Download MGFOA Meeting OPEB 5

MGFOA Annual Meeting 2016
OPEB and GASB 74/75
May 11, 2016
Daniel J. Rhodes, FSA, MAAA
Vice President and Consulting Actuary
Kathleen A. Riley, FSA, MAAA, EA
Senior Vice President and Actuary
Copyright © 2016 by The Segal Group, Inc. All rights reserved.
Topics
1. GASB 74/75 Overview
2. OPEB Funding and Discount Rate
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GASB OPEB Statements
In June 2015, GASB released two Statements related to Other
Postemployment Benefits (OPEB)
 Accounting and Financial Reporting for Postemployment Benefits Other Than
Pensions (Released as GASB Statement No. 75)
 Supersedes the requirements of GASB Statements No. 45 and No. 57
 Concerns employer reporting
 Effective for fiscal years beginning after June 15, 2017
 Financial Reporting for Postemployment Benefits Other Than Pension Plans
(Released as GASB Statement No. 74)
 Replaces the requirements of GASB Statement No. 43 and No. 57
 Also includes requirements for defined contribution OPEB plans that would
replace the requirements for these plans in
GASB Statements No. 25, No. 43, and No. 50
 Concerns plan reporting
 Effective for fiscal years beginning
after June 15, 2016
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GASB 74/75 OPEB Statements
Objectives
 Improve accounting and financial reporting by state and local governments for
OPEB
 Improve information provided by state and local government employers about
financial support for OPEB that is provided by other entities
 Improve the usefulness of information about OPEB included in the general purpose
external financial reports of state and local governmental plans for making decisions
and assessing accountability
 Establish standards for measuring liabilities, expenses, and deferred inflow/outflow
of resources
 Does not address funding
 GASB took position that funding is a policy decision for government officials to
determine
Many provisions required by the new GASB Statements 67 and 68 for
pensions have carried over to these Statements relating to OPEB.
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Distinctions Among Different Types of Plans
Different plan types, different reporting requirements:
Single Employer Plans
 Provide defined benefit OPEB to the employees of one employer
Agent Multiple Employer Plans
 Provides defined benefit OPEB to employees of multiple employers
 Plan assets are pooled for investment purposes but separate accounts
are maintained so each employer’s share of the assets is only available to
pay the benefits of its employees
Cost-Sharing Multiple Employer Plans
 Provides defined benefit OPEB to employees of multiple employers
 OPEB obligations are pooled and plan assets can be used to pay the
benefits of the employees of any employer in the plan
 Note that there could be a cost-sharing subgroup within an agent plan, if
subgroups have separate reporting requirements
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Major Components
Net OPEB
liability
reported on
employer
financials
Accounting for
Cost Sharing
Plans
Calculating the
OPEB expense
Expansion of
Disclosure
Information
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Net OPEB Liability Reported on Employer Financials
Net OPEB liability (in GASB 43/45, the Unfunded Actuarial Accrued liability
(UAAL))
 OPEB liability less market value of assets (Plan Fiduciary Net Position)
Net OPEB Liability is the Unfunded Actuarial Accrued Liability calculated
using:
 Projected future benefits
– Includes projected future service, automatic cost-of-living adjustments,
projected ad hoc benefit changes, and salary increases (if benefit
connected to compensation)
 Blended discount rate for those plans that have assets
 Entry Age Normal, using a level percentage of pay
 Market Value of Assets
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Calculating OPEB Expense
Current OPEB Expense
 Based on the Annual Required Contribution
(ARC)
 Normal Cost plus
 Amortization of the UAAL
– Period of not greater than 30 years
– Closed or open amortization period
– Level dollar or level percent of payroll
amortization
 Can be based on any of six actuarial cost
methods
 Annual OPEB Cost (AOC)
 ARC plus
 Interest on Net OPEB Obligation
 Adjustment to the ARC
New OPEB Expense
 The change in net OPEB liability each
year, with deferred recognition of certain
elements
 Components of new OPEB expense
 Service Cost
 Interest on the total OPEB liability
 If there are assets, projected investment
returns over the year
 Plan amendments
 Differences between expected and
actual experience, and changes in
assumptions (with certain deferrals)
 If there are assets, differences between
actual and projected earnings over the
year (5-year spread)
GASB specifically states that the new standards are for accounting purposes
only and are not for the purpose of establishing funding standards.
