Sample City OTHER POSTEMPLOYMENT BENEFITS PLAN. GASB 45 Actuarial Valuation Report as of July 1, 2013 for 2014 Fiscal Year

Transcription

1 OTHER POSTEMPLOYMENT BENEFITS PLAN GASB 45 Actuarial Valuation Report as of July 1, 2013 for 2014 Fiscal Year Sample City Miracle Hills Drive, Suite 100 Omaha, NE phone:

2 January 1, 2014 Mr. John Doe Budget Manager Sample City 123 Main Street Sample City, USA RE: GASB 45 Actuarial Valuation Report Dear John: Enclosed please find five copies of the July 1, 2013 GASB Statement No. 45 actuarial valuation report for the Sample City Other Postemployment Benefits ( OPEB ) Plans. The report provides a summary of the Annual OPEB Cost, or accounting cost determined under GASB Statement No. 45, the Annual Required Contribution (ARC) for the fiscal year beginning July 1, The determinations included in the report are based on an assumed July 1, 2013 transition date to GASB Statement No. 45 along with plan provisions and census data provided by the City as of July 1, Please note, the ARC is an accounting term and is not actually a required contribution amount the City is obligated to fund. The ARC was determined based on the investment return assumptions discussed below. The investment return assumption of 4.5% was selected based on discussions with you and the requirements of GASB Statement No. 45. Under GASB Statement No. 45, the investment return assumption should be the estimated long-term investment yield on the investments that are expected to be used to finance the payment of benefits, with consideration given to the nature and mix of current and expected investments Since the City currently finances the OPEB benefits from a general fund, the current investment return on the assets of the general fund should produce the basis for the investment return assumption. If the City would begin to prefund the OPEB benefits in a dedicated trust with an investment structure aimed to achieve a higher investment return than the City s general fund, a higher investment return assumption may be appropriate and potentially lower liabilities and costs. Please call me if you have questions regarding the report. I look forward to discussing the report with you and other representatives of the City. Sincerely, Michael S. Vech, ASA, MAAA Enclosure

3 January 1, 2014 Sample City 123 Main Street Sample City, USA RE: Other Postemployment Benefits Plans Valuation Report This report will summarize the liabilities, annual required contribution ( ARC ) and annual OPEB cost for the Other Postemployment Benefits Plans ( OPEB Plans ) maintained by Sample City. The report provides a summary of the following determinations: 1. The actuarial liabilities as of July 1, 2013 for the OPEB Plans. 2. The annual required contribution, annual OPEB cost and expected net OPEB obligation for the OPEB Plans under GASB Statement No. 45 for the fiscal year ending June 30, Actuarial computations included in this report have been prepared to fulfill employer accounting requirements. The calculations reported herein have been made on a basis consistent with our understanding of GASB Statement No. 45 requirements. The calculations include medical, prescription drug and dental benefits provided to retired employees and their dependents. The valuation involved several significant steps that are highlighted below: Assembly of Participant Data Base A participant data base for active employees and former employees and dependents who are retired and receiving postemployment benefits was defined from the Sample City data base. Projected obligations reflect not only payments made to those currently retired but those expected to retire in the future. Review of Claim Experience The per capita medical, prescription drug and dental claim costs are based on the self-insured premiums and underlying claim experience of the OPEB Plans and actuarial age adjustment factors. Actuarial Assumptions A review of actuarial assumptions was made with representatives of Sample City. In my opinion, the assumptions selected are reasonably related to the experience of the OPEB Plans and represent my best estimate of anticipated future experience of the OPEB Plans. Actuarial Valuation Based on the participant data base, claim costs and the actuarial assumptions, the future obligations of the OPEB Plans were identified. These future obligations were then allocated to current periods to define an annual required contribution and annual OPEB cost using procedures outlined under GASB Statement 45.

