1.
IMTA Northern Region Meeting
Mark Schulte, FSA, EA, MAAA
October 5, 2018

2.
1 General background
2 Pension background
3 Pension funding
4 OPEB costs
5 OPEB funding
6 Pension and OPEB outlook
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3.
 Retirement benefits usually in two main categories
 Pensions
 Other Post Employment Benefits
 Both are benefit promises where costs must be estimated
many years in future
 Cost of the promises must be disclosed in financial statements
when they are earned
2

4.
 Why are pension and OPEB important?
3
“The Fiscal Firebomb Looming for Small Cities in Illinois”
“The bottomless pit - public pensions”
“Pension debt yielding a grim outlook for local governments”
“Retiree Health Care: The Brick That Broke Municipalities’ Backs”
“Taxpayers on the hook for billions in hidden government-worker healthcare costs”
“Taming the OPEB Beast”/“Slaying the OPEB Dragon”
Pension & OPEB Headlines
Pensions!

5.
 Public agencies face growing pressure of retiree benefit costs
which are higher than expected
 Increased scrutiny on costs
 Legal, logistical, and financial obstacles to reducing costs
4

6.
 Pension & OPEB funding is different than accounting
 GASB accounting results are a snapshot of plan’s funded status
 “Funding” calculations are usually a long-term view
 Different actuarial measurements can create confusion about
which are the “right” numbers
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Sample Plan GASB
Funded Status
“Funding”
Funded Status
Liabilities $41.2M $27.4M
Assets 21.3M 21.1M
Unfunded Liability $19.9M $6.3M
Funded % 52% 77%

7.
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$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
Unfunded Liability ($MM) – Sample Pension Plan
Unfunded Liability Accrued Liability Market Asset Value
 Pension liabilities are generally fairly stable and constantly increasing. It’s up
to the investments (plus employer contributions) to keep up with the
liability growth.
 Need a proactive funding and investment policy to be successful

8.
 Investment return assumptions and volatility are key pension
risk factors
7
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Investment Returns – Sample Pension Plan
Actual Return Expected Return (7.0%)

9.
 Liability discount rate (investment return assumption)
determines “present value” of future pension payments
 Higher investment earnings translate to lower contributions,
but the opposite is true too
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10.
 Many pension plans’ funded status has decreased in recent years
 Underfunded plans can sometimes operate for many decades without
running out of money – as long as actuarial contributions are made
9
Funded Ratio – Sample Pension Plan

11.
 IMRF provides pensions to non-safety local
employees
 Agent, multiple-employer system:
 Each employer responsible for their own pension costs
 Over 3,300 pension plans; generally well-funded
 Mandatory contribution rates, with enforcement
mechanism
10

12.
 Over 650 local safety pension plans
 Article 3 (Police) and Article 4 (Firefighters) in pension code
 Varying levels of funding sufficiency
 Single-employer plans
 Plan administration and investments handled locally
 Each municipality responsible for calculating and paying
their own pension costs
11

13.
 Based on prescribed methods and assumptions in IL pension code
 Mandate property tax levy to help fund contributions
 State comptroller can garnish tax revenues for contribution non-compliance
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Minimum Statutory Contribution Formula
Normal Cost
 Value of new benefits earned by active members this year
 Cost split between Employers and Employees
Plus
Amortization of Unfunded Liability
 Spreads out unfunded liability over several years (as % of payroll)
 Statutory minimum target is 90% funded by 2040
 Paid entirely by employer – i.e., employer is responsible for any
unexpected pension costs attributable to active members or retirees

14.
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Should employers be looking beyond statutory minimum pension
contributions?
Eventually need to pay the cost of all promised pensions
Delaying contributions reduces the potential investment return
available to reduce future pension costs
There are several options to develop an Actuarially Determined
Contribution (ADC)

15.
 Basic “Normal Cost plus Amortization of Unfunded Liability” approach is
still appropriate
 Amortization methods and assumptions can be refined
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Statutory Amortization ADC Alternative
Target 90% funding Target 100% funding
Amortize as level % of payroll Amortize as level $ amount
Single amortization period ending 2040 Amortization “layers” each year
Usually 10-20 year amortization periods
Assumptions: ~6.5% discount rate
3.5% payroll growth
Other (lower risk) investment targets?
Lower or no payroll growth assumption

16.
 Sample comparison of minimum contribution to ADC
 Assume Liability=$100M; Assets=$70M; NC=$2M
 Discount rate=6.5%; Payroll=3.5% or 0%
 90% vs. 100% funding target; 23 vs 20 year amortization period
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Statutory Minimum Alternative ADC
Normal Cost $2.0M $2.0M
Unfunded Liability
Amortization
1.2M 2.7M
Total Contribution $3.2M $4.7M

