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OPEB Best Practices Nine Clichés You’ll Love to Hate Robert Scott-City of Carrollton GFOAT Fall Conference October 11, 200...
# 1-Misery Loves Company <ul><li>Joint Procurement of Actuarial Services </li></ul><ul><ul><li>Helps both sides deal with ...
#2-United We Stand, Divided We Fall <ul><li>Seeking Buy-In and Communicating to All Stakeholders </li></ul><ul><ul><li>The...
#2-United We Stand, Divided We Fall (Continued) <ul><ul><li>Externally, Health Plan Consultants, Actuaries, Third Party Ad...
# 3-Without a Strong Foundation, the House Will Not Stand <ul><li>The basis for the entire OPEB valuation is the underlyin...
# 4-Begin With End in Mind <ul><li>Do not start the actuarial process until you are prepared to act. </li></ul><ul><li>A l...
# 5-The Devil is in the Details <ul><li>Bonus cliché- Workers respect what the boss inspects. </li></ul><ul><li>Do not thi...
# 6-You Can Pay Me Now or You can Pay Me Later  (but later is more) <ul><li>Bonus cliché-The costs are what the costs are....
# 6-You Can Pay Me Now or You can Pay Me Later  (but later is more)  (Continued) <ul><li>Choosing aggressive actuarial met...
# 7 Cash Flow is King <ul><li>It is important to remember that the ARC is nothing more than an allocation of costs to an i...
# 8 Buy Low, Sell High <ul><li>The problem is that no one has come up with an accurate future definition of what either “h...
# 8 Buy Low, Sell High (Continued) <ul><li>For those governments that have existing cash reserves or plan on issuing OPEB ...
# 9 The Only Constant is Change  <ul><li>Bonus cliché-If you do what you’ve always done, you will get the results you’ve a...
# 9 The Only Constant is Change <ul><li>Build as much flexibility into your health care plans and your OPEB structure as p...
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GFOAT Fall 2007-OPEB Best Practices.ppt

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GFOAT Fall 2007-OPEB Best Practices.ppt

  1. 1. OPEB Best Practices Nine Clichés You’ll Love to Hate Robert Scott-City of Carrollton GFOAT Fall Conference October 11, 2007 Corpus Christi
  2. 2. # 1-Misery Loves Company <ul><li>Joint Procurement of Actuarial Services </li></ul><ul><ul><li>Helps both sides deal with the huge increase in actuarial valuations </li></ul></ul><ul><ul><li>Allows an opportunity to write best practices into the RFP </li></ul></ul><ul><ul><li>Promotes more meaningful benchmarking </li></ul></ul><ul><ul><li>Facilitates the timing of the reviews </li></ul></ul><ul><ul><li>Provides economies of scale=reduced rates </li></ul></ul><ul><ul><li>Helps small governments navigate the OPEB maze </li></ul></ul>
  3. 3. #2-United We Stand, Divided We Fall <ul><li>Seeking Buy-In and Communicating to All Stakeholders </li></ul><ul><ul><li>The OPEB process spans departments and organizations </li></ul></ul><ul><ul><li>Internally, Finance including Accounting & Treasury, Human Resources, Legal, Top Management, Governing Board, Employee groups </li></ul></ul>
  4. 4. #2-United We Stand, Divided We Fall (Continued) <ul><ul><li>Externally, Health Plan Consultants, Actuaries, Third Party Administrators, Outside Insurers, External Auditors, Pension Plan Administrators, Financial Advisors, Investment Advisors, Trust Agents </li></ul></ul><ul><li>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 </li></ul>
  5. 5. # 3-Without a Strong Foundation, the House Will Not Stand <ul><li>The basis for the entire OPEB valuation is the underlying health plan accounting and census data </li></ul><ul><li>The responsibility for the accuracy and consistent preparation of this data often falls to parties outside the employer’s organization </li></ul><ul><li>The best actuary in the world will have wildly inaccurate numbers if the underlying data is not reliable. </li></ul><ul><li>Biennial or triennial reviews can affect the availability of information-plan for it. </li></ul><ul><li>It is management’s responsibility to ensure that this data is reliable. </li></ul>
  6. 6. # 4-Begin With End in Mind <ul><li>Do not start the actuarial process until you are prepared to act. </li></ul><ul><li>A large OPEB liability without a strategy in place for addressing it can reflect negatively on the government </li></ul><ul><li>Decide in advance when major stakeholders should be brought in to the process. </li></ul><ul><li>Allow yourself ample time to evaluate options and make changes. Most should start two years before the required implementation date </li></ul>
  7. 7. # 5-The Devil is in the Details <ul><li>Bonus cliché- Workers respect what the boss inspects. </li></ul><ul><li>Do not think that you can hire the actuary and simply wait for the results. </li></ul><ul><li>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 </li></ul><ul><li>No one knows the plan and operating philosophy of the employer as well as the employer. </li></ul><ul><li>Require the actuary to review all assumptions with you before finalizing the review. </li></ul>
  8. 8. # 6-You Can Pay Me Now or You can Pay Me Later (but later is more) <ul><li>Bonus cliché-The costs are what the costs are. </li></ul><ul><li>An actuarial review simply allocates future costs into individual accounting periods </li></ul><ul><li>The costs being allocated are a function of the OPEB program in place, the demographic makeup of the members and the overall operating environment. </li></ul>
  9. 9. # 6-You Can Pay Me Now or You can Pay Me Later (but later is more) (Continued) <ul><li>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. </li></ul><ul><li>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. </li></ul>
  10. 10. # 7 Cash Flow is King <ul><li>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. </li></ul><ul><li>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 </li></ul>
  11. 11. # 8 Buy Low, Sell High <ul><li>The problem is that no one has come up with an accurate future definition of what either “high” or “low” is. </li></ul><ul><li>Many governments issued POBs in 1999 right before a long term market decline. </li></ul><ul><li>Other’s issued POBs in 2003 right before a prolonged market appreciation. </li></ul><ul><li>Was the second group inherently smarter or luckier? </li></ul>
  12. 12. # 8 Buy Low, Sell High (Continued) <ul><li>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 </li></ul>
  13. 13. # 9 The Only Constant is Change <ul><li>Bonus cliché-If you do what you’ve always done, you will get the results you’ve always gotten. </li></ul><ul><li>No one can predict the future of health care with 100% accuracy other than it will be substantially different than it is today </li></ul><ul><li>You will never be finished managing OPEB costs-constant tweaking will be the order of the day. </li></ul><ul><li>Build as much flexibility into your health care plans and your OPEB structure as possible and constantly monitor new developments. </li></ul>
  14. 14. # 9 The Only Constant is Change <ul><li>Build as much flexibility into your health care plans and your OPEB structure as possible and constantly monitor new developments. </li></ul><ul><li>Consider alternate benefit packages such as defined contribution options. </li></ul>

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