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Controlling your OPEB Story

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In June 2015, the Governmental Accounting Standards Board (GASB) approved two new statements that call for more prominence and accuracy when displaying Other Post-Employment Benefit (OPEB) liabilities, such as health insurance for retirees. This webinar will focus on the changes coming to the industry -- from implementing these statements, to strategies for explaining these changes to media and taxpayers.

Published in: Government & Nonprofit
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Controlling your OPEB Story

  1. 1. 1 Controlling Your Other Post-Employment Benefits (OPEB) Story How employers and pension plans can explain OPEB liabilities to media and taxpayers
  2. 2. 2  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  3. 3. 3  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  4. 4. 4  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  5. 5. 5 About Sikich »Multi-disciplinary: We are a professional services firm specializing in accounting, technology, investment banking and advisory services with clients in the U.S. and around the world. »Excellent reputation: With a reputation for professional excellence, Sikich provides valuable client service as well as timely and cost-effective services. »Strong talent: We employ more than 650 talented people including 87 partners, all of whom devote their careers to a focused area. »Award-winning: Sikich has been ranked as the country’s 31st largest accounting firm, as well as the seventh-largest value-added technology provider nationally, both by Accounting Today. PR practice is frequently honored by industry groups. 89 Total Partners 32 Years Serving Clients 650+ Total Personnel 7,900+ Total Clients 12 Offices Nationwide 1 Collaborative and Positive Culture
  6. 6. 6 Alex Brown Research Manager, National Association of State Retirement Administrators (NASRA) ❯ Co-author of papers on public pensions and retiree health care, including: ❯ “Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms” ❯ “Understanding Finances and Changes in Retiree Health Care” ❯ NASRA Issue Briefs ❯ Topics include pension spending, hybrid retirement plans, COLAs Today’s presenters
  7. 7. 7 Bill Hallmark Consulting Actuary, Cheiron ❯ Provides actuarial consulting for public pension and OPEB plans ❯ Nearly 30 years of experience ❯ American Academy of Actuaries ❯ Current chair, Public Plans Subcommittee ❯ Incoming Vice President of Pensions ❯ Provided written comments and oral testimony to GASB on GASB 67, 68, 74 and 75 ❯ Served on the Implementation Guide Advisory Committee for GASB 67 and 68 ❯ Frequent speaker on new GASB standards and implementation Today’s presenters
  8. 8. 8 Mack Reynolds Partner-in-Charge, Sikich Marketing & Public Relations ❯ Advising public pensions since 2006 ❯ Chicago Teachers’ Pension Fund ❯ Illinois Municipal Retirement Fund ❯ Texas County & District Retirement Fund ❯ Fraternal Order of Police (Chicago) ❯ NASRA member since 2009 ❯ Presented to conferences ❯ GFOA ❯ IFEBP ❯ NIRS Today’s presenters
  9. 9. 9 Fred Lantz Partner-in-Charge, Sikich Government Services ❯ Nationally recognized expert advising state and local governments since 1983 ❯ Government Finance Officers Association Technical Services Center ❯ Liaison to GASB ❯ Task force on GASB Statement No. 43 (OPEB) Implementation Guide ❯ GASB Pension Roundtable ❯ Presenter to national, state and local conferences ❯ AICPA State and Local Government Expert Panel Today’s presenters
  10. 10. 10 GASB Statement Nos. 74 and 75 Fred Lantz, Partner-in-Charge of Sikich Government Services
  11. 11. 11  What is OPEB? ❯Postemployment benefits other than pensions ❯ Benefits are paid after employment ❯ Benefits include healthcare (e.g., medical, vision, dental, hearing) ❯ Benefits may also include life insurance, disability, long-term care unless provided by a pension plan ❯ Includes explicit benefits and implicit benefits ❯ Explicit benefits the employer pays a benefit ❯ Benefit is expressed as a specific dollar amount or as a percentage of age adjusted premiums ❯ Implicit benefits generally result from retirees continuing in the employers health plan but not paying an age adjusted premium ❯ Required in many states OPEB Statements: GASB Nos. 74 & 75
  12. 12. 12 OPEB Statements: GASB Nos. 74 & 75  What is OPEB? ❯ Exchange of benefits for employee services performed ❯ Part of compensation package provided by employer ❯ All or portion of the cost born by the employer ❯ Special funding situation by non-employer (state)  What is not an OPEB? ❯ Special termination benefit (GASB S-47) ❯ An offer made by an employer for a period of time to encourage employees to retire ❯ Inducement to leave employment prior to retirement ❯ Includes both voluntary and involuntary early retirement programs ❯ Sick leave conversion ❯ GASB S-16 compensated absence 12
  13. 13. 13 OPEB Statements: GASB Nos. 74 & 75  Why the change from current accounting for OPEB? ❯ Pension benefits and OPEB benefits are both forms of compensation that employees earn over their service life ❯ Pension benefits and OPEB benefits are both paid out after the service life of the employee (after employment) ❯ All or portion of the cost is born by the employer ❯ GASB is aligning OPEB standards with the new pension standards that are becoming effective now (fiscal years ended June 30, 2015 and thereafter) ❯ Impact of pension changes 13 ©2015 Sikich LLP. All Rights Reserved.
