Webinar VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS… And a lot more.

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WebinarVEBAS PRE-FUNDING RETIREE HEALTH
BENEFITS And a lot more.
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VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS

• Whether you are a benefits manager, administrator
  charged with finding a solution to manage retiree
  medical liabilities or an investor analyzing a
  company with post-retirement benefits on the
  books, this webinar is a must attend event.
  Hear from benefits expert, Lance Wallach, as he
  provides valuable guidance on the implications of
  VEBAs and the potential benefits they can offer.
  Topics of discussion will include
• An overview of the GM and Ford agreements
• How they work The proper formation and operation
  of a VEBA
• Key considerations for plan design,
  administration and investments
• Alternatives to VEBAs
• Pros and cons for employers and special
  considerations for public-sector employers
• Investor perspective The potential impact of a
  VEBA on large, publicly traded companies

• This is your opportunity to hear from and ask
  specific questions of the leading expert on
  VEBAs! Plus, Mr. Wallach has offered 10 minutes
  of free consultation to webinar participants
  within one week after the event! Who Should
  Attend?From Private, Public Sector and
  Multi-Employer Entities including
• Plan administrators
• Plan Benefit Managers
• HR personnel as well as
• Health Care Benefit Consultants
• Compliance Officers
• Attorneys
• As well as analysts from Hedge Funds, Private
  Equity and Venture Capital companies investing in
  companies with or considering a VEBA

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VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS

• Presented byLance Wallach, CLU, CHFC, CIMC A
  member of the AICPA faculty of teaching
  professionals and an AICPA course developer, is a
  frequent and popular speaker on VEBAs, retirement
  plans, reducing health insurance costs, and
  captive insurance at accounting and benefits
  conventions. He has authored numerous books
  including Tax Planning and Asset Protection Using
  VEBAs Mr. Wallach writes for over fifty
  publications including AICPA Planner, Accounting

• Today, CPA Journal, Enrolled Agents Journal,
  Financial Planning, Registered Representative,
  Tax Practitioners Journal, CPA/Law Forum,
  Employee Benefit News, Health Underwriter,
  Advisor and the American Medical Association
  News. Mr. Wallach is listed in Who's Who in
  Finance and Industry and is frequently quoted in
  the press for his expertise on VEBAsincluding
  Bloomberg.com, Washington Post and USA Today. He
  has also been featured on television and radio
  financial talk shows including NPR.

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Accounting Today Reduce Other
Post-Employment Benefits Liability with a VEBABy
Lance Wallach June 16, 2008

• In 1994, the Government Accounting Standards
  Board (GASB) established standards for public
  employee pension plans. Government and public
  employers have to report and account for pension
  benefits costs.
• However, until recent years, there was no such
  standard in place for other post-employment
  benefits (OPEBs) for state and local government
  workers.
• Private sector employers have been required to
  report OPEBs for over 15 years under the FASB
  Standards106/158.
• Government and public sector employers have been
  required to report OPEBs since August 2004 after
  the issuance of GASB Statement 45. This means
  that all government employers must now keep their
  promise of providing retiree benefits. They need
  to be calculated accurately, accrued during the
  employees years of work with the employer, and
  recognized as a financial obligation as OPEB
  costs. These costs are to be reported on
  financial statements of large public sector
  employers beginning with the first financial
  report period after December 15, 2006, and on
  small employers beginning in 2008.

• The intent of GASB 45 was to bring government
  and public accounting standards into line with
  private company standards. This requires
  reporting pensions as well as non-pension
  post-employment benefits. As the name states,
  OPEBs are benefits other than pensions. Many
  state and local governments, public schools,
  public universities and other public and
  government agencies provide post-employment
  benefits that are non-pension-related. These
  benefits can include health care benefits
  including vision, dental, prescription and health
  insurance life insurance legal benefits and
  other non-pension-related work benefits.
• Until these changes were put in place with GASB
  45 and enforced, readers of government and public
  financial statements had incomplete information
  on the costs of services provided by state and
  local governments and public employers, and were
  therefore unable to analyze the financial
  position and long-term health of these government
  and public agencies.

