CalPERS healthcare coverage working well for retirees (March-April 2018)
Retirees’ Voice (Advocate column):
- Susan Petit: “There is life after CSM” (Nov. 2016)
- John Kirk: “When I like an author, I read all of their books” (Nov. 2015)
- John Searle: Rejuvenating the retirees’ chapter through engagement (May 2015)
Retiree Medical Benefits: An Introduction
- SMCCD Retirees Actuarial Study
- GASB 45 slideshow (Powerpoint)
- GASB 45 slideshow (pdf)
- Pew Study: California Post-Retirement Health Plans Underfunded
Q & A about post-retirement health care funds
(from the May 2010 Advocate)
by Bruce Maule, AFT 1493 Rep. to RBOA, CSM, Accounting
In the April 2010 issue of the Advocate I wrote an article to introduce myself as the AFT representative to the San Mateo County Community College District’s Retirement Board of Authority (RBOA). The RBOA administers the irrevocable trust created to pre-fund post-retirement health care benefits. The irrevocable trust is officially called the San Mateo County Community College District Other Post-Retirement Benefit (OPEB) trust. The RBOA and the OPEB trust were created in response to the Governmental Accounting Standards Board (GASB) pronouncements 43 and 45, which addressed post-retirement health care benefits.
After the April article I received many emails from AFT members with questions about the OPEB trust and the pre-funding of post-retirement health care benefits. To answer your questions I met with Kathy Blackwood, the chief financial officer of the District, on April 14, 2010. The following article is a summary of our conversation.
To make this article easier to read, I have used a question and answer format. Kathy provided important information for this article, but all of the words below are mine. Other sources of information for the article include the actuarial study prepared by Total Compensation Systems.
On the AFT website you will find the current contract, which states the terms of the post-retirement health care benefits. The amount of post-retirement health care benefits you will receive depends upon your date of hire. Please go to the AFT website (www.aft1493.org) and click on “Contract and Salaries” then “Complete Contract” then “Article 10: Retirement” to see the benefits to which you are entitled.
On the AFT website you will also find the most recent actuarial study (2009) and a PowerPoint slide show created in 2006 that explains many of the issues that need to be addressed to implement GASB 43 and 45. From the AFT homepage scroll down to the Retirees section or use the “Faculty Issues” pull-down menu and click on “Retirees.” Although the terms “actuarial study” and GASB sound impenetrable, these reports are very readable. I encourage all interested AFT members to read the actuarial study and view the PowerPoint slideshow.
To increase the readability of this article I have rounded dollar amounts and percentages; any differences between the numbers stated and actual amounts are immaterial.
1. I have been an employee of the District for many years, but this is the first time I have heard about the pre-funding of post-retirement health care benefits, OPEB trusts and actuarial studies. Why has this become an issue now?
The District has had a liability to pre-fund post-retirement health care benefits ever since post-retirement health care benefits first appeared in the AFT contract. Since the creation of the benefits the District has been using an actuary to calculate the total amount due for post-retirement benefits, and the District has periodically received updated actuarial reports. Since 1993 the District has been setting aside money in a reserve account to pre-fund post-retirement health care benefits.What is new is GASB 43 and 45. In 2004, GASB issued these two pronouncements, which changed the requirements for calculating, disclosing and presenting the financial effects of post-retirement health care benefits. Districts were also required to prepare actuarial studies that meet standards set in GASB 43 and 45. Districts such as ours were given a time window to comply, and our District has now met the compliance requirements.
2. What is an actuarial study, and why is it important?
The actuarial study is the foundation required to implement GASB 43 and 45. The services of an actuary are needed to calculate the postemployment liability. First, the actuary estimates the amount of the postemployment liability (a future value) based on the District’s contract language, the number of employees, and assumptions such as the expected changes in the future cost of health care. The actuary then discounts this future amount based upon an expected rate of return on investments and calculates the present value of the liability. The difference between the present value of the liability and the amount currently available to pay the liability is called the unfunded liability. Lastly, the actuary calculates how much it would cost each year to pay the health care costs incurred for the current year plus the amount to fully fund the unfunded liability over thirty years; this amount is called the annual required contribution (ARC). GASB 43 and 45 set strict standards on how the actuarial study must be prepared, and they require an update every two years or sooner if material changes occur. GASB 43 and 45 allow the liability to be funded over a period of up to thirty years, which is the timeline used in the actuarial study.
