How will the new gasb other post employment benefits opeb standard impact oregon pebb
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Bd attach. 9. How Will the New GASB Other Post Employment Benefits (OPEB) Standard Impact Oregon PEBB. August 15, 2006. Dennis Monaghan, F.S.A., E.A. Dennis Tierney, M.A.A.A. Pamela Hodge, J.D. Agenda. Overview New GASB Rules Required Financial Data & Funding Options

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How will the new gasb other post employment benefits opeb standard impact oregon pebb l.jpg

Bd attach. 9

How Will the New GASB Other Post Employment Benefits (OPEB) Standard Impact Oregon PEBB

August 15, 2006

Dennis Monaghan, F.S.A., E.A.

Dennis Tierney, M.A.A.A.

Pamela Hodge, J.D.

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  • Overview New GASB Rules

  • Required Financial Data & Funding Options

  • Actuarial Process Requirements

    • Health Benefit Cost Projection & Trend Issues

    • Investment Return Assumptions

  • Oregon PEBB Costs

  • Effective Dates & Analyses Cycle

  • Financial Implications

  • Action Steps

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Overview of Statement 45 Rules

  • What are Other Post Employment Benefits (OPEB)?

    • Compensation received after employment ends in exchange for employees’ current service

    • Benefits other than pension benefits

    • Healthcare Benefits

      • Medical • Dental

      • Rx • Vision

    • Other Benefits (if not part of pension plan)

      • Life Insurance • Disability

      • Group Legal • Long-Term Care

      • Retiree Discounts (PUD)

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Overview of Statement 45 Rules

  • What are not Other Post Employment Benefits (OPEB)?

    • Vacation

    • Sick Leave

    • COBRA

    • Ad Hoc Early Retirement or Termination Incentives

    • Conversion of unused PTO hours to an individual retiree health care account

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Overview of Statement 45 Rules

  • Why did GASB adopt a new accounting standard?

    • Current accounting standards fail to recognize the cost of OPEB when employee services are rendered

    • Current accounting standards do not identify the value of OPEB already “earned” or accrued as a result of employees’ past service

  • New OPEB standards are structured like GASB’s pension accounting & reporting standards

    • GASB #25 – Plan’s accounting

    • GASB #27 – Employer’s accounting

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Required Financial Data & Funding Options

What Financial Data Have to be Reported

  • Key financial statement components

    • Annual OPEB Cost (annual expense)

    • Net OPEB Obligation (balance sheet liability)

      What are the Funding Options

  • Advance funding is not required; however, there are some advantages

    • The Net OPEB Obligation will be close to zero

    • The actuary can use a more favorable discount rate to value the plan

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Health Benefit Cost Projection Issues

  • Must recognize the “Implicit Rate Subsidy”

  • Post-employment healthcare benefits must be projected based on claims costs for retirees or on age-adjusted premiums

  • Use of unadjusted premiums only acceptable in “community-rated plans”

  • Health Claim Trend

    • If credible, base on employer’s actual experience

    • Emphasize expected long-term future trends

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Annual Amounts





















Actual Cost

Average Cost

Illustration of “Implicit Rate Subsidy”

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Investment Return Assumptions

  • Also called the “Discount Rate”

  • The estimated long-term investment yield on the investments expected to be used to pay the OPEB benefits

  • Investments expected to be used to pay the OPEB benefits are

    • Plan assets

    • Employer assets

    • Or a combination of the two

  • A partially funded plan will use a blended investment return assumption (the discount rate)

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Investment Return Assumption - Example

  • Unfunded Plan

    • Use expected rate-of-return on PEBB assets

    • 5%?

  • Prefunded Plan

    • Use expected rate-of-return on long-term asset mix

    • A mix of stocks and bonds

    • 8%

  • Impact on actuarial liabilities of prefunding

    • Able to use 8% instead of 5% investment return assumption

    • Actuarial liabilities could be 30% lower due to use of prefunding assumptions

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PEBB’s Costs

  • Annual OPEB Cost (AOC – employer’s expense)

    • Annual Required Contribution (ARC)

      • Normal Cost (NC) based on actuarial cost method selected, equals portion of an active employee’s projected benefits that is recognized in the employer’s fiscal year

      • Amortization of Unfunded Actuarial Accrued Liability (UAAL) over a maximum of 30 years

      • Amortization method for gains or losses and plan changes depends on actuarial cost method selected

    • Plus Adjustment due to Contributions > or < ARC

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PEBB’s Costs (cont.)