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Deferred Recognition
 Changes in actuarial assumptions/actuarial gains and losses
 Recognized in expense over average expected remaining service lives of active
and inactive members (including retirees)
 Average remaining service life of inactive members is 0
 Resulting amortization periods will be very short
 Method must be systematic and rational, using closed period
 Massachusetts retirement system experience (GASB 67/68):
 Most valuations have shown 5 or 6 years for amortization period
 However, these include inactive, non-vested employees only entitled to a return of
contributions
 These participants would not be included in an OPEB valuation, and thus resulting
amortization likely to be greater by one year
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Deferred Recognition
 Differences between actual and projected earnings over the year (i.e., investment
gain/loss)
 Recognized in expense over closed 5 year period
 Net OPEB liability on balance sheet will be “market volatile” but expense will
reflect asset smoothing
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Deferred Items
Deferred items are shown as “Deferred Outflows of
Resources and Deferred Inflows of Resources Related to
OPEB”
“Deferred outflows” are increases in net OPEB liability that have not been
recognized through expense
“Deferred inflows” are decreases in net OPEB liability that have not been
recognized through expense
For example, if average expected remaining service is 6 years, 1/6th of
demographic actuarial gains/losses would be recognized in OPEB expense
for the year; the remaining 5/6ths would be recorded as deferred
inflow/outflow
 Includes the impact of any changes in the blended discount rate from one
measurement date to the next
Similarly, 1/5th of investment gains/losses in the fiscal year are recognized
in OPEB expense for the year and the remaining 4/5ths are recorded as
deferred inflow/outflow
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Additional Disclosure Requirements
 Includes both Notes and Required Supplementary Information
 Expanded employer disclosures, including:
 Description of plan and assumptions
 Policy for determining contributions
 Sensitivity analysis of the impact on the OPEB liabilities under five different
scenarios
– Must calculate and disclose the following:
» Baseline scenario at assumed discount rate and healthcare cost trend rate
» The assumed healthcare cost trend rate plus 1% and trend rate minus 1%
» The assumed discount rate plus 1% and discount rate minus 1%
 Changes in the net OPEB liability for the past 10 years (if available)
 Development of long-term earnings assumption (if applicable)
 If Actuarially Determined Contribution is calculated, 10 year schedule (if available)
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Additional Disclosure Requirements continued
Note disclosures on the discount rate of return must include:
Description of how discount rate was determined
Methods and assumptions used to determine expected return on assets
 Expected asset allocation
 Expected real rates of return for each major asset class
– Whether rates of return are
arithmetic or geometric means
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Impact on the Final Statements
 The faster—often immediate—recognition of OPEB changes will introduce greater
volatility in the reported expense, as will the change in how the discount rate is
selected
 OPEB benefits already had a volatile nature to them, the new requirements will
exacerbate the issue
 This volatility will be reflected on the income statements of plan sponsors
 Putting the net OPEB liability on the balance sheet will add a large and unstable
element to an employer’s net financial position as presented in the basic financial
statements
 Both the timing and the scope of the new reporting will require greater coordination
between the employer, the actuary, and the auditor
 More involvement from auditors in actuarial results?
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Topics
1. GASB 74/75 Overview
2. OPEB Funding and Discount Rate
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OPEB Funding
Assume 7.5% discount rate, and full funding of the
Actuarially Determined Contribution (ADC) each year
Fiscal Year
Ending
June 30,
Projected
Benefit
Payments
Actuarially
Determined
Contribution
Additional
Funding
Assets at
End of Year
AAL at
End of Year
2015
$4,493,986
$9,202,200
$4,708,214
$4,892,920
$125,728,801
2016
5,100,518
9,630,666
4,530,148
9,992,221
133,621,868
2017
5,767,682
10,079,131
4,311,449
15,272,187
141,609,811
2018
6,325,428
10,548,531
4,223,103
20,882,740
149,821,771
2019
6,901,448
11,039,846
4,138,398
26,854,109
158,264,908
 In this example, ADC calculated in a similar manner as the Annual Required
Contribution (ARC) under GASB 45 (normal cost + 30-year amortization of UAAL)
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Actuarially Determined Contribution
 What is an “actuarially determined contribution”?
