Part 2 Where are states in implementing OPEB

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Part 2 Where are states in implementing OPEB?
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Where are States in Implementing OPEB

• As of March 15, 2007
• 23 have done either actuarial valuations or
  preliminary valuation (including Massachusetts,)
  remainder are in process
• 12 have either submitted trust legislation or
  have already enacted trusts
• 8 anticipate funding part or all of ARC in FY08

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Where are States in Implementing OPEB

• Funding Mechanisms being considered by states
  include
• of Tobacco Settlement Payments (Massachusetts)
• Appropriations (Many states)
• of payroll (Delaware, Florida, Georgia, Nevada,
  South Carolina)
• of Lottery Net Revenues (North Carolina)
• Other Funds and Predecessor Trusts

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How Large Are These Liabilities?
Estimated Unfunded OPEB Accrued Liabilities
Obtained through publicly available sources.
Billions
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How Large Are These Liabilities?
Estimated Unfunded OPEB Accrued Liabilities as a
of Personal Income
Obtained through publicly available sources.
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How Large Are These Liabilities?
Estimated Unfunded Per Capita OPEB Accrued
Liabilities
Obtained through publicly available sources.
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Overview of OPEB in Massachusetts

• OPEB is retiree health care costs, inclusive of
  dental / vision and a small amount of life
  insurance
• State is responsible for state workers, not
  teachers or other municipal employees for OPEB.
• Municipalities are responsible for them
• State contracts for health insurance through
  Group Insurance Commission (GIC)
• Municipalities contract for health insurance
  individually
• State and municipal employees are unionized

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Strategies Massachusetts is Considering or has
used to deal with OPEB

• Measured the Liability
• Without information, there can be no strategy
• Updated for FY2008 budget
• Amortizing Unfunded OPEB obligations over a long
  time up to 30 years
• Considering OPEB costs in any long term
  personnel decision making
• Governor has proposed legislation for a Trust
• Allows lower cost of funds due to higher return
  if funded
• House has confirmed Governors proposal

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How we are Using Results to Decide Strategy
DOES NOT INCLUDE TEACHERS
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How we are Using Results to Decide Strategy
DOES NOT INCLUDE TEACHERS
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How we are Using Results to Decide Strategy
Current PAYGO cost is about 330 MM OPEB is
2-3x Private industry is 6-10x
DOES NOT INCLUDE TEACHERS note numbers
unofficially updated to FY08 to 763.1M and
1,206M
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Sensitivity Analysis 1 ? in Health Care Trend
Rate no prefunding
? in UAAL 19.5 / - 15.1
? in ARC 24.4 / - 18.3
DOES NOT INCLUDE TEACHERS
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Sensitivity Analysis 1 ? in Health Care Trend
Rate Prefunding
? in UAAL 14.0 / - 11.4
? in ARC 17.0 / - 13.4
DOES NOT INCLUDE TEACHERS
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Sensitivity Analysis Change in Retiree
Contribution Rates to 25
? in UAAL - 11.8
? in ARC -11.7
DOES NOT INCLUDE TEACHERS
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Sensitivity Analysis Change in Retiree
Contribution Rates to 25
? in UAAL - 11.8
? in ARC -11.8
DOES NOT INCLUDE TEACHERS
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Getting Beneficiaries Involved in Controlling
Health Care Costs

• 4 categories
• Programs offering health assessments and
  monitoring
• Health insurance incentives, ranging from
  discounts for nonsmokers to financial rewards to
  workers who reach personal health and fitness
  goals
• Healthy work environment initiatives, such as
  banning smoking near state office buildings and
  recognizing healthy worksites with awards
• Physical fitness programs, such as fitness
  challenges and events, walking programs, and
  pedometer programs

Source State Employee Wellness Initiatives NGA
Brief May 2005
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Getting Beneficiaries Involved in Controlling
Health Care Costs

• Examples
• Delaware Health Rewards proactive approach to
  health
• Kentucky Health risk assessments offered
• North Carolina Healthy Month established
• Oklahoma Wellness Week proclaimed
• South Dakota Toolkits, goal setting, web
  initiatives

Source State Employee Wellness Initiatives NGA
Brief May 2005
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Getting Beneficiaries Involved in Controlling
Health Care Costs

