Strategy Session for Negotiating for Other Post-Employment Benefit (OPEB) Liabilities

1. Strategy Session for Negotiating for Other Post-Employment Benefit (OPEB) Liabilities

2. Table of Contents • Lack of Employer Planning • Why Negotiate for OPEB Funding • Understanding an OPEB Report • Negotiation Considerations • Funding Sources • How Much Should be Funded • Case Studies • OPEB Funding Trends • Q&A

3. “ ” The future ain’t what it used to be. - Yogi Berra Getting Started

4. Lack of Employer Planning • You can’t start saving for retirement when you are in your sixties! • Reducing Benefits • Frozen benefits • Defined contribution plans • Benefit caps • Restrictive service requirements • Benefit buyouts • Higher Costs • High co-pays • High deductibles • Dependent elimination

5. “ ” Hard work never killed anybody, but why take a chance? - Edgar Bergen Action Plan

6. Why Negotiate for OPEB Funding • Employers will most likely delay funding unless they are forced or enticed to fund OPEB liabilities • GASB 45 does not legally obligate employers to fund OPEB liabilities, only to size them • Early start allows you to benefit from compounding investment returns, which can significantly reduce program expenses even with below average returns • 5.00% average return means deposit grows by 332% over 30 years • 7.00% average return means deposit grows by 661% over 30 years • Lack of funding will eventually lead to rating downgrades for employers – making it more difficult to fund OPEB liabilities • “…an absence of action taken to fund OPEB liabilities or otherwise manage them will be viewed as a negative rating factor” (Fitch)

7. Understanding an OPEB Report • Typically consolidated • Packed with assumptions • Inflation • Mortality Rates • Discount Rate • Health Care Cost • Annual required contribution is not required

8. Negotiation Considerations • What does funding mean? • Deposits into a trust • Withdrawals • Borrowing cost • Potential use of Taft Hartley trust guidelines for governance • Equal representation of employee and employers on governing board • Full fiduciary responsibility assumed by the board

9. Negotiation Considerations • Ensuring employer follow through • Can not be pay-go • Can not permit immediate depletion • Specific funding targets • Asset Balance • Cash Deposits • Setup and administrative cost can be excessive • Fee based • Asset based • Embedded cost

10. Funding Sources • Employer contributions/Employee contributions • Share costs at point of service • Increased co-pays, deductibles, etc. • Direct contributions to the trust • Federal reimbursement of OPEB expenses • Certain entities that provide federally funded services can apply for OPEB expense reimbursement for certain employees

11. Funding Sources • Debt can be used to supplement funding efforts • Conservative uses of debt can kick start funding efforts • Debt can insure that contributions are paid • Interest is the responsibility of the employer • Debt can also be used to capitalize on short term reimbursement opportunities

12. How Much Should be Funded • OPEB funding doesn’t have to be an all or nothing proposition • Funding the Annual Required Contribution is the goal, but any funding amounts above pay-go expenses will have long term benefits • Funding can be done using a scaled in approach, increasing annually as General Fund revenue growth allows • Over funding can lead to diminished federal reimbursement opportunities by decreasing your overall liability • Under funding can lead to the trust expiring prematurely, leaving retirees without promised benefits

13. “ ” 42.7% of all statistics are made up. - Larry, the Cable Guy Case Study #1: Misleading Report

14. Case Study #1: Misleading Report • Large NE School District with approximately 5,000 active employees and an Annual Required Contribution of approximately $16.2 million • District officials claimed that in order to have enough money to provide the benefit, employees had take a 15% pay cut for a period of 20 years • Overwhelming vote to strike

15. Case Study #1: Misleading Report • Holes in District analysis • 60% AFT • 4% earnings rate • Exaggerated inflation well above wage increases • Implicit subsidy • Union and District officials reach a compromise to contribute 3.52% of annual salary to OPEB trust, splitting the cost approximately 50/50 between Union members and the District • Union agreed to a higher deductible • District agree to cash deposits into a trust

16. “ Light travels faster than sound. That is why some people appear bright until you hear them speak. - Anonymous ” Case Study #2: Mortality Gains

17. Case Study #2: Mortality Gains • Midsize NE city with a $50 million total liability • Insure the lives of workers to recover death benefits to pay for OPEB cost • Employees expect that there is a contract for lifetime benefit Outcome • Excessive costs • Unrealistic assumptions • Betting on the early death of employees

18. “ ” It’s better to have tried and failed, than not to have tried at all. - Spunky Tuna Case Study #3: Desired Outcome

19. Case Study #3: Desired Outcome • Midwestern County with an initial liability of approximately $369 million • Established guidelines • Initial needs defined • Regular due diligence • Mutual oversight • Develop concessions in exchange for funding • Reduced spousal and dependent benefit • Medicare supplement plan • Increase service requirement for benefit eligibility • County contributes 2.5% of premiums to a trust • Funding and concessions reduced liability to approximately $225 million

20. OPEB Funding Trends • Few trusts have been formed and funding levels remain low nationwide • Public sector entities are making or contemplating aggressive changes to benefit plans in an effort to reduce expenses: • Increase employee premiums and co-pays • Eliminate or reduce spousal and/or dependentcoverage • Cap employer contributions and implement adefined contribution plan • Negotiated concessions should come with firmcommitments

21. “ ” I never said most of the things I said. - Yogi Berra Disclaimer

22. Q&A