OPEBs: Implementation Issues for Public Power
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Transcript of OPEBs: Implementation Issues for Public Power
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OPEBs: Implementation Issues for Public Power
Joni Davis, Manager
Financial Accounting and Reporting
Omaha Public Power District
September 27, 2005
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Agenda Actuarial Valuation Accounting Example Implementation Considerations SFAS 71 Funding Survey of Other Utilities
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Actuarial Valuation
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Actuarial Valuation Annual valuation is required at least biennially Valuation based on current substantive plan as
understood by employer and retirees Actuarial assumptions must be reasonable Key assumptions include:
Discount rate Retiree health care trend rates Amortization period
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Actuarial Valuation Splits total OPEB present value of benefits into two
pieces as of a given valuation date Past service liability and future service liability
Total Projected Payments for OPEBs
Total OPEB Present ValueDiscount for
Interest
Past Service Liability (a.k.a., Accrued Liability)
Future ServiceLiability
Valuation Date
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Net OPEB Obligation Net OPEB Obligation = Cumulative difference between
OPEB cost and employer’s actual contributions Initial OPEB obligation equals $0
No retroactive application Initial accrued liability is amortized into annual required
contribution (ARC)
Final OPEB cost for a year equals ARC Plus: Interest on the net OPEB obligation Minus: Adjustment to ARC for past under- or over-
contributions (if applicable)
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Annual OPEB Cost
Total Projected Payments for OPEBs
Total OPEB Present ValueDiscount
for Interest
Accrued LiabilityFuture Service
Liability
Unfunded Accrued Liability (UAL)Assets
Future ServiceLiability
Annual OPEB Cost (“ARC”) = Amortization of UAL + Normal Cost
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Actuarial Cost Methods GASB 43 and 45 permit six different actuarial cost methods
“Immediate Gain/(Loss)” Methods Projected Unit Credit Attained Age Entry Age
“Spread Gain/(Loss)” Methods Frozen Attained Age Frozen Entry Age Aggregate
Once one method is selected, it will be difficult to change to another
Usually produces the lowest costs
Usually produces the highest costs
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UAL Amortization MethodologyTwo types of amortization methodologies are available
Level dollar is the standard “mortgage type” of amortization Level percentage of payroll assumes amortization payments increase
each year in line with projected increases in payroll
Minimum and maximum amortization periods 10 to 30 years amortizations 10 year minimum only applies to “significant decrease” in liability
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Funding When pre-funding is not required, anticipated level of
funding has an impact on liability discount rate assumption…which, in turn, has an impact on the size of the OPEB liability
Utilities can choose to1) Continue pay-as-you-go (i.e., no pre-funding),
2) Fund the entire ARC, or
3) Fund something in between
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Discount Rate
Paragraph 13cd of GASB 45: Liability discount rate should be “…the estimated long-term investment yield on the investments that are expected to be used to finance the payment of benefit.” Return based on plan assets, if the Utility’s policy is to “contribute
consistently an amount at least equal to the ARC” Return based on assets of the employer, “for plans that have no plan
assets” A proportional combination of plan and employer assets, for a partially
funded plan
Result is discount rate that may be different than the pension interest rate
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Health Care Cost Increases
Health care cost trend rates impact OPEB costs Health care costs have been (and are expected to continue)
increase significantly Most FAS 106 assumptions start high, then decline to an
ultimate rate Example:
Initial rate = 12% per year Declining 1% per year to ultimate rate Ultimate rate = 5% per year
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U.S. Retiree Health Care Cost Increases
0 .0 0 %
2 .0 0 %
4 .0 0 %
6 .0 0 %
8 .0 0 %
1 0 .0 0 %
1 2 .0 0 %
1 4 .0 0 %
