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State of Utah GASB 74/75 Actuarial Valuations for State OPEB Plans

Board Meeting #2

State of Utah

September 6, 2017

© 2017 Korn Ferry. All rights reserved 2

Agenda

1 OVERVIEW OF ACTUARIAL VALUATIONS 3

2 HIGHLIGHTS OF PLAN DEMOGRAPHICS 4

3 VALUATION RESULTS 6

4 KEY VALUATION ASSUMPTIONS 8

5 CHANGES DUE TO GASB 74 AND 75 REQUIREMENTS11

6 FUNDING ALTERNATIVES 15


Scope of Work

Overview of Actuarial Valuations

Korn Ferry Hay Group (KFHG) provides biennial actuarial Valuations for:

− State of Utah Employees’ OPEB Plan as of December 31

− State of Utah Elected Officials’ Health Care Plan as of December 31

− Utah Employees’ Unused Sick Leave as of June 30

Starting with the 12/31/16 valuation, the actuarial valuation is performed in accordance with the new GASB 74/75 standards

The results of the 12/31/16 valuation will be used to develop the required financial disclosures and the OPEB annual expense for the fiscal years ending June 30, 2017 and ending June 30, 2018

The results of the 12/31/16 OPEB valuation, based on updated census and updated actuarial assumptions, for both the State Employees’ plan and the Elected Officials’ plan, are shown in this presentation


Demographic Data – Eligible for Future Retiree Medical Coverage from Program I

Above counts exclude employees hired after 1/1/2006. The

12/31/2016 counts shown above excluded employees with no

sick leave balances since they do not receive an employer

subsidy for medical or life insurance

Office of Education employees hired before July 1, 2012 may

elect Educators plan at retirement

Since the last

valuation, both

active and inactive

counts have

decreased

12/31/2008 12/31/2010 12/31/2012 12/31/2014 12/31/2016

Actives 20,385 11,875 10,864 9,150 6,739

Retirees 2,886 3,272 3,327 3,411 3,119

Dependents 2,002 2,600 2,235 2,432 1,638

Total Inactives 4,888 5,872 5,562 5,843 4,757

Total 25,273 17,747 16,426 14,993 11,496

Number of Lives


Demographic Data – Eligible for Future Retiree Medical Coverage from Program I

Average age

and service of

frozen group

of employees

is going up as

counts are

decreasing

Average age

of retirees is

slightly

higher than

2014

Under 6565 and

OverTotal Under 65

65 and

OverTotal

Under

65

65 and

OverTotal

Under

65

65 and

OverTotal

Retirees

Count 2,126 1,146 3,272 1,911 1,416 3,327 1,743 1,668 3,411 1,485 1,634 3,119

Average Age 59.5 68.6 62.7 59.9 68.7 63.7 60.0 69.0 64.4 60.1 69.5 65.0

Dependents

Count 1,919 681 2,600 1,478 757 2,235 1,281 1,151 2,432 1,254 384 1,638

Average Age 56.7 69.1 60.0 58.6 69.1 62.2 59.6 66.5 62.9 56.8 68.7 59.6

12/31/2016

Inactives

12/31/2010 12/31/2012 12/31/2014

Active State Employees - Age and Service*

*Counts exclude employees hired after 1/1/2006

12/31/2012 12/31/2014 12/31/2016

Total 10,864 9,150 6,739

Average Age 49.8 51.0 52.5

Average Service 16.8 18.6 21.0


Final Valuation Results – State Employees Plan

As of December 31,

2014

As of December 31,

2016

As of December 31,

2016

Discount rate 4.50% 4.50% 3.75%

Healthcare cost trend rates

Medical/Rx Pre-Medicare Trend - Current Yr 5.20% 5.90% 5.90%

Medical/Rx Medicare Trend - Current Yr 5.20% 5.90% 5.90%

Ultimate trend rate 4.20% 4.14% 4.14%

Year Ultimate rate is Reached 2084 2075 2075

Present Value of Future Benefits $430,302,616 $383,184,985 $404,425,056

Actuarial Accrued Liability (AAL) $386,532,391 $353,864,974 $369,176,402

Assets as of Valuation Date $205,498,084 $243,492,752 $243,492,752

Unfunded Actuarial Accrued Liability $181,034,307 $110,372,222 $125,683,650

(actuarial accrued liability less assets)