 Definition in GASB 74/75:
 A target or recommended contribution to a defined benefit OPEB plan for the
reporting period, determined in conformity with Actuarial Standards of Practice
based on the most recent measurement available when the contribution for the
reporting period was adopted.
 Definition in ASOP 6*:
 A potential payment, other than by a retired participant, to prefund the retiree
group benefits program, as determined by the actuary using a contribution
allocation procedure. It may or may not be the amount actually paid by the plan
sponsor or other contributing entity.
 Definition of “contribution allocation procedure” in ASOP 6:
 A procedure that uses an actuarial cost method, and may include an asset
valuation method, an amortization method, and an output smoothing method, to
determine the actuarially determined contribution for prefunding a retiree group
benefits program.
*Actuarial Standard of Practice No. 6: Measuring Retiree Group Benefits Obligations and Determining
Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions
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Blended Discount Rate
Under GASB 74/75
 Based on projected benefits, current assets and projected assets for current
members
 Projected assets include contributions on behalf of current members and excludes
contributions intended to fund service costs for future employees
 For projected benefits that are covered by projected assets
 Discount using the long-term expected rate of return on assets
– Should be net of investment expenses but without reduction for administrative
expenses
 For projected benefits that are not covered by projected assets
 Discount using yield or index rate for 20 year, tax-exempt general obligation
municipal bonds with an average rating of AA/Aa or higher
 Likely to be 3.5% – 4.0%, based on current indexes
 Solve for a single rate that gives the same total present value
 Use that single equivalent rate to calculate the OPEB liability
For plans with assets, the derivation of the discount rate will
require significant additional calculations by the actuary
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Blended Discount Rate
Discount Rate for “Unfunded” Benefits
Bond Buyer 20-Bond GO Index*
Date
Index
Date
Index
06/11/2015
3.87%
10/08/2015
3.68%
06/18/2015
3.79%
10/15/2015
3.68%
06/25/2015
3.80%
10/22/2015
3.67%
07/09/2015
3.76%
10/29/2015
3.66%
07/16/2015
3.82%
11/05/2015
3.69%
07/23/2015
3.75%
11/12/2015
3.74%
07/30/2015
3.75%
11/19/2015
3.65%
08/06/2015
3.75%
11/24/2015
3.63%
08/13/2015
3.69%
12/03/2015
3.57%
08/20/2015
3.73%
12/10/2015
3.57%
08/27/2015
3.79%
12/17/2015
3.57%
09/03/2015
3.82%
12/24/2015
3.57%
09/10/2015
3.82%
12/30/2015
3.57%
09/17/2015
3.78%
01/07/2016
3.45%
09/24/2015
3.71%
01/14/2016
3.45%
10/01/2015
3.67%
01/21/2016
3.37%
 Using index introduces discount
rate volatility
 Similar to FASB accounting rules
 Will likely require updated
disclosure calculations using
index rate at fiscal year-end,
even in non-valuation year
*http://www.bondbuyer.com/marketstatistics/search_bbi.html?details=true
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Blended Discount Rate
Projecting Contributions and Determining Rate
How are contributions projected in determining the discount rate?
 Is one of the following true?
 Contributions are subject to statutory or contractual requirements, or
 A formal, written policy related to contributions exists
 If so, then use professional judgment to project contributions
 Consider the employer’s 5 year history as indicator for future contributions
 Reflect all known events and conditions
 If neither is true, projected contributions are based on average contributions for the
past 5 years
 For example, average can be percentage of pay or percentage of actuarially
determined contribution made
 Matter of professional judgment
 Potentially modified for subsequent events
Municipal employers without a formal OPEB funding policy
may want to adopt one prior to GASB 75 implementation
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Questions
Daniel J. Rhodes, FSA, MAAA
Vice President and Consulting Actuary
617.424.7348
[email protected]
Kathleen A. Riley, FSA, MAAA, EA
Senior Vice President and Actuary
617.424.7336
[email protected]
www.segalco.com
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