17.
 What do OPEB promises look like?
 Often “tiered” with different grandfathered groups
 Often varies by employee group (e.g., Police, Fire, Misc)
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Sample OPEB Subsidies
Premiums  100% paid by employer
 % of premium based on service at retirement
 Retirees receive amount equal to active subsidy
 Premium up to cap
 Fixed dollar amount
Premium increases  Paid by employers
 Split between employer and retirees
Duration  Lifetime
 Pre-65
 Specified period (e.g., up to 10 years)

18.
 Retiree OPEB costs are often projected to extend for many
years
17
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
2066
2068
Projected Retiree Benefit Payments
Current Retirees Future Retirees

19.
 Actuarial calculations estimate OPEB costs decades into the
future
 Many factors affect projected OPEB costs
 OPEB can be very volatile compared to pensions
 Benefit provisions sometimes flexible
 Challenging to project health costs and utilization several decades into
future
 Potential changes in national healthcare system?
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20.
 Governmental Accounting Standards Board (GASB) requires
measurement of the value of OPEB promises
 GASB 45 shined a light on OPEB starting in 2006, but was outdated
from the start
 Full liability not on balance sheet
 To much variation in calculation methods and assumptions
 GASB 75 effective for FYs beginning after 6/15/2017
 Catches OPEB up with pensions
 Significant effect on balance sheet
 More frequent actuarial reporting
 More volatile liabilities in many cases
 Alternative Measurement Method (AMM) still available, but more complex
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21.
 Direct Subsidy and Implicit Subsidy costs
 Implicit Subsidy can be difficult to understand and explain, but still need
to recognize under GASB 75 accounting
 Is supposed to reflect the additional “hidden” cost of allowing retirees to
remain on employer’s group medical plan
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Active employee (age 40) Retiree (age 60) Total
Premium 800 800 1,600
Medical Costs 600 1,000 1,600
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Illustration of Implicit Subsidy

22.
 OPEB funding is entirely separate from accounting
requirements
 Many OPEB plans are unfunded, but some employers have
established OPEB trusts
 OPEB funding challenges
 OPEB funding is usually optional, not mandatory like pensions
 OPEB liability volatility
 Investment objectives – stability vs. returns
 Often starting from $0
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23.
OPEB Trust Considerations
 Revocable vs. irrevocable trusts
 Revocable trusts offer additional flexibility
 Irrevocable assets better for GASB 75 accounting
 Assets reflected in Fiduciary Net Position and Net OPEB Liability
 Expected investment return affects liability discount rate
 Consider converting revocable to irrevocable, or a
combination of the two?
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24.
 Normal Cost + Unfunded Liability Amortization model is appropriate for
both pensions and OPEB
 Often need special adjustments to OPEB funding policy because starting
from lower funding level than pensions
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$0.0
$5.0
$10.0
$15.0
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
2066
2068
Millions
Projected OPEB Costs/Contributions
Employer pays 100% future payments (pay-as-you-go cost)
Traditional funding policy (30 year)
Phase-in to level OPEB cost ($7M)

25.
 What does trust projection look like with different funding policies?
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$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
2066
2068
Millions
Projected OPEB Trust Assets
Traditional funding policy (30 years)
Phase-in to level OPEB cost ($7M)

26.
 How to coordinate OPEB trust contributions and benefit payments?
 Some employers want to get “100% funded” before paying benefits
from trust – is this practical?
 Consider
 Direct vs. implicit subsidies
 OPEB liability and asset volatility
 Flexible funding/spending policy
 Contribution sources: employer vs. employee
 Some employers end up “super-funding” their OPEB trust
 Make OPEB trust contributions plus annual retiree benefits paid from
general assets
 Can cause an unstable contribution pattern
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27.
 IL public safety pension consolidation and reform proposals
 Nationwide trend towards lowering pension plan benefits –
depending on statutory protections
 Additional scrutiny on actuarial assumptions/transparency
 “Mark-to-market” accounting
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28.
 Focus on disclosing/communicating/mitigating pension risks
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Solvency Liability (3.0%) 6.0% Discount Rate 7.0% Discount Rate 8.0% Discount Rate
Unfunded Liability $102.1 M $47.1 M $33.0 M $21.2 M
Assets $72.4 M $72.4 M $72.4 M $72.4 M
Liability $174.5 M $119.5 M $105.4 M $93.6 M
$ M
$20 M
$40 M
$60 M
$80 M
$100 M
$120 M
$140 M
$160 M
$180 M
$200 M
Effect of Discount Rate on Funded Status
Baseline assumption

29.
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30.
Mark Schulte, FSA, EA, MAAA
marks@vaniwaarden.com
Van Iwaarden Associates
612.596.5960
All information in this presentation is for general informational purposes only and should
not be relied upon without the express written consent of the authors.
L/D/C/R: 4/ms/sb
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