4 Sample City January 1, 2014 Page -2- Medicare Prescription Drug, Improvement and Modernization Act of 2003 ( Act ) The measures of benefit obligations, annual required contribution and annual OPEB cost reflect effects of the Act. However, there is no impact due to the Act, since any federal subsidy to be received on retiree prescription drug costs is not accounted for under Statement 45 based on guidance issued by the GASB in Technical Bulletin Please contact me if you have questions about our report or would like additional information derived from the analysis we have prepared. Sincerely, Michael S. Vech, ASA, MAAA Enclosure

5 Contents of Report Executive Summary 1 Page Overview of Accounting Standards 4 Plan Assets 6 Plan Funded Status 7 Annual Required Contribution, Annual OPEB Cost and 8 Net OPEB Obligation Summary of Plan Provisions 9 Actuarial Methods and Assumptions 11 Participant Data 14

6 Executive Summary Introduction The Governmental Accounting Standards Board (GASB) has issued the accounting standard, Statement 45, relating to Other Postemployment Benefits (OPEB). This statement requires public employers sponsoring and subsidizing retiree healthcare benefit programs to recognize the cost of such benefits on an accrual basis. Sample City provides medical, prescription drug and dental benefits (healthcare benefits) to retired employees and their dependents under certain conditions. The City adopted the provisions of GASB Statement 45 for the fiscal year ended June 30, This report was prepared in accordance with the requirements of GASB Statement 45 and provides an actuarial valuation as of July 1, 2013 of the retiree healthcare benefits sponsored by the City and the fiscal year 2014 accounting expense and financial reporting information. After discussions with representatives of the City, we are not aware of any other OPEB benefits offered to employees that are subject to GASB Statement 45 other than the healthcare benefits described above. Background Prior to the adoption of GASB Statement 45, public employers recognized accounting expense for retiree healthcare benefits on a cash basis. In other words, the accounting expense was equal to retiree healthcare claims and expenses (or if fully insured the retiree premiums), less collected retiree contributions, during the year. Because employers paid most of the claims or premiums during the course of the fiscal year, any accounting or balance sheet liability was relatively low or, in most cases, not reported. GASB Statement 45 requires employers accrue the value of retiree healthcare benefits earned during the employee s working lifetime. Changing the accounting expense recognition from a cash to an accrual basis requires performing an actuarial valuation and developing the following: Actuarial Present Value of Future Benefits The present value of future benefits expected to be paid to current and future retirees. Actuarial Accrued Liability The present value of future benefits attributable to employee service earned in prior fiscal years. Normal Cost The present value of future benefits earned by employees during the current fiscal year. Annual Required Contribution or ARC The Normal Cost plus an amortization of the difference between the Actuarial Accrued Liability and any assets available to pay benefits. 1

7 Annual OPEB Cost The ARC plus a technical adjustment based on the balance sheet liability at the beginning of the fiscal year. In the first fiscal year that GASB Statement 45 is adopted, the Annual OPEB Cost will usually equal the ARC because the initial balance sheet liability is zero. Net OPEB Obligation The balance sheet liability which is the cumulative difference between the Annual OPEB Cost and the actual employer contributions in relation to the ARC. The Actuarial Accrued Liability impacts the development of the ARC, and is disclosed in the employer s notes to the financial statement, but is not a component of the employer s balance sheet or accounting liability. The Annual OPEB Cost is accrued on the employer s operations statement and is not necessarily the same as the employer s actual cash contribution. An employer may decide to contribute the minimum amount needed to pay the current year benefits, or commonly referred to as pay-as-you-go funding. In this case, the balance sheet liability will typically grow significantly in the years following the adoption of GASB Statement 45. Other employers may decide to fully-fund the value of the retiree healthcare benefits and contribute the entire Annual OPEB Cost into a separate retiree healthcare trust. For such employers, the balance sheet liability will be zero. Impact of Assumptions/Prefunding ARC in Trust The valuation depends primarily on the investment assumption used to develop the present value of future benefits. GASB Statement 45 requires this investment return to be based on the assets available to pay benefits. Plan sponsors that finance benefits on a pay-as-you-go basis typically pay retiree healthcare benefits from the general fund. Because an employer s general fund is primarily invested in short-term securities, a low investment return assumption, such as 4 percent to 5 percent, is typically used to develop the present value of future benefits. However, plan sponsors that fully-fund retiree healthcare benefits in a separate trust may be able to design an investment portfolio that generates much higher returns, such as 7 percent to 8 percent. Using a higher investment return such as 8 percent will produce a lower Annual OPEB Cost when compared to an investment return of 5 percent. Other key assumptions such as healthcare inflation, projected healthcare claims, when an employee retires, if the employee elects healthcare coverage and how long the employee survives after retirement will also impact the valuation. 2

