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Retiree Healthcare and the GASB 45 Standard

Retiree Healthcare and the GASB 45 Standard. District Field Service Representative Training Atlanta, Georgia November 2006. The HealthCare Problem. State of HealthCare in the U.S. Skyrocketing Costs Since 2004, Costs increase nearly 8% annually 4 times rate of inflation

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Retiree Healthcare and the GASB 45 Standard

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  1. Retiree Healthcare and the GASB 45 Standard District Field Service Representative Training Atlanta, Georgia November 2006

  2. The HealthCare Problem

  3. State of HealthCare in the U.S. Skyrocketing Costs Since 2004, Costs increase nearly 8% annually 4 times rate of inflation 4.3 times the amount spent on National Defense 4 Consecutive years of double digit increases in premiums

  4. State of HealthCare in the U.S. Since 2002 premiums up 73% compared to inflation (14%) and wages (15%).

  5. Premiums and Prescriptions Current premium costs for single employees average $4,024 while premium costs for those with family plans average $14,500 annually. Prescription spending has increased more than 14% over previous years, more than triple the annual rate of inflation. These increases are across all plan types including HMO, PPO, POS and indemnity plans.

  6. Active Employees and Retirees(Overall) Active Employees- the average family premium is $12,500 annually regardless of plan type, while the average annual premium for single coverage is $4,800. Retirees- the costs are usually higher. While the average premium for single coverage holds at $4,800, the costs for employee and spouse coverage average $9,400 and premium costs for an employee with family average $13,200.

  7. Top 30 Cities in the US Active employees have access to various plan types including HMO (66.75%), PPO (56.7%), Indemnity (20%) and other (33.3%)

  8. Top 30 Cities in the US: Active The average employer/employee contribution for single coverage is $4,273/$760 (84%/16%). The average employer/employee contribution for family coverage is ($10,252/$2,729) (79%/21%).

  9. Top 30 Cities: Dental and Vision The average premium for dental coverage for a single firefighter is $288 with the employee contributing $84 (30%). The average premium for dental coverage for family coverage is $672 with the employee contributing $300 (45%). The average premium for vision coverage for a single firefighter is $366 with the employee contributing $66 (18%). The average premium for vision coverage for family coverage is $487 with the employee contributing $168 (35%).

  10. All US Cities: Active EmployeesIAFF HealthCare Database (n=326) Active employees have access to various plan types including HMO (44.4%), PPO (71%), Indemnity (7.9%) and other including POS (21.9%).

  11. All US Cities: Active EmployeesIAFF HealthCare Database (n=326) The plans typically selected by firefighters are PPO (56.9%), HMO (26.8), other (including POS) (14%) and Indemnity 4.6%).

  12. All US Cities: Active EmployeesIAFF HealthCare Database (n=326) The average employer/employee contribution for single coverage is $4,772/$600 (88%/12%). The average employer/employee contribution for family coverage is $9,269/$1,895 (83%/17%).

  13. Top 30 Cities in the US: Retirees In the top 30 US cities, all employees have access to retiree healthcare. Plan types available include HMO (36.7%), PPO (26.7%), Indemnity (13.3%) and other including POS (16.7%).

  14. Top 30 Cities in the US: Retirees There are various funding mechanisms for firefighter retiree health insurance in the top 30 US cities. These include city/state (36.7%), city trust (36.7%), pension plan (13.3%), or self pay (13.3%).

  15. Top 30 Cities in the US: Retirees The average employer or other provider/retiree contribution for single coverage is $2,893/$1,937 (59%/41%). The average employer or other provider/retiree contribution for retiree/spouse coverage is $7,107/$4,324 (62%/38%). The average employer or other provider/retiree contribution for family coverage is $9,496/$5,683 (62%/38%).

  16. All US Cities: RetireesIAFF HealthCare Database (n=326) Only 80% of all IAFF members have access to retiree healthcare. Plan types available include HMO (27.2%), PPO (54.3%), Indemnity (4.6%) and other including POS (33.5%).

  17. All US Cities: RetireesIAFF HealthCare Database (n=326) The average employer or other provider/retiree contribution for single coverage is $2,935/$1,718 (63%/37%). The average employer or other provider/retiree contribution for retiree/spouse coverage is $5,673/$2,593 (68%/32%). The average employer or other provider/retiree contribution for family coverage is $7,263/$4,122 (63%/37%).

  18. All US Cities: RetireesIAFF HealthCare Database (n=326) Sixty-seven percent of respondents to the IAFF healthcare survey report that Medicare becomes the primary medical plan at age 65.