  • Net OPEB Obligation (NOO)

    • Initial Net OPEB Obligation (at implementation) = $0

    • Optionally, employers may elect to adopt retroactively if prior actuarial valuations are consistent with standard

    • NOO will change from year to year

      • Contributions = ARC; NOO = $0

      • Contributions > ARC; NOO < $0 (an asset)

      • Contributions < ARC; NOO > $0 (a liability)

    • NOO should be recognized in year-end financial statements

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Effective Dates

  • Effective dates for employer’s financials (based on Statement 34):

    Annual RevenueEffective for FY after

    Phase I >$100m 2/15/2006

    Phase II >$10m & <$100m 12/15/2007

    Phase III <$10m 12/15/2008

  • Effective dates for the Plan’s financials are one year earlier

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How Often Do Analyses Have to be Done?

  • Frequency of actuarial valuations

    • At least biennially – Required for plans with a total membership of 200 or more

    • At least every three years for smaller plans

  • Required notes to financial statements

  • Required supplementary information

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What if PEBB Doesn’t Pay?

  • Underpayments create liabilities

  • Net OPEB Obligation

  • Very low discount rate required

  • Disclosure of large unfunded actuarial liabilities

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GASB vs. Pay-As-You-Go (PAYG)






Annual Amount













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Where does OPEB Disclosure Fit Into the Rating Scheme

  • OPEB Liabilities Are Not New

  • They’re Already Here – But Generally Not Quantified

  • New OPEB Disclosure Will Affect All Rating Factors – Except Economic

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OPEB Rating Impact – Most Analogous To Pension Obligations

Debt Factors

  • Types of Obligations

  • Overall Debt Burden

  • Other Long Term Liabilities

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Debt Factors (continued)

Pension Liabilities

  • Size of UAAL/Funding Ratio

  • Historical Progress

  • Pension Obligation Bond Versus UAAL

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Management Factors

Pension Perspective

  • How are Pension Liabilities Being Managed

  • Are Liabilities Being Shifted to Future Administrations (Tax Payers)?

  • Are Required Contributions Being Made

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Financial Factors

Pension Benefits as an Expense

  • How Do Pensions Affect the Employer’s Cost Structure?

  • What is the Trend in Contribution Payments?

  • Will Pension Contributions Jeopardize Debt Service?

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OPEB As a Rating Factor

Bond Rating Agencies Will Factor the Implications of OPEB Into Ratings

  • Will be Evaluated Like Pensions

  • How Will These Obligations Be Managed?

  • Are the Commitments Sustainable?

  • Impact on Ratings

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Are the Commitments Sustainable?

  • Project future retiree healthcare costs

  • Project future revenue expected to be available for retiree healthcare costs

  • Calculate the ratio of costs to revenue

  • Examine the graph of the projected ratios

  • Are the ratios relatively steady? Increasing? Decreasing? Or?

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Preparing For New Financial Reporting

  • Perform projection of financial impact

    • GASB disclosures

    • Year-by-year future OPEB payments

    • Expected revenue to support OPEB payments

  • Review opportunities to reduce costs

  • Educate:

    • Elected officials

    • Union Leaders

    • Finance

    • Administration

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New Reporting Deadline Approaching

  • The numbers are material

  • Solutions take time

    • Bargaining issues

    • Elected officials

    • Grandfathering issues

    • State statutes

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GASB Impact Study

  • Calculate GASB cost impact

  • Develop alternatives to reduce cost

  • Consider pre-funding options

  • Price impact of proposed changes

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Thank you!

Dennis Tierney, M.A.A.A.

Vice President

Aon Consulting

1211 SW Fifth Avenue, Suite 600

Portland, OR 97204


[email protected]

Dennis Monaghan, FSA

Vice President

Aon Consulting

1211 SW Fifth Avenue, Suite 600

Portland, OR 97204


[email protected]

Pamela Hodge, J.D.

Vice President

Aon Consulting

1211 SW Fifth Avenue, Suite 600

Portland, OR 97204


[email protected]