8 Valuation Results The following section presents the key GASB Statement 45 valuation and accounting results for the retiree healthcare benefits offered to City employees. The Actuarial Accrued Liability is determined as of July 1, 2013, based on census data collected as of July 1, The Annual Required Contribution (ARC) is defined as the Normal Cost plus a 30-year level dollar amount amortization of the Unfunded Actuarial Accrued Liability. The Annual OPEB Cost equals the ARC because the initial balance sheet liability is zero. Actuarial Accrued Liability as of July 1, Investment Return of 4.5% $600,000 Annual Required Contribution for Fiscal Investment Return of 4.5% 104,760 Annual OPEB Cost for Fiscal Investment Return of 4.5% 104,760 Expected Employer Contribution for Fiscal 2014 (Pay-As-You-Go Funding or Employer Contribution in relation to the ARC) 45,000 3

9 Overview of Accounting Standards In May of 1990, the Governmental Accounting Standards Board (GASB) provided rules in Statement 12 (Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers) that require governmental employers that provide postemployment benefits other than pension benefits to present certain disclosures. In November of 1994, the GASB provided rules in Statement 26 (Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans) that require defined benefit pension plans that administer postemployment healthcare plans to present certain disclosures and notes to the financial statements. In June 2004, the GASB issued Statement 45 (Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions), which requires accrual accounting for other postemployment benefit plans, which may result in accounting cost recognized different than actual cash or pay-as-you-go contributions made to such plans. The effective date of Statement 45 is fiscal periods beginning after December 15, 2006 for phase 1 governments (those with total annual revenues of $100 million or more for GASB Statement 34 implementation); after December 15, 2007 for phase 2 governments (those with total annual revenues between $10 million and $100 million for GASB Statement 34 implementation); and after December 15, 2008 for phase 3 governments (those with total annual revenues of less than $10 million for GASB Statement 34 implementation). Earlier implementation of Statement 45 is encouraged. Statement 45 does not require advance funding but rather accrual accounting of the obligations associated with other postemployment benefit plans. The magnitude of the accounting cost and any obligation of the other postemployment benefit plans will depend upon the benefit structure and projected participant population. The results are directly dependent upon the projected claims costs for participants expected to receive benefits in the future. The obligations recognized are based upon current and future generations of retired participants. This report will determine the annual required contribution, annual OPEB cost, net OPEB obligation, and related actuarial obligations according to GASB Statement 45 based on the current other postemployment benefit plans. 4

