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© PFM 1© PFM 1© PFM 1
Other Post-Employment Benefits (“OPEB”)
Pre-FundingJohn C. Robinson, CTP
Senior Managing Consultant
Multi-Asset Class Portfolio Strategist
PFM Asset Management LLC. 221 West 6th Street
Suite 1900
Austin, Texas 78701
737.600.1269
pfm.com
December 4, 2017
© PFM 2© PFM 2© PFM 22© 2015 PFM Asset Management LLC
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Objectives
• What is OPEB?
• Implications of New GASB Rules
• Benefits of Pre-Funding a Trust
• Types of Trusts
• Creating an Investment Program
• Appendix: OPEB and GASB Rules “Cheat Sheet”
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I. What is OPEB?
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What is an OPEB?
Form of deferred compensation
Promise to provide retiree benefits must now be accrued during the working years of employees
Post-retirement benefit other than pension
• Including:
• Retiree medical, life, vision, dental
• Implicit retiree medical subsidy
• Not Including:
• Early retirement incentives, severance based on unused sick pay, vacation and compensated absences
Multiple funding options
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Losing Purchasing Power
Inflation Rate(Core PCE)
Inflation Rate(Core PCE)
Investment Rate(3 month Treasury)
Investment Rate(3 month Treasury)
0.00
0.50
1.00
1.50
2.00
2.50
Jan-2009 Apr-2012 Jul-2015
Per
cen
t (%
)
3.00
Healthcare CPI
Healthcare CPI
Source: Bureau of Labor Statistics
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OPEB Funded Ratio Distribution
ME
NY
PA
VAWV
NC
SC
GA
FL
ALMS
TN
KY
OHIN
MIWI
IL
MN
IA
MO
AR
LATX
OK
KS
NE
SD
NDMT
WY
CO
NMAZ
UT
ID
NV
CA
OR
WA
AK
HI
Note: Oklahoma does not report implicit subsidy of its retirement plan death and disability benefits as a separate unfunded OPEB. Nebraska and South Dakota do not offer other OPEBs.
Source: Standard & Poor’s 2016
5% - 10%1% - 5%0% - 1%0% Funded 40% - 60%20% - 40%10% - 20% Above 60%
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Healthcare inflation rate historically outstrips CPI
Medicare Age increases result in higher liabilities
Affordable Care Act does not relieve employers of liabilities
Many public OPEB liabilities have grown significantly
Government employers are required to comply with GASB
New GASB rules will force governments to recognize liabilities on the
balance sheet
Considerations
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II. Implications of New GASB Rules
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In 1994, GASB established standards for public pensions, but not OPEB
benefits
Cash outlays vs. OPEB costs earned by employees
GASB No. 43, No. 45 issued in 2004
Background
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GASB 45 Creation
In June 2004, the Governmental Accounting Standards Board (“GASB”) published Statement No. 45
Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions
Other Post-Employment Benefits (“OPEBs”) are compensation for employee services that are realized at some point in the future
Why GASB 45?
Postemployment healthcare benefits pose significant costs for most governments
Postemployment healthcare benefits are the most common form of OPEBs
Current pay-as-you-go financial reporting fails in regard to OPEBs for several reasons, including:
This type of reporting does not recognize the cost of benefits in periods when they were earned, and
Current reporting fails to provide assessment of future cash flow needs and demands.
GASB 45-Regulations
Source: GASB website; www.gasb.org/st/summary/gstsm45.html
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Phase Government Size (by revenue)
Implementation Date
Phase 1 $100 Million December 15, 2006
Phase 2 $10 - 100 Million December 15, 2007
Phase 3 Less than $10 Million December 15, 2008
Implementation Timeline
What does GASB do?
