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HomeMy WebLinkAbout112106 GASB 45 BriefingNovember 21, 2006 City of Virginia Beach GASB 45 Briefing Barbara P. Bailey, CEBS, CLU Ken Jeffries Reinhart Kramreither, ASA, MAAA Contents GASB 45 ? Overview and Requirements – Actuarial Valuation – Assumptions ? Plan Enrollment ? Financial Results ? Issues – Options for the City – Bond Rating Impact ? Future Workforce Recruitment and Retention ? Decision Points – 1 Mercer Health & Benefits GASB 45 Overview and Requirements GASB 45 Overview and Requirements What is GASB 45? ? Standard created by the Governmental Accounting Standards Board – to provide consistent accounting and reporting standards for government entities Private sector counterpart is Financial Accounting Standards Board – (FASB) Accounting standard requiring governments to disclose their costs – and obligations for Other Post Employment Benefits (OPEB*) Requires governmental employers to account for retiree medical – costs as workers earn benefits Even if benefits are not vested or guaranteed or could be amended – or discontinued, they still must be accounted for as OPEB * OPEB = Compensation received, after employment terminates, in exchange for employee’s current service 3 Mercer Health & Benefits GASB 45 Overview and Requirements (continued) Financial Reporting Requirements ? Recognize OPEB Expense (referred to as the Annual Required – Contribution –“ARC”) Report Net OPEB Obligation (difference between ARC and actual – contribution) as liability Footnote Disclosure (plan description, funding policy and – assumptions) Applies to the City’s financial statements effective for FYE June 30, – 2008 Provide information about “promised”benefits (actuarial liabilities) – associated with past service and the extent to which those promises are funded 4 Mercer Health & Benefits GASB 45 Overview and Requirements What are OPEB? ? Life, Disability, Medical and Long Term Care benefits – A form of deferred compensation – Benefits are “earned”and obligations accrue during employment – even though benefits are not taken until after employment ends 5 Mercer Health & Benefits Actuarial Valuation Actuarial Valuation Assumptions and Methodology ? Census Data ? 7 Mercer Health & Benefits Assumptions and Methodology Valuation based on City and Schools’specific data including: ? Census of active employees and retired employees – Current retiree health care plan of benefits – Actual City and Schools claims cost – Assumptions for turnover, mortality, retirement age based on ? Virginia’s Retirement System (VRS) 1994 GAM Static Mortality – 10 year “select and ultimate”turnover, to assume higher percentage of members – leave the system within the first 10 years of service Separate retirement assumptions for City, School, and Public Safety members – Actuarial Cost Method allocates the present value of future benefits to ? past and future periods of service Valuation uses Projected Unit Credit (“PUC”) methodology – Yields the lowest accrued liability of the six available methods – 8 Mercer Health & Benefits Assumptions and Methodology (continued) Two discount rate approaches used: ? If unfunded, the rate expected to be earned on the City’s general assets must be – used (generally a money market rate) Valuation uses 3.0% (produces greater liability) ? If funded, a long-term interest rate may be used – Valuation uses 7.5% (produces lower liability) ? Demographic assumptions based on VRS annual pension valuation ? Eligible retirees assumed to elect benefit coverage ? City: 80% – Schools: 70% – 60% of participating retirees elect coverage for spouses ? 80% assumed married at retirement – Husbands are assumed to be 3 years older than their wives – Health plan (medical + pharmacy) trend at 11.0% in 2007, decreasing ? to an ultimate trend of 5.5% after 2015 9 Mercer Health & Benefits Census Data As of July 2006 Total City Total Schools Grand Total Total Actives 5,739 10,543 16,282 Current Retirees 530 671 1,201 Total 6,269 11,214 17,483 10 Mercer Health & Benefits Employee Count by Age and YOS Current employee age and service distribution: ? Active Employees Reflected in Valuation of GASB Liability CITYYOS BandGrand Age Band>=0 - 5>=5 - 10>=10 - 15>=15 - 20>=20 - 25>=25 - 30>=30 - 35>=35 - 40>=40 - 45>=45+Total < 2030000000003 >=20 - 25202800000000210 >=25 - 203968430000000483 >=30 - 35343220573000000623 >=35 - 403022321351041300000786 >=40 - 45283178114238130170000960 >=45 - 5020217190175185224300001,077 >=50 - 55139118111120121154101800872 >=55 - 60646862815787652000504 >=60 - 6524301847353619660221 Grand Total1,9581,10959076854151821534605,739 Active Employees Reflected in Valuation of GASB Liability SCHOOLSYOS BandGrand Age Band>=0 - 5>=5 - 10>=10 - 15>=15 - 20>=20 - 25>=25 - 30>=30 - 35>=35 - 40>=40 - 45>=45+Total < 2030000000003 >=20 - 25257200000000259 >=25 - 2063311520000000750 >=30 - 35512346702000000930 >=35 - 40556304303964100001,264 >=40 - 45565353236292107200001,555 >=45 - 5049839827026822211050001,771 >=50 - 553523003323071772381290001,835 >=55 - 6024719925328018614113347101,487 >=60 - 659497901449588383670689 Grand Total3,7172,1141,5561,389791580305838010,543 11 Mercer Health & Benefits GASB 45 Financial Results GASB 45 Valuation 2007 valuation results reflect ? Current retiree claims costs and administrative expense (data – through June 2006) with trend applied to develop future costs Retiree premium contributions will increase assuming implicit – subsidy removed over 10 years* Actuarial assumptions shown on pages 8 & 9 – Plan of benefits as communicated to retirees for 2007 – 2006 enrollment (active employee and retiree) – * Impact to be covered in the Health Care Rate Setting