GASB 45 OPEB Measuring the Liability Let us Surprise You Multiple Employer Issues

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GASB 45 OPEB Measuring the Liability(Let us
Surprise You????)Multiple Employer Issues

• 2006 NASACT Annual Conference
• August 22, 2006
• Omaha, Nebraska

Presented By James J. Rizzo, ASA, MAAA Senior
Consultant Actuary Gabriel, Roeder, Smith
Company Fort Lauderdale Office
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Presentation Overview

• Multiple Employer OPEB Plans
• Agent Multiple Employer OPEB Plans
• Aspiring to be Cost Sharing Multiple Employer
  OPEB Plans
• Why Not be a Cost Sharing Multiple Employer OPEB
  Plan
• Hot Topics on Cost Sharing Plans

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Multiple Employer OPEB Plans

• Same types and definitions as for Pensions
• Agent Multiple Employer OPEB Plans
• Cost Sharing Multiple Employer OPEB Plans
• No Hybrids

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Agent Multiple Employer OPEB Plans

• No Qualifying Trust for the Plan as a whole
• Viewed as an aggregation of Single Employer OPEB
  Plans, with pooled administrative and investment
  functions
• Accounting and reporting can be ugly
• Plan must maintain separate sub-accounting of
  assets and activity by employer, so that the
  employers contributions made for OPEB purposes
  provide the OPEB benefits only for the employees
  of that employer

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Agent Multiple Employer OPEB Plans

• Ending balance in each sub-account has an equal
  liability, and an equal asset on the respective
  employers financials
• Reported on the managing employers books as an
  Agency Fund, with no plan net assets reported
• Each participating employer has an actuarial
  valuation and reporting requirements the same as
  a Single Employer OPEB Plan
• Each employer has its own expensing and reporting
  requirements the same as a Single Employer OPEB
  Plan

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Agent Multiple Employer OPEB Plans

• Pooling of the OPEB benefits and costs in an
  Agent Multiple Employer Plan is impossible
• Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Working definition
• Multi-employer health plans which charge the same
  premium for the same coverage for all
  participating employers, without regard to the
  age/sex of the members, without regard to whether
  members are active or retired, without regard to
  group-specific characteristics, but which satisfy
  a certain additional actuarial test.
• Not to be confused with a Cost Sharing Multiple
  Employer OPEB Plan

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Agent Multiple Employer OPEB Plans

• Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Paragraph 13a(2) of GASB Statement No. 45
• the projection of future retiree benefits
  should be based on claims costs, or age-adjusted
  premiums approximating claims costs, for
  retirees, in accordance with actuarial standards
  issued by the Actuarial Standards Board8.
• Footnote 8 See Actuarial Standard of Practice
  No. 6 (ASOP 6), Measuring Retiree Group Benefit
  Obligations, revised edition (Washington, DC
  Actuarial Standards Board, December 2001), or its
  successor documents.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Paragraph 13a(2) of GASB Statement No. 45
  (continued)
• it is appropriate to use the unadjusted
  premiums as the basis for projection of retiree
  benefits, to the extent permitted by actuarial
  standards9.
• Footnote 9 quotes from Actuarial Standards of
  Practice (ASOP) No. 6 (3.4.5) For example, the
  actuary may use a single unadjusted premium rate
  applicable to both active employees and
  non-Medicare-eligible retirees if the actuary has
  determined that the insurer would offer the same
  premium rate if only non-Medicare-eligible
  retirees were covered.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Actuarial Standards Board (ASB) task forces
  response to comments regarding Section 3.4.5 of
  ASOP No. 6
• The task force modified the languageto clarify
  the significance of age differences in
  determining rates and to exemplify the limited
  circumstances under which an unadjusted premium
  rate might be used
• Paragraph 109 of GASB Statement No. 45
• The Board's intent was to permit the use of
  unadjusted premiums in circumstances in which the
  claims experience of a single employer would have
  little or no impact on the premiums charged.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Appendix 2 of ASOP No. 6
• If the insurer appears to be committed to
  continuing such subsidy for the retirees, there
  is some justification for valuing future retiree
  costs for the postretirement plan sponsor with
  the community rate as the basis, although the
  plan sponsor may want to know of the apparent
  subsidy and the possibility that it might not be
  available in the future. There is also some
  justification for valuing the future retiree
  costs with the higher expected claim costs for
  retirees as the basis, since the subsidy may
  disappear.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• QA 66 of the Implementation Guide
• ...the use of unadjusted premiums is appropriate
  only on the condition that the actuary has
  determined, essentially, that the circumstances
  of the particular community-rated plan
  effectively insulate the employer from the
  effects of age on the cost of providing
  healthcare benefits for retirees that otherwise
  would be presumed to exist.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• QA 67 of the Implementation Guide
• ...Paragraph 13a(2) of Statement 45 requires as
  an additional condition that the actuary has
  evaluated whether the community-rated plan would
  offer the same unadjusted premium rate even if
  all of that employers plan members were
  non-Medicare-eligible retirees---that is, has
  determined that the unadjusted premium rate would
  be unaffected by such a change. Otherwise the
  use of claims costs, or age-adjusted premiums
  approximating claims costs, is required.
• The example in QA 68 of the Implementation Guide
  is particularly helpful in illustrating when a
  plan might not be a community-rated plan for GASB
  purposes.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Possible examples
• Employer pays for a Medicare Supplemental Plan
  for all retirees eligible for Medicare, for which
  the price is not a function of age and the
  employers members are a very small percentage of
  the total
• A commercial HMO covering private/public sector
  employers members, which charges the same
  premium for the same coverage for all employers
  in the program and is expected to continue to do
  so

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• The hurdle to get past is the requirement that
  the must Actuary make a certain determination
  concerning the plans current and future
  policies. The actuarys determination concerns
  the situation in which only the employers
  non-Medicare-eligible retirees were members and
  none of its active employees were members. The
  actuary must determine that the plan would charge
  that employer the same premium per member in that
  situation as it would charge if all the
  employers actives and retirees were members.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Typical plans that charge a blended premium among
  all employers in the plan would never permit any
  employer to cover only its non-Medicare-eligible
  retirees. So the actuarys determination is
  purely hypothetical.
• Nevertheless, there is pressure and momentum for
  certain plans to be deemed community-rated plans,
  and some such plans may, indeed legitimately, be
  considered community-rated.