\
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Accounting Today Reduce Other
Post-Employment Benefits Liability with a VEBABy
Lance Wallach June 16, 2008

• Actuarial calculations are used to derive the
  OPEB cost. In order to keep the calculations up
  to date, they must be recalculated every two to
  three years depending on the size of the
  employer. For example, employers with less than
  100 employees can use a simplified alternative
  method for measuring the OPEB cost, but these
  employers still need to re-evaluate and re-assess
  every three years. The costs and obligations for
  post-employment benefits are determined using the
  actuarial present value of the post-employment
  benefits - in other words, the present value on
  term of service and the terms of the OPEB plan
  that are presently in place.
• There are assumptions that are made in the
  actuarial evaluations. They include

• There are assumptions that are made in the
  actuarial evaluations. They include
•   Healthcare cost factors age, industry,
  
  family, geography, gender.
•   Expected long-term and/or short term rate of
  
  return on plan assets.
•    Projected salary scale.
•    Death rates.
•    Projected inflation of medical care costs.
•    Employee turnover rate.
•   Retirement rates this can vary extensively
  from year to year.
•    Any promises made to retirees.
•   Discounts or benefits designed into the plan.

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Accounting Today Reduce Other
Post-Employment Benefits Liability with a VEBABy
Lance Wallach

• After the actuarial evaluations are completed,
  each employee gains a different attribution
  period, which is based on their period of
  eligibility date of hire to date of full
  eligibility (i.e. retirement). With all this
  said, GASB only requires that employers report
  OPEBs employers are not required or even
  obligated to fund the OPEB cost. However, not
  doing so can affect significantly an employers
  credit rating and cost of issuing debt financing.
  
• The largest OPEB cost for an employer is health
  care benefits. The majority of public sector
  employers, with more than 200 employees, offer
  some form of post-employment health benefits.
  Unfortunately, with the uncontrollable increases
  in health care costs happening annually, and
  severe budget cuts being put in place across
  nearly all public and government agencies, the
  continuing use of pay-as-you-go will become
  more difficult and create new financial
  liabilities for employers. Add to this state
  laws that require employers to allow retirees to
  remain on the active health plan until Medicare
  steps in, and the reduction in federal and state
  subsidies, and employers are struggling to
  subsidize the gap between the blended plan cost
  (active employees and retirees) and the actual
  retiree cost. Even if the employer is not
  contributing to the retiree health care plan,
  this amount adds additional liability.

• In December 2004, a report from Standard and
  Poors, stated that The new GASB 45 reporting
  may reveal cases in which the actuarial funding
  of post-employment health benefits would
  seriously strain operations, or, further, may
  uncover conditions under which employers are
  unable or unwilling to fulfill these obligations.
  In such cases, these liabilities may adversely
  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."
• The following year, in June 2005, Fitch Ratings
  released its report, saying Fitch's credit
  focus will be on understanding each issuer's
  GASB 45 liability and its plans for addressing
  it. Fitch also will review an entity's reasoning
  for developing its plan. An absence of action
  taken to fund OPEB liabilities or otherwise
  manage them will be viewed as a negative rating
  factor. Steady progress toward reaching the
  actuarially determined annual contribution level
  will be critical to sound credit quality."
• Everyone is working towards a solution that will
  benefit both employers and employees. But it
  takes constant monitoring by both employers and
  employees.

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Accounting Today Reduce Other
Post-Employment Benefits Liability with a VEBABy
Lance Wallach

• One solution that could benefit everyone is
  considering a VEBA plan.
• VEBAs have been successfully established to help
  reduce health costs and establish financially
  sound OPEB plans that have proven to be both
  efficient and effective. The VEBA can help
  employers develop strategies that can lower their
  liabilities. Many private sector employers have
  benefited from the introduction and use of a VEBA
  for their OPEB plan.
• A well designed GASB 45 OPEB involves many
  different risk management strategies and funding
  techniques. Any benefit promise made by an
  employer should be partially or fully funded in a
  qualified trust to enable actuaries the use of
  long-term discount rates during the calculations.
  One approach to this funding source could be
  issuing OPEB obligation bonds or finance pools.
  The employer can then successfully take these
  finance strategies and blend a defined-benefit
  approach with a defined-contribution strategy to
  create a successfully managed OPEB plan with
  reduced liabilities.

• These two basic forms of post-employment benefit
  plans specify either the amount of benefits to be
  provided to an employee at the end of their
  employment period, or stipulate only the amount
  to be contributed by the employer to a members
  account for each year of active employment.
• A defined-benefit OPEB plan is where the terms
  are specified and the benefits provided from the
  time of retirement or other employment
  separation. These benefits can be
  dollar-specific or the type/level of coverage -
  for example, a dollar payment based on a flat
  rate or years of service, or defined medical
  coverage, prescription drugs or a percentage of
  the premiums. Unfortunately, the defined benefit
  OPEB plan is complicated where the reporting
  makes assumptions on future medical costs,
  mortality rates, the availability of Medicare,
  and the probability of future events.

