OPEB (Other Post Employment Benefits) Funding and Investing. Massachusetts Association of Regional Schools (MARS) October 14, 2014

Transcription

1 OPEB (Other Post Employment Benefits) Funding and Investing Massachusetts Association of Regional Schools (MARS) October 14, 2014

2 INTRODUCTIONS MAUREEN TOAL, MPA PARS (Public Agency Retirement Services) Senior Vice President, Consulting DENNIS MULLINS, CPA, CFA U.S. Bank Senior Portfolio Manager

3 PARS PUBLIC AGENCY RETIREMENT SERVICES 30 years of expertise in governmental retirement and OPEB programs OPEB, retirement/separation incentives, pensions, customized plans, alternatives to Social Security plans Administers 3 post-retirement health care trusts: 1 st in 1996 for school districts, 2 nd in 2006 (for school districts and community colleges School district trusts includes the largest school board association in the country (CA) and two multiple employer trust programs for TX schools. $1 billion in OPEB trust assets for 139 public agencies; administers over 1,150 retirement plans More than 675 client agencies, 368 school districts, with over 375,000 plan participants 3

4 ABC S OF OPEB 4

5 A: IT STARTS WITH ACTUARIAL Have an actuarial report performed per GASB Forecast budgets using actuarial information Evaluate consequence of GASB 45 Manage the outcome Continue pay-as-yougo approach Set-aside funds in District held special fund (revocable) Fund into irrevocable trust (GASB 45- compliant) Change OPEB benefit programs Keep benefits the same but reduce costs Alternative approaches: bonds, annuitizing, define contribution, incentives 5

6 B: BENEFIT WHAT IS ITS VALUE GASB 45 requires actuarial valuation to measure and value the benefit - long term liability (like with pension) # of Employees/ Members How Often? By Whom? 200 or more Every 2 years Actuary Under 200 Every 3 years Actuary Under 100 Every 3 years Alternate Measurement Method (AMM) 6

7 C: COUNTING THE LIABILITY GASB 45 REQUIREMENTS Requires accounting and reporting by employers of OPEB liabilities on financial statements based on valuation Does not require funding Only funds set aside in an irrevocable can be counted as assets against liabilities on financial statements New GASB Exposure draft: no longer a footnote on statements, will be on balance sheets 7

8 TO FUND OR NOT TO FUND? 8

9 PAY-AS-YOU-GO APPROACH.relying on paygo to meet obligations has serious consequences. As annual spending on retiree health care grows, the fiscal squeeze already pressuring municipalities tightens further and forces cuts in basic services. Even if municipalities ignore their long-term obligations and do not pay down their retiree health care liabilities, they cannot escape the fact that those costs are rising and eroding the resources available for important services like education and public safety. - Massachusetts Taxpayers Association Report

10 WHY PREFUND? Investing assets can result in a greater rate of return which in turn lowers liabilities Contributions into the trust are assets which offset liabilities on financial statements GASB 68 will require districts to report pension liabilities on their balance sheet in 2015 with OPEB following in the near future Credit rating companies look more favorably on agencies who adopt an irrevocable trust and pre-fund Districts with lower liabilities have a better chance to retain some level of retiree healthcare 10

11 OPEB FUNDING SCENARIOS 1. Put in Full ARC $1,000, Put in Full ARC, then reimburse PAYGO at the End of Year $1,000,000 - $600, Put in difference between ARC and PAYGO $400, Put in anything??? Remember: Something is always better than nothing! 11

12 IS IT A TRUST? IRC Section 115 Trust or VEBA or 401(h) An IRS vehicle designed specifically to be used for retiree health care funding IRS Approval? So that each participating agency, its employees, retirees, and beneficiaries are covered with critical IRS tax-qualified status so income earned on trust non-taxable. GASB 45 Compliance Developed to comply with three requirements of GASB 45, the trust is irrevocable, protected from creditors, and solely for payment of OPEB benefits MA Law Compliant -- MGL 32B 20 dedicated to OPEB, free from creditors Trustee and Trust Agreement/Documents - legally validate as trust 12