GASB 45 states that the cost of OPEBs should be associated with the periods when
benefits are paid or provided
GASB requires governments to report annual OPEB costs as well as unfunded actuarial
accrued liabilities for past service costs
This increases accounting reporting transparencies related to the costs associated
for services provided
GASB 45-Regulations
Source: GASB website; www.gasb.org/st/summary/gstsm45.html
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GASB Statements 74 & 75 replaced GASB 45 in June 2015
Applies same structure and approach to OPEB
Removes Annual Required Contribution (“ARC”) from statement thus divorcing accounting from funding
Updated GASB Accounting and Reporting
Source: GASB website; www.gasb.org/st/summary/gstsm45.html
Defines more conservative assumptions and variables
Creates broader transparency into total accrued liabilities
Discount rate assumptions will be somewhat more defined
Introduces the concept of ‘depletion’ into the liability discounting process
Significantly increases supplemental information disclosures
Requires participants in multi-employer plans (i.e., school systems that are part of a state-wide pension plan) to report significantly more information, and record a proportional share of the plan
GASB Statement
Required for FY starting after
Generally in Reports for FY
Ending
GASB 74 June 15, 2016 June 30, 2017GASB 75 June 15, 2017 June 30, 2018
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GASB requires that the OPEB valuation be included on a balance sheet as a long-term liability
Given the current ratings environment, an increase in long-term liabilities related to OPEBs may negatively affect bond rating
Cash designated to cover an OPEB liability will not reduce the OPEB liability on the balance sheet unless invested in an irrevocable trust
Investing in equities is one way to increase the actuary’s assumed rate of return and may lower the amount of funds that must be invested
How GASB 74 & 75 Impact Annual Financial Reporting
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GASB 74/75 – Impact on Financials
GASB Change Expense Volatility
Impact on Liabilities
Unfunded liability on balance sheet –
Accrued unfunded liability recognized immediately –
Lower discount rate
ARC requirement eliminated ? ?
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OPEB Balance Sheet Change Illustration
Under GASB 74/75 , the Net liability will be reflected in the balance of the CAFR versus being shown in the notes of the CAFR.
Illustrative Purpose Only
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III. Benefits of Pre-Funding a Trust
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04:5904:5804:5704:5604:5504:5404:5304:5204:5104:5004:4904:4804:4704:4604:4504:4404:4304:4204:4104:4004:3904:3804:3704:3604:3504:3404:3304:3204:3104:3004:2904:2804:2704:2604:2504:2404:2304:2204:2104:2004:1904:1804:1704:1604:1504:1404:1304:1204:1104:1004:0904:0804:0704:0604:0504:0404:0304:0204:0104:0003:5903:5803:5703:5603:5503:5403:5303:5203:5103:5003:4903:4803:4703:4603:4503:4403:4303:4203:4103:4003:3903:3803:3703:3603:3503:3403:3303:3203:3103:3003:2903:2803:2703:2603:2503:2403:2303:2203:2103:2003:1903:1803:1703:1603:1503:1403:1303:1203:1103:1003:0903:0803:0703:0603:0503:0403:0303:0203:0103:0002:5902:5802:5702:5602:5502:5402:5302:5202:5102:5002:4902:4802:4702:4602:4502:4402:4302:4202:4102:4002:3902:3802:3702:3602:3502:3402:3302:3202:3102:3002:2902:2802:2702:2602:2502:2402:2302:2202:2102:2002:1902:1802:1702:1602:1502:1402:1302:1202:1102:1002:0902:0802:0702:0602:0502:0402:0302:0202:0102:0001:5901:5801:5701:5601:5501:5401:5301:5201:5101:5001:4901:4801:4701:4601:4501:4401:4301:4201:4101:4001:3901:3801:3701:3601:3501:3401:3301:3201:3101:3001:2901:2801:2701:2601:2501:2401:2301:2201:2101:2001:1901:1801:1701:1601:1501:1401:1301:1201:1101:1001:0901:0801:0701:0601:0501:0401:0301:0201:0101:0000:5900:5800:5700:5600:5500:5400:5300:5200:5100:5000:4900:4800:4700:4600:4500:4400:4300:4200:4100:4000:3900:3800:3700:3600:3500:3400:3300:3200:3100:3000:2900:2800:2700:2600:2500:2400:2300:2200:2100:2000:1900:1800:1700:1600:1500:1400:1300:1200:1100:1000:0900:0800:0700:0600:0500:0400:0300:02
