 16.0% 1983 18.4% 1982 24.2% Negative Negative Positive but less than assumed Positive but less than assumed Greater than assumed 8.5% Greater than assumed 8.5%

  9. RS Plan Asset Allocation(Varies over time) • Domestic Equity 50% • International Equity 10% • Bonds 35% • Cash 5%

  10. Concern for 2011 • With continued phase in of the 2008 investment loss, the DRC is very likely to apply for 2011 unless there is superior investment performance for 2010 as well as 2009. • However, legislation is being pursued to address this issue. We are combining our efforts with other plans which are under PPA and are facing an even more serious problem.

  11. Accounting of DRC – Statement 71 • Statement 71 applies to the DRC Contribution. • RUS has indicated this is acceptable to them, with an amortization period of the average working lifetime of plan participants. • An amortization period of 10 years should be acceptable.

  12. Long – Term Changes: 1982 to 2009 Plan19822009 Age 65 65.8% 12.4% Age 62 15.7% 52.0% Age 62/30 Year 18.5% 34.0% Age 60 ----- 1.6% COLA 0.0% 19.8% Average Future Benefit Level 1.6% 1.8%

  13. RS Plan Changes 2006 - 2007 • UpgradeDowngrade • Benefit Level 39 1 • Normal Retirement Age 1 1 • COLA 1 1 • Employee Contributions 3 6 • New Plans 7 • New Hires – Reduced Plan 15 • New Hires – No Plan 9 Plan Freezes None Plan Terminations None

  14. RS Plan Changes in 2008 • UpgradeDowngrade • Benefit Level 10 3 • Normal Retirement Age 1 3 • COLA 1 1 • Employee Contributions 0 4 • New Plans 2 • New Hires – Reduced Plan 1 • New Hires – No Plan 0 Plan Freezes None Plan Terminations None

  15. RS Plan Changes Effective 1/1/2010Benefit Level Changes Number of Co-ops Benefit Level Increases 4 Benefit Level Decreases By 0% - 0.5% 41 By 0.51% - 1% 7 By more than 1% 2 50* Decreased Benefit Level for New Hires 11 Plan Freezes 2 * 5 co-ops downgraded their NRD. 2 co-ops increased employee contributions.

  16. RS Plan Changes Effective 1/1/2010Normal Retirement Date Changes Number of Co-ops Age 62/30 Years Actual to Normal 9 Age 62/30 Years Actual to Age 62 6 Age 62/30 Years Actual to Age 65 1 Age 62/30 Years Normal to Age 62 1 Age 62/30 Years Normal to Age 65 1 Age 62 to Age 65 6 24

  17. RS Plan Changes Effective 1/1/2010Other Plan Changes Number of Co-ops Add COLA 1 Remove COLA 6 Add 100% Death 1* Remove 100% Death 10** Increase Employee Contributions 3 Decrease Employee Contributions 1 * Also downgraded NRD ** One co-op also downgraded NRD and removed COLA

  18. Form 990 Calculations • From 990 must show the actuarial value of the increase in pension benefits for certain participants • If requested, NRECA will calculate these amounts or discuss alternative estimates once the co-op provides the names of the participants • Requests can be made with the names of the appropriate participants through rs990@nreca.coop

  19. Post Retirement Benefit Valuation Services • NRECA provides valuations, studies, and financial statement disclosures of post-retirement (other than pension) benefits on a fee for service basis • Applicable financial standards are FAS 106, FAS 112, FAS 132, and FAS 158 • Most common benefits considered are post retirement medical, drug, dental, and life • Consulting services on possible plan changes to control costs are also provided

  20. Post Retirement Benefit Valuations • The fee charged depends on the complexity of the co-op’s plan and the number of participants • Approximately one-third of co-ops pay a portion of the retiree medical premium for at least some employees • Contact Howard Van Houten at 703-907-6453 or howard.vanhouten@nreca.coop

  21. New Optional Formof Benefit Distribution • During 2010, the RS Plan will develop a new choice, the “Full Cash Refund Annuity,” to offer to employees upon retirement at no additional cost to Co-ops • The retiree receives a guaranteed income for life and, upon death, any excess of the lump sum amount the retiree could have received at retirement over payments actually received is paid in a lump sum to the beneficiary

  22. Use of Lump Sum Option • Over 92% of retirees choose a lump sum • Is the lump sum the best choice for the participant? • Is the lump sum the best choice for the plan?

  23. Lump Sum Concerns and New Annuity Option • Retiree who takes lump sum is betting he will die sooner rather than later • Outliving retirement income is a real possibility • From the standpoint of the plan, the lump sum is the most expensive option • Does another annuity form exist that is good for participants and good for the plan?

