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IMTA Annual Conference
Mark W. Schulte, FSA, EA, MAAA
June 24, 2019
 Lots of information about GASB 75 during the past
few years; now it’s finally here
 Substantial changes to volume and c...
Actuarial reporting
Financial reporting
Common pitfalls
What’s on the horizon?
2
What’s the same?
 Still project future retiree benefits and then
discount into “today’s dollars”
3
-
100,000
200,000
300,...
What’s the same?
 Lots of actuarial assumptions used to estimate the
value of future retiree costs
 Yes, we still have t...
What’s different?
 More frequent reporting: biennial valuations for all
employers
 Also need roll-forward updates in the...
 What should you look for in “off year” updates?
6
Update Item Considerations
Discount rate  Municipal bond index rate
(...
 Employers can measure liabilities up to 12 months
prior to fiscal year-end
 Much easier to use this “lookback” method t...
 Sample actuarial valuation/reporting schedule
8
Date Year 1 Year 2
Reporting Date (FYE) 4/30/2019 4/30/2020
Valuation Ty...
 Alternative Measurement Method (AMM) is still
available if fewer than 100 participants (active +
retired)
 BUT … it’s p...
 GASB 75 for OPEB will require more disclosure
information than GASB 68 for pensions
 Get started soon!
 GASB 75 needs ...
 1st year restatement of prior position (i.e., replace
Net OPEB Obligation with Net OPEB Liability)
11
GASB 45 GASB 75
Un...
12
Sample Funded Plan
13
Lookback method requires small adjustment equal to
contributions between measurement and reporting
dates
14
 Fund accounting
 NOL allocations are straightforward
 Accounting allocations can get trickier when balancing
OPEB e...
 Discount rate and liability volatility
 Assumption scrutiny
 Crossover calculations for funded plans
 Cadillac Tax
 ...
2.50%
2.75%
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
GASB 75 Discount Rate Volatility
Fidelity GO AA - 20 Yrs GASB 45 4.0...
17
Assumption Considerations
Discount rate  Muni bond index rate is a reference “input”; should change annually
 Crossov...
 Actuarial standards of practice now require disclosure
of rationale for selecting each assumption
18
19
 Crossover calculations for discount rate
20
 40% excise tax on employer-sponsored health plan
costs that exceed certain thresholds
 Originally supposed to be eff...
21
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
AnnualSinglePremiumRate
Illustration of Cadillac Tax
Cadillac Tax Ta...
22
 Various ways to estimate the cost, but each adds a
layer of complexity to the calculations
- Adjustments to medical t...
23
 Older healthcare trend assumptions usually
converge to ultimate rate quickly
Year Increase Rate
FY2019 8.0%
FY2020 7....
24
 Society of Actuaries “Getzen Model” developed
several years ago
 Based on research of economy’s capacity to
support ...
 No requirement to pre-fund OPEB, but there is an
incentive with the discount rate calculations
 Some OPEB funding polic...
 Discretionary OPEB funding vs. mandatory pension
contributions
 Pension payments are generally more concrete and
predic...
 Assessment and Disclosure of Pension Risk (ASOP 51)
effective for all pension actuarial reports with a
measurement date ...
 Make sure you get a head start on FY2019 GASB 75
reporting
 Budget and plan for more frequent actuarial reporting and
d...
29
Mark W. Schulte, FSA, EA, MAAA
marks@vaniwaarden.com
Van Iwaarden Associates
612.596.5971
All information in this presenta...
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GASB 75 Implementation Issues

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IMTA Annual Conference presentation on Other Post-Employment Benefits (OPEB) GASB 75 public sector accounting

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GASB 75 Implementation Issues