  14. 14. 14  GASB Statement No. 74 (for OPEB plans) ❯ Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans ❯ Requires more extensive disclosures on OPEB liabilities ❯ Includes ten years of required supplementary information ❯ Covers OPEB plans whether or not administered through trusts ❯ Effective for fiscal years ending June 30, 2017 and thereafter ❯ Implement in the OPEB plan report or the employer report if the OPEB plan does not issue a separate report ❯ Many plans are not administered via separate trusts OPEB Statements: GASB Nos. 74 & 75
  15. 15. 15  GASB Statement No. 75 (for employers that provide OPEB) ❯ Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions ❯ Requires employers to report a net OPEB liability on accrual basis financial statements ❯ Replaces NOPEBO/NOPEBA ❯ Expense and liability recognition divorced from funding ❯ Employers in cost sharing plans and non employers with special funding situations may be impacted the most ❯Effective for employers fiscal years ending June 30, 2018 and thereafter OPEB Statements: GASB Nos. 74 & 75
  16. 16. 16  Provide more accurate perspective on OPEB liabilities, such as health insurance for retirees ❯ How much do retiree “promises” actually cost? ❯ Greater transparency ❯ Note disclosure and required supplementary information ❯ Greater consistency ❯ Employers will use the same methodology for valuing the liability and related expense ❯ Need to measure employee benefits when earned in accrual basis financial statements ❯ Early implementation allowed/encouraged ❯ Negative impact of being first to implement Why do GASB Nos. 74 & 75 exist?
  17. 17. 17 Retiree Healthcare Benefits for State and Local Employees in 2014 Alex Brown, NASRA Research Manager
  18. 18. 18  Significant variation in the state OPEB landscape  Some states face significant OPEB liabilities  More states have begun to accumulate assets to prefund OPEB benefits  OPEB costs are flexible and can be influenced by a number of factors ❯ Benefit changes and legal rulings ❯ Assumptions vs. experience ❯ Cost of medical services Spotlight on Retiree Health Care Benefits for State and Local Employees in 2014
  19. 19. 19  Actuarial funding vs. pay-as-you-go  Benefit changes and legal rulings  Implications of federal law ❯Affordable Care Act ❯Medicare  Actuarial assumptions vs. experience ❯Investment return ❯Medical inflation Factors that can influence OPEB liabilities
  20. 20. 20 State OPEB UAAL, FY 13 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 NY, CA, NJ, TX, IL, NC, CT, GA, MA, OH
  21. 21. 21 State OPEB ARC & Percentage Paid, FY 13
  22. 22. 22 State OPEB Assets, FY 13
  23. 23. 23  Investment return assumption ❯If assets under management ❯Median investment return assumption in FY 13 = 4.9 percent  Medical inflation ❯Most states assume a decrease in the medical inflation rate ❯Median medical inflation rate assumption in FY 13 = 7.3 percent ❯Median long-term medical inflation rate assumption in FY 13 = 5 percent Key Assumptions
  24. 24. 24  To the extent possible, states may employ various strategies to reduce OPEB cost ❯ Scale back access to retiree health benefits ❯ Reduce benefit offerings ❯ Modify criteria which must be met to become eligible for retiree health benefits ❯ Use public health insurance exchanges created under ACA as an alternative means of providing pre- Medicare retirees with access to health care. State response
  25. 25. 25 Percentage of State Governments Offering Retiree Health Insurance, FY 08 – FY 13 60 65 70 75 80 85 90 08 09 10 11 12 13 Insurance to retirees under 65 Insurance to retirees over 65 Source: Medical Panel Expenditure Survey, HHS
  26. 26. 26  State OPEB liabilities remained stable in FY 2013  More states are beginning to prefund OPEB benefits  States continue to address OPEB benefits and costs, to the extent permitted by individual state law  New accounting standards will fundamentally change OPEB reporting requirements Observations
  27. 27. 27 GASB 74 and 75 – Key Changes from an Actuarial Perspective Bill Hallmark, Consulting Actuary, Cheiron, Inc.