Common Funding Strategies
PAYGO (“Pay as you go”)
Internal Service Fund “Reserve”
Advantages Disadvantages
• Convenient
• Possibly cost effective
• Creates largest liability
• Guaranteed loss to inflation
• Does not address problem
Advantages Disadvantages
• Can match assets with liabilities, address inflation
• Assets revert to General Fund
• Can use funds if needed
• Limited solution
• No GASB benefits (full liability remains)
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04:5904:5804:5704:5604:5504:5404:5304:5204:5104:5004:4904:4804:4704:4604:4504:4404:4304:4204:4104:4004:3904:3804:3704:3604:3504:3404:3304:3204:3104:3004:2904:2804:2704:2604:2504:2404:2304:2204:2104:2004:1904:1804:1704:1604:1504:1404:1304:1204:1104:1004:0904:0804:0704:0604:0504:0404:0304:0204:0104:0003:5903:5803:5703:5603:5503:5403:5303:5203:5103:5003:4903:4803:4703:4603:4503:4403:4303:4203:4103:4003:3903:3803:3703:3603:3503:3403:3303:3203:3103:3003:2903:2803:2703:2603:2503:2403:2303:2203:2103:2003:1903:1803:1703:1603:1503:1403:1303:1203:1103:1003:0903:0803:0703:0603:0503:0403:0303:0203:0103:0002:5902:5802:5702:5602:5502:5402:5302:5202:5102:5002:4902:4802:4702:4602:4502:4402:4302:4202:4102:4002:3902:3802:3702:3602:3502:3402:3302:3202:3102:3002:2902:2802:2702:2602:2502:2402:2302:2202:2102:2002:1902:1802:1702:1602:1502:1402:1302:1202:1102:1002:0902:0802:0702:0602:0502:0402:0302:0202:0102:0001:5901:5801:5701:5601:5501:5401:5301:5201:5101:5001:4901:4801:4701:4601:4501:4401:4301:4201:4101:4001:3901:3801:3701:3601:3501:3401:3301:3201:3101:3001:2901:2801:2701:2601:2501:2401:2301:2201:2101:2001:1901:1801:1701:1601:1501:1401:1301:1201:1101:1001:0901:0801:0701:0601:0501:0401:0301:0201:0101:0000:5900:5800:5700:5600:5500:5400:5300:5200:5100:5000:4900:4800:4700:4600:4500:4400:4300:4200:4100:4000:3900:3800:3700:3600:3500:3400:3300:3200:3100:3000:2900:2800:2700:2600:2500:2400:2300:2200:2100:2000:1900:1800:1700:1600:1500:1400:1300:1200:1100:1000:0900:0800:0700:0600:0500:0400:0300:02
Common Funding Strategies
Irrevocable Trust
Advantages Disadvantages
• GFOA best practice*
• Allows investment in higher return securities
• Better mediation against risks of healthcare inflation and Medicare age increases
• GASB reporting benefits
• Minimizes liability on financial statements
• May require higher budget commitment upfront
• Requires outside assistance
• Ongoing budgetary commitment
* http://www.gfoa.org/establishing-and-administering-opeb-trust
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Why Pre-Fund OPEB liabilities?
GASB 74 & 75 make OPEB a long term liability, which must be reported in the annual financial report
Multiple outside entities use the annual report to assess the creditworthiness and financial soundness
Auditors
Ratings Agencies
Investors and Creditors
Public Agencies
Funding liabilities now avoids pushing the funding problem onto future generations of boards and administrations
Taking advantage of higher discount rate
Potential reduction in budgetary appropriation
Possible lower funding cost
Funding compensation/benefit package for employees
Funding Your OPEB Liabilities
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$7,612,255
$5,427,433
$3,869,684
1,000,000
3,000,000
5,000,000
7,000,000
9,000,000
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Now 5 Years 10 Years
$1 million invested on day 1, assuming an annual return of 7%, will grow to $7.6 million at the end of 30 years*
The difference between investing now and investing in 5 years is $2.2 million in lost earnings
Delaying of funding for 10 years could result in $3.8 million in lost earnings
Advantage of Funding Liabilities Now
*Example represents growth of original deposit at an annual earnings rate of 7%, which is an average long-term rate of return for a balanced fixed-income and equity portfolio; assumes no redemptions of funds.