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Agent Multiple Employer OPEB Plans

• J. Community-rated plans are permitted to use
  premiums without any adjustment to reflect aging
  effect
• Principles-based accounting and transparency
• Avoid creating a plan structure for the purpose
  of the evasion of fair and full disclosure of
  costs and liabilities
• There must be a legitimate business reason for
  the plan structure.

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Aspiring to be a Cost Sharing Plan

• Those in the organization who manage the Multiple
  Employer OPEB Plan generally aspire to deem the
  Plan to be a Cost Sharing Plan, for the following
  reasons and more.
• No individual actuarial valuations for each
  participating employer all grouped into one
  actuarial valuation contracted by the managers of
  the Cost Sharing Plan
• No individual expense recognition of an Annual
  OPEB Cost or a Net OPEB Obligation shortfall
  only the contractually required contribution
  charged by the Cost Sharing Plan, leaving no
  liability as long as it is paid

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Aspiring to be a Cost Sharing Plan

• No individual disclosure of own UAAL in own CAFR,
  only broad general information the Cost Sharing
  Plan discloses the ARC and UAAL in its financial
  statement per GASB 43
• No separate sub-accounting of activity and assets
  by employer only a group accounting
• Pressure from participating employers not make
  them have individual actuarial valuations,
  individual Annual OPEB Costs and Net OPEB
  Obligations and individual disclosure of the own
  UAAL

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Why Not be a Cost Sharing Plan?

• Because it might cost the state and the other
  participating employers some extra real money
  now to begin pre-funding.

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Cost Sharing Multiple Employer OPEB Plans

• Four required elements in the documents and in
  practice
• Trust or equivalent arrangement - A legally
  separate entity under the stewardship of a board
  of trustees, or the equivalent
• Irrevocable Employer no longer has ownership or
  control of the assets, except for any
  reversionary right once all benefits have been
  paid
• Dedicated The understanding embodying the
  employers commitment to provide the benefits
  without diversion for other purposes, and
  separated from use for actives
• Protected Legally protected from the employers
  and administrators creditors

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Cost Sharing Multiple Employer OPEB Plans

• B. Pooling OPEB benefits and costs among
  participating employers
• Not to be confused with pooling of current
  coverage for actives among participating
  employers
• Not to be confused with pooling between actives
  and retirees in fact, active and retiree
  benefits need to be unmingled
• Contributions toward and benefits for actives and
  retirees must be separated in order to ensure the
  Plan Assets as used solely for OPEB benefits,
  without any cross-subsidizing.

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Cost Sharing Multiple Employer OPEB Plans

• B. Pooling OPEB benefits and costs among
  participating employers
• Pooling in Cost Sharing OPEB Plans relates solely
  to the pooling among participating employers of
  the costs and benefits of OPEB (e.g., retiree
  medical coverage)
• Simplest version is a single of pay for
  explicit subsidies, whether fixed/floating dollar
  benefits or of premium benefits
• Might be separate pools under overall program, to
  recognize different levels of subsidies or
  eligibilities among
• different employee groups or
• different employers

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Cost Sharing Multiple Employer OPEB Plans

• B. Pooling OPEB benefits and costs among
  participating employers
• Can there be a Pay-As-You-Go Cost Sharing Plan
  providing explicit subsidies?
• A technical reading of the GASB Statements and
  Implementation Guide could lead to a Yes.
• Principles-based Accounting vs. Rules-based
• Transparency
• Can there be PAYGO Cost Sharing Plan providing
  just implicit subsidies?

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Cost Sharing Multiple Employer OPEB Plans

• C. Special Funding Situations
• Definition
• A circumstance in which a governmental entity is
  legally responsible for contributions to an OPEB
  plan that covers the employees of another
  governmental entity or entities.
• If the state is legally responsible for 100 of
  all contractually required contributions in
  support of the benefits of members of all
  employers, then the state must apply the
  recognition and disclosure requirements for
  Single Employer OPEB Plans

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Cost Sharing Multiple Employer OPEB Plans

• C. Special Funding Situations
• If the state is legally responsible for
  substantially all (for example, 90-99 of the
  total) of the contractually required
  contributions to a Cost Sharing Plan, and that
  responsibility is ongoing and is unlikely to
  change significantly in the foreseeable future,
  the state is encouraged to apply the Single
  Employer requirements of Statement No. 45, rather
  than those of Cost Sharing Plans.

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Cost Sharing Multiple Employer OPEB Plans

• C. Special Funding Situations
• These may create some tension and require some
  judgment.
• There can be a lot at stake. Single Employer
  treatment means expensing the Annual OPEB Cost
  and disclosing the UAAL in the Notes.
• How far below 90 is it still substantially
  all?
• How is the calculated? Exactly how are the
  numerator and denominator determined?
• Are different components of subsidy to be
  aggregated or disaggregated when calculating the
  ?

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Questions Answers ?