GASB 45 focused a bright light on the cost of retiree health benefits and other OPEB’s. That was exactly the point. In the past, most government employers didn’t recognize OPEB costs until employees actually retired. That tended to mask the cost until it was too late to do anything about it.
Once the cost is unmasked, forward-thinking governments have moved to control them. Here’s how some of our clients have dealt with the issue.
CASE 1: BIG CITY, EARLY ADOPTER
This city’s OPEB issues were famously featured in the New York Times article “The Next Retirement Time Bomb” in December 2005. They decided to address the issue head-on. We worked with the City and its unions to set assumptions before beginning the actuarial valuation, so that all stakeholders could focus on solutions once the numbers were published. All agreed that the status quo was unsustainable. We collaborated with the City’s providers and unions to substantially reduce its OPEB liabilities. Some cost reductions were easy – like higher copayments for name-brand drugs vs. generics. Others were harder: prefunding OPEB liabilities, and switching to defined contribution (DC) accounts for new hires.
CASE 2: MIDSIZE CITY, SHIFT TO DC ACCOUNTS
This growing Western city realized that, while its OPEB liabilities were not unreasonable, they would become a problem if nothing was done. We designed a plan to shift the City’s open-ended defined benefit OPEB liabilities to defined contribution accounts, while preserving the expectations of long term employees and retirees. Each employee received a starting account balance for past service, and regular payroll contributions going forward. It’s been received as a win for both sides, with more certainty for both employer and employees.
CASE 3: PRIVATE COLLEGE, LOWERED COSTS AND PROVIDED FOR EARLY RETIREES
In the 1990’s, this private college needed to find a way to control retiree medical costs and provide incentives for early retirement. We took a look at the College’s retiree medical plan, and noticed that its Medicare integration method was overly expensive. By making that adjustment, along with a few others, they generated enough savings to provide medical coverage for early retirees.
© 2011 Northern Consulting Actuaries, Inc. dba Van Iwaarden Associates.