Model returns may not reflect material economic or market factors.
Returns are shown before any fees.
Do not assume that the recommendations made in the future will be profitable or will equal the performance cited.
Growth of Initial $1 million Investment*Invest today vs. 5 years vs. 10 years
Years
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Discount Rates Under GASB 43/45 and GASB 74/75
A blended discount rate that reflects the
proportionate amounts of plan and employer assets
expected to be used to pay benefits as they come
due
“No single approach may fit all situations”
Blend the rate based on funded ratio
Blend the rate based on percentage of the ARC being
contributed
In many cases the actuaries seem to simply apply the investment return rate to the entire liability amount if the plan sponsor is making reasonable progress toward increasing the funded ratio and annual funding of the ARC
The plan and plan sponsor may continue to follow their
previous approach for funding purposes, but the reporting on
the GASB basis will be based on one standard:
The expected rate of return on plan assets, to the extent plan assets
are projected to be available for the payment of future benefits
The yield of 20-year, tax-exempt municipal bonds for the remainder of
future payments – which will be all future payments if there is no Trust
Based on the implementation of the GASB 67/68 standard, plan assets
will be projected to be available for the payment of future benefits if the
plan sponsor has an actual track record of contributing the full ARC
If there is not a track record of contributing the full ARC, as is likely in
the OPEB space, if there are assets the projected cash flows of
benefits, investment returns, employer and employee contributions
based on historical patterns, and the asset levels will be combined to
identify a potential “depletion date”
C u r r e n t S t a n d a r d : G A S B 4 3 / 4 5 N e w S t a n d a r d : G A S B 7 4 / 7 5
The rate is based on facts and circumstances of the client and final determination by the actuary.
We have greater ability to project a depletion date under the new standards, but still require the
particular financial and actuarial data of the client to do so.
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Moody’s State/Local
• Pre-funding of OPEB liabilities “moderately credit positive”
• Does not add OPEB directly to the scorecard; below-the-line adjustment if liabilities appear large relative to
budget and tax base and management has not addressed
S&P State
• Debt and liability scores include a score for OPEB risk assessment based on relative unfunded liability compared
to other states, an assessment of the flexibility to change the benefits, and strategy for cost management
S&P Local
• OPEB evaluation focuses on required contribution rather than unfunded liabilities
• Adds debt, pension, and OPEB contributions together
• To the extent that pre-funding reduces the unfunded liability by building assets and by enabling a lower discount
rate, the rating would be improved
Fitch
• Adds debt, pension and OPEB contributions together
• Pre-funding OPEB adjusts the debt and liability score upward
Rating Agency Treatment of OPEB
The exact benefit to the scorecard is based on the specific financial data of the client. In some cases
we can analyze the scorecard for a specific issuer and estimate an indicative score for that specific
category. In others the rating framework is more qualitative and estimating an indicative score is not
possible.
© PFM 24© PFM 24© PFM 24
Earn a higher rate of return than cash – more efficient use of resources
Reduce the unfunded liability that will be reported on the balance sheet following GASB 74/75 by:
• Dedicating assets to decrease Net OPEB Liability
• Allowing application of the higher discount rate to some portion of the liability
Offset the % growth in costs of the medical benefits by investing in long-term assets
The cost of the benefit is funded when earned, instead of passed to future taxpayers/ ratepayers
Benefits of an Irrevocable Trust
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IV. Types of Trusts
© PFM 26© PFM 26© PFM 26
GASB Rules for an OPEB Trust
Current GASB standards state that to be allowed as a direct balance sheet offset to
the OPEB liability, the OPEB assets must have the following characteristics:1
1. Must be irrevocable;
2. Remote from creditors; and,
3. For the exclusive benefit of participants and beneficiaries.
Remoteness from creditors has been widely viewed as having two components:
The trust is its own legal entity; and,
The employer and its agents do not exert specific control over investment of the
assets.