  24. A New Alternative:Full Cash Refund Annuity (FCRA) • The Full Cash Refund Annuity will provide a new alternative that addresses some of these concerns • The retiree receives a guaranteed income for life and, upon death, any excess of the lump sum amount the retiree could have received at retirement over payments actually received is paid in a lump sum to the beneficiary • FCRA will be combined with Life only and one J&S Annuity • The following slide illustrates the new annuity choice for a hypothetical retiree at age 62

  25. A New Alternative:Full Cash Refund Annuity • Following is hypothetical monthly benefit*: • $855 for life, and death benefit of $146,000 minus payments received * Approximate amounts; conversion factor for this option has not yet been decided; initial death benefit computed using 2009 rates

  26. A New Alternative:Full Cash Refund Annuity • Example 1: Suppose the retiree on the previous slide dies at age 67 after receiving 60 monthly payments of $855: • Initial death benefit:$146,000 • Payments received during retiree’s lifetime:$855 x 60 = $51,300 • Death benefit to beneficiary:$146,000 - $51,300 = $94,700

  27. A New Alternative:Full Cash Refund Annuity • Example 2: Suppose the retiree on the previous slide dies at age 82 after receiving 240 monthly payments of $855: • Initial death benefit:$146,000 • Payments received during retiree’s lifetime:$855 x 240 = $205,200 • Death benefit to beneficiary:$0, because payments received exceed initial lump sum that participant could have elected

  28. A New Alternative:Full Cash Refund Annuity • In some sense, the Full Cash Refund Annuity offers the best of both worlds: • A guaranteed lifetime income that the participant cannot outlive • A substantial death benefit payable in a lump sum if the retiree dies prematurely

  29. Health Care Reform Law Provision generating the highest number of inquiries and questions to date: Non-Dependent Child Coverage up to Age 26

  30. Bill Construction Creates Confusion Non-Dependent Child Coverage up to Age 26 If employer (ER) covers dependents, now required to cover non-dependent child “until child turns 26 years of age” • Unless child is eligible for other ER Plan (prior to 2014) • Applies even if child is married; but not required to cover the child’s spouse or child’s children

  31. Simple So Far…But • IRC provisions ensures ER-paid coverage (directly or via cafeteria plan) for an adult child remains tax-free (i.e., excludable from employee [EE] income) for “any tax year ending prior to the year in which such child attains age 27.” • So . . . . • While coverage ONLY required “until the child turns 26 years of age,” (so Co-op CAN cut off on 26th Birthday) • IRS now permits tax exclusion until “such child attains age 27” if Co-op permits EE to keep child on until end of Plan Year (usually December 31) (to not force children off plan mid-year)

  32. Perhaps A Picture is Worth A Thousand Words (or More Interpretations)

  33. I Got It...But • Secretary Of HHS to issue Regs defining “dependent” for this purpose – distinct from current IRS definition • Date of Regulations to be determined (TBD) • This is a new provision of Health Law – NOT Tax Code • Need to figure out who is a “dependent” before creating new designation of “non-dependent” • While this could effectively eliminate all other restrictions (age 19, still in school, etc.), it could create new certification requirements to ensure that coverage is limited to eligible individuals and employer costs are maintained. • Shift from verifying student status to verifying under age 26 • Prior to 2014, employers will want to verify that these adult children are not eligible for other employer coverage.

  34. Waiting For “Clarifying” Regulations • When Secretary Of HHS issues regulations defining “dependent” for this purpose, NRECA will review and analyze impacts • Please Remember - • No one knows WHEN Regs will be issued at this point • No impact on plans until January 1, 2011

  35. How Did We Do Overall – The Positives • Preserves co-op ability to customize/tailor its health benefits package as allowed now under ERISA. • ACHIEVES Focus of NRECA Resolution on Health Care • Pushed out 40% “Cadillac Tax” Until 2018 – A legislative lifetime away • SUCCEEDED by including plans with “electric line workers” like us in “high risk” classification, giving us higher thresholds before tax kicks than most other plans. • Permits stronger incentives for wellness & chronic disease management to lower costs in the long run.

  36. More Positives • Brings all plans “up to” NRECA standards by eliminating lifetime/annual benefits caps, recessions, excluding pre-existing conditions • Gets millions into coverage to reduce “cost shift” to plans like ours from uncompensated care provided to uninsured.

  37. There Are Negative Aspects, Too • Several aspects of the new law will increase, rather than decrease, our health care costs; specifically: • 40% Excise Tax on “High Cost” Plans (even with delay to 2018) • New fees and taxes levied on drug companies, medical equipment manufactures, health insurance “companies” etc. will simply be passed on to electric co-ops that pay for these benefits.  • For all stakeholders there are many unknowns • Already working to make improvements to the new law with “Technical Corrections” proposals and meetings with Regulators

  38. Business Travel Accident Coverage • Employee Coverage to increase to $100,000 for all classes of employees/directors • 50 mile radius exclusion removed for employees, managers, department heads • Program enhancements effective with each groups Annual enrollment starting 1/1/2011

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