• Examples
• Arkansas - 20 per month premium reduction if
  employees take part in voluntary risk assessment
• Maryland Club Maryland health screening,
  family fitness, exercise classes
• West Virginia, Alabama, Georgia, Kentucky lower
  premiums for non-smokers
• Ohio fitness days and challenges

Source State Employee Wellness Initiatives NGA
Brief May 2005
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Getting Beneficiaries Involved in Controlling
Health Care Costs

• Lifecycle Example Texas
• Blue Cross / Blue Shield of Texas integrates
  utilization review, wellness programs, disease
  management
• Workplace wellness initiative from Department of
  State Health Services

Source Controlling Costs and Preventing Fraud in
the Texas Employees Group Benefits Program Fiscal
Year 2006 The Key to Cost Containment Prepared
by The Employees Retirement System of Texas Ann
S. Fuelberg Executive Director
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Funding Strategies Pros and Cons

• Create an Irrevocable Trust
• Pros
• If funded, affords most rate of return, cutting
  costs dramatically biggest bang for the buck
• May be a similar structure to current pension
  system, but separate legal entity
• Cons
• Inflexible the only way funds can be removed is
  for benefits, unless all future costs are paid
• Needs to be separate account from pensions for
  tax purposes

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Funding Strategies Pros and Cons

• Do Nothing
• Pros
• No budgetary effect
• Cons
• Debt ratings may be changed if peers are funding
  OPEB
• Ratios will be downgraded due to increased
  liabilities

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Funding Strategies Pros and Cons

• Partially Fund
• Pros
• Follows the spirit of GASB 45
• Shows management is taking action
• Massachusetts Governor has proposed taking this
  approach using up to 90 of MSA payments
• House did not confirm
• Cons
• Cannot use highest interest rates, thereby
  lowering liability considerably
• Cash flow drain, though not as much as full
  funding

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Funding Strategies Pros and Cons Partial
Funding
Millions Pensions Only
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Funding Strategies Pros and Cons Partial
Funding
Governors proposal for funding up to 90 of
expected MSA Payments
Millions Pensions and OPEB
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Other Strategies for Dealing with OPEB that
Governments have Done or are Considering

• Change the health benefit structure
• Increase cost sharing
• Think outside the box
• Employee actions
• OPEB Bonds
• Insurance vehicles

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Funding Strategies Pros and Cons

• Increase Employee Contributions
• Pros
• Directly lowers employer obligations
• Employees have more of a stake in governments
  health care decisions
• Cons
• May trigger contractual issues with unions
• May not have an immediate affect as current
  employees and retirees may not be effected

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Funding Strategies Pros and Cons

• Allow greater employee options
• VEBA trusts, IRC 401(h) after tax contribution
  accounts, HSAs, Defined Contribution (DC),
  Retirement Medical Benefit Accounts
• Pros
• Employees have more of a stake in governments
  health care decisions
• Potential Tax Benefits for employees depending on
  vehicle
• Cons
• Need to be careful with DC accounts as it creates
  classes of employees

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Funding Strategies Pros and Cons

• Using one-time revenues, surpluses, MSA payments
• Pros
• Gives a quick jolt of funding with minimal pain
  on taxpayers
• Cons
• May be one time only true funding needs to be
  sustained

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Funding Strategies Pros and Cons

• Using bonds and insurance vehicles
• Pros
• Gives a quick jolt of funding with minimal
  immediate pain on taxpayers
• Cons
• Bonds trades a variable liability to a fixed
  liability
• Insurance products need to defease the liability
  to be effective

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Funding Strategies Pros and Cons

• The elephant in the room
• Control health care costs through consolidation
  and aggressive management
• Pros
• Combined with other strategies has the greatest
  effect
• Cons
• May require legislation and breaking down age-old
  barriers

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Quick Comparison of Funding Vehicles
Source TIAA CREF The Retiree Health Care
Challenge Page 16 November 2006
1 IRS PLR 200610025
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Quick Comparison of Funding Vehicles
Source TIAA CREF The Retiree Health Care
Challenge Page 16 November 2006
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Massachusetts Next Steps in GASB 45
Implementation

• Legislation needs to be passed on trust and
  initial funding model needs to be agreed upon
• If funding is similar to Commonwealths pension
  model, get Federal approval
• Work with 60 separate auditees to get
  implemented
• Commission to explore future funding

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Questions