Employing a discretionary advisor assists in meeting the remoteness standard.
1Current GASB Standards 43 & 45
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Single Employer Trust
Sponsored by the employer
May be set up to accept:
• OPEB or pension contributions
Offers great customization to employers with unique needs:
• Documents
• Legal terminology and language
• Distributions
Offers an employer greater flexibility and control
© PFM 28© PFM 28© PFM 28
Sponsored by Plan Administrator and a Trustee Bank, or by two or more
governments
May be set up to accept:
• OPEB or Pension contributions
Multiple employers adopt the same trust
• Employer signs an adoption agreement to participate
• Each employer has a unique account (s)
May have lesser ability for customization
Offers an employer simplified, quick access
• e.g., no need to create a new legal documents
Multiple Employer Trust
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Single Employer vs. Multiple Employer Trust
Single Employer Multiple Employer
Governing BoardNot required (but an oversight committee is)1 Not required
Set-up Start new (or existing trust) Existing trust
DocumentsCreated new by attorney, or existing template
Existing master trust (vetted)2
IRS Private Ruling Not required (IRC 115) Not required
Customization High May be limited
Investment Flexibility High May be limited
Control High May be limited
Fees Depend on level of assets Depend on level of assets
1This group would oversee the trust from the employers perspective to ensure it continued to meet the employer’s needs (i.e., was prudent).
2An adoption agreement and service agreement may contain customization options for employers.
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V. Creating an Investment Program
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7. Implement Plan and Oversee OPEB Assets
6. Determine the Appropriate Asset Allocation
5. Establish OPEB Trust
4. Evaluate Implications of Funding Choices
3. Designate Oversight Committee
2. Develop an Implementation Plan
1. Complete an Actuarial Study
OPEB Obligation Management Process
© PFM 32© PFM 32© PFM 32
Annual budget appropriation
Strategic funding allocation from the general fund investment portfolio
Appropriation of a funding amount from a one-time revenue source (initial
funding amount)
Some percentage of debt service savings for general fund
OPEB Trust Funding Options
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Develop Investment Policy Statement
Compile written Investment Policy Statement to
provide guidelines on:
• Investment Authority & Objectives
• Incorporate Asset Allocation Targets and Ranges
•Selection of Investment Managers
•Guidelines for Portfolio Holdings
•Performance Standards
•Control Procedures
Annual Investment Policy Review
Investment PolicyStatement
© PFM 34© PFM 34© PFM 34
2017 Capital Market Assumptions
For the intermediate term (up to five years), our capital market assumptions derive from our assessment of current economic conditions, including corporate profits, balance sheets, etc, and current valuations for various asset classes. Our long-term assumptions are derived using an economic building block approach that projects economic and corporate profit growth and takes into consideration the fundamental factors driving long-term real economic growth, our expectation for inflation, productivity and labor force growth.
Expected Return Expected Risk Expected Return Expected Risk
US Equity 7.0% 17% 7.7% 16%
International Developed Equity
6.6% 18% 7.7% 17%
Em erging M arkets Equity
6.1% 24% 7.7% 20%
Core Bonds 1.5% 4% 5.5% 5%
Interm ediate Investm ent G rade
1.9% 6% 6.3% 7%
Em erging M arkets Debt
4.0% 10% 7.3% 10%
High Yield 4.8% 10% 6.8% 10%
Bank Loans 4.5% 6% 5.2% 6%
REITs 5.5% 12% 6.4% 12%
Private Equity Real Estate
6.8% 15% 7.7% 15%
Com m odities 3.9% 16% 5.3% 16%
Hedge Funds 5.9% 15% 7.3% 15%
Private Equity 8.7% 25% 9.6% 25%
Cash 1.9% 1% 3.3% 1%
Interm ediate: Next 5 Years Long Term Projections
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2017 Capital Market Assumptions, Cont.