Presentation 13 Mercer Health & Benefits GASB 45 Financial Results –City and Schools Liability and ARC Calculations for 2007 Unfunded 3%Funded 7.5% ($Millions) CITYSCHOOLSTOTALCITYSCHOOLSTOTAL Actuarial Accrued Liability$149.1$183.1$332.2$87.9$112.7$200.6 28.7 Annual Required Contribution16.723.139.812.016.7 Expected 2007 Costs3.56.29.73.56.29.7 Cash Flow Increase 0.00.00.08.510.519.0 The City of VA Beach would need to disclose in the financial statement a liability of: ? $332.2 million if unfunded – $200.6 million if funded – Based on GASB 45 rules, if the City decides to attain a funded status, the City must ? establish a formal OPEB funding policy Projected first year deposit = $28.7 million (the ARC) ? Plan costs (retiree claims & expenses ) should be paid from thisamount – 14 Mercer Health & Benefits Liability for Retiree Medical By Eligibility Illustration of the distribution of actuarial liability for Cityand Schools ? population assuming unfunded status VA Beach Public Schools City of VA Beach Unfunded Actuarial Liability (3.0%) Unfunded Actuarial Liability (3.0%) Retirees, Actives Not Fully Eligible, Actives Not Fully Eligible, $22.0M, 12%, (671) Retirees, $80.0M, 54%, (4,466)$112.7M, 62%, (7,525) $34.8M, 23%, (530) Actives Fully Eligible,Actives Fully Eligible, $34.3M, 23%, (1,273)$48.3M, 26%, (3,018) $183M $149M Note: Count reflects retirees and disableds only, and Actives under 65 15 Mercer Health & Benefits Issues Bond Rating Impact Future Workforce Recruitment and Retention Bond Rating Impact Bond rating agencies are looking for a realistic plan to meet OPEB ? obligations from municipalities. Absence of a plan will be viewed as a negative rating factor. An appropriation or consistent pattern of making payments in the past pursuant to an established funding policy is viewed as evidence of a formal commitment. Moody’s Quotes ? Moody’s does not anticipate that the liability disclosures will cause immediate rating adjustments on a broad scale. – As governments and their retirement benefit plans begin issuing financial reports in compliance with the new rules, – OPEB funding status will become more visible among the many attributes Moody’s assesses in the municipal credit rating process. Moody’s will exclude OPEB liabilities from calculations of state or local debt burdens, but include them as a factor – in the overall credit assessment of an issuer. 17 Mercer Health & Benefits Bond Rating Impact Fitch Quotes ? Failure to make actuarially determined OPEB plan contributions will most likely result in rising net OPEB – obligations, which like rising net pension obligations are a deferral of financial responsibility. Therefore, over time, a lack of substantive progress in funding and managing OPEB liabilities or a failure to develop a realistic plan to meet annual OPEB contributions could adversely affect anissuer’s credit rating. Conversely, in Fitch’s opinion, the prudent accumulation of assets in a trust account outside the general fund and well in advance of pay-as-you-go cost escalations can avoid or forestall liquidity problems ortax capacity concerns that might lead to credit deterioration. Initially, Fitch’s credit focus will be on understanding each issuer’s liability and its plans for addressing it. Fitch – also will review an entity’s reasoning in developing its plan. An absence of action taken to fund OPEB liabilities or otherwise manage them will be viewed as a negative rating factor. Reality dictates that an entity may opt to defer OPEB funding intimes of budget stress. However, indefinite – deferrals are damaging to credit quality. While not debt, pension and OPEB accumulated costs are legal or practical contractual commitments that form a portion of fixed costs. Long-term deferral of such obligations is a sign of fiscal stress that will be reflected in ratings. Standard and Poor’s Quotes ? The new reporting may reveal cases in which the actuarial funding of post-employment health benefits would – seriously strain operations, or, further, may uncover conditionsunder which employers are unable or unwilling to fulfill these obligations. In such cases, these liabilities mayadversely affect the employer’s creditworthiness. All Standard & Poor’s rated employers will be monitored closely in terms of their reporting under GASB 45. Upon implementation of these new standards, we will include the new information as part of our ongoing analytical surveillance of ratings. 18 Mercer Health & Benefits Future Workforce Recruitment and Retention Health Care coverage is a benefit offered as part of the City’s total ? compensation package A competitive compensation package is crucial for recruitment and ? retention of a quality workforce 19 Mercer Health & Benefits Options for the City Options for the City Decide to fund or not to fund the liability ? Leave plans status quo ? Reduce the financial results of the GASB 45 valuation ? Change who is eligible for retiree medical benefit – for example, increase years of service to be eligible for the City contribution ? from 25 to 30 Change the retiree medical plan design offered – for example, reduce the coverage provided by the plan with higher ? deductibles, greater co-pays and maximum out-of-pockets, etc. Change the amount of the City contribution for retiree medical – for example, reduce or eliminate the City contribution for retiree medical ? 21 Mercer Health & Benefits Decision Points Decision Points Do you put money aside now, prior to June 30, 2008, as we continue ? to study all options and determine how to proceed? Do you fund? ? If you fund, where do you place the funds? ? If you fund, do you create a legal liability? ? Do you make plan changes? ? 23 Mercer Health & Benefits