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Accounting Today Reduce Other
Post-Employment Benefits Liability with a VEBABy
Lance Wallach

• A defined-contribution OPEB plan considers the
  individual. It takes into account individual
  contributions while active, rather than the
  benefits the beneficiaries are to receive
  post-employment. Benefits for the
  defined-contribution plan consist of
  contributions, earnings on investments of these
  contributions, and forfeitures on the members
  account. This makes the plan easier to report
  on, but does not specify the amount of benefits
  received by the employee after retirement.
• GASB accrual standards only apply to
  defined-benefit OPEB plans. Defined
  contributions are considered funded, as the
  employer cost equals the required contribution.
  Therefore, changing the way retiree healthcare
  and other post-employment benefits are paid can
  lower or even eliminate the unfunded other
  post-employment benefits liability.

• Now that the public sector and government
  agencies have to report other post-employment
  benefits, the VEBA can establish the best plan
  for the least liability for employers. State and
  local governments and public services can look at
  the private sector and see the benefits it has
  gained from using VEBAs. They can see how it can
  help soften the financial impact of the new,
  significant reporting obligation.
• Lance Wallach is a frequent speaker at national
  conventions and writes for more than 50
  publications. He was the National Society of
  Accountants Speaker of the Year. Lance welcomes
  your contact. Email - lawallach_at_aol.com or call
  516-938-5007 for more info.
• DISCLAIMER The information provided herein is
  not intended as legal, accounting, financial, or
  any other type of advice for any specific
  individual or other entity. You should contact
  an appropriate professional for any such advice.

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? Why VEBAs in the PS market? ? How does GASB
relate to costs? ? What 'vehicles' can employers
use? ? How does a VEBA work for pre-funding
retiree health? ? Reference Material / Articles
of Interest
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VEBA the Buzz Word in Employee Benefits

• Voluntary employees beneficiary associations
  (VEBAs) are being used to manage retiree medical
  liabilities
• Key factors
• Financial commitment by an employer
• Acceptance of responsibility by the
  union/retirees
• Employer pays
• Fixed payments
• Active wage deferrals
• Other
• Retirees pay
• Retiree contributions
• Coinsurance and deductibles
• Plan changes, which are determined by the
  trustees
• Plan trustees will include representatives of the
  retirees

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Why VEBAs in the Public Sector Market?

• Private employers are limited in their retiree
  health funding options
• Implications of pulling too much revenue away
  from taxable income
• Cafeteria plan rules for employee funding
• Drain on available cash for other profit-making
  investments
• Public employers do not have the tax limitations
  of private employers
• GASB liability reporting is triggering a fresh
  look at how to fund or pre-fund retiree health
  benefits
• Advantage of public sector trusts
• No limits on amount that can be funded
• Because a government entity is not subject to
  income tax

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Polling Question

• What type of jurisdiction do you represent?
• State
• County, City or Town
• School district
• Transit group
• Federal employer
• Other jurisdiction/instrumentality
• Non-profit organization
• Insurance company
• Administrative service provider
• Other

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? Why VEBAs in the PS market? ? How does GASB
relate to costs? ? What 'vehicles' can employers
use? ? How does a VEBA work for pre-funding
retiree health? ? Reference Material / Articles
of interest
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How Does GASB Relate to Costs?

• The Governmental Accounting Standards Board
  (GASB) statements of accounting principles for

• Statement 45 for Employers
• Statement 43 for Plan Disclosure

Requires DisclosureNOT Funding
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What is OPEB?

• Other Post Employment Benefits (OPEB)
• Medical benefits
• Dental
• Vision
• Prescription drugs
• Life insurance
• Legal services
• OPEB Reporting is phased in bysize of employer

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GASB Has Taken Hold

• As of November 2007, Standard Poors Ratings
  Services reported
• 40 states have completed an actuarial valuation
• OPEB liabilities are nearly 400 billion
• Employers are considering the following actions
• Move from pay-as-you-go to prefunding a trust to
  get a more advantageous discount rate
• Review legal basis for establishing trusts and
  issuing bonds
• Use a carefully managed and forecasted
  pay-as-you-go funding plan
• Adjust employee contribution levels
• Reduce benefits
• Create different benefit tiers for new employees
• Contain health care costs in current plans

