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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
© 2017 Korn Ferry. All rights reserved 3
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
© 2017 Korn Ferry. All rights reserved 4
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
© 2017 Korn Ferry. All rights reserved 5
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
© 2017 Korn Ferry. All rights reserved 6
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
© 2017 Korn Ferry. All rights reserved 7
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
© 2017 Korn Ferry. All rights reserved 8
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
© 2017 Korn Ferry. All rights reserved 9
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
© 2017 Korn Ferry. All rights reserved 10
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)
© 2017 Korn Ferry. All rights reserved 11
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
© 2017 Korn Ferry. All rights reserved 12
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
© 2017 Korn Ferry. All rights reserved 13
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
© 2017 Korn Ferry. All rights reserved 14
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
© 2017 Korn Ferry. All rights reserved 16
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%
© 2017 Korn Ferry. All rights reserved 17
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
© 2017 Korn Ferry. All rights reserved 18
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
© 2017 Korn Ferry. All rights reserved 19
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