AAL Funded Status as of Valuation Date 53% 69% 66%

Entry Age Normal Cost as of Valuation Date $5,946,102 $4,335,810 $5,000,257

Active Employee Headcount 9,150 6,739 6,739 Retiree Headcount 3,411 3,119 3,119

Postemployment Benefit Valuation Results

State of Utah State Employees

Assumptions

Valuation Results


Final Valuation Results – Elected Officials Plan

As of December 31, 2014 As of December 31, 2016 As of December 31, 2016

Discount rate 4.50% 4.50% 5.25%

Healthcare cost trend rates

Medical/Rx Pre-Medicare Trend - Current Yr 5.20% 5.90% 5.90%

Medical/Rx Medicare Trend - Current Yr 5.20% 5.90% 5.90%

Ultimate trend rate 4.20% 4.14% 4.14%

Year Ultimate rate is Reached 2084 2075 2075

Present Value of Future Benefits $17,756,044 $21,756,687 $18,860,858

Actuarial Accrued Liability (AAL) $12,694,069 $17,095,076 $15,237,018

Assets as of Valuation Date $8,863,190 $11,789,512 $11,789,512

Unfunded Actuarial Accrued Liability $3,830,879 $5,305,564 $3,447,506

(actuarial accrued liability less assets)

AAL Funded Status as of Valuation Date 69.8% 69.0% 77.4%

Entry Age Normal Cost as of Valuation Date $905,846 $869,161 $706,663

Active Employees 94 70 70 Retirees 39 53 53 Former Legislators/Governors 112 82 82

Postemployment Benefit Valuation Results

State of Utah Elected Officials

Valuation Results

Assumptions


Key Valuation AssumptionsDiscount Rate – used to calculate the present value of future cash flows

(net retiree claims)

GASB 45 says the discount rate should be the estimated long-term yield on

the investments that are expected to be used to finance the payment of

benefits

Discount rate in prior valuation of State Employees’ plan and Elected Officials’

plan was 4.5%

GASB 74/75 discount rate is determined differently (and more prescriptive)

than under GASB 43/45; however the discount rate can be the same if future

plan assets are projected to always be sufficient to pay all projected benefits

when due.

Based on the expected long term rate of return on the Trust assets and the

State’s funding policy, a discount rate of 3.75% was chosen for the State

Employees’ plan, and 5.25% was chosen for the Elected Officials’ plan

Additional disclosure information is required in GASB 74/75 financial

statements to justify the expected rate of return and the discount rate


Key Valuation Assumptions, cont’d

Health Care Trend Rates– used to project future healthcare costs

Standard health care trend approach is to start with a short-term projection

trend rate, gradually changing in subsequent years until an ultimate

sustainable trend level is reached over a long period

Trends are applied to State of Utah’s per-capita experience rates as of the

date of the valuation

We changed the trend assumption in the 2014 valuation using a long term

model from the Society of Actuaries (SOA). The new model has become

widely accepted as a standard by OPEB actuaries and auditing firms

Health care trends were at 5.2% in the 2014 valuation, declining gradually to a

4.2% ultimate trend rate in 2084 and beyond

Updated health care trends for the 2016 valuation are 5.9%, declining

gradually to a 4.1% ultimate trend rate in 2075 and beyond


Key Valuation Assumptions, cont’d

Mortality Rates – used to discount future cash flows due to expected

mortality at different ages

The current mortality assumptions have not changed for several years, and

rates do not include an explicit projection scale for mortality improvement

Most recent Actuarial Standards of Practice (ASOPs), in particular ASOP 25,

require actuaries to consider future mortality improvement beyond the

valuation date, and auditing firms are enforcing it during their audits

We recommend changing to a standard published table, the RP2014 mortality

table for both pre-retirement and post-retirement mortality assumption, along

with 75% of the MP2015 projection scale for mortality improvement. This

projection scale applies “generational” improvements to longevity, based on

the concept that our children will live longer than we will.

The estimated impact of changing the State Employees’ OPEB plan valuation

to the new mortality assumption is approximately a 1% net decrease in Total

Actuarial Liability (actives and retirees combined)


GASB 45 versus GASB 75 OPEB Expense

Amortization of Unfunded Liabilities

The maximum period of time GASB 45 allows for amortizing the Unfunded

Actuarial Accrued Liability (which represents employee services already

rendered) is 30 years

The GASB 45 amortization period was allowed to be either be “open” or

“closed”

The State Employees’ OPEB plan was changed from an open 20 year

amortization period to an open 10 year period in the December 31, 2014

GASB 45 valuation. This was based on discussions with the State and long

term cost projections that were provided to the State

The Elected Officials’ plan currently uses an open 20 year amortization period

in the December 31, 2014 valuation

A discussion of alternative funding approaches under GASB 74 and 75 will be

discussed in the last section of this report


GASB 45 versus GASB 75 OPEB Expense, cont’d

GASB 75 does not provide a choice in amortization periods, and open

periods are no longer allowed

The unfunded actuarial liability (GASB 75 Net OPEB Liability or NOL) at the

beginning of the fiscal year of GASB adoption is fully recognized in the State’s

balance sheet

Changes in actuarial liabilities are recognized in annual OPEB expense as

follows:

Actuarial gains and losses from experience and changes in assumptions

are spread over a closed period equal to the average remaining service

period of all plan participants (including zero for inactives), which will

shorten the amortization period for recognizing these gains/losses

Changes in net liability due to plan amendments are fully recognized in

the year the change occurs

Changes in net liability due to actual versus expected earnings on

investments are spread over a closed five year period, beginning with the

current reporting period


Other New Disclosure Requirements

GASB 74 (for plans) & 75 (for employers) add several new disclosures to the

State’s plan financial statements and employer financial statements, including:

A ten year history of reconciliation of changes in the Net OPEB Liability

(NOL)

Statement of Net Fiduciary Position (NFP), i.e., trust assets, and

reconciliation of changes in NFP

Ten year history of covered employee payroll

Five year schedule of Deferred Inflows and Outflows (GASB 75 only)

Information about the long-term expected return on plan assets, and

investment policy

If an actuarially determined contribution (ADC) is calculated, a ten year

history of employer contributions as compared to the ADC

Note that the above historical schedules can be built on a prospective

basis


Funding Considerations under GASB 75

State of Utah’s funding policy has been to make contributions to the OPEB

trust equal or greater than the Annual Required Contribution (ARC) as

calculated under GASB 45 methods

Under GASB 75, the State is no longer required to calculate an actuarially

determined annual expense in the same manner as an ARC, which used a

specified actuarial cost method and specified interest rate

The State’s balance sheet liability will no longer be tied directly to the

employer contributions in relation to the ARC. The GASB 45 concept of Net

OPEB Asset or Obligation no longer exists

Under GASB 74 & 75, the State will now have wide discretion in setting its

own annual and long term funding levels

In the next section we will show Actuarially Determined Contribution (ADC)

scenarios

Funding Alternatives


Funded Status of the State Employees’ Plan

The funded ratio (ratio of assets to Actuarial Accrued Liability) by Pool as of

12/31/2016 are shown below:

Funded Status as of 12/31/2016

Office of

Education

Office of

Transporation Public Safety

Other State

Employees

12/31/2016

Total

Total AAL 8,793,961 54,675,429 29,779,686 275,927,326 369,176,402

Trust Assets 5,693,602 28,999,281 16,378,573 192,421,296 243,492,752

Unfunded AAL 3,100,359 25,676,148 13,401,113 83,506,030 125,683,650

Funded % 65% 53% 55% 70% 66%


Funding Scenarios for the State Employees’ Plan

The suggested Actuarially Determined Contribution is the sum of the Entry

Age Normal Cost and an amortization of the Unfunded AAL over a closed

period of years

The chart below shows three alternative funding levels for the 2017-2018

fiscal year:

The annual ADC amounts will decrease in future years, as employees retire or

terminate employment, and as the plans become fully funded

After plan reaches 100% funded status, Normal Cost will still be paid as long

as there are still active employees in the plan

ADC with Alternative Closed Amortization Periods

Office of

Education

Office of

Transporation Public Safety

Other State

Employees

12/31/2016

Total

ADC - 7 Yr 650,760 4,868,605 2,467,002 17,941,276 25,927,643

ADC - 8 Yr 595,085 4,407,521 2,226,349 16,441,702 23,670,656

ADC - 10 Yr 516,782 3,759,040 1,887,889 14,332,661 20,496,372


Projection of Funded Progress under Alternative Funding Levels (based on different amortization periods)

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036

10 Yr closed 66 68 70 71 74 76 79 82 87 93 100 100 100 100 100 101 101 101 101 102

8 year closed 66 69 72 75 78 82 87 93 100 100 100 100 100 101 101 101 101 101 102 102

7 Year Closed 66 69 73 77 81 86 93 100 100 100 100 100 101 101 101 101 101 102 102 103

50

60

70

80

90

100

110

% F

un

ded


Funded Status of the Elected Officials’ OPEB Plan

The funded ratio (ratio of assets to Actuarial Accrued Liability) as of 12/31/2016 is

shown in the table below:

The Elected Officials plan’s ADC using a 20 year amortization and a 5.25% rate

of return is $1,026,345

The employer actual contribution for fiscal 2017 was $1,387,600

A 20 year open amortization period is projected to achieve a funded ratio of

100% after approximately 35 years

A 20 year closed amortization period would achieve a 100% funded ratio in 20

years

Elected Officials

Total AAL $15,237,018

Trust Assets $11,789,512

Unfunded AAL $3,447,506

Funded % 77%

Funded Status as of 12/31/2016

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