13 IS IT A TRUST? Separate from Assets of District? Contributions are irrevocable to comply with GASB 45 considered assets that offset liabilities on financial statements Exclusive Benefit for exclusive benefit of employees, retirees, and beneficiaries Assets Can Only Revert Back to district when no beneficiaries of the plan remain Safeguards Assets Permanently perceived increased security Diversified Investment Options Massachusetts Prudent Investor Law allowing for higher actuarial discount rate 13

14 WHAT DOES MA SAY? Adopt M.G.L. 32B:20 Other Post Employment Benefits Liability Trust Fund Accept legally binding trust documents or declaration that are irrevocable and free from creditors Must report to PERAC actuarial information Other approaches: special legislation, stabilization funds, funds but not trusts Proposed changes to OPEB Trust Law: Section 4 of H3611 OPEB trust components not passed to strengthen M.G.L 32B:20 Survey: most have not adopted 32B:20 Municipalities 60%, Regions 30% Survey: only a few have GASB 45 compliant trusts 14

15 WHAT DOES IRREVOCABLE MEAN? Does M.G.L. 32B:20 satisfy irrevocability requirement of GASB 43? No use of irrevocable or trustee in Other Post Employment Benefits Liability Trust Fund Myths of irrevocability Can reimburse for paygo expenses or pay healthcare providers, retirees Can control when contributions are made and how much Can control how often district takes distribution Can revert back to employer 15

16 MULTIPLE-EMPLOYER VS. SINGLE EMPLOYER MULTIPLE-EMPLOYER SINGLE-EMPLOYER SETUP No setup existing trust Setup costs new trust IRS PRIVATE RULING Yes covers entire trust Varies legally costly; only applies to individual trust DOCUMENTS Existing master plan/trust vetted by every agency that joins ONGOING EFFORT Less More COMPLIANCE Responsibility of Trust Administrator INVESTMENTS Pools and customized Customized ECONOMIES OF SCALE Yes No Created new by attorney or prototype Responsibility of employer and attorney FEES Lower can decrease with asset growth Higher limited scale GASB 45 COMPLIANT Yes Not always 16

17 QUESTIONS TO ASK ABOUT TRUST PROVIDER Ready-to-use, simply organized Start up and ongoing compliance costs and risks Turn-key comprehensive services IRS-approved Restrictions and red tape - funding and contribution requirements OPEB experience as investment management, trustee Federal and highly regulated trustee 17

18 WHAT ARE OTHERS DOING (SCHOOL DISTRICTS)? 18

19 Liability per Active Employee LIABILITY PER ACTIVE EMPLOYEE Spreading the total liability across all active employees results in a median liability of $25,000 per employee $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $ District PVFB Per Active Median 19

20 ACCRUED LIABILITY PER PARTICIPANT Average accrued liability per active employee of $14,100 and $37,900 for retirees $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $ District Active Retired 20

21 Increase in ARC EXPENSING LIABILITIES The median Annual Required Contribution is over 2.2 times the current cost of providing retiree healthcare benefits ARC vs. Current Expense 18x 16x 14x 12x 10x 8x 6x 4x 2x 0x District 21

22 AVERAGE INCREASE IN PAYGO Based on the actuarial study results of over 40 school districts, annual pay-asyou-go costs will more than double in the next ten years for the average district. 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x 5 Years 10 Years 15 Years 22

23 ACTUARIAL DATA CONTRIBUTIONS AMOUNT Average ARC $801,603 Average Accrued Liability $6,705,856 Average Unfunded Liability (last actuarial often prior to funding) $6,127,614 23

24 CONTRIBUTION DATA CONTRIBUTIONS Largest Single Contribution AMOUNT $5.6 million Smallest Single Contribution $8,000 Frequency Once a year or less 88% Frequency Monthly to Six times a year 12% Monthly Average Contribution $101,000 Yearly Average Contribution $780,104