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What Have Public Employers Learned?
WHAT HAVE STATES LEARNED?
Maryland 14 billionOPEB liability 2 billion annual prefunding contribution compared to annual pay-go of 311 million
California 48 billionOPEB liability 3.6 billion annual prefunding contribution compared to annual pay-go of 1.2 billion
New Jersey 20 billionOPEB liability 5 billion prefunding contribution compared to annual pay-go of 1.2 billion
26 States 300 billionOPEB liability 35.6 billion annual prefunding contribution compared to annual pay-go of 8.3 billion
Experience already shows moving from pay-go to
pre-funding increases annual costs 6 10 times.
NOTE Collected from state reports, press
articles, and Credit Suisse, You Dropped a Bomb
on Me, GASB March 2007.
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Polling Question

• What has your jurisdiction already done regarding
  GASB OPEB liabilities?
• Nothing but discussion
• Initial actuarial valuation
• Valuations and plan changes
• Valuations and contribution/eligibility changes
• Benefit curtailment
• Not applicable

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OPEB Requirements for Plan Assets

• To use accumulated plan assets to offset OPEB
  liabilities, plan assets must be
• Transferred to an irrevocable trust or equivalent
  arrangement
• Dedicated to providing benefits to retirees and
  their beneficiaries under the terms of the plan
• Legally protected from creditors of the employer
  and plan administrator
• Advantage of funding
• Higher discount rate, which will result in a
  lower Annual Required Contribution (ARC)

Assets
Liabilities/ARC
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? Why VEBAs in the PS market? ? How does GASB
relate to costs? ? What 'vehicles' can employers
use? ? How does a VEBA work for pre-funding
retiree health? ? Reference Material / Articles
of interest
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The Ideal Trust Structure

• Employer and employee contributions tax exempt
• Federal and state income tax
• FICA
• Permit employee after-tax or pre-tax
  contributions
• Trust investment earnings tax exempt
• Benefit payments tax exempt
• GASB OPEB qualified asset
• Plan assets protected by exclusive benefit trust

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The Bad News?

• No single vehicle existsto fill all these
  criteria.

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The Good News There are Some Attractive
Possibilities

• Potential Vehicles
• 501(c)(9) VEBA
• 115 or Integral Governmental Trust
• 401(h) Medical Account

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What to think about

• The Government Finance Officers Association
  (GFOA) recommends that if a government elects to
  establish a trust fund, it should consider the
  following
• Legal environment
• Impact on ARC
• Leveraging costs and investing expertise
• Trust vehicles and pros and cons
• Administrative and reporting requirements
• Governance structure
• Satisfying GASB irrevocable trust requirements,
  but still being flexible

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Pre-funding Establishing a Trust

• Source of Funding
• Contributions
• Bond Proceeds
• Accrued sick and vacation leave
• Level of Prefunding
• Must determine level of prefunding
• Proportion of benefits prefunded will dictate
  discount rate, a key factor in determining the
  size of the obligation
• Assess scenarios to model the impact on funding
  and liabilities

• Irrevocable or Not?
• If trust is not irrevocable, cannot count assets
  as OPEB assets in the financial statement
• Full disclosure and a plan to manage the cost is
  what rating agencies want to assign rating risk

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? Why VEBAs in the PS market? ? How does GASB
relate to costs? ? What 'vehicles' can employers
use? ? How does a VEBA work for pre-funding
retiree health? ? Reference Material / Articles
of Interest
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VEBAsA Quick Primer

• Voluntary Employees Beneficiary Associations
  (VEBAs) are tax-favored trusts authorized under
  IRC 501(c)(9) that allow employers to make
  tax-deductible contributions to a trust to fund
  health and welfare benefits
• A VEBA trust is typically coupled with a group
  health plan
• VEBAs are used for the following types of
  arrangements
• Single employer collectively-bargained trusts
• Taft-Hartley trusts
• Retiree committee trusts
• Governmental plan retiree trusts

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VEBA RequirementsTax Treatment

• BenefitsMedical coverage provided under a VEBA,
  and medical benefits paid or reimbursed by a
  VEBA, are excluded from retirees incomes
• DeductionsEmployer contributions to a VEBA are
  deductible when contributed, subject to IRC
  419/419A limitations (but note that these limits
  dont apply to governmental VEBAs)
• IncomeInvestment income of a VEBA on reserves
  held for retiree medical benefits may be subject
  to unrelated business income tax (but note that
  UBIT doesnt apply to governmental VEBAs)