  28. 28. 28  Measuring the Total OPEB Liability ❯Liability projected to measurement date ❯Actuarial cost method must be Entry Age ❯ Many OPEB valuations currently use Projected Unit Credit ❯New basis for discount rate Key Actuarial Changes
  29. 29. 29  Statement of Net Position ❯Net OPEB Liability = Total OPEB Liability – Fair value of assets ❯Deferred inflows and outflows = unrecognized portion of unanticipated changes  Annual Expense ❯Annual Required Contribution (ARC) is gone ❯Recognition of changes is much quicker ❯Annual expense is much more volatile Key Actuarial Changes
  30. 30. 30 Funding GASB 43/45 GASB 74/75 Pay-as-you-go Long-term expected return on unrestricted assets 20-year tax exempt general obligation bond index Fully Pre-Funded Long-term expected return on plan assets Long-term expected return on plan assets Fully Pre-Funded Criteria Contribute ARC Satisfy crossover test Partially Pre-Funded Blended rate Single equivalent rate from crossover test Discount Rate
  31. 31. 31 Discount Rate – Crossover Test  Are assets (including future contributions for current members) sufficient to pay all current member benefits if all assumptions are met? ❯ An ARC based on 30-year rolling amortization would not satisfy this requirement ❯ But, a lower contribution amount based on a longer, closed amortization may
  32. 32. 32  GASB 45 – Based on ARC ❯ Employer service cost + ❯ Amortization payment on unfunded liability ❯ Often, 30 years as a level percentage of payroll  GASB 75 – No ARC ❯ Employer service cost + ❯ Interest on net OPEB liability* + ❯ Recognition of changes ❯ Plan changes – immediate recognition ❯ Investment experience – 5 years ❯ Liability experience and assumption changes – average future working life including inactives Annual OPEB Expense * Assumes expected return and discount rate are identical
  33. 33. 33  Annual OPEB expense will generally be higher ❯ Interest on the net OPEB liability is greater than 30- year, level percentage of pay amortization payment ❯ Exception: if discount rate is higher due to satisfying the crossover test, net OPEB liability and expense may be lower  And more volatile ❯ Shorter recognition periods will result in much more volatility, possibly even creating OPEB income in some years ❯ Benefit reductions, in particular, may create immediate OPEB income Annual OPEB Expense
  34. 34. 34  Mortality has been improving faster than anticipated ❯ More people are living into their 80’s and 90’s ❯ More expensive to provide lifetime OPEB benefits  Health care inflation continues to exceed growth in GDP and other prices Other Issues Probability of a 60-Year Old Today Living To Age: 70 80 90 Male 92% 79% 50% Female 95% 84% 58% Based on RP-2014 healthy annuitant mortality projected using scale MP-2015 from 2006
  35. 35. 35  Now is the time to reconsider OPEB funding strategies ❯ Establish or re-evaluate plan to pay for promised benefits ❯ Consider a pre-funding strategy that satisfies GASB’s crossover test ❯ May be able to start small and build over time ❯ Immediate accounting relief due to higher discount rate ❯ Investment returns will ultimately pay for some of the benefits ❯ Assets held in trust improve the security of the promised benefits for plan members Funding Strategies
  36. 36. 36 The Latest GASB (Media) Challenge Mack Reynolds, Partner-in-Charge of Sikich Marketing & Public Relations
  37. 37. 37  Key questions ❯Are you ready to be more clear in the way you report your financial obligations? ❯Are you ready for questions about why you weren’t more clear before? The Latest GASB Challenge
  38. 38. 38 The Latest GASB Challenge
  39. 39. 39 The Latest GASB Challenge
  40. 40. 40  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  41. 41. 41  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  42. 42. 42  GASB Nos. 74 and 75 will give reporters a new set of story leads The Latest GASB Challenge
