OPEB cost control

1. OPEB
Cost Control
Strategies
May 15, 2008

2. OPEB Cost Control Techniques
Zero liability (for small employers)
Plan “tweaks”
Funding
Defined contribution
accounts

3. Zero Liability for Small Groups
Age
Actual
Cost
Blended
Cost
Implicit
Subsidy
20 $200 $400
30 300 400
40 400 400
50 500 400
60 600 400 200
Most employers charge retirees the blended cost
Small fully-insured employers (<50 employees)
can charge retirees the actual (not blended) cost
If they do, there’s no implicit subsidy!

4. Plan tweaks: many options
Prescription drugs – lower generic &
OTC copays, higher name brand
Eligibility: service requirements for
full benefits
Different benefits for new employees
Defined dollar benefit (DDB)
Medicare integration method:
COB, exclusion or carve-out
Medicare Part D strategies

5. Medicare Part D
Different strategies for public
vs. private employers
PDP subsidy often better than
28% direct subsidy, especially
for public employers
Higher value for most plans
Better accounting treatment
Direct-subsidy tax advantage
irrelevant for public employers

6. Funding
• Potential higher discount rate (lower liabilities)
• Possible greater flexibility in investments
• Smaller ARC and Net OPEB Obligation
• Better credit rating
* Note that pre-funding is NOT required

7. OPEB Funding
GASB’s requirements for a funded plan
• Employer contributions irrevocable
• Assets dedicated to providing retiree benefits
• Assets protected from creditors
Funding vehicles
• 501(c)(9) trust, aka VEBA
• Section 115 Trust
• Insurance Contract

8. Funding - with Higher Discount Rate
With pre-
funding &
No pre- higher
funding discount
Present Value of OPEB Benefits $5,000,000 $4,000,000
Actuarial Accrued Liability 3,000,000 2,400,000
Plan Assets 0 1,000,000
Unfunded Actuarial Accrued Liability 3,000,000 1,400,000
Normal Cost 250,000 200,000
Annual Required Contribution – Year 1
Normal Cost $250,000 $200,000
Amortization of Unfunded Accrued Liability 173,490 80,962
Total $423,490 $280,962

9. Defined
Contribution
Accounts
What they do
• Replace open-ended liabilities with known cost
• Potentially more secure benefits for employees

10. Defined
Contribution
Accounts
Transition from defined benefit: Anaheim
• Preserve current benefits for those near retirement
• Evaluate benefits for eligible employees
• Set up an individual account for each with:
• a starting balance for past-service benefits
• regular payroll contributions
• Invest in default or chosen funds
• Web-based claim and premium payments

11. Cost Control
Examples
City of Duluth – a little of everything
• Prescription drugs – new copay schedules
• Start to pre-fund existing OPEB liabilities
• Defined contribution accounts for new hires

12. Questions??
James A. Van Iwaarden, FSA
www.vaniwaarden.com
612.596.5961, 888.596.5960