Controlling your OPEB Story

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Controlling Your Other
Post-Employment
Benefits (OPEB) Story
How employers and
pension plans can
explain OPEB liabilities
to media and taxpayers

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 GASB Nos. 74 and 75 will give reporters a new
set of story leads
The Latest GASB Challenge

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set of story leads

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set of story leads

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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

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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

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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

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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

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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

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GASB Statement Nos. 74 and 75
Fred Lantz, Partner-in-Charge of Sikich Government Services

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 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

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 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

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 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
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©2015 Sikich LLP. All Rights Reserved.

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 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

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 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

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 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?

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Retiree Healthcare Benefits for
State and Local Employees in 2014
Alex Brown, NASRA Research Manager

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 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

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 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

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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

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State OPEB ARC & Percentage Paid,
FY 13

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 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

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 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

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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

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 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

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GASB 74 and 75 – Key Changes
from an Actuarial Perspective
Bill Hallmark, Consulting Actuary, Cheiron, Inc.

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 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

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 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

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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
on plan assets
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

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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

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 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

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 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

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 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

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 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

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The Latest GASB (Media) Challenge
Mack Reynolds, Partner-in-Charge of Sikich Marketing & Public Relations

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 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?

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set of story leads

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set of story leads

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set of story leads

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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
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

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 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?

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 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

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“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

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“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)

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 Most employers and public plans have
some PR issues
 Illinois is among the worst and most-often
criticized

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“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

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 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

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 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

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Illinois Municipal Retirement Fund:
How Proactive Media Relations Helps

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 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

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 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

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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

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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

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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

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“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

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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

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How to apply IMRF example to media
interest in OPEB
GASB Statement Nos. 74 & 75

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 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

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 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

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 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

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 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

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Contact information
Mack Reynolds
mreynolds@sikich.com
312-541-9300; ext. 105
Fred Lantz
flantz@sikich.com
630-566-8557

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Contact information
Alex Brown
alex@nasra.org
202-624-8461
Bill Hallmark
bhallmark@cheiron.us
877-243-4766; ext. 1113

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Controlling your OPEB Story

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