1 6 .0 0 %
Pre -6 5 Po s t-6 5
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Accounting Example
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Accounting ExampleExample Assumptions Interest rate 7.0% Amortization 20 years (level amount) Trend rates Low trend assumption Funding No prefunding (pay-as-you-go)
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Accounting—Year 1 (in $ millions)
Actual
1/1/2005 For 2005 Projected
1/1/2006
Liability $ 118 $ 125 Assets 0 0 Unfunded Accrued Liability $ 118 $ 125 Transition Obligation 118 115 Net OPEB Obligation $ 0 $ 10 Normal Cost $ 4 Interest on Net OPEB Obligation 0 Amortization of Transition Obligation 11 Total Expense $ 15 Expected Payments $ 5
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Accounting—End of Year 1
Net OPEB Obligation Net Obligation at 1/1/2005 $ 0 ARC for 2005 15 Contributions During 2005 (5) Net Obligation at 1/1/2006 $ 10
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Accounting—Year 2 (in $ millions)
Actual
1/1/2006 For 2006 Projected
1/1/2007
Liability $ 125 $ 133 Assets 0 0 Unfunded Accrued Liability $ 125 $ 133 Transition Obligation 115 111 Net OPEB Obligation $ 10 $ 22 Normal Cost $ 5 Net Interest on OPEB Obligation 1 Amortization of Transition Obligation 11 Total Expense $ 17 Expected Payments $ 5
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Accounting—Year 2
Net OPEB Obligation Net Obligation at 1/1/2005 $ 10 ARC for 2005 17 Contributions During 2005 ( 5) Net Obligation at 1/1/2006 $ 22
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Financial Impact – Pay as you go (numbers
are for presentation purposes only and were not actuarially calculated)
2007 2008 2009 2010 2011 Total
OPEB Expense 10.0 11.3 12.8 14.5 16.4 65.0
OPEB Liability 10.0 21.3 34.1 48.6 65.0 65.0
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Implementation Considerations
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Implementation Considerations GAS 45 not effective until 2007
Benefit changes prior to 2007 will impact initial OPEB cost Early adoption is encouraged (but not required)
Key valuation assumptions Interest rate Medical trend rates Initial amortization period
SFAS 71 Plan funding decisions
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Plan Design Options Increase retiree premium cost Base retiree premiums on “true” retiree costs
(i.e. no blending with active rates)
Add age and/or service related subsidy schedule Place “Cap” on level of Utility costs Move to flat dollar or defined contribution type subsidy schedule Change plan options available to retirees Eliminate/reduce subsidy for future employees/retirees Move from Medicare COB approach to Carve Out Approach
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SFAS 71
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SFAS 71 – Accounting for the Effects of Certain Types of Regulation
Allows for the deferral of costs EITF Issue 92-12 (SFAS 106)
Regulatory authorizationFive year amortization20 year life
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SFAS 71 – 5 year amortization (numbers are
for presentation purposes only and were not actuarially calculated)
No deferral: 2007 2008 2009 2010 2011 Total
OPEB Expense 10.0 11.3 12.8 14.5 16.4 65.0
OPEB Liability 10.0 21.3 34.1 48.6 65.0 65.0
SFAS 71 deferral:
OPEB Expense 2.0 4.3 6.8 9.7 13.0 35.8
OPEB Liability 10.0 21.3 34.1 48.6 65.0 65.0
Regulatory Asset 8.0 15.0 21.0 25.8 29.2 29.2
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FUNDING
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Funding
Generally, insurance not an option Voluntary employee benefit association trusts
(VEBAs – 501(c)(9) [tax deductible] Irrevocable grantor trusts Specific assets within retirement plans –
401(h)
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Funding (numbers are for presentation purposes only and were not actuarially calculated)
No funding: 2007 2008 2009 2010 2011 Total
OPEB Expense 10.0 11.3 12.8 14.5 16.4 65.0
OPEB Liability 10.0 21.3 34.1 48.6 65.0 65.0
25% funding:
OPEB Expense 10.0 11.1 12.4 13.8 15.5 62.8
OPEB Liability 7.5 15.8 25.1 35.5 47.1 47.1
Fund Balance (w/o interest) 2.5 5.3 8.4 11.8 15.7 15.7
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Survey of Other Utilities
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Survey of Other Utilities
Funding Discount rates Amortization Period Plan design changes SFAS 71
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Special Thanks
Hewitt Associates LLC