3. Can we trust the actuarial study?
The actuarial study was done by Geoffrey L. Kischuk and his firm, Total Compensation Systems (TCS). Mr. Kischuk is one of the most respected actuaries in California. His firm prepares the actuarial studies for 60 out of the 72 community college districts in California, and more than 450 school districts in California. He uses dynamic modeling techniques, which are considered among the most advanced available. He served as one of the actuaries who advised the Governmental Accounting Standards Board when it created GASB 43 and 45. He is also a well-received speaker at conferences. As an actuary he has a fiduciary responsibility to make conservative assumptions and present all information fully and clearly. The District officials who have worked directly with TCS believe the quality of their work to be outstanding.
4. What rate of return is assumed in the actuarial study?
The most recent actuarial study, dated September 8, 2009, which was prior to the establishment of the OPEB Trust, assumed the District’s investments would earn a rate of return of 5%. This was based on the fact that all of the District’s investments were short term. Therefore all future liability amounts were discounted at 5% to calculate the present value of the liability. The actuarial study states, “GASB 43 and 45 require the interest assumption to reflect likely long term investment return.” Because the District only had short-term investments, the study used the same rates for projecting long-term returns. The District will obtain an updated actuarial valuation that will incorporate the fact that the investments in the OPEB Trust are long term when it receives its next study in 2011. The expected rate of return for long term investing will be set at 7% plus plan expenses. The long term investing will reduce the District’s liability since the rate of return expected to be received in the long term is 2% higher than the 5% discount for short term investing utilized in the District’s actuarial valuation prior to GASB 45 being in effect for the District.
5. What is the amount of the liability for post-retirement health care benefits?
The most recent actuarial study measured the liability as of May 1, 2009. The present value of the liability for service years completed by current and retired employees as of that date, discounted at 5%, was $135,000,000 dollars. That means to fully fund the post-retirement health care benefits already earned by current and retired employees, as of May 1, 2009, the District would have needed to invest $135,000,000 on May 1, 2009, and earn a 5% rate of return on that investment.
6. Are the post-retirement health care benefits fully funded?
7. How much has the District saved toward this $135,000,000 liability?
In 1993 the District began setting aside $1,500,000 each year to pay for the unfunded postemployment liability for health care benefits. As of 2010, the set-asides, plus the interest accrued, have grown to about $35,000,000. The amount set-aside is called the Pre-funded Post-Retirement Reserve.
8. Where is the $35,000,000?
In October 2009, the Board authorized a transfer of $5,000,000 into the OPEB trust, an irrevocable trust whose sole purpose is to pay for retiree health care benefits. About $14,500,000 was loaned to the District to build Canada Vista. About $500,000 is currently in use in the employee home loan program. The remainder, about $15,000,000, is invested in the San Mateo County Investment Pool or in the Local Agency Investment Fund (LAIF); both the County Investment Pool and LAIF (administered by the state of California) are like money market funds and return a low rate of return. At the time of the collapse of Lehman Brothers, the funds were invested in LAIF and did not suffer any losses.
9. Does the amount in the Post-Retirement Reserve belong to the employees?
No. The Post-Retirement Reserve is a District fund, which the District has set aside to pay for the District’s post retirement benefit liability. The Reserve is not restricted and the District can choose to “undesignate” these funds at any time. The RBOA and the OPEB trust were created in order to irrevocably set aside funds for this liability. The RBOA oversees the irrevocable Trust, not the Reserve.However, District officials have stated that the District is committed to move the entire $35,000,000 into the irrevocable OPEB Trust and to fully pre-fund the postemployment health care benefits liability over thirty years or sooner.
10. Why were Post-Retirement Reserve funds invested in Canada Vista?
At the time of the investment in College Vista there was no OPEB trust. The only option for investing the funds was in the County Investment Pool and in LAIF, which were both paying less than 1% interest. The District needed to borrow funds to build Cañada Vista. During normal times, the District could have borrowed the amount needed at a reasonable interest rate through existing credit markets. However, when the financing for Canada Vista was needed our economy was in a financial crisis. Because of the crisis few lenders were extending credit, and the credit terms demanded were very unfavorable and carried unusually high interest rates. The cost of borrowing in the credit markets would have been $200,000 in fees plus an interest rate of 5%, if financing could have been attained at all. The District chose to lend itself the funds from the Reserve. From the Reserve perspective, we would earn 2.5% instead of less than 1%. From the Cañada Vista perspective, they would pay 2.5% instead of 5% and incur $60,000 in legal fees instead of $200,000. The District saw the loan to Canada Vista as a win-win situation.