Employee contributions to a VEBA are allowed, but
must be on an after-tax basis.
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VEBA Requirements General Structure

• A VEBA must meet the following requirements
• Must be an employee association
• Membership in the association must be voluntary
• Must be used to provide life, sickness, accident,
  or other permissible benefits to its members and
  dependents (no deferred compensation)
• No part of the net earnings of a VEBA may inure
  to the benefit of an employer, private
  shareholder, or individual
• No reversion to contributing employer

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VEBA Requirements Permissible Benefits

• Provides life, sickness, accident or other
  similar benefits
• Benefits may include health, disability, life,
  ADD, vacation, supplemental unemployment
  benefits, severance, education, child care
  facilities, legal services, disaster relief loans
• Retiree Health Reimbursement Arrangements
• Cannot include commuting expenses, accident or
  property insurance, loans, pensions, annuity,
  profit sharing or any other deferred compensation
  benefits or malpractice insurance
• Certain de minimis benefits are permitted

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VEBA RequirementsMembership

• Organization must be formed on behalf of
  employees who associate together to receive the
  benefits provided by the organization
• Employees must share an employment-related common
  bond
• VEBA meets employee organization standard if 90
  of membership are employees, former employees,
  etc. and their dependents

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VEBA RequirementsNondiscrimination Rules

• VEBAs cannot discriminate, either in eligibility
  or in benefits, in favor of officers,
  shareholders, or highly compensated employees of
  an employer contributing to or otherwise funding
  the association
• But these nondiscrimination rules do not apply if
  the employees/retirees are collectively-bargained
• Special rules apply for contributions for key
  employees

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VEBA RequirementsDocumentation

• Trust agreement
• Plan of benefits
• Contracts with service providers
• For example, claims administrators, insurance
  carriers, investment managers, enrollment
  administrators, pharmacy benefit managers,
  subrogation, wellness, COBRA services, actuaries,
  auditors, lawyers

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VEBA RequirementsGovernance

• VEBA must be controlled by the employee
  membership, an independent trustee(s) or trustees
  or other fiduciaries at least some of whom are
  designated on behalf of the employee members
• Appointment of VEBA trustees varies depending on
  the type of trust

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VEBA RequirementsGovernment Filings

• VEBAs must apply to the IRS for a determination
  letter on Form 1024 to obtain recognition of
  tax-exempt status
• Generally, VEBAs must file an annual information
  return on Form 990
• Governmental units and their affiliates do not
  have to file the Form 990

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VEBAs should appeal to employers

• Collectively Bargained Workforce
• Wants flexibility to allow after-tax employee
  contributions
• Wants to be able to contribute pre-tax mandatory
  employee contributions
• Does not have statutory authority to contribute
  to a 115 trust that meets GASB OPEB trust rules

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Integral IRC Section 115 Trusts

• Section 115(1) of the IRC provides that gross
  income does not include income derived from the
  exercise of any essential government function
  which accrues to a state or political subdivision
• The establishment of a trust to provide medical
  benefits to retired employees and their
  dependents is an essential governmental function
• Employer contributions to the trust are not
  taxable to retirees
• Medical benefits or insurance received by
  retirees from the trust will not be taxable
• Private letter ruling may be necessary

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Section 115 RequirementsTax Treatment

• BenefitsMedical coverage provided under a
  Section 115 trust, and medical benefits paid or
  reimbursed by the trust, are excluded from
  retirees incomes
• DeductionsEmployer contributions to a Section
  115 trust are deductible when contributed,
  without limitation
• IncomeInvestment income of a Section 115 trust
  on reserves held for retiree medical benefits is
  not subject to unrelated business income tax

Employee contributions to a Section 115 trust are
not permitted.
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Section 115 Trusts

• Governmental entities may jointly form trusts to
  minimize legal and administrative costs
• Several states have passed new laws that
  authorize the creation of trust funds in order to
  accumulate assets for OPEB
• State-only solution v. all governmental agencies

40
401(h) Accounts

• A 401(h) Account is a separate Retiree Medical
  Account within a Defined Benefit Pension Plan
• Can pay benefits for retirees and their
  dependents
• Funding must be subordinate to funding the
  retirement plan obligations
• Overfunding can be transferred to the 401(h)
  account
• Contributions for medical benefits cannot exceed
  25 of the total contributions to the plan
• Funds must be able to revert to the employer

