SHELBY COUNTY SCHOOLS OTHER POST-EMPLOYMENT BENEFITS (OPEB) Prepared by Office of Finance Alicia J. Lindsey, CPA, CGMA Chief Financial Officer May 19, 2015
Overview Q. What is OPEB? A. OPEB is an acronym for Other Post-Employment Benefits such as Health and Life Insurance. Q. How does it impact the District? A. In 2004 , the Governmental Accounting Standards Board promulgated Statement 45, Accounting and Financial Reporting by Employers for Post employer Benefits Other than Pensions to address shortcomings in State and Local Government Financial Statements as it relates to the cost of public services and to analyze the financial positions of a government. Beginning with periods after December 2006 , States and Local Governments began reporting their unfunded post employment benefit liability. GASB 45 aligns with FASB 106 Employer’s Accounting for Postretirement Benefits Other Than Pensions. 2
Overview What is OPEB? In a nutshell, the liability represents the present value of future benefits expected to be paid to current retirees as well as future retirees based upon service to date. For retirees, the liability represents the total expected costs of future benefit payments - the benefits have been fully "earned" since they are no longer working. For actives (i.e., future retirees), it represent the portion earned to date based upon service. So if an active has worked 15 years and is expected to work 30, the liability is 1/2 of the total expected future benefit payments. The Annual Required Contribution (ARC) represents the employer contribution that would be needed each year to fund: • The current year’s service accrual for active employees, plus; • An amortization payment to pay-off the unfunded liability over a period not exceeding 30 years. 3
Overview What is OPEB concl’d? o Accrual of post-retirement benefit cost during period of active employment o Disclosure of unfunded actuarial accrued liability in Required Supplementary Information (RSI) of Comprehensive Annual Financial Report o Does not require funding, only expense accrual and disclosure; however, we are at a point where funding and benefit changes are critical. Normal Cost Annual Required Contribution = + Amortization of Unfunded Actuarial Accrued Liability 4
Background Q. How much was Memphis City Schools’ OPEB liability before the merger? A. Memphis City Schools’ (MCS) liability before the merger (at June 30, 2013) was $1,144,290,900. Q. How much did MCS contribute towards its OPEB trust annually? A. MCS deposited $12M in 2012 and the value of the asset at June 30, 2013 was $13,705,386. Q. How much was Legacy Shelby County Schools’ OPEB liability before the merger? A. Shelby County Schools’ (SCS) liability before the merger (at June 30, 2013) was $342,401,361. At June 30, 2013, the previous contributions were valued at $3,828,139. 5
Background Q. What was the OPEB liability when the two districts merged? A. Per the two actuarial valuations as of June 30, 2013, the combined OPEB liability was $1,486,692,261. The next actuarial valuation report for the combined District was as of June 30, 2014 and at that time, the OPEB liability was $1,472,361,305. The unfunded amount was $1,451,539,250. Q. How much did Unified Shelby County Schools pay toward its OPEB after they merged last year? A. $12M plus $2,091,354 (contribution from Municipal School Districts) was contributed in October 2014. Q. How much will Unified Shelby County Schools contribute towards its OPEB trust this year? A. It is undetermined at this time how much the District will contribute in 2015 / 2016 . Q. How will this impact this upcoming year’s budget? A. The FY2015-16 Budget currently does not include a contribution for the OPEB trust. Retiree premiums and “implicit subsidy” amounts paid by the District count as “pay as you go” contributions towards the OPEB liability. 6
Current State of the Plan (as of June 30, 2014) 7
Questions? 8
Definitions AAL or Actuarial accrued liability The present value of projected future benefits earned by employees to date. Actuarial assumptions Factors that must be assumed for purposes of projecting future benefit payments as part of an actuarial valuation. Actuarial gain A difference between an actuarial assumption and actual results that decreases cost. Actuarial loss A difference between an actuarial assumption and actual results that increases cost. Actuarial valuation A process used by actuaries to 1) project future benefit payments, 2) discount those payments to their total present value, and 3) systematically allocate an appropriate portion of that amount to each period of employee service using one of several accepted methods. Actuarial value of assets Value assigned by actuaries to assets accumulated to finance the actuarial accrued liability. Typically, the actuarial value of assets is an average of market values over a period of three to five years. Advance funding Value assigned by actuaries to assets accumulated to finance the actuarial accrued liability. Typically, the actuarial value of assets is an average of market values over a period of three to five years. 9
Definitions Age-adjusted premium A healthcare premium that takes into account the age of the individual covered. As a rule, age-adjusted premiums for retirees as a group are higher than age-adjusted premiums for active employees as a group. Agent multiple-employer plan A centralized organization, such as a statewide public-employee retirement system, that manages the individual plans of a number of different employers. An agent multiple-employer plan will have a separate actuarial valuation and separate rates for each participating employer. Aggregate method One of six accepted actuarial cost allocation methods used to assign the cost of projected benefits earned by employees to the appropriate period of service. Amortization The systematic allocation of incurred costs to future periods. ARC or Annual required contribution The portion of the present value of projected benefits earned by employees attributable to the current period. Attained age method One of six accepted actuarial cost allocation methods used to assign the present value of projected benefits earned by employees to the appropriate period of service. 10
Definitions Blended premium A healthcare premium that does not take into account the age of the individuals covered, as when a single premium is used for both active and retired employees (also known as a common premium). Common premium A healthcare premium that does not take into account the age of the individuals covered, as when a single premium is used for both active and retired employees (also known as a blended premium). Contribution Payment to a third party, including a trust or equivalent arrangement, in connection with post-employment benefits. Cost-sharing multiple-employer plan A centralized organization, such as a statewide public-employee retirement system, that manages a single plan in which multiple employers participate. A cost-sharing multiple-employer plan will have a single actuarial valuation for the entire plan and a single set of rates applicable to all participating employers. Defined benefit plan An arrangement involving an employer’s promise to provide specific benefits upon separation or retirement. 11
Definitions Hybrid plan An arrangement involving elements of both a defined contribution and a defined benefit plan. Implicit rate subsidy The de facto subsidy of retirees by permitting them to pay lower than age-adjusted premiums through the use of a single common or blended premium for both retirees and active employees. NPO or Net pension obligation Accounting liability created when an employer does not fully fund its annual required contribution for pensions. Net OPEB obligation Accounting liability created when an employer does not fully fund its annual required contribution for OPEB. Other post-employment benefits All types of post-employment benefits not offered as an integral part of a pension plan as well as all forms of post-employment healthcare. Pay-as-you-go funding A method of financing benefits by making required payments only as they come true. 12
Definitions Pension benefits Retirement income and any other type of benefit offered as an integral part of a pension plan except for post-employment healthcare. Projected unit credit method One of six accepted actuarial cost allocation methods used to assign the present value of projected benefits earned by employees to the appropriate period of service. Retroactive benefit enhancement A change in a benefit formula favorable to the employees that is applied to past years of service. Short-term timing difference Liability created when an employer’s annual required contribution is regularly liquidated in a subsequent period rather than in the period to which it relates. Single-employer plan A plan managed by or on behalf of a single employer. Substantive plan The terms of an OPEB arrangement as understood by both employer and employee. 13
Definitions UAAL or Unfunded actuarial accrued liability The difference between the actuarial accrued liability and the actuarial value of assets accumulated to finance that obligation. Vested benefits Benefits earned by employees that in no way dependent upon their continued employment. Vesting benefits Benefits earned by employees that have not yet vested but are expected to vest. 14
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