  19. All US Cities: RetireesIAFF HealthCare Database (n=326) Nearly 32% of respondents report a reduction of benefits offered post Medicare while two thirds report no reduction in benefits. Those experiencing a reduction in benefits also note as much as a 50% reduction in the employer’s contribution to the premium.

  20. Retiree HealthCareNew Accounting Requirements Under GASB #45

  21. GASB Statement 45: New Rules • In 2004, the Governmental Accounting Standards Board (GASB) released Statement 45 (GASB 45) concerning health and other non-pension benefits for retired public employees. These benefits may also be called “other post-employment benefits” and retiree healthcare programs are by far the most costly.

  22. GASB Statement 45: New Rules • The intent of GASB 45 is to bring governmental accounting standards more in line with private company standards. • Though GASB has no power to change ‘how’ governments fund retiree health, pension and other benefits, it does govern the rules that auditors must follow in providing options on the reliability of governmental financial statements. • Audited financial statements prepared according to GASB are scrutinized by investors in state and local bonds and rating agencies that make judgments on the likelihood those bonds will be paid off is required.

  23. Retiree Healthcare Compared to Pensions • Retiree health benefits, like pensions are a form of deferred compensation. • the employee earns the compensation during their working years but is paid after they retire. • Pension systems typically are funded by governments paying normal costs each year as employees earn the compensation and the funds are invested to generate returns and grow until required to be paid to the employees following retirement. • Known as “Prefunding”

  24. Retiree Healthcare Compared to Pensions • To the extent the funds set aside each year for pensions are insufficient to cover the projected benefit costs, the system is said to have an ‘unfunded liability’. • Retiree health benefit programs under GASB 45 standards are very similar and will result in the calculation of an ‘unfunded liability’ similar to that of pension systems.

  25. GASB Standards 45: Why is this an issue? • Causes the reporting of OPEB liabilities • Unfunded liability is likely significant and could impact • Healthcare Plan design and benefits • Local government cash flow • Potentially --- Bond ratings • Effective dates approaching so planning time is short

  26. GASB Standard 45 • The effective dates of the GASB 45 requirements will be phased in over three years based on state/local government annual revenues in fiscal year 1998-99. • Effective DateAnnual Revenue • 12/15/06 $100 million or more • 12/15/07 $10 million or more but less than $100 million • 12/15/08 less than $10 million

  27. GASB Standards 45: Requirements Explained • The GASB accounting standard 45 requires an employer to accrue the costs of other post-employment benefits (OPEB) over the career of an employee and to disclose the amount of any unfunded liability. • For employers who choose to fully fund their OPEB liabilities, the annual expense is called the Annual Required Contribution (ARC). • ARC is the sum of the annual costs for benefits earned during the year plus an amortization, or costing out, of expenses for benefits earned before the adoption of GASB 45.

  28. GASB Standard 45: What does it require? • Actuarial reporting of annual required contribution (ARC) to post-retirement benefit costs during period of active employment • Normal costs + amortization of unfunded actuarially accrued liability • Also required to report liability for terminated employees with benefits not yet received and retired employees and beneficiaries currently receiving benefits. • Disclosure of unfunded actuarially accrued liability • Encourages but DOES NOT require funding

  29. GASB Standard 45: When Employers DO NOT Fully Fund Benefit Costs • For employers who do not fully fund the costs of these benefits, the annual expense also includes further adjustments because there are no investment earnings to offset the liability. • Under this scenario, the reportable annual expense for an unfunded benefit plan could be as much as twice the annual expense for a fundedplan. These increased costs are the primary reason that GASB 45 is so significant to public sector employees, since most OPEB are not fully funded for the anticipated liability.

  30. GASB Standard 45 • Today, most public sector OPEB are funded on a ‘pay-as-you-go’ basis • GASB 45 DOES NOT REQUIRE advanced funding. The decision whether to fund the benefits has no impact on the actual cash costs eventually paid out as plan benefits. • The impact of the decision whether to pre-fund will however have a significant impact on… • accounting process • bond rating agencies as they may look unfavorably on governmental employers that do not have a plan for funding their OPEB obligations.

