2006-08-23 CC Set Agenda & Handouts

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Ehlers Advisor . August 2006 OPEB costs and liabilities may have implications that will force some governmental units into other decisions. (continued from page 3) Implications The new accounting standards will not change the actual cost over time of OPEB, nor will they will require employers to change the benefits they provide or the ways those benefits are funded. They simply will require more accurate accounting of the real costs of the benefits and of the liabilities already incurred. For some local governments, the costs and liabilities may be relatively small. However, even if you directly pay nothing for OPEB benefits, you may have to report a liability due to a feature of the new standards called the "implicit rate subsidy." This is based on the idea that if retirees are allowed to continue in the employer's health insurance plan, even at their own expense, this will cause higher premiums. The standards require that this subsidy be measured and reported. For government units that provide relatively generous benefits for retirees, the OPEB costs and liabilities may be very large. Recent news reports have quoted officials from the City of Duluth, who report an unfunded liability of nearly $300 million for retiree health insurance and have warned of dire consequences if steps are not taken to reduce the liability. Bringing these costs and liabilities into clearer focus may have implications that will force some government units into other decisions. 1. The new accounting standards may bring to light serious long-term financial concerns that are not as obvious under current accounting practices. 2. Inclusion of the required information in the fmancial statements may encourage elected officials and their constituents to advocate for changes in benefits and funding options. 3. If the costs and liabilities are especially high, they could have an impact on a government unit's credit rating. Cost Reduction Strategies The new standards may speed efforts by local governments to reduce the long-term costs of OPEB. In many cases, such reductions will require changes in collective bargaining agreements. Some strategies for reducing costs may include: . reducing the portion of premium costs that the former employer pays for retiree insurance coverage; . eliminating post-employment coverage for newly hired employees; . making eligibility for coverage more restrictive; . transitioning coverage from defmed benefit plans to defmed contributions plans; and . reducing premium costs through consumer-driven health plans and other strategies. Ie I ~~~~~~,~ Ehlers & Associates is committed to designing outstanding financial solutions for outstanding communities Funding Strategies Once local governments have completed their actuarial studies and seen the size of their accrued liabilities and annual costs, they will also want to consider options for funding their OPEB obligations. Under current Minnesota law, options are quite limited. Local governments can set aside funds in a designated fund balance, but this will do little to change the long-term cost of OPEB or the impact on the balance sheet. In other states, however, other options have been used, including the following: . setting aside funds in an irrevocable trust (this may reduce the accrued liability by allowing a better discount rate in the actuarial valuation process); . investing the trust funds in higher yielding investments (e.g., stocks, mutual funds, or corporate-owned life insurance) that are not currently allowed for government funds; and . issuing taxable OPEB bonds to fund long-term liabilities. During the 2006 legislative session, several proposals were discussed to allow some of these options, but nothing was approved. There will certainly be more discussions about these options in coming sessions. Ehlers Role So far, Ehlers has had very little involvement with our clients in implementation of the new GASB standards. Like many of you, we are trying to increase our understanding of the standards and the implications they will have. As we move forward, however, Ehlers staff are exploring several ways in which we may be able to assist our clients with these new standards. 1. We are studying whether and how some of the funding options used in other states may be beneficial for local governments in Minnesota. 2. We intend to work with several professional organizations to provide input on legislative proposals for the 2007 session. 3. We plan to be in a position to help our clients evaluate funding options for their OPEB obligations and to help them determine what options will be in their best interests. 4. Finally, if the State allows the issuance of OPEB bonds, we will be ready to assist our clients by assessing the impact of various bonding options and facilitating the issuance of bonds. Roseville, MN Office: 3060 Centre Pointe Drive. Roseville, MN 55113-1105.651-697-8500 Brookfield, WI Office: 375 Bishops Way, Suite 225. Brookfield, WI 53005-6202 . 262-785-1520 Lisle, IL Office: 550 Warrenville Road, Suite 220 . lisle, IL 60532.630-271-3330 .6.