Title: OPEB Best Practices Nine Clichs Youll Love to Hate
1OPEB 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
32-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
42-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.