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Public Investment and Debt Management Forum
Mark Schulte, FSA, EA, MAAA
July 25, 2018
1 Pension and OPEB background
2 OPEB costs
3 OPEB funding
4 Pension background
5 Pension funding
6 Pension future
1
 Retirement benefits usually in two main categories
 Pensions
 Other Post Employment Benefits
 Both are benefit promis...
 Why are pension and OPEB important?
3
“Minnesota's public-pension system is in crisis, new data shows”
“ Pension Crisis ...
4
“School employers struggle to pay retirees' health benefits”
“Retiree Health Care: The Brick That Broke Municipalities’ ...
 Public employers face pressure of retiree benefit
costs which are higher than originally expected
 Increased scrutiny o...
 What do OPEB promises look like?
 Usually “tiered” with different grandfathered groups
 Usually varies by employee gro...
 Retiree OPEB costs are often projected to extend
for many years
7
-
100,000
200,000
300,000
400,000
500,000
600,000
700,...
 Various “levers” to control costs
8
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
2018
2020
2022
2024
...
 Actuarial calculations estimate OPEB costs decades
into the future
 Many factors affect projected OPEB costs
 OPEB can...
 Governmental Accounting Standards Board (GASB)
requires measurement of the value of OPEB promises
 GASB 45 shined a lig...
 OPEB liability is the discounted value of projected
future payments
 OPEB liabilities vary significantly depending on
i...
 OPEB funding is entirely separate from accounting
requirements
 Many OPEB plans are unfunded, but some MN
employers hav...
 How to coordinate OPEB trust contributions and benefit
payments?
 Some employers want to get “100% funded” before payin...
 Consider projections of trust assets and total employer costs
(trust contribution + benefit payments)
14
 Determine projected employer costs after understand effect
on projected trust assets
15
 MN statewide plans (TRA, PERA, MSRS) provide
pension benefits to most public employees
 Liabilities determined on a pla...
 Pension liabilities are fairly predictable; investment
returns are the most volatile factor
17
Source: MN TRA 2017 actua...
 Plan funded status is stabilizing, but there is a long
way to go – and the plan is maturing
18
Source: MN TRA 2017 actua...
 Investment return assumptions and volatility are
key pension risk factors
19
Source: MN TRA 2017 actuarial funding report
 Significant differences between GASB accounting calculations
and long-term funding results
 Different actuarial measure...
 Are GASB accounting results relevant?
 “Financial results using this method are simply a
snapshot in time and do not an...
 Contribution rates are set in statute, but evaluated
by actuary each year
 Can plan funded status consistently improve ...
 Recent legislation finally increased contribution rates
23
Current TRA Future TRA
Employee rate 7.50% 7.75% (FY2024)
Emp...
 How will future contribution rates change to address funding
deficiencies and potential assumption adjustments?
24
Sourc...
 Pension plan maturity is increasing nationwide
 Assets/liabilities very large compared to employers’ budgets
 Requires...
26
Mark Schulte, FSA, EA, MAAA
marks@vaniwaarden.com
Van Iwaarden Associates
612.596.5960
All information in this presentatio...
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The Alphabet Forest: OPEB, GASB and Pensions

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Funding and accounting for public sector pension and Other Post-Employment Benefits (OPEB) plans

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The Alphabet Forest: OPEB, GASB and Pensions