41
401(h) Account Issues

• Pre-tax employer contributions
• Pre-tax employee contributions permitted through
  a mandatory pickup arrangement in which all
  eligible employees must participate
• Possible employee dissatisfaction stemming from
  mandatory and irrevocable pickup arrangement
• Additional administration required separate
  funding and accounting for pension and medical
  benefits
• Sponsors of well-funded pension plans may not be
  able to make contributions because of funding
  limit

42
VEBA 501(c)(9) Trust Pros and Cons

• Advantages

Disadvantages

• Medical benefits are provided tax-free to retiree
  (beneficiary)
• Investment earnings are tax-exempt
• No contribution or benefit limitations
• Flexibility

• Permits only after-tax employee contributions, no
  pre-tax employee contributions
• Requires IRS approval
• Nondiscrimination rules (not applicable to
  collectively bargained plans)

43
115 Trust Pros and Cons

• Advantages

Disadvantages

• Medical benefits are provided tax-free to retiree
  (beneficiary)
• Investment earnings are tax-exempt
• No formal IRS filing
• No contribution or benefit limitations
• Exclusive benefit rule
• Flexibility

• Unclear whether retiree pre-tax contributions are
  allowed
• Unclear whether employee can contribute
  prospective leave accruals
• Varying state laws for establishment and
  governance of trusts
• No formal guidance from IRS yet
• Nondiscrimination rules (not applicable to
  collectively bargained plans)

44
401(h) Pros and Cons

• Advantages

Disadvantages

• Medical benefits are provided tax-free to retiree
  (beneficiary)
• Investment earnings are tax-exempt
• No vesting required
• Mandatory employee contributions can be pre-tax
• No nondiscrimination testing

• Mandatory employee contributions and irrevocable
  pick-up arrangement
• Contributions must be incidental to retirement
  benefit
• Annual 401(h) contributions cannot exceed 25 of
  total aggregate contributions
• Must be part of a 401(a) defined benefit or money
  purchase plan
• Additional administration required for retirement
  system

45
Operational ConsiderationsPlan Design

• Plan Sponsors will need to determine
• eligibility rules
• type of benefit plan
• contributions

46
Operational Considerations Plan Design Five
Medicare Part D Strategies

• 1. Obtain the 28 federal subsidy to Plan
  Sponsors for providing Rx coverage equivalent to
  Part D
• 2. Qualify your plan as its own PDP (gt50 Federal
  subsidy)
• 3. Contract with a PDP on a group basis
• 4. Keep the current Rx program
• 5. Cease covering prescription drugs and shift
  subsidy to other retiree benefits

Consider the PROS and CONS of each strategy!
47
Operational ConsiderationsPlan Administration

• Determine which plan administrative processes
  will be handled by trustees and staff and/or
  delegated to vendors
• Develop vendor procurement process
• Determine performance standards for vendors
• Issue RFPs, obtain bids and interview vendors
• Select vendors and negotiate vendor contracts
• Evaluate vendor performance

48
Operational ConsiderationsPlan Investments

• Determine whether plan investment strategy will
  be handled by trustees and/or delegated to
  investment managers
• Develop investment manager selection process
• Determine goals for investment managers
• Issue RFPs, obtain bids and interview investment
  managers
• Select investment managers and negotiate
  contracts
• Evaluate performance of investment managers

49
Operational ConsiderationsProfessional Advisors

• Identify, interview and select professional
  advisors to assist with complex tasks
• Actuarial services
• Auditors
• Attorneys
• Evaluate performance of professional advisors

50
Pension Protection ActPublic Safety Retirees

• Public safety officers may direct up to 3,000
  of annual retirement benefits to be paid tax-free
  for health insurance or long-term care insurance,
  effective 1/1/07
• Applies to 401(a), 403(b) and 457 plans
• Available only if disability or normal retirement
  age at separation from service
• Direct payment only, reimbursement to retiree not
  permitted
• Health insurance may cover retiree, plus spouse
  and dependents
• Payments may be made for insured or self-insured
  coverage
• Numerous administrative issues (e.g., definition
  of NRA, election after termination, coordination
  with plans and insurers, tax reporting, survivor
  benefits)

51
? Why VEBAs in the PS market? ? How does GASB
relate to costs? ? What 'vehicles' can employers
use? ? How does a VEBA work for pre-funding
retiree health? ? Reference Material/Articles of
interest
52
Disclosure RequirementsTerminology

