OPEBs: Implementation
Issues for Public Power
Joni Davis, Manager
Financial Accounting and Reporting
Omaha Public Power District
September 27, 2005
Agenda
Actuarial Valuation
 Accounting Example
 Implementation Considerations
 SFAS 71
 Funding
 Survey of Other Utilities

Actuarial Valuation
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
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 Value
Past Service Liability
(a.k.a., Accrued Liability)
Future Service
Liability
Valuation Date
Discount for
Interest
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 overcontributions (if applicable)
Annual OPEB Cost
Total Projected Payments for OPEBs
Total OPEB Present Value
Accrued Liability
Assets
Unfunded Accrued
Liability (UAL)
Discount
for Interest
Future Service
Liability
Future Service
Liability
Annual OPEB Cost (“ARC”) =
Amortization of UAL + Normal Cost
Actuarial Cost Methods
 GASB 43 and 45 permit six different actuarial cost methods

“Immediate Gain/(Loss)” Methods




Usually produces
the lowest costs
“Spread Gain/(Loss)” Methods




Projected Unit Credit
Attained Age
Entry Age
Frozen Attained Age
Frozen Entry Age
Aggregate
Usually produces
the highest costs
Once one method is selected, it will be difficult to change to
another
UAL Amortization Methodology
Two 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
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 to
1)
2)
3)
Continue pay-as-you-go (i.e., no pre-funding),
Fund the entire ARC, or
Fund something in between
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
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
U.S. Retiree Health Care Cost Increases
1 6 .0 0 %
1 4 .0 0 %
1 2 .0 0 %
1 0 .0 0 %
8 .0 0 %
6 .0 0 %
4 .0 0 %
2 .0 0 %
P re -6 5
09
20
08
20
6
07
20
20
0
5
20
0
4
0
3
P o s t-6 5
20
0
20
02
20
01
20
00
20
99
19
7
98
19
1
99
6
99
5
1
99
4
1
99
1
93
19
92
19
19
91
0 .0 0 %
Accounting Example
Accounting Example
Example Assumptions
 Interest rate
 Amortization
 Trend rates
 Funding
7.0%
20 years (level amount)
Low trend assumption
No prefunding (pay-as-you-go)
Accounting—Year 1
(in $ millions)
Actual
1/1/2005
Liability
Assets
Unfunded Accrued Liability
Transition Obligation
Net OPEB Obligation
$
$
$
For 2005
118
0
118
118
0
Projected
1/1/2006
$
$
$
Normal Cost
Interest on Net OPEB Obligation
Amortization of Transition Obligation
Total Expense
$
$
4
0
11
15
Expected Payments
$
5
125
0
125
115
10
Accounting—End of Year 1
Net OPEB Obligation
 Net Obligation at 1/1/2005
 ARC for 2005
 Contributions During 2005
 Net Obligation at 1/1/2006
$
0
15
(5)
$ 10
Accounting—Year 2
(in $ millions)
Actual
1/1/2006
Liability
Assets
Unfunded Accrued Liability
Transition Obligation
Net OPEB Obligation
$
$
$
For 2006
125
0
125
115
10
Projected
1/1/2007
$ 133
0
$ 133
111
$ 22
Normal Cost
Net Interest on OPEB Obligation
Amortization of Transition Obligation
Total Expense
$
$
5
1
11
17
Expected Payments
$
5
Accounting—Year 2
Net OPEB Obligation
 Net Obligation at 1/1/2005
 ARC for 2005
 Contributions During 2005
 Net Obligation at 1/1/2006
$
10
17
( 5)
$ 22
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
Implementation Considerations
Implementation Considerations

GAS 45 not effective until 2007



Key valuation assumptions





Benefit changes prior to 2007 will impact initial OPEB cost
Early adoption is encouraged (but not required)
Interest rate
Medical trend rates
Initial amortization period
SFAS 71
Plan funding decisions
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
SFAS 71
SFAS 71 – Accounting for the Effects
of Certain Types of Regulation
Allows for the deferral of costs
 EITF Issue 92-12 (SFAS 106)

 Regulatory
authorization
 Five year amortization
 20 year life
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
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
SFAS 71 deferral:
FUNDING
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)

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
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
25% funding:
Survey of Other Utilities
Survey of Other Utilities
Funding
 Discount rates
 Amortization Period
 Plan design changes
 SFAS 71

Special Thanks

Hewitt Associates LLC