GASB 45 Conference: The Next Great Financial Challenge

Similar documents
Wage $27.35 $16.41 $19.15 $21.88 $ Pension $7.30 $0.00 $5.11 $5.84 $6.57. Health $8.00 $8.00 $8.00 $8.00 $8.00

Journeyman Level 1 Level 2 Level 3 Level 4. Wage $27.60 $16.56 $19.32 $22.08 $ Pension $7.50 $0.00 $5.25 $6.00 $6.75

By E mail. July 24, Revised Purchase Price and Income Limits Seller s Guide Bulletin # Dear Participating Lender:

MT-15. Mortgage Recording Tax Return

RUTHANNE VISNAUSKAS Commissioner/CEO. ANDREW M. CUOMO Governor. Page 1. By E mail. June 27, 2017

NEW YORK STATE MEDICAID PROGRAM INFORMATION FOR ALL PROVIDERS

Local Commissioners Memorandum

GASB 45 Conference: The Next Great Financial Challenge

Local Commissioners Memorandum

2009 Annual Report. New York State Workers Compensation Board. David Patersen, Governor Robert E. Beloten, Chair

Local Commissioners Memorandum

Local Commissioners Memorandum

New York s unemployment insurance system: A vital safety net for New York workers and their families during economic downturns

Town of Theresa. Internal Controls Over Claims Auditing. Report of Examination. Period Covered: January 1, 2012 December 31, M-89

New York s unemployment insurance system: A vital safety net for New York workers and their families during economic downturns

Page 1 of 5 Publication CHAR023 (2018)

Local Government Snapshot

Little Falls City School District

Village of Delhi. Financial Condition. Report of Examination. Thomas P. DiNapoli. Period Covered: June 1, 2011 March 1, M-110

Mahopac Central School District

Village of Galway. Claims Processing. Report of Examination. Thomas P. DiNapoli. Period Covered: June 1, 2012 January 31, M-79

Southwestern Central School District

Jefferson-Lewis- Hamilton-Herkimer- Oneida Board of Cooperative Educational Services

Technical Assistance. Community Budget and Fiscal Management New York State Office of Mental Health

New York State Teachers Retirement System

M1015 Lord Hoole Fema 6/2012

POPULAR ANNUAL FINANCIAL REPORT

Local Commissioners Memorandum

Genesee County Soil and Water Conservation District

King Center Charter School

Town of Amenia. Leave Accruals. Report of Examination. Thomas P. DiNapoli. Period Covered: January 1, 2012 October 10, M-361

New Rochelle City School District

Financial Levels for Medicaid and Related Program Eligibility

Mineola Union Free School District

Catskill Central School District

Financial Levels for Medicaid and Related Program Eligibility

Financial Levels for Medicaid and Related Program Eligibility

NYSHIP RATE CHANGES EFFECTIVE SEPTEMBER 1, 2013

Watertown Housing Authority

Town of Stanford. Financial Condition. Report of Examination. Thomas P. DiNapoli. Period Covered: January 1, 2012 January 31, M-225

City of White Plains

NYSHIP Rates & Deadlines for 2018

West Hempstead Water District

Cortland Enlarged City School District

Canton Central School District

Johnson City Central School District

Statewide Permanent Exits Within Two Years of In Care Date

Labor Market Overview

Labor Market Overview

Prattsburgh Central School District

Ardsley Union Free School District

Bethpage Union Free School District

Oyster Bay Water District

NEW YORK STATE OFFICE OF TEMPORARY AND DISABILITY ASSISTANCE 40 NORTH PEARL STREET ALBANY, NY

Niagara Falls Water Board

Town of Allegany. Financial Management. Report of Examination. Period Covered: January 1, 2009 January 2, M-103

New Paltz Central School District

Statewide Rate of Permanent Exits Within 2 Years of First Admission

Beacon City School District

Union-Endicott Central School District

Village of Homer. Purchasing and Credit Cards. Report of Examination. Thomas P. DiNapoli. Period Covered: March 1, 2015 April 13, M-112