25 CONTRIBUTION VS. ARC CONTRIBUTIONS AMOUNT Contributing ARC 8% More than ARC 40% Less than ARC 52% 25

26 DISTRIBUTION DATA DISTRIBUTIONS Percentage not taking distributions 85% Percentage taking distributions 15% Longest period without distribution NOT planning to take distribution within 5 years of original contribution Planning to take distribution within 5 years of original contribution 10 years 83% 17% 26

27 INVESTMENT PROFILE Investment Approach Target Return (30 yr. period) Percentage of Districts Conservative 6.2% 22% Tactical Range (5% to 20% Equity) Income 6.8% 29% Tactical Range (20% to 40% Equity) Balanced 7.5% 36% Tactical Range (40% to 60% Equity) Growth 8.9% 9% Tactical Range (60% to 80% Equity) 27

28 EXAMPLE: 15 YEARS FUNDING DISTRICT TYPE OF PARTICIPANTS (a) Active Participants 2,154 (b) Retired Participants 187 (a) + (b) Total Participants 2,341 28

29 EXAMPLE: FIRST 8 YEARS Funding School District $5,000,000 $4,500,000 $4,000,000 $3,500,000 Contributions Distributions Total Assets $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $ Year 29

30 EXAMPLE: FUNDING APPROACHES Year Pay-As-You-Go Level Contribution Level % of Unfunded AL Level % of Payroll 2005 $596,865 $1,199,000 $1,579,150 $936, $721,391 $1,199,000 $1,474,189 $964, $848,958 $1,199,000 $1,384,194 $993, $966,047 $1,199,000 $1,307,013 $1,022, $1,082,860 $1,199,000 $1,240,259 $1,053, $1,224,957 $1,199,000 $1,182,141 $1,085, $1,331,547 $1,199,000 $1,131,732 $1,117, $1,382,667 $1,199,000 $1,086,405 $1,151, $1,368,560 $1,199,000 $1,043,556 $1,185, $1,355,578 $1,199,000 $1,001,017 $1,221,268 30

31 EXAMPLE: FUNDING ALTERNATIVES $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 Pay-as-you-go $600,000 $400,000 $200,000 $ Year 31

32 EXAMPLE: FUNDING ALTERNATIVES $1,600,000 $1,400,000 Pay-as-you-go $1,200,000 $1,000,000 $800,000 $600,000 $400,000 Level % of Payroll $200,000 $0 Year

33 EXAMPLE: FUNDING ALTERNATIVES $1,600,000 $1,400,000 Pay-as-you-go $1,200,000 $1,000,000 $800,000 Level % of Payroll $600,000 $400,000 $200,000 Level Contribution $ Year 33

34 EXAMPLE: FUNDING ALTERNATIVES $1,600,000 Pay-as-you-go $1,400,000 $1,200,000 $1,000,000 Level % of Payroll $800,000 $600,000 Level Contribution $400,000 $200,000 Level % of Unfunded AAL $0 Year

35 INVESTING IN OPEB 35

36 OPEB INVESTMENT ISSUES MGL 203C Prudent Investor Rule Monies in trust fund shall be invested by the custodian consistent with the prudent investor rule Diversification of Assets Allowed with irrevocable trust; allows for actuary to increase discount rate Discount Rate: Rule of Thumb For every 1% increase in the actuarial discount rate, a 10-15% decrease in the Annual Required Contribution (ARC) and Actuarial Accrued Liability on actuarial valuation 36

37 MA CITY: IMPACT OF INVESTING ON LIABILITY Valuation Date: June 30, 2012 Pay-As-You-Go Discount Rate: 4.00% Percent Change Pre-Funding Discount Rate: 8.00% Actuarial Value of Assets $0 --- $0 Unfunded Actuarial Accrued Liability (UAAL) $300,478, % $171,220,852 Annual Required Contribution (ARC) $19,803, % $13,562,148 37

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