11. When will the loan to Canada Vista be repaid?
The loan agreement states the loan must either be repaid or reissued within eighteen months of completion of the project. The estimated completion date is June 2010, creating a deadline for repayment or reissuance of December 2011. In December 2011 Canada Vista will continue to require financing, so the District will either borrow the money through traditional credit channels and repay the money to the Post-Retirement Reserve or ask that the current loan be rolled over into a new loan. Since the money was loaned from the Post-Retirement Reserve the funds belong to the District, and the Board of Trustees will make the decision on the future financing of Canada Vista.
12. Why has the District not transferred the full $35,000,000 into the OPEB irrevocable trust?
As stated above, $14,500,000 has been loaned to Canada Vista and the Board of Trustees controls when outside financing will be accessed to repay the loan. The Board of Trustees also controls the $500,000 used in the employee home loan program and it will be repaid to the Reserve at the discretion of the board. The remainder, the $15,000,000 invested in the San Mateo County Investment Pool and LAIF, could be moved into the OPEB trust at any time; the transfer from the Reserve to the OPEB trust requires a vote of the Board of Trustees. Kathy Blackwood stated that administering the OPEB irrevocable trust is a new experience for the members of the District’s RBOA. The RBOA and the OPEB trust have only been in existence since October 2009, when the first transfer of $5,000,000 occurred. Kathy believes the RBOA members should assess the investment strategy, the investment selection, and the performance of the investments before significant additional funds are transferred.
13. What will happen if the OPEB trust does not have enough money to pre-fund post-retirement health care benefits?
The post-retirement health care benefits are a contractual obligation that the District has agreed to and in doing so has created a financial commitment to fund the liability for the eligible employees of the District. The benefits are a combination of a defined benefit plan and a defined contribution plan (because the District has set limits on its contributions); however, the District is required to meet the terms of the contract regardless of the amount in the OPEB irrevocable trust. The District currently pays all post-retirement health care benefits out of the current year budget. It is currently the intention of the District to continue to pay post-retirement health care benefits out of the current year budget until the funds in the OPEB trust can meet the obligation.
14. How much is the District paying out of its current budget for health care benefits for retirees?
According to the actuarial study, the District will pay $6,900,000 in the year beginning May 1, 2009 for health care benefits for retirees. This amount will rise to $7,600,000 in 2013 and to $8,500,000 in 2018.
15. Is the $135,000,000 liability for post-retirement health care benefits for faculty only?
No. Under GASB 43 and 45 the actuarial study is required to include all groups that earn post-retirement health care benefits, which are AFT, CSEA, management, AFSCME, and term-vested retirees. The liability for AFT members is $66,000,000, which is about 49% of the liability. The CSEA portion is $33,000,000 (24%), management $25,000,000 (19%), AFSCME $7,000,000 (5%), and vested retirees $4,000,000 (3%). The funding of the OPEB trust covers all groups, so the AFT portion cannot be treated separately.
16. Do GASB 43 and 45 require the District to fund the OPEB trust?
No. GASB 43 and 45 require the District to calculate and disclose the amount of the unfunded liability for post-retirement health care benefits. GASB does not have the power to require funding. However, if the liability is not being funded on a thirty-year timetable there will be negative consequences for the District including reduced access to credit markets and an impact on accreditation. In addition, without leveraging the planned long term investing that the GASB guidelines highly recommend, the District would pay a significantly higher premiums for their health care benefits due to the loss of earning on the long term investments done through the irrevocable trust. The District is committed to avoid the consequences of not pre-funding the liability over thirty years.
17. What is an irrevocable trust, and why is it important?
Once the District moves money out of the District budget and into the OPEB irrevocable trust the money can only be used to provide post-retirement health care benefits for retirees. The Board of Trustees cannot control or reclaim any funds invested in the OPEB trust. There is one exception: If the district puts more money into the fund that is needed to pay post-retirement health care benefits, the district can reclaim the surplus.
18. Is the District committed to fully fund the liability for post-retirement health care benefits?
Kathy Blackwood stated that the goal of the District is to fully fund the OPEB trust within thirty years. Once the OPEB trust is fully funded all retiree health care benefits will be paid directly from the irrevocable trust. The District will continue to put additional money into the trust as part of the pre-funding of the annual cost of the benefits. Until the time when the District can pay all post-retirement health care benefits from the OPEB trust, the District will pay the amount needed out of the current budget.