• Actuarial Accrued Liability (AAL)
• The AAL is the portion of the actuarial present
  value of total projected benefits allocated to
  years of employment prior to the measurement date
• Normal Cost
• The Normal Cost is the portion of the actuarial
  present value of total projected benefits
  allocated to the year following the measurement
  date
• Annual Required Contribution (ARC)
• The ARC is equal to the normal cost and the
  amortization of the unfunded accrued liability.
  There is no requirement that the ARC is funded
• Net OPEB Obligation (NOO)
• The NOO is the cumulative difference between the
  ARC and the actual contributions made (if any).
  At transition the NOO may be set at zero
• Implicit Rate Subsidy
• An implicit rate subsidy is the spread between
  the actual cost of retiree health care premiums
  and those of active participants when a
  government insures both in a single group at a
  blended rate

53
Obscure Health-Benefit Scheme Is
Central Issue in Auto TalksThe Washington post
September 9, 2007

• We heard at the end of our careers that we
  were not going to get what was promised all the
  years we were coming into work everyday, said
  Larry Solomon, former president of UAW Local 751
  in Decatur, Ill. We felt betrayed.
• The form of funding is also important. A
  VEBA funded with cash is less risky than one
  funded with stock in a shaky company.
• Because VEBAs are so complicated, vigorously
  educating employees on how they work is key to
  their success, said Lance Wallach, a VEBA
  consultant. A few years ago, a lot of the
  casinos in Atlantic City started calling me about
  setting up a VEBA for them, he said. I told
  them it wouldnt work because a lot of the
  workforce were not English-speaking. Part of
  making this work should be communicating to
  workers.
• Some of the more successful VEBAs, analysts
  say, are run by states and municipalities, which
  can raise taxes if their VEBAs run low on money.
  Government entities in California, Idaho,
  Indiana, Montana, Oregon and Washington have
  created VEBAs, and many more expect to do so in
  the next few years because the Government
  Accounting Standards Board recently began
  requiring disclosure of post-employment benefit
  obligations. ..

54
Talks Continue Between GM and UAW By
Jacqueline Fell Posted Sunday, September
16, 2007 at 945 a.m.

• The call hasnt come telling union workers at
  General Motors to walk off the job. But there
  still isn't a new contract between the United
  Auto Workers and General Motors. Some say the
  fact that no one is talking, could be a good
  sign.
• General Motors and the United Auto Workers
  restarted negotiations Saturday morning around
  11. The night before, the parties were at the
  table until 430 in the morning.
• Union members were on stand-by Thursday
  night putting picket signs together and waiting
  to see if a possible strike would come when the
  contract expired at midnight.
• Someone close to the negotiations say a deal
  is not expected to be reached Saturday. At the
  core of the talks between GM and the UAW is high
  health care costs.Thats where VEBA comes in.
  It's an innovative way to pay for healthcare.
  It's a trust that would be funded by the auto
  company but used by union workers. But members
  NBC 25 News spoke to this past week, say they
  know nothing about it. NBC 25 talked to an expert
  on a voluntary employees beneficiary association
  - or VEBA.
• Lance Wallach, specializes in these plans,
  and says this type of fund could save General
  Motors and bring stability to the UAW.
• GM is the strongest of the Big Three U.S.
  Automakers but it also has one of the highest
  expenses - healthcare costs for retired and
  active employees. Last year GM spent 4.8 billon
  on healthcare. It's a liability, some analysts
  say, could shut GM down for good.
• "You don't want General Motors to go out of
  business...this probably is the only solution,"
  says Lance Wallach.
•   Wallach says a voluntary employee
  beneficiary association could be the saving grace
  for the automaker. But is it the best for the
  UAW?
• "The plusses for the UAW are that they know
  the money will be available whether General
  Motors stays in business of goes out of
  business," says Wallach. "Through this VEBA
  they're going to get a lot less than they would
  normally get from the obligation General Motors
  currently has to the workers."
• In Wallach's opinion, if the two don't come
  to an agreement on a VEBA plan, both could lose
  out.
• "If they don't take this they're putting
  General Motors out of business."
• Lance Wallach is a frequent speaker on
  VEBAs, pensions, and tax-oriented strategies at
  accounting, legal and medical conventions
  throughout the United States. He speaks at more
  than 70 conventions a year about VEBAs he can be
  reached at 516/938-5007.