Town of Columbus. Budget Development Practices. Report of Examination. Thomas P. DiNapoli. Period Covered: January 1, 2011 August 1, M-225

Town of Huron. Financial Management. Report of Examination. Thomas P. DiNapoli. Period Covered: January 1, 2011 September 18, M-367

Village/Town of Mount Kisco

Susquehanna Valley Central School District

Binghamton City School District

Oneida-Herkimer- Madison Board of Cooperative Educational Services

Schenevus Central School District

Sauquoit Valley Central School District

Lansing Central School District

Town of Oxford. Financial Management. Report of Examination. Period Covered: January 1, 2015 August 22, M-420

Minisink Valley Central School District

Penn Yan Central School District

North Colonie Central School District

The Role of Property Taxes in New York s State-Local Tax System. Hudson Valley Property Tax Relief and Reform Conference

Village of Newark Valley

Northville Public Library

Barnard Fire District

Town of North Castle

Corinth Central School District

Forestburgh Fire District

Altmar-Parish- Williamstown Central School District

Madrid-Waddington Central School District

Vestal Central School District

Menands Union Free School District

2018 Rates & Information

Town of Hume. Financial Management. Report of Examination. Period Covered: January 1, 2009 February 11, M-333

Worcester Central School District

North Rose-Wolcott Central School District

Cambria Housing Authority

Albany Parking Authority

Hunter-Tannersville Central School District

Wallkill Central School District

Town of Kortright. Financial Management. Report of Examination. Period Covered: January 1, 2015 August 25, M-397

Richland Fire District

Central Valley School District

Charlotte Valley Central School District

North Greenbush Common School District

Highland Falls - Fort Montgomery Central School District

Oxford Academy and Central School District

Transcription:

GASB 45 Conference: The Next Great Financial Challenge June 29, 2006 WHAT IS GASB 45? Tom Green, Managing Director - Citigroup 1

Other Post Employment Benefits ( OPEBs ) Total OPEB Liability $1.3 Trillion 2

How Big is $1.3 Trillion? $3 $2 ($ in Trillions) $1 $2.3 $1.3 $0.65 $0 All Muni Debt Pension UAAL OPEB UAAL 3

Pension Funding vs. OPEB Funding Public Pension Funding Assets and Liabilities $3.2 Trillion Unfunded 25% OPEB Funding Assets and Liabilities $1.3 Trillion Assets 1% Assets 75% Unfunded 99% 4

Sizing-up the OPEB Problem $700 Billion 1 - $1.3 trillion: estimated public sector OPEB liability $336 Billion: unfunded OPEB Liability for S&P 500 2 $165 Billion: unfunded pension liability for S&P 500 2 $50 Billion: The City of New York estimated unfunded OPEB Liability 3 $?? Billion: State of New York unfunded OPEB Liability 4 Individual OPEB liabilities for NY Counties will vary widely $1.1 Trillion: US Federal Government unfunded OPEB liability 5 5 1 Federal Reserve Board of Chicago, February 2006. 2 Credit Suisse, February 2006. 3 The City of New York January 2006 Financial Plan. 4 Actuarial study underway. 5 S&P Report entitled America's Other Looming Bill, Unfunded Government Pensions dated May 30, 2006.

Financial Reporting of OPEBs GASB 45 Many state and local governmental employers provide Other Post Employment Benefits or OPEBs as part of an overall compensation package offered to qualified employees GASB 45 requires governmental employers to disclose accrued OPEB liability (funded and unfunded) and progress towards funding (in same manner as pension liabilities): Requiring systematic, accrual-basis measurement and recognition of OPEB cost/expense over a period that approximates the employees years of service. Providing information about actuarial accrued liabilities associated with OPEB and whether and to what extent progress is being made in funding the plan. GASB 45 requires reporting estimates of the full OPEB liability based on promises or agreements in place. GASB 45 imposes no new benefit costs to the employer. 6 Managing the OPEB UAAL will create significant budgetary pressures for many public entities Healthcare Benefits: Medical Dental Prescription Drugs Vision Other Benefits: Life Insurance Disability Long-Term Care Group Legal