Please refer to PFM’s 2017 Capital Market Assumptions for a complete description of the methodology used to develop these assumptions and important disclosures.
US Equity
International Developed Equity
Em erging M arkets Equity
Core Bonds
Interm ediate Investm ent G rade Corp
Em erging M arkets Debt
High Yield
Bank Loans
REITsPrivate
Equity Real Estate
Com m oditiesHedge Funds
Private Equity
Cash
US Equity 1
International Developed Equity
0.8 1
Em erging M arkets Equity
0.7 0.7 1
Core Bonds 0.3 0.2 0.2 1
Interm ediate Investm ent G rade
0.3 0.2 0.2 0.9 1
Em erging M arkets Debt
0.5 0.5 0.5 0.4 0.4 1
High Yield 0.7 0.5 0.5 0.4 0.4 0.4 1
Bank Loans 0.4 0.3 0.3 0.3 0.3 0.7 0.7 1
REITs 0.5 0.4 0.4 0.3 0.3 0.3 0.4 0.4 1
Private Equity Real Estate
0.4 0.3 0.3 0.3 0.3 0.2 0.4 0.2 0.8 1
Com m odities 0.1 0.1 0.2 0.2 0.2 0.3 0.2 0.2 0.1 0.1 1
Hedge Funds 0.6 0.5 0.5 0.4 0.4 0.3 0.4 0.4 0.4 0.3 0.2 1
Private Equity 0.7 0.6 0.6 0.3 0.3 0.3 0.5 0.2 0.4 0.4 0.1 0.5 1
Cash 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 1
Correlations
© PFM 36© PFM 36© PFM 36
Determine Appropriate Asset Classes
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© PFM 37© PFM 37© PFM 37
Efficient FrontierBased on Long-Term Capital Market Assumptions
Exp
ecte
d R
etur
n
Expected Risk
Domestic Equity
International Equity
Alternatives
Fixed Income
100 FI
20/8025/75
30/7035/65
40/60
50/5055/45
60/4065/35
70/3075/25
© PFM 38© PFM 38© PFM 38
Determine the Appropriate Asset Allocation
• Greater return potential (4% to 7%)• Invests in securities with return expectations to more closely match liability growth
• Actuary, Investment Advisor, and Board should determine the asset mix60%
40%
Multi‐Asset Class Portfolio
Stocks Bonds
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© PFM 39© PFM 39© PFM 39
Your Board/Committee maintains fiduciary responsibility
Key Items to Update & Monitor:
Investment Policy Development
Portfolio Diversification / Risk
Investment Advisor Fees
Investment Fund Fees
Investment Performance
Implement Plan and Oversee OPEB Assets
Key Parties to Engage:
Finance Department
Actuary
Investment Advisor
Procurement
Custodian/Trustee
© PFM 40© PFM 40© PFM 40
Questions ????
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VI. Appendix: GASB Rules “Cheat Sheet”
© PFM 42© PFM 42© PFM 42
• Pay As You Go (PAYGO)
– Current year out of pocket claims and insurance premiums payable
• Actuarial Accrued Liability (AAL)
– The existing liability for OPEB
• Unfunded Actuarial Accrued Liability (UAAL)
– The existing unfunded liability for OPEB which is amortized over a period of years.
• Normal Cost
– The cost of future benefits earned by employees in the current year. Annual Required Contribution
(ARC)
– Amortized Unfunded Actuarial Accrued Liability + Normal Cost.
• Net OPEB Obligation (NOO)
– OPEB amount stated on balance sheet, cumulative ARC less qualifying OPEB assets.
Important OPEB Definitions (will change with new standards)
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© PFM 43© PFM 43© PFM 43
GASB Rules for OPEB (1 of 4)Feature GASB 45 GASB 74-75 Potential ImpactOPEB Liability
The difference between the actuarial funding requirement (Annual OPEB Cost, AOC) and what was actually funded is recorded on the Statement of Net Position as a liability (or asset). The full liability is addressed in the notes and as supplemental information.
The entire net, or unfunded, portion of the OPEB liability will be recognized in the Statement of Net Position in the government’s financial statements.