  1. 1. IMTA Annual Conference Mark W. Schulte, FSA, EA, MAAA June 24, 2019
  2. 2.  Lots of information about GASB 75 during the past few years; now it’s finally here  Substantial changes to volume and content of OPEB financial reporting  Financial statement changes (and work involved) are highly dependent upon OPEB plan details 1
  3. 3. Actuarial reporting Financial reporting Common pitfalls What’s on the horizon? 2
  4. 4. What’s the same?  Still project future retiree benefits and then discount into “today’s dollars” 3 - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049 2052 2055 2058 2061 2064 2067 2070 2073 2076 2079 2082 2085 Projected Retiree Benefit Payments Current Retirees Future Retirees
  5. 5. What’s the same?  Lots of actuarial assumptions used to estimate the value of future retiree costs  Yes, we still have to value an “implicit subsidy” - What would you spend on active employee health premiums if retirees weren’t enrolled on the group health plan? 4
  6. 6. What’s different?  More frequent reporting: biennial valuations for all employers  Also need roll-forward updates in the “off years”  OPEB and pension reporting is moving towards annual assessments, just like all private sector accounting 5
  7. 7.  What should you look for in “off year” updates? 6 Update Item Considerations Discount rate  Municipal bond index rate (spot rate input; not a long-term assumption)  “Crossover” calculation for funded plans Assets Must reflect actual year-end assets Benefit payments  Need to use actual “direct subsidy” benefit payments  Implicit subsidy payments usually estimated by actuary Plan changes  Adjustments to eligibility or subsidies offered to retirees  Unclear if changes to underlying group health plan need to be reflected
  8. 8.  Employers can measure liabilities up to 12 months prior to fiscal year-end  Much easier to use this “lookback” method than to wait until after year-end to collect data 7 Valuation Date & Measurement Date Reporting Date Net amount Reported at FYECalculate liabilities 4/30/2018 4/30/2019
  9. 9.  Sample actuarial valuation/reporting schedule 8 Date Year 1 Year 2 Reporting Date (FYE) 4/30/2019 4/30/2020 Valuation Type Full Roll-forward Valuation Date 4/30/2018 Same as prior Measurement Date 4/30/2018 4/30/2019
  10. 10.  Alternative Measurement Method (AMM) is still available if fewer than 100 participants (active + retired)  BUT … it’s pretty complicated  Fewer providers offering AMMs  Need to balance GASB 75’s specific requirements (paragraphs 224-226) vs. what’s practical with a DIY spreadsheet 9
  11. 11.  GASB 75 for OPEB will require more disclosure information than GASB 68 for pensions  Get started soon!  GASB 75 needs to track:  Total OPEB Liability (TOL)  Fiduciary Net Position and Net OPEB Liability (funded plans)  OPEB expense and deferred inflows/outflows of resources  Sensitivity to discount rate and healthcare trend assumption  GASB statements and Implementation Guides have good sample note disclosures/RSI – use them! 10
  12. 12.  1st year restatement of prior position (i.e., replace Net OPEB Obligation with Net OPEB Liability) 11 GASB 45 GASB 75 Unfunded actuarial accrued liability $38M $37M Balance sheet liability $12M $37M  GASB 45 Net OPEB Obligation amortized unfunded liability onto balance sheet very slowly Net OPEB Obligation Net OPEB Liability
  13. 13. 12 Sample Funded Plan
  14. 14. 13 Lookback method requires small adjustment equal to contributions between measurement and reporting dates
  15. 15. 14  Fund accounting  NOL allocations are straightforward  Accounting allocations can get trickier when balancing OPEB expense and deferred inflows/outflows of resources  Cost-sharing multiple employer plans  Separate employers with “shared” plans  Applicable if have separate standalone financial statements  Proportionate share calculations can be challenging
  16. 16.  Discount rate and liability volatility  Assumption scrutiny  Crossover calculations for funded plans  Cadillac Tax  Funding policy considerations  Risk analysis 15
  17. 17. 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% GASB 75 Discount Rate Volatility Fidelity GO AA - 20 Yrs GASB 45 4.0%  A 100bps discount rate change can change liabilities by 10% - 15% 16
  18. 18. 17 Assumption Considerations Discount rate  Muni bond index rate is a reference “input”; should change annually  Crossover calculations for partially-funded plans Cadillac Tax GASB 75 requires this be included in liabilities Health trend rates Newer models are more robust than old rule-of-thumb estimates Participation rate  What % of future retirees will continue medical coverage?  Significant effect on liability calculations Expected asset return Should be based on advice from investment advisor; need to explain rationale in notes to financial statements
  19. 19.  Actuarial standards of practice now require disclosure of rationale for selecting each assumption 18
  20. 20. 19  Crossover calculations for discount rate
  21. 21. 20  40% excise tax on employer-sponsored health plan costs that exceed certain thresholds  Originally supposed to be effective in 2018, but delayed to 2020 and again to 2022  GASB 75: Projected plan costs “should include taxes or other assessments expected to be imposed on benefit payments”
  22. 22. 21 - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 AnnualSinglePremiumRate Illustration of Cadillac Tax Cadillac Tax Tax Threshold Total Cost Annual Premium Tax Threshold “Excess” Cost Cadillac Tax
  23. 23. 22  Various ways to estimate the cost, but each adds a layer of complexity to the calculations - Adjustments to medical trend increase assumption - Load on liability calculation  Effect on OPEB liability many not be substantial since future cost increases are discounted with interest
  24. 24. 23  Older healthcare trend assumptions usually converge to ultimate rate quickly Year Increase Rate FY2019 8.0% FY2020 7.5% FY2021 7.0% FY2022 6.5% FY2023 6.0% FY2024 5.5% FY2025 5.0%  And then “reset” to new starting rate next year
  25. 25. 24  Society of Actuaries “Getzen Model” developed several years ago  Based on research of economy’s capacity to support growing healthcare costs  Typically: - 5 years of short-term costs - 50+ years of mid-term trends - Ultimate trend ~ 4.0%  Gaining wider use by actuaries and sometimes required by auditors
  26. 26.  No requirement to pre-fund OPEB, but there is an incentive with the discount rate calculations  Some OPEB funding policy considerations:  OPEB liability volatility and predictability  Implicit vs. direct subsidies  Investment return volatility  Time horizon  Coordination with retiree payments from general assets 25
  27. 27.  Discretionary OPEB funding vs. mandatory pension contributions  Pension payments are generally more concrete and predictable (investments … not so much) 26 $0.0 $50.0 $100.0 $150.0 $200.0 Unfunded Liability ($MM) – Sample Pension Plan Unfunded Liability Accrued Liability Market Asset Value
  28. 28.  Assessment and Disclosure of Pension Risk (ASOP 51) effective for all pension actuarial reports with a measurement date on or after November 1, 2018  Not applicable to OPEB … yet  Very important to understand OPEB risks and volatility if pre-fund OPEB and develop a funding policy 27
  29. 29.  Make sure you get a head start on FY2019 GASB 75 reporting  Budget and plan for more frequent actuarial reporting and data collection  Evaluate assumptions (e.g., discount rate and participation rate), how they’re determined, and consider how they will affect GASB 75 calculations  Balance OPEB and pension contribution commitments 28
  30. 30. 29
  31. 31. Mark W. Schulte, FSA, EA, MAAA marks@vaniwaarden.com Van Iwaarden Associates 612.596.5971 All information in this presentation is for general informational purposes only and should not be relied upon without the express written consent of the author. L/D/C/R: 4/ms/sb 30

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