Financial Reporting of OPEBs GASB 45 GASB Statement No. 45 becomes effective for reporting periods that begin after: December 15, 2006 Phase I Governments Annual Revenues of $100 million or more December 15, 2007 Phase 2 Governments Annual Revenues of $10 million or more but less than $100 million December 15, 2008 Phase 3 Governments Annual Revenues of less than $10 million However, GASB does encourage earlier implementation. The SEC and the rating agencies also have called for early calculation and disclosure Actuarial valuation must be completed every 2 years for entities with more than 200 employees. Annual cost can be based on a valuation date of up to 2 years prior to the beginning of the fiscal year. Calculation of OPEB liabilities is more difficult than pension fund liabilities less predictable, higher cost volatility and inflation, greater variation among employers 7

8 The New OPEB Vocabulary AOC = Annual OPEB Cost ARC = Annual Required Contribution Contributions Made = Annual Actual Contribution NOO = Net OPEB Obligation If Contributions Made < ARC = NOO AAL = Actuarial Accrued Liability UAAL= Unfunded Actuarial Accrued Liability 115, VEBA, 401h Trust Funded, Non-funded, Blended Rate OPEB Bonds

Annual Required Contribution (ARC) GASB 45 requires the calculation of the Annual Required Contribution (ARC) ARC Contains 2 Components Amortization of Past Liability An amount needed to amortize the past liability over time at the discount rate (30 year maximum time frame) Calculated as level or as percentage of payroll Normal Cost Actuarially determined amount to capture the total cost of benefits earned in the current year If a public entity always contributes the ARC beginning on the transition date, no Net OPEB Obligation (NOO) will be disclosed on the balance sheet 9

Measurement of OPEB Liability OPEB liability can be divided into 3 parts Liability earned in the past - Current year s liability - Future liability Sample Illustration: Jamie has 20 years of service and will have 30 years at retirement. Assume Jamie's total liability is $30,000 or a PV of $1000 per year Liability Earned in the Past Liability Earned this Year Liability Earned in the Future $20,000 $ 1 0 0 0 $9,000 This liability will be disclosed in the CAFR footnotes as an Actuarial Accrued Liability The sum of all past earned liabilities will be the employee s total OPEB liability 10 Information derived from Milliman Inc. (October 5, 2005 presentation at BMA Conference).

Why is GASB 45 & OPEB an issue? 2006 2011 2016 2021 2026 2031 Funded Plan PAYGO Source: GFOA Annual Conference, July 2005 11

Relative Scale of OPEB Components Amortization of Past Liability 2 to 10 Times PAYGO Normal Normal Cost Cost Pay-As-You-Go Current Budget Amount Annual Required Contribution (ARC)* 12 *Note that there s no requirement to actually pay this amount, just a requirement to calculate and disclose it.

Selected OPEB Information for Counties in New York Jefferson St. Lawrence St. Lawrence Sullivan Clinton Franklin Franklin Lewis Hamilton Hamilton Warren Washington Oswego Orleans Oneida Niagara Monroe Herkimer Monroe Wayne Fulton Fulton Saratoga Genesee Onondaga Seneca Onondaga Herkimer Montgomery Montgomery Rensselaer Erie Ontario Wyoming Cayuga Madison Schenectady Yates Schenectady Livingston Seneca Cortland Otsego Cortland Albany Chenango Schoharie Albany Tompkins Chenango Schoharie Schuyler Chautauqua Steuben Greene Chautauqua Cattaraugus Steuben Greene Allegany Delaware Chemung Tioga Broome Columbia Sullivan Ulster Ulster Essex Essex Dutchess EXAMPLES OF 5 LARGER COUNTIES County PAYGO Erie $12,071,497 Monroe 13,800,000 Nassau 90,000,000 Suffolk 60,938,724 Westchester 32,974,830 EXAMPLES OF 5 SMALLER COUNTIES County PAYGO Allegany $55,902 Delaware 21,700 Herkimer 566,684 Ontario 8,857 Steuben 207,199 Orange Putnam Westchester Rockland Rockland New York City Suffolk Suffolk Nassau Source: County annual reports for 2003 or 2004. 13