Combined with the other changes from pronouncements 67, 68, 74 and 75, many governments that previously had a positive Net Position could be in a negative position following implementation.
Cost Allocation/ Expense Recognition
Six methods allowed including Projected Unit Credit, which is the prevailing standard for private pensions
The present value of projected future benefit payments will be attributed only through the entry age actuarial cost method using level percentage of payroll
The entry age actuarial cost method may result in a higher liability measure than the other measures that were previously allowed
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GASB Rules for OPEB (2 of 4)Feature GASB 45 GASB 74-75 Potential Impact
Discount rate for Measuring Liability
A policy rate selected based on expected long-term investment returns
A hybrid of the current practice and the more conservative rules for private sector accounting, which are based on the cost of debt/other liabilities. The portion of benefit payments not expected to be funded by trust assets must be discounted using a high-quality tax-exempt 20-year general obligation municipal bond rate.
An increase in reported liability for the majority of plans that continue to fund OPEB as a pay-as-you-go expense, and for plans that are projected to deplete their funds.
Amortization of Accrued Liability
Unfunded liability could be recognized over open or closed periods of up to 30 years
The net unfunded liability accrued to date will be recognized immediately. Issuers and plans may continue to use alternate amortization methods for their funding policy.
The reported liability will increase significantly
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GASB Rules for OPEB (3 of 4)Feature GASB 45 GASB 74-75 Potential Impact
Amortization of Changes in Expense/ Liability
Open or closed periods of up to 30 years
Depending on the cause of the change, either immediate, five years, or a closed period based on the average expected remaining service life for actives and inactives
Increased amount and volatility of expense
Calculation of Expense
The AOC adjusts the ARC, based on normal cost and the amortization of accrued liability on an open or closed period of up to 30 years, for any cumulative unpaid ARC to date
The expense or change in net position is equal to a number of factors (service cost, interest, changes of benefit terms or assumptions, experience, etc.)
The ARC will no longer be a required calculation, and plans will have to set funding on an Actuarial Determined Calculation based on their choice of assumptions.
Annual expense will be more volatile. Funding policy will be separated from accounting, and more responsibility for setting funding policy and reporting funding progress will be placed with the plan and issuer
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GASB Rules for OPEB (4 of 4)Feature GASB 45 GASB 74-75 Potential ImpactReporting for Cost-Sharing Multiple-Employer Plans
Report only the contractual or statutory amount contributed to the OPEB plan as an expense
Will report OPEB expense, net liability, and the supporting actuarial data based on their proportionate share of the collective amounts for all governments in the plan
In conjunction with the similar requirement from GASB 67 and 68 this will be a major change for these employers and will provide information that the bond rating agencies have not been able to consistently incorporate into their ratings previously.
Asset Valuation
OPEB trust fund values can be smoothed over up to a 30-year period
Plan assets must be measured at market value as of the end of the reporting period
Net Liability and expense will be more volatile
Note Disclosures
Information on the plan, benefits, total Unfunded Actuarial Liability, and actuarial assumptions
Significantly expanded detail of actuarial assumptions, as well as sensitivity analyses for projected costs and investment returns, and ten-year historical data on liabilities, expenses, funding.
More extensive information on plan trends and financial position.
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DisclaimersAny investment advice in this document is provided solely by PFM Asset Management LLC. PFM
Asset Management LLC (“PFMAM”) is an investment advisor registered under the Investment
Advisers Act of 1940.
This material is based on information obtained from sources generally believed to be reliable and
available to the public, however PFM Asset Management LLC cannot guarantee its accuracy,
completeness or suitability. This material is for general information purposes only and is not intended
to provide specific advice or a specific recommendation. All statements as to what will or may happen
under certain circumstances are based on assumptions, some but not all of which are noted in the
presentation. Assumptions may or may not be proven correct as actual events occur, and results may
depend on events outside of your or our control. Changes in assumptions may have a material effect
on results. Past performance does not necessarily reflect and is not a guaranty of future results. The
information contained in this presentation is not an offer to purchase or sell any securities.
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