  43. 43. 43 GASB Nos. 74 and 75 don’t change a plan’s financial health… … but they highlight a big benefit to retirees that may surprise taxpayers The Latest GASB Challenge Plan OPEB-Funded Status Unfunded liability owed to retiree health insurance Bedrock RHI 15.22% $185M; or, $152K per employee City of Mayberry RHI 0.00% $376M; $192K per employee State RHI 0.00% $34.5B; $538K per employee Bedrock Falls RHI 0.00% $9M; $7K per employee
  44. 44. 44  Reporters will ask ❯ If OPEB benefits are part of a retiree’s pension, why haven’t you funded this in the past? ❯ How can you lower your OPEB liabilities? Can you stop providing retiree health insurance? ❯ What else does OPEB include? ❯ Why did GASB decide to change how this number is reported now? ❯ Why weren’t you more transparent about OPEB, even if GASB didn’t require it? ❯ What else should we be examining? The Latest GASB Challenge
  45. 45. 45  Credible groups challenge sustainability ❯ American Enterprise Institute ❯ Arnold Foundation ❯ The Civic Federation  Academics challenge assumptions ❯ Joshua Rauh, Robert Novy-Marx  Wall Street warns of “pensions meltdown”  Legislators seek reform  Ratings agencies publicize their own public pension guidelines The Latest GASB Challenge
  46. 46. 46 “Governments are still failing to make full contributions. Public pensions are taking greater investment risk with the money they do receive. If those investments fail to pan out, the budget picture for many governments will once again be grim.” ❯ The Wall Street Journal (oped by Andrew Biggs of the American Enterprise Institute) Editors form opinions, sway readers
  47. 47. 47 “If public pension plans are losing ground on their funding status in years when the market is delivering above normal returns, is there any hope? “Probably not, but if there is a way to save public pension funds, it will require the two parties most responsible for the current sorry state of affairs: state politicians and government employee unions.” ❯ Forbes (oped) Editors form opinions, sway readers
  48. 48. 48  Most employers and public plans have some PR issues  Illinois is among the worst and most-often criticized Editors form opinions, sway readers
  49. 49. 49 “The State of Illinois was rated the country’s most troubled public pension system in a study of state-administered pension plans, retiree health care and other post-employment benefits.” ❯ Associated Press Editors form opinions, sway readers
  50. 50. 50  After pension viability is challenged  After questions are raised  After editorial opinions and public opinions take shape  After ratings agencies state their cases  After news breaks of inappropriate behavior Many public pensions are slow to respond
  51. 51. 51  Many public pensions miss the chance to tell their stories ❯ Long-term perspective ❯ Prudent investment ❯ Low cost ❯ Secure retirees ❯ Economic impact ❯ Short-term ❯ Long-term Many public pensions are slow to respond
  52. 52. 52 Illinois Municipal Retirement Fund: How Proactive Media Relations Helps
  53. 53. 53  Created by General Assembly in 1939 as an “Agent” multiple-employer pension plan  Locally funded 2,976 municipal employers 287,000 municipal employees + retirees  Second largest public pension in Illinois ❯ $34.9 billion in assets ❯ 93.1 percent funded on market basis  Does not have OPEB obligation IMRF approach to PR
  54. 54. 54  Recognized media challenges ❯ Reporters are unfamiliar w/ subject and on deadline ❯ Embrace conflict and controversy ❯ Enlighten readers, effect change  Pensions are complex ❯ Keep message simple ❯ Foster more accurate story ❯ “Pension envy” debate can’t be won  Developed key media messages ❯ What should the public understand? ❯ What negative issues should we preempt? IMRF approach to PR