  31. GASB Standard 45: What Employers Need to Know • Public sector employers need to develop a course of action to: • Meet the reporting requirements under the accounting standards and • Manage their financial and political impact. • In order to develop a course of action, public sector employers need to: • Understand whether the accounting standards apply and if so, to understand the legal and benefit design aspects of the plan; • Conduct a preliminary actuarial analysis to determine whether the liabilities and annual expense require any action;

  32. GASB Standard 45: Actuarial Valuation • Determine the potential monetary liability of the retiree health plan; • Budget for GASB costs and to properly distribute costs among employee classifications; • Aid in developing strategies for managing costs through funding or managing plan costs; and • Employers may use data contained within these actuarial valuations to “aid” them in union negotiations.

  33. GASB Standard 45: What Employers Need to Know • All employers will need to understand the impact on their bond ratings and decide on a funding strategy. • Some employers will rely solely on funding strategies to manage the expense, while others will develop strategies to manage costs through benefit plan changes or cost management. • All employers will want to anticipate questions from bond rating agencies, taxpayers, and retirees.

  34. GASB 45: What Do Bond Raters Say? • Investor services will use a series of questions to review management criteria. • Is the jurisdiction actively pursuing alternatives to soften the impact of OPEB? • Where does the OPEB problem rank in relation to other planning priorities? • How conservative (or aggressive) are the methods and assumptions being used to determine OPEB liabilities and plan for the future?

  35. GASB 45: What Do Bond Raters Say? • Investor services will ask questions to review financial criteria: • Are there other areas in the budget to cut to make room for increasing OPEB costs? • Will total carrying charges of bond debt service, pension contributions, plus OPEB contributions be sustainable given existing (or projected) resources?

  36. GASB 45: What Do Bond Raters Say? • Investor services will ask questions to review the debt criteria: • What is the legal obligation of the employer to meet retiree health care obligations? • How does OPEB alter the long-term liability landscape for the employer? • Does OPEB put the employer at a comparative disadvantage in relation to its peers from the standpoint of total long-term liabilities?

  37. GASB 45: What Do Bond Raters Say? • Investor services written statements: • Standard and Poor’s • Moody’s • Fitch • All recognize GASB 45 does not present ‘new’ liability • All are looking for a ‘plan’ for the future

  38. GASB 45: Likely Employer Actions • Move to “employee pay” or Reduce benefits • Reduce or alter future employee post retirement benefits • Change the current contribution formula for the retiree and family benefits • Increase the share of retiree health benefits costs paid by employees during their working years. • Raise the number of years required to vest in retiree health benefits. • Establish a defined contribution program to which state and/or local governments would agree to contribute a set amount of money thus shifting the financial risk to the employee.

  39. GASB 45: How will IAFF Members be Affected? • Affiliates will most likely be faced with employer proposals to reduce OPEB liabilities by: • Lowering the level of retiree health care benefits granted; • Offering new employees (or new retirees) a reduced benefit level; or • Placing a cap on total OPEB employer provided benefits. • Affiliate leaders should insist on labor-management discussions to develop alternative solutions to these proposals.

  40. GASB 45: Recommendations/Options for IAFF Members • Prefunding retiree health benefits to begin addressing unfunded liabilities • Partial prefunding retiree health benefits • Prefunding results in a reduction in costs over time as investment earnings would supplement employer and employee contributions for retiree health costs. • Prefunding also helps secure expected benefits for employees by creating a pool of assets strengthening the ability to continue to offer benefits over time. • Prefunding contributes to higher bond rating as bond rating agencies monitor the funding status of the retiree health program, and help determine the interest rates paid on debt.

  41. GASB 45: Recommendations/Options for IAFF Members • Legislative action • Actuarial valuation information should be made available to legislators to enable them to appropriately address the magnitude of state and local government unfunded liability • Creation of a working group to address; • retiree health care costs • types of prefunding vehicles • investment guidelines • viability of issuing bonds to reduce liability • increasing funding from Federal government

  42. GASB 45: Recommendations/Options for IAFF Members • Establishment of Retiree Medical Trusts (RMTs). • An RMT is a hybrid health plan with features similar to defined benefit and defined contribution plans. • IAFF affiliates may consider the incorporation of OPEB bonds as an alternative means of funding healthcare benefits. • The OPEB bonds issued to date have been taxable, thus affording investment flexibility of proceeds.

  43. GASB 45: Recommendations/Options for IAFF Members • Establish irrevocable trust arrangements, such as a Versatile Employee Benefit Alternative (VEBA) Trust. • A VEBA is a tax-exempt trust primarily used to fund eligible medical expenses. • Section 115 integral part government trusts offer another alternative that provides a tax-exempt base for reimbursing health expenditures.

  44. Questions or Comments

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