  1. 1. Public Investment and Debt Management Forum Mark Schulte, FSA, EA, MAAA July 25, 2018
  2. 2. 1 Pension and OPEB background 2 OPEB costs 3 OPEB funding 4 Pension background 5 Pension funding 6 Pension future 1
  3. 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. 4.  Why are pension and OPEB important? 3 “Minnesota's public-pension system is in crisis, new data shows” “ Pension Crisis Too Big for Markets to Ignore” “ The bottomless pit - public pensions” “ Pension debt yielding a grim outlook for local governments” “ Trouble Ahead: Unfunded Liabilities in State Pension Funds” Pension Headlines Pensions!
  5. 5. 4 “School employers struggle to pay retirees' health benefits” “Retiree Health Care: The Brick That Broke Municipalities’ Backs” “The Retiree Medical Benefit Crisis” “The next retirement time bomb” “Taxpayers on the hook for billions in hidden government-worker healthcare costs” “Taming the OPEB Beast” “Slaying the OPEB Dragon” “Research Bureau's OPEB report predicts grim future” OPEB Headlines OPEB!
  6. 6.  Public employers face pressure of retiree benefit costs which are higher than originally expected  Increased scrutiny on costs  New accounting standards  Some newsworthy abuses  Us vs. them mentality  Legal, logistical, and financial obstacles to reducing costs 5
  7. 7.  What do OPEB promises look like?  Usually “tiered” with different grandfathered groups  Usually varies by employee group 6 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  100% paid by employer  Split between employer and retirees Duration  Lifetime  Pre-65  Specified period (e.g., up to 10 years) HRA/HCSP One-time or ongoing amount paid to account
  8. 8.  Retiree OPEB costs are often projected to extend for many years 7 - 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
  9. 9.  Various “levers” to control costs 8 $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 $45.0 $50.0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 2064 2066 2068 AnnualOPEBFinancingCosts($M) Projected Retiree Benefit Payments - Alternative Design Options Increase eligibility No post-65 subsidy Fixed-dollar subsidy No premium subsidies Current members/benefits
  10. 10.  Actuarial calculations estimate OPEB costs decades into the future  Many factors affect projected OPEB costs  OPEB can be very volatile  Benefit provisions sometimes flexible  Challenging to project health costs and utilization several decades into future  Potential changes in national healthcare system? 9
  11. 11.  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  Too much variation in calculation methods and assumptions  GASB 75 effective FY2018  Catches OPEB up with pensions  Significant effect on balance sheet  More frequent actuarial reporting  More volatile liabilities in many cases 10
  12. 12.  OPEB liability is the discounted value of projected future payments  OPEB liabilities vary significantly depending on interest rate used to discount future payments  Suppose have a $1,000 OPEB payment in 30 years?  Costs $131 in “today’s dollars” if earn 7.0% per year  Costs $356 if only earn 3.5% per year  Implications for both accounting and funding purposes 11
  13. 13.  OPEB funding is entirely separate from accounting requirements  Many OPEB plans are unfunded, but some MN employers have established OPEB trusts  Revocable vs. irrevocable trusts  Revocable offer additional flexibility  Irrevocable assets better for GASB 75 accounting  Consider converting to irrevocable, or a combination of the two? 12
  14. 14.  How to coordinate OPEB trust contributions and benefit payments?  Some employers want to get “100% funded” before paying benefits from trust – is this practical? 13 Additional OPEB Funding Considerations OPEB funding is optional, not mandatory like pensions Direct vs. implicit subsidies OPEB cost volatility Investment objectives Contribution sources: employer vs. employee
  15. 15.  Consider projections of trust assets and total employer costs (trust contribution + benefit payments) 14
  16. 16.  Determine projected employer costs after understand effect on projected trust assets 15
  17. 17.  MN statewide plans (TRA, PERA, MSRS) provide pension benefits to most public employees  Liabilities determined on a plan-wide basis  GASB 68 accounting allocated to employers  Most assumptions and contribution rates are set in State statutes – can be difficult to change 16
  18. 18.  Pension liabilities are fairly predictable; investment returns are the most volatile factor 17 Source: MN TRA 2017 actuarial funding report
  19. 19.  Plan funded status is stabilizing, but there is a long way to go – and the plan is maturing 18 Source: MN TRA 2017 actuarial funding report
  20. 20.  Investment return assumptions and volatility are key pension risk factors 19 Source: MN TRA 2017 actuarial funding report
  21. 21.  Significant differences between GASB accounting calculations and long-term funding results  Different actuarial measurements can create confusion about which are the “right” numbers 20 GASB Funded Status “Funding” Funded Status Liabilities $41.2B $27.4B Assets 21.3B 21.1B Unfunded Liability $19.9B 6.3B Funded % 52% 77% Source: MN TRA 2017 actuarial funding and GASB 67 reports
  22. 22.  Are GASB accounting results relevant?  “Financial results using this method are simply a snapshot in time and do not anticipate any future course corrections or adjustments.”  Similar criticism could be applied to long-term funding results/assumptions?  Financial economics debate about how pension debt should be valued (and financed) 21
  23. 23.  Contribution rates are set in statute, but evaluated by actuary each year  Can plan funded status consistently improve if contribution responsiveness is slow? 22 Source: MN TRA 2017 actuarial funding report; “updated” assumptions are those recommended by plan actuary in report Contribution Rates Cumulative Deficiency Statutory Rates 15.93% “Required” Rates 18.43% 2.50% “Updated Assumption” Rates 23.07% 7.14%
  24. 24.  Recent legislation finally increased contribution rates 23 Current TRA Future TRA Employee rate 7.50% 7.75% (FY2024) Employer rate 7.50% 8.75% (by FY2024) Total rate 15.00% 16.50%  Funding from State will increase to help reimburse school districts for employer contribution increases  Reduction in COLAs and other ancillary benefits to help close the funding gap
  25. 25.  How will future contribution rates change to address funding deficiencies and potential assumption adjustments? 24 Source: MN TRA 2015 funding projection report
  26. 26.  Pension plan maturity is increasing nationwide  Assets/liabilities very large compared to employers’ budgets  Requires new perspective for pension managers  Focus on risk instead of absolute return  Other ways to mitigate pension risks?  Additional scrutiny on actuarial assumptions and transparency  Trend towards lowering pension plan benefits  Reduced COLAs for current employees  Lower benefits for future employees  Some interest in Defined Contribution and hybrid plans 25
  27. 27. 26
  28. 28. 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 27

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