10 Overview of Accounting Standards (continued) GASB Statement 45 introduced new terms defining the accrual basis of accounting for other postemployment benefit plans including the Annual Required Contribution, Annual OPEB Cost, and Net OPEB Obligation. Annual Required Contribution The Annual Required Contribution, or ARC, is actuarially determined in accordance with the parameters of Statement 45. The Annual Required Contribution is based on the following three components: Normal Cost The portion of the actuarial present value of all future benefits allocated to the fiscal year by the actuarial cost method, plus Amortization Payment An amortization of the unfunded actuarial accrued liability over a period of no more than thirty years, plus Interest Interest at the assumed investment return on the Normal Cost and Amortization Payment A more detailed description of certain actuarial terms, including the actuarial present value of future benefits, actuarial accrued liability and normal cost, is continued on page 11. Annual OPEB Cost The Annual OPEB Cost is an accrual basis measure of the annual periodic accounting cost of the employer s OPEB plans. The Annual OPEB Cost is based on the following three components: Annual Required Contribution The employer s periodic required contribution actuarially determined in accordance with the parameters of Statement 45, plus Interest on Net OPEB Obligation Interest at the assumed investment return on the beginning of year Net OPEB Obligation, minus Adjustment to ARC Amortization of the discounted present value of the balance of the beginning of year Net OPEB Obligation Net OPEB Obligation The Net OPEB Obligation is the sum of (a) the OPEB liability or cost already booked at transition to Statement 45, if any, and (b) the cumulative difference between the Annual OPEB Cost and the employer s contributions to the OPEB plans since the effective date of Statement 45. 5

11 Plan Assets Future plan benefits may be derived from plan assets on the valuation date, future contributions and investment income on these amounts. The actuarial value of plan assets must be based on the market value. Changes in the actuarial value of plan assets during the latest year and the current valuation date are displayed below. Actuarial Value of Plan Assets on July 1, Plus Increases Expected Employer Contributions* 45,000 Interest and Dividends 0 Realized and Unrealized Gain/(Loss) 0 Less Decreases Expected Benefit Payments* (45,000) Investment Expenses 0 45,000 (45,000) Actuarial Value of Plan Assets on June 30, * These are to be determined using actual employer contributions and actual benefit payments of the retirees for the period. For fully insured plans this is the difference between the age-adjusted total premiums and actual collected retiree contributions covered during the period. For self-insured plans, this is the difference between actual retiree claims/expenses and the actual collected retiree contributions made for the retirees covered during the period. 6

12 Plan Funded Status 1. Actuarial Present Value of Future Benefits As of July 1, 2013 Retired Employees $ 100,000 Retired Spouses/Surviving Spouses 25,000 Actives Employees 600,000 Actives Spouses/Surviving Spouses 210,000 Total $ 935, Actuarial Accrued Liability Retired Employees $ 100,000 Retired Spouses/Surviving Spouses 25,000 Actives Employees 350,000 Actives Spouses/Surviving Spouses 125,000 Total $ 600, Actuarial Value of Plan Assets 0 4. Unfunded Actuarial Accrued Liability (2) (3) 600, Funded Ratio (3) / (4) 0.0% 6. Covered Payroll $12,500, Unfunded Actuarial Accrued Liability as a Percentage of Covered Payroll (4) / (6) 4.8% 7

13 Annual Required Contribution, Annual OPEB Cost and Net OPEB Obligation Annual Required Contribution Fiscal Year Ending June 30, Normal Cost Actives Employees $ 50,000 Actives Spouses/Surviving Spouses 15,000 Total 65, Actuarial Accrued Liability 600, Actuarial Value of Plan Assets 0 4. Unfunded Actuarial Accrued Liability (2) (3) 600, Amortization Factor Amortization Payment (4) / (5) 35, Interest on Normal Cost and Amortization Payment 4, Annual Required Contribution (1) + (6) + (7) 104,760 Annual OPEB Cost 9. Annual Required Contribution 104, Interest on Net OPEB Obligation Adjustment to Annual Required Contribution Annual OPEB Cost (9) + (10) + (11) 104,760 Net OPEB Obligation 13. Net OPEB Obligation Beginning of Year Annual OPEB Cost 104, Expected Employer Contributions Made* 45, Expected Net OPEB Obligation End of Year* (13) + (14) - (15) 59,760 * These are to be re-determined using actual employer contributions for the period of July 1, 2013 to June 30, For self insured plans, this is the difference between actual retiree claims/expenses and the actual retiree contributions made by the retirees covered during the period. For fully insured plans this is the difference between the actual age-adjusted total retiree premiums and actual collected retiree contributions. 8