GASB, OPEB and RBOA: An introduction to retirement health care benefits alphabet soup
(from the April 2010 Advocate)
by Bruce Maule, AFT 1493 Rep. to RBOA, CSM, Accounting
On March 2, 2010, Kathy Blackwood, the chief financial officer of the District, sent an email to all faculty and retirees to introduce the Retirement Board of Authority (RBOA). In October, 2009, the Executive Committee of AFT 1493 approved my selection to be the AFT representative on the RBOA. As the AFT representative I attend all meetings of the RBOA, vote as a board member, and report to the AFT on the activities of the board. This is my first of a series of reports on the Retirement Board of Authority.
I was interested in serving as the AFT representative to the RBOA because I am a CPA and I have been teaching accounting at CSM for twenty years. In my classes I teach students how to follow the rules issued by the Financial Accounting Standards Board (FASB), which apply to publically traded companies. The District is required to follow the rules of the Governmental Accounting Standards Board (GASB), which is the parallel organization to FASB. Serving on the RBOA gives me an opportunity to apply my professional skills and what I teach in the classroom in the service of the employees and retirees of the District.
The other members of the RBOA are Kathy Blackwood (District CFO), Ray Chow (District Controller), Harry Joel (District Vice Chancellor of Human Resources) and Stephanie Samuelson (CSEA).
Kathy Blackwood made the following points in her email:
• For over 15 years, the District has been setting aside funds in a Post-Retirement Reserve Fund for the purpose of funding future retiree medical benefits. These funds were invested in the county investment pool.
• In Fall 2009 the Board of Trustees established an Other Post-Employment Benefits (OPEB) trust and appointed a Retirement Board of Authority (RBOA) to oversee the trust.
• The OPEB trust is an irrevocable trust whose sole purpose is to pay for retiree health benefits.
• In October 2009, the Board authorized the first transfer into the trust of $5 million.
• The irrevocable trust will invest the funds in longer-term investments than were allowed when the funds were invested in the county investment pool.
• With the irrevocable trust we are anticipating earning a higher rate of return than the county pool, which means the District will need to invest less money in order to meet its employee and retiree benefit obligations.
• After the end of the fiscal year, the RBOA will report the earnings of the trust.
• The RBOA is developing a website that will contain a variety of information about this trust and the District’s obligations.
• The District is committed to funding its retirement obligations and is actively working to make sure that the funds will be there when they are needed.
The purpose of the OPEB trust is to accumulate funds to pay for post-retirement health benefits. Section 10.1 of the AFT contract provides for retiree medical and dental benefits. The post-retirement benefits you will receive depend upon your hiring date. Please click here to see Section 10.1 of the contract, which delineates the benefits to which you are entitled.
GASB set high standards and specific legal requirements for the creation and administration of an OPEB trust. During 2009 Dan Kaplan served as the AFT representative on the committee that created the RBOA, which is responsible for the OPEB trust. The committee completed a lengthy and thorough process to select highly qualified partners for our program. The committee selected three partners: Keenan Financial Services for program coordination and administration; Benefit Trust Company for trust services; and Morgan Stanley Smith Barney for asset investment management. These partners will help the RBOA meet its legal obligations and provide professional advise on how to administer the OPEB trust and how to invest the trust assets. Although I joined the RBOA after the partner selection process had been completed, I fully support the decisions made by Dan and the committee. We all owe Dan Kaplan thanks for the time he spent to help this important initiative get a successful start.
The background of this initiative is important. In 2004 GASB issued two pronouncements, GASB 43 and 45, which changed the requirements for calculating, disclosing and presenting the financial effects of post-retirement health benefits. Districts such as ours were given a time window to comply. The creation of the OPEB irrevocable trust and the RBOA are two important steps our District needed to make to be in compliance with the required timeline to implement GASB 43 and 45.
The OPEB irrevocable trust and the RBOA were both created by actions of the District Board of Trustees. However, once the OPEB trust and the RBOA came into existence they became separate legal entities, which are independent of the District Board of Trustees. GASB 43 and 45 require that the sole purpose of the OPEB trust and the RBOA be to provide post-retirement health care benefits to district employees. Once the district moves money out of the district budget and into the OPEB irrevocable trust, the money can only be used to provide post-retirement health benefits to retirees. The Board of Trustees cannot control or reclaim any funds invested in the OPEB trust. Although the five members of the RBOA are all district employees, we are required to observe our status as RBOA board members and our actions must solely be to benefit district retirees.
The requirements of GASB 43 and 45, and the meaning of the dollar amounts, can be long and complex. I will use my reports in the Advocate to try to make the issues and the numbers clear and meaningful to my fellow AFT members. This report was my introduction. In future issues of the Advocate we will look at some of the important topics and some of the important dollar amounts in detail.