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OPEB Best Practices Nine Clichs Youll Love to Hate

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Title: OPEB Best Practices Nine Clichs Youll Love to Hate


1
OPEB Best PracticesNine Clichés Youll Love to
Hate
  • Robert Scott-City of Carrollton GFOAT Fall
    Conference
  • October 11, 2007 Corpus Christi

2
1-Misery Loves Company
  • Joint Procurement of Actuarial Services
  • Helps both sides deal with the huge increase in
    actuarial valuations
  • Allows an opportunity to write best practices
    into the RFP
  • Promotes more meaningful benchmarking
  • Facilitates the timing of the reviews
  • Provides economies of scalereduced rates
  • Helps small governments navigate the OPEB maze

3
2-United We Stand, Divided We Fall
  • Seeking Buy-In and Communicating to All
    Stakeholders
  • The OPEB process spans departments and
    organizations
  • Internally, Finance including Accounting
    Treasury, Human Resources, Legal, Top Management,
    Governing Board, Employee groups

4
2-United We Stand, Divided We Fall (Contin
ued)
  • Externally, Health Plan Consultants, Actuaries,
    Third Party Administrators, Outside Insurers,
    External Auditors, Pension Plan Administrators,
    Financial Advisors, Investment Advisors, Trust
    Agents
  • With as many groups involved you need a single
    point of contact to coordinate all parties and
    clear goals that will provide for unified
    direction

5
3-Without a Strong Foundation, the House Will
Not Stand
  • The basis for the entire OPEB valuation is the
    underlying health plan accounting and census data
  • The responsibility for the accuracy and
    consistent preparation of this data often falls
    to parties outside the employers organization
  • The best actuary in the world will have wildly
    inaccurate numbers if the underlying data is not
    reliable.
  • Biennial or triennial reviews can affect the
    availability of information-plan for it.
  • It is managements responsibility to ensure that
    this data is reliable.

6
4-Begin With End in Mind
  • Do not start the actuarial process until you are
    prepared to act.
  • A large OPEB liability without a strategy in
    place for addressing it can reflect negatively on
    the government
  • Decide in advance when major stakeholders should
    be brought in to the process.
  • Allow yourself ample time to evaluate options and
    make changes. Most should start two years before
    the required implementation date

7
5-The Devil is in the Details
  • Bonus cliché- Workers respect what the boss
    inspects.
  • Do not think that you can hire the actuary and
    simply wait for the results.
  • An actuarial review is projecting 40-50 years
    into the future so that even a small change in
    assumptions can result in huge difference in the
    ARC AAL
  • No one knows the plan and operating philosophy of
    the employer as well as the employer.
  • Require the actuary to review all assumptions
    with you before finalizing the review.

8
6-You Can Pay Me Now or You can Pay Me Later
(but later is more)
  • Bonus cliché-The costs are what the costs are.
  • An actuarial review simply allocates future costs
    into individual accounting periods
  • The costs being allocated are a function of the
    OPEB program in place, the demographic makeup of
    the members and the overall operating
    environment.

9
6-You Can Pay Me Now or You can Pay Me Later
(but later is more) (Continued)
  • Choosing aggressive actuarial methods,
    amortization methods and assumptions can result
    in recognizing a relatively low ARC and AAL in
    the current period but do not change the
    underlying costs.
  • This means, the less recognized currently, the
    more there will be to recognize in future years.
    This especially true if you are pre-funding and
    projecting high investment returns.

10
7 Cash Flow is King
  • It is important to remember that the ARC is
    nothing more than an allocation of costs to an
    individual accounting period based on the PV of
    future cash flows Those managing retiree health
    care costs need to focus on both the ARC and the
    cash flows.
  • Requesting your actuary to provide projected cash
    flows for the next five years and comparing them
    to actual cash flows (expect variations-no
    actuary is perfect) will help you to better
    understand the ARC and the Plan

11
8 Buy Low, Sell High
  • The problem is that no one has come up with an
    accurate future definition of what either high
    or low is.
  • Many governments issued POBs in 1999 right before
    a long term market decline.
  • Others issued POBs in 2003 right before a
    prolonged market appreciation.
  • Was the second group inherently smarter or
    luckier?

12
8 Buy Low, Sell High (Continued)
  • For those governments that have existing cash
    reserves or plan on issuing OPEB Obligation Bonds
    they may want to mitigate risk by phasing into
    equities over time or spreading their OPEB Bond
    issuance over several years

13
9 The Only Constant is Change
  • Bonus cliché-If you do what youve always done,
    you will get the results youve always gotten.
  • No one can predict the future of health care
    with 100 accuracy other than it will be
    substantially different than it is today
  • You will never be finished managing OPEB
    costs-constant tweaking will be the order of the
    day.
  • Build as much flexibility into your health care
    plans and your OPEB structure as possible and
    constantly monitor new developments.

14
9 The Only Constant is Change
  • Build as much flexibility into your health care
    plans and your OPEB structure as possible and
    constantly monitor new developments.
  • Consider alternate benefit packages such as
    defined contribution options.
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