OPEBs: Implementation Issues for Public Power

1. OPEBs: Implementation Issues for Public Power Joni Davis, Manager Financial Accounting and Reporting Omaha Public Power District September 27, 2005

2. Agenda • Actuarial Valuation • Accounting Example • Implementation Considerations • SFAS 71 • Funding • Survey of Other Utilities

3. Actuarial Valuation

4. 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

5. Total Projected Payments for OPEBs Total OPEB Present Value Discount for Interest Past Service Liability (a.k.a., Accrued Liability) Future ServiceLiability Valuation Date 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

6. 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)

7. Total Projected Payments for OPEBs Total OPEB Present Value Discountfor Interest Accrued Liability Future ServiceLiability Assets Unfunded Accrued Liability (UAL) Future ServiceLiability Annual OPEB Cost (“ARC”) = Amortization of UAL + Normal Cost Annual OPEB Cost

8. 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

9. UAL Amortization Methodology Two types of amortization methodologies are available • Level dollaris 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

10. Funding • When pre-funding is not required, anticipated level of funding has an impact on liability discount rateassumption…which, in turn, has an impact on the size of the OPEB liability • Utilities can choose to • Continue pay-as-you-go (i.e., no pre-funding), • Fund the entire ARC, or • Fund something in between

11. 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

12. 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

13. U.S. Retiree Health Care Cost Increases

14. Accounting Example

15. Accounting Example Example Assumptions • Interest rate 7.0% • Amortization 20 years (level amount) • Trend rates Low trend assumption • Funding No prefunding (pay-as-you-go)

16. Accounting—Year 1

17. 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

18. Accounting—Year 2

19. 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

20. Financial Impact – Pay as you go (numbers are for presentation purposes only and were not actuarially calculated)

21. Implementation Considerations

22. 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

23. 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

24. SFAS 71

25. 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

26. SFAS 71 – 5 year amortization (numbers are for presentation purposes only and were not actuarially calculated)

27. FUNDING

28. 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)

29. Funding (numbers are for presentation purposes only and were not actuarially calculated)

30. Survey of Other Utilities

31. Survey of Other Utilities • Funding • Discount rates • Amortization Period • Plan design changes • SFAS 71

32. Special Thanks • Hewitt Associates LLC