Example: Larger County OPEB Illustration While an actuarial valuation is necessary to accurately quantify the OPEB UAAL and ARC, estimates can be calculated using standard industry multiples Hypothetical OPEB Pay-As-You-Go cost of $90 million Hypothetical total members of 20,000+ (active and retired) Citigroup estimates that Larger County could have an unfunded OPEB liability in the range of $1.35 billion to $ 6.75 billion (assumes a high discount rate) For illustrative purposes, our analysis assumes $3.6 billion If an amortization schedule similar to that assumed for the pension system is applied to the OPEB UAAL, the following payment requirements would result: UAAL Amortization Annual Required Contribution ($ Millions) 800 700 600 ($ Millions) 1,800 1,600 1,400 500 1,200 400 300 1,000 800 600 200 400 100 200-2007 2010 2013 2016 2019 2022 2025 2028 2031 2034-2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 UAAL Amortization UAAL Amortization Normal Cost 14 Note: Amortization schedule assumes level percent of payroll, 4% inflation rate and 8% investment rate of return

Example: Smaller County OPEB Illustration While an actuarial valuation is necessary to accurately quantify the OPEB UAAL and ARC, estimates can be calculated using standard industry multiples Hypothetical OPEB Pay-As-You-Go cost of $5 million Hypothetical total members of 2,000+ (active and retired) Citigroup estimates that Smaller County could have an unfunded OPEB liability in the range of $75 million to $375 million (assumes a high discount rate) For illustrative purposes, our analysis assumes $200 million If an amortization schedule similar to that assumed for the pension system is applied to the OPEB UAAL, the following payment requirements would result: UAAL Amortization Annual Required Contribution ($ Millions) 40 35 30 25 20 ($ Millions) 100 90 80 70 60 50 15 40 10 5 30 20 10-2007 2010 2013 2016 2019 2022 2025 2028 2031 2034-2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 UAAL Amortization UAAL Amortization Normal Cost 15 Note: Amortization schedule assumes level percent of payroll, 4% inflation rate and 8% investment rate of return

GASB Irrevocable Trust The existence of an OPEB Trust with broad investment powers, in conjunction with a longterm plan for funding the remaining OPEB liabilities, would be the basis for the actuary to use a long-term investment rate of return, in the range of 7-9% used by many pension systems, as the discount rate used in determining the size of any remaining unfunded liability GASB 45 requires an OPEB Trust to have the following protections: A legally separate entity ( Trust ) under the control of a trustee or board of trustees Employer no longer has ownership or control of the assets; the Trust is irrevocable OPEB Trust moneys are dedicated to OPEB liabilities and may not be diverted by employer to other purposes Legally protected from the employer s and administrator s creditors 16

Discount Rate and Relationship on Annual Payments Assuming OPEB assets are placed in an irrevocable trust with broad investment powers and employers contribute the ARC, GASB 45 allows use of estimated long-term investment yield, considering nature & mix of plan investments, to determine annual payments If irrevocable trust with broad investment powers is not established, the discount rate is limited to a rate of return consistent with the limited investments local governments in New York can use Actuarial Discount Rate has a significant impact on the size of the UAAL and Normal Cost Discount Rate should be representative of actual investment returns achievable For PAYGO plans, typically reflects General Fund returns of 3-5% Funded plans investing in equity and bonds can achieve returns of 7-9% GASB 45 allows an irrevocable trust with broad investment powers to use a higher discount rate The use of a higher discount rate will translate into lower annual ARC payments since the Present Value of the future liability will be lower 17