55
ATT, Verizon May Follow GM, Let Unions Take on
Retiree CostsBy Jeff Green and John LippertOct.
15, 2007 (Bloomberg) ATT

• Oct. 15, 2007 (Bloomberg) ATT Inc., the
  biggest U.S. phone company, and No. 2 Verizon
  Communications Inc. may follow General Motors
  Corp. in trying to shift retiree health-care
  liabilities to a union-run fund, a move that has
  helped boost GMs shares 39 percent this year.
• The largest U.S. automaker reached a landmark
  agreement with the United Auto Workers last month
  to transfer 50 billion in such obligations to a
  Voluntary Employee Beneficiary Association, or
  VEBA. The telecommunications companies, which
  will both negotiate new contracts with their
  unions in the next two years, reported a combined
  71 billion in retiree liabilities last year.
• Well be watching how the GM union-run fund
  develops, said Alberto Canal, a spokeman for New
  York-based Verizon. He declined to give
  additional details. Verizon spends 3.5 billion
  a year for health-care coverage for 900,000
  active workers, retirees and dependents, he said.
• Verizon and ATT both have a union that may set
  a precedent for so-called VEBAs in separate talks
  with GM that started last week. The
  Communications Workers of Americas industrial
  unit is considering a union-run fund for a GM
  plant it represents in Ohio. Michael Coe, a
  spokesman for San Antonio-based ATT, declined to
  comment.
• Telecommunications are the next big group that
  will be looking at VEBAs, said Howard
  Silverblatt, an analyst at Standard Poors in
  New York. The ratings service estimates
  companies in the SP 500 had 387 billion in
  retiree health-care and insurance commitments at
  the end of last year.
• Sparked in 2005
• Interest in retiree health-care trusts has been
  rising since 2005, when GM set up a 3 billion
  fund that it controlled with the United Auto
  Workers as part of a plan to require union
  retirees to pay health-care premiums fort the
  first time, said Lance Wallach, who runs VEBA
  Plan LLC, a consulting company in Plainview, New
  York.
• About a third of Wallachs business is talking
  to private-equity investors and venture
  capitalists about the risks of retiree
  health-care liabilities and the potential for
  unlocking their value from companies balance
  sheets, he said. These are venture-capital guys
  looking for an edge.

56
GM Allowed to take up to 6B
out of fund By Sharon Silke Carty USA TODAY

• Motors' soaring health care costs have created a
  tempting pool of money the automaker is
  considering dipping into.
• The hitch That money is squirreled away in a
  fund designed to ensure that retirees will have
  their health care paid for by the automaker.
• While discussing first-quarter results Tuesday,
  GM Chief Financial Officer John Devine said the
  company is considering tapping into the 20
  billion Voluntary Employee's Beneficiary
  Association fund. The company is entitled to draw
  out cash equal to what it spent last year on
  health care and what it has spent so far this
  year.
• That means GM could take 6 billion from the
  fund, Devine said, because its health care costs
  have been rising. For the first quarter alone,
  the company could account for 700 million in
  health care expenses. Once it takes money out of
  the fund, it is not required to replace it. And
  the money could be used for general business
  expenses, Devine said.
• 'It is a source of liquidity if we need it," he
  said. "We can extract it pretty aggressively, if
  we have to."
• Health care costs are a concern for the
  automaker.
• It expects to spend 5.6 billion on health care
  for active and retired workers and their families
  this year, compared with 5.2 billion last year.
  That adds more than 1,000 to the price of each
  vehicle it produces, the company has said.
• GM is working with the United Auto Workers union
  to try to reduce some of those costs. As part of
  its current union contract, which runs until
  2007, GM and the union agreed to examine ways to
  cut costs by changing HMOs and preferred provider
  plans.
• But GM executives have said they'd like to give
  union workers the same plan salaried workers get,
  which would cost union workers more.
• Salaried workers pay for 27 of their health
  care, while union workers pay for about 7,
  according to GM.
• After a meeting with GM last week, top union
  officials said that's not something they'll
  likely agree to. 'If they'd like to give the
  salaried employees our plan, we'd be happy to
  share it with them," said Richard Shoemaker, UAW
  vice president.
• Lance Wallach, an accountant who specializes in
  VEBA plans, said GM's intention to pull money out
  of its health care account is a warning shot to
  the union.
• And, "If General Motors gets away with this,
  it's something that could resonate through the
  auto industry," he said.
• But Dallas Salisbury, president of the Employee
  Benefit Research Institute, said GM is planning
  to use the VEBA the way it was intended.
• "This is really a shock absorber account that in
  essence, buys them some time to analyze what they
  actually want to do," he said. "It gives them
  greater flexibility in the end."