  55. 55. 55 Public pensions messages Pensions work. • Traditional pensions are economical • It’s not race to the bottom • Pension costs and benefits are shared • DB plans are in it for long term • DB plan gets you more for less Pension policies have long-term impact. • Responses should be measured • We don’t need to break it to fix it • We should focus on long term • We should honor our commitments Retirement security benefits everyone. Pensions support our local economies. • The buck stays here • Retirees stay in Illinois • Public pensions make meaningful impact • Pensions vital to those who don’t receive Social Security
  56. 56. 56 IMRF messages Locally funded. • Manages pensions for 2,900+ employers • Able to enforce commitments Independently managed. • Elected board of members, employers, beneficiaries IMRF is a good role model. Focused on long-term. • Consistent, full funding • 93.1% funded (12/31/14) • Extremely efficient • Well-allocated assets • Non-compounding COLAs
  57. 57. 57 Develop active PR plan ❯ Train media spokespeople ❯ Identify, met with all reporters covering public pensions ❯ Print, broadcast, online ❯ Correct press errors swiftly ❯ Accept chances for brief commentary ❯ Pursue editorial board meetings ❯ Large and small, across state ❯ Address community groups IMRF approach to PR
  58. 58. 58 Results
  59. 59. 59 “Not all Illinois pension funds are in serious financial trouble… [IMRF is] not part of the underfunded state system… How did they do it? IMRF officials say it’s a combination of good planning and wise investing.” ❯Associated Press Results
  60. 60. 60 Results “IMRF acts as a shining example of how the often- maligned traditional defined benefit plan can work — provided it’s properly funded by employees and government, pursuing a sound investment approach and dedicated to weeding out questionable practices and corruption.” ❯ State Journal-Register / Better Government Association
  61. 61. 61 How to apply IMRF example to media interest in OPEB GASB Statement Nos. 74 & 75
  62. 62. 62  Identify your audiences  Taxpayers  Elected officials  Understand what they want and need to hear  OPEB is pre-funded  Costs were always included in the annual reports  Develop a PR and media relations strategy that addresses your audience needs Craft and control your GASB story
  63. 63. 63  Craft a message  Why DB plans matter  Why GASB updates rules  How GASB 74 & 75 won’t affect plan’s health  How GASB 74 & 75 will affect plan and employer’s financial statements  Create a communications plan; commit to it  Establish yourself as media’s best source of information about GASB Nos. 74 & 75  Anticipate reporter questions  Respond thoughtfully, but promptly to requests Craft and control your GASB story
  64. 64. 64  Media train your spokespeople  Develop proper press materials  Keep them devoid of jargon  Be proactive  Pursue reporters  Teach them pensions “101”  Offer interviews  Develop stories  News releases  Op Eds  Correct errors  By reporters or others Craft and control your GASB story
  65. 65. 65  Look for opportunities to tell your story  National pension news  Public service efforts  Retiree profiles  National Save for Retirement Week  Prepare to accept the bitter with the sweet  Become a visible, accessible expert! Own your GASB story
  66. 66. 66 Questions?
  67. 67. 67 Contact information Mack Reynolds mreynolds@sikich.com 312-541-9300; ext. 105 Fred Lantz flantz@sikich.com 630-566-8557
  68. 68. 68 Contact information Alex Brown alex@nasra.org 202-624-8461 Bill Hallmark bhallmark@cheiron.us 877-243-4766; ext. 1113
  69. 69. 69 LinkedIn: www.linkedin.com/company/sikich Facebook: www.facebook.com/sikichllp Twitter: www.twitter.com/sikichllp Blog: www.sikich.com/blog www.sikich.com

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