What the Rating Agencies Are Saying From a rating standpoint, OPEB obligations, like other cost pressures that lack offsetting resources, affect not only debt and management factors, but also financial. If any changes resulting from OPEB have the effect of adversely affecting an employer's financial position or flexibility, then credit quality may suffer. The key to preserving credit quality will be in how OPEB liabilities are managed. " - June 15, 2006 The difference between financing these benefits under the old pay-asyou-go (PAYGO) method and the new advance funding method will be significant. As OPEB obligations take on greater urgency, management must respond with thoughtful, long-term solutions. -December 14, 2005 Even though compliance with the This finding underscores the funding pressure that compliance with the new accounting rules may entail for many states, given their generous retiree health benefits and past lack of pre-funding. Many states are expected to set up and fund trusts to hold retiree health benefit assets, in order to avoid incurring balance-sheet liabilities and to take advantage of the higher assumed interest rate allowed under the standard for plans in which benefits are paid using assets held in trust.. - January 2006 Even though compliance with the new accounting rules is expected to exert financial stress and to bring to light previously unknown liabilities, Moody s expects the disclosure effects will be largely positive over the long term. Any resulting fiscal strain is likely to be more than offset in most cases by the positive implications of management practice improvements under the accounting rules. - July 2005 Failure to make actuarially determined OPEB plan contributions will most like result in rising net OPEB obligations, which like rising net pension obligations are a deferral of financial responsibility. Therefore, over time, a lack of substantive progress in funding and managing OPEB liabilities or a failure to develop a realistic plan to meet annual OPEB contributions could adversely affect an issuer s credit rating. - June 22, 2005 18

Conclusion Massive OPEB liability by any measure GASB deadlines are imminent While accountants will not require action, rating agencies and creditors will NYSAC is here to help 19

DISCLAIMER: CITIGROUP IS NOT RESPONSIBLE FOR OPEB PROBLEM Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the existence of and proposed terms for any transaction contemplated hereby (a Transaction ). Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction. IRS Circular 230 Disclosure: Citigroup, Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of the Transaction. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided. Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time. We maintain a policy of strict compliance to the anti-tying provisions of the U.S. Bank Holding Company Act of 1956, as amended, and the regulations issued by the Federal Reserve Board implementing the anti-tying rules (collectively, the "Anti-tying Rules"). Moreover, our credit policies provide that credit must be underwritten in a safe and sound manner and be consistent with Section 23B of the Federal Reserve Act and the requirements of federal law. Consistent with these requirements and our Anti-tying Policy: The extension of commercial loans or other products or services to you by Citibank, N.A. ( Citibank ) or any of its subsidiaries will not be conditioned on your taking other products or services offered by Citibank or any of its subsidiaries or affiliates, unless such a condition is permitted under an exception to the Anti-tying Rules. We will not vary the price or other terms of any product or service offered by Citibank or its subsidiaries on the condition that you purchase another product or service from Citibank or any Citigroup affiliate, unless we are authorized to do so under an exception to the Anti-tying Rules. We will not require you to provide property or services to Citibank or any affiliate of Citibank as a condition to the extension of a commercial loan to you by Citibank or any of its subsidiaries, unless such a requirement is reasonably required to protect the safety and soundness of the loan. We will not require you to refrain from doing business with a competitor of Citigroup or any of its affiliates as a condition to receiving a commercial loan from Citibank or any of its subsidiaries, unless the requirement is reasonably designed to ensure the soundness of the loan. Although this material may contain publicly available information about Citigroup corporate bond research or economic and market analysis, Citigroup policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citigroup has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances. 2006 Citigroup Global Markets Inc. Member SIPC. All rights reserved. CITIGROUP and the Umbrella Device are trademarks and service marks of Citigroup or its affiliates and are used and registered throughout the world. 20