14 Summary of Plan Provisions All plan provisions summarized below are effective July 1, 2013 Covered Individual An individual who is employed by Sample City and who is eligible in the group health plan. Eligibility A Covered Individual who retires from services with the City after reaching age 55 with 15 years of service. Health Insurance Benefits Deductible Network: $500 per person, but maximum of $1,000 per family. Out of Network: $2,500 per person, but maximum of $5,000 per family. Coinsurance Network: 10% of allowed charges after deductible. Out of Network: 20% of allowed charges after deductible. Office Visit $20 Annual Maximum Out-of-Pocket Network: $1,000 per person per year, but $2,000 maximum per family. Out of Network: $5,000 per person per year, but $10,000 maximum per family. Prescription Drug Benefits Deductible $50 per person, but maximum of $100 per family. Copayments/Coinsurance Generic Formulary/Brand Non-Formulary Brand $10 copayment $25 copayment $40 copayment Dental Insurance Benefits Deductible $25 per person, and $50 per family. Coinsurance Preventive Services 100%; deductible waived Basic Services 80% Major Services 50% Orthodontia Services 50% Annual Maximum $1,000 per person Lifetime Orthodontic Maximum $1,000 per person 9

15 Duration of Coverage Spouse/Dependent Coverage Retiree Contributions All coverage ceases when the retiree or spouse attains age 65 or becomes eligible for Medicare except for COBRA continuation if elected. Spousal/Dependent coverage is provided as long as the required contributions are paid, except when the retiree is no longer covered by the plan. The monthly contributions are based on 102% of the full active employee premium rate. Monthly contributions are fiscal 2014 are: Single Family Health Insurance $600 $1,400 10

16 Actuarial Methods Actuarial Cost Method The Projected Unit Credit Cost Method was used to determine the annual required contribution. The actuarial present value of future benefits is the present value necessary today to provide for a benefit payment or series of benefit payments in the future for all plan participants. It is determined by discounting the future benefit payments at the assumed investment return and reflect the probability of payment. The normal cost is determined as the sum of the individual normal costs for each active participant. The accrued liability is the sum of the individual accrued liabilities for all plan participants. The unfunded accrued liability equals the total accrued liability less the actuarial value of plan assets. Asset Valuation Method The actuarial value of assets must be determined based on some recognition of the fair market value of assets. Initially, the actuarial value of assets is to be equal to the fair market value of assets. This method will be formally adopted after decisions regarding the OPEB Plan s funding and investment policy are made. Amortization Method The unfunded accrued liability is being amortized as a level dollar amount on an open basis over a period of 30 years. 11

17 Actuarial Assumptions Valuation Date July 1, 2013 Initial Health Coverage Claims Cost Age Per Participant (including administrative expenses) Under Age 65 Retiree $13,000 Spouse $14,500 Age 65 and Over N/A The assumed claim costs were determined from the self-insured premiums and underlying claim experience of the OPEB Plans and actuarial age adjustment factors. Health Care Cost Trend Rates Year Rate Duration % Duration Duration Duration Duration Duration Investment Return 4.5% per Year Salary Increases 3.0% per Year Mortality RP 2000 Mortality Tables Retiree Participation Rate 25% Initial Spouse Participation Rate Male Employees: 30% Female Employees: 30% 12

18 Turnover Rates based on Scale T-7 of the Actuary s Pension Handbook. Sample rates varying by age: Age Rate % Disability None Retirement Sample rates varying by age and employee type: Age General or Over

19 Participant Data As of July 1, 2013 Active Participants Age at Valuation Date Male Female Total Less than & Over Total Average Age 45.0 Average Service 11.0 Average Pay $50,000 Retired Employees and Spouses Age Group Retirees Spouses Less than and Over 0 0 Total