Case study: Real ways to reduce GASB 45 liability and cost

  • Print
  • Connect
  • Email
  • Facebook
  • Twitter
  • LinkedIn
  • Google+
By Janet Jennings | 09 July 2010

The challenge

Now that many public employers have had their GASB 45 valuations completed, it's probably no surprise that a large public employer wanted to reduce its GASB 45 liabilities. This employer offered substantial medical, long-term disability (LTD), and life benefits to both pre- and post-age-65 retirees. Active employees were eligible upon retirement, as were members who had left the government entity before retirement with a vested benefit (terminated vested members). The other postemployment benefit (OPEB), actuarial accrued liability (AAL), was distributed among these three groups as follows:


Actives
50%
Terminated Vesteds
16%
Retirees
34%
 

 

The solution

Milliman worked with the employer to evaluate the GASB 45 impact of the following potential benefit reductions:

  1. Eliminate post-65 medical coverage for retirees and their dependents
  2. Freeze the employer's retiree subsidy on a per-retiree-per-month basis so that future increases in retiree costs would be 100% paid by the retiree
  3. End coverage for terminated vested members

 


 
option
Value as a % of the current plan
1
2
3
1,2,and 3
Actuarial Accrued Liability (AAL)
36%
37%
78%
20%
Annual Required Contribution (ARC)
37%
29%
77%
15%
 

The rationale for these changes was as follows:

  • The pay-as-you-go costs were manageable at the time, but were projected to increase substantially over the next 10 years.
  • Retirees over age 65 have many other options for medical coverage.
  • Coverage for terminated vested members is not consistent with the objective of rewarding long service.

The outcome

The employer adopted the three benefit reductions listed above with two modifications. OPEB benefits were discontinued for new hires. Under number two above, future increases in retiree contributions would increase no faster than the combined active employee and retiree rate increase. Future increases in retiree costs would be shared between the retiree and the employer.

The AAL and ARC amounts were reduced by 70% to 80%, and the AAL is now distributed among the three groups as follows:

Actives
51%
Terminated Vesteds
0%
Retirees
49%
 

These changes required the employer to implement substantial change management, including communication for its members, especially on alternate post-65 plans. However, these reductions in GASB 45 liabilities and costs allowed the employer to manage its OPEB costs according to its needs. By working closely with actuaries in this fashion, clients can evaluate the OPEB benefit changes that make sense for them.