Other Post Employment Benefits Implementation of GASB 74, 75 and 85

GASB Changes Financial Reporting for Postemployment Benefits Other than Pension Plans (“Plan Accounting”) – GASB 74 Replaces GASB 43 Accounting and Financial Reporting for Postemployment Benefits Other than Pensions (“Employer Accounting”) – GASB 75 Replaces GASB 45 Ominbus 2017 – GASB 85 Postemployment Benefits

GASB 74 Trust Definition Contributions from employers and nonemployer contributing entities and earnings on those contributions are irrevocable Plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms, and Plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the OPEB plan administrator. Furthermore, for defined benefit OPEB plans, plan assets also are legally protected from creditors of the plan members. The definition of trust remains the same as GASB 43. GASB 74 implementation guide provides additional information on partitions between active and retiree funds when included in the same plan. Due to the additional guidance, considerable discussion as to whether the State Retiree Health Plan met the definition of a trust. Considerable discussion with the GASB and SAO to resolve this question as it impacts reporting of assets and reliance on the plan’s valuation

Comparison of GASB 43/45 to 74/75 Discount Rate Single Blended Discount Rate (GASB 67/68 method) Cost Method Entry Age Normal OPEB Expense More rapid recognition of actuarial gains and losses and changes in actuarial assumptions. Immediate recognition of plan changes Valuation Options 2 year requirement Disclosure Requirements Additional Sensitivity Measurements Under GASB 74/75, the entry age normal is the only allowable cost allocation method for financial reporting Under GASB 74/75 the expense is no longer tied to funding, the liability must be immediately recognized and presented in the financial statements. Under 43/45, OPEB expense was tied to funding, the liability was recognized over time and only appeared in the footnotes.

Plan Accounting – Similarities to GASB 67 Cost Method Entry Age Normal Discount Rate Long-term expected rate of return on plan investments if projected to be sufficient to make projected benefit payments Index rate for 20 year tax exempt municipal bond with AA/Aa or higher rating to extent projected benefit payments not covered by plan investments. Measurement Date Plan’s Fiscal Year End Valuation Liabilities can be rolled forward from a valuation date within 24 months of fiscal year end Plan Assets Must be stated as of measurement date – no roll forward

2017 Valuation When appropriate the same demographic and economic assumptions adopted by ERS and TRS Boards for purposes of conducting their respective retirement plan valuations are used. The OPEB valuation utilizes the same long-term inflation assumption adopted by ERS for purposes of the retirement plan Aspects of the valuation process unique to OPEB Discount rate –Under GASB 74, when no plan assets are accumulated, the discount rate assumption must be based upon the expected yield or index rate for 20-year, tax-exempt general obligation municipal bonds rated AA/Aa (or equivalent) or higher. Health Benefit Cost Trend – The health benefit cost trend represents the expected annual rate of increase in health benefit costs, excluding the effects of changes in demographics and changes in plan provisions. The health benefit cost trend has exceeded the general rate of inflation for many decades.

Reporting of proportionate share is a major difference from GASB 45. Group Benefit Plan Multiple employer cost sharing plan For employer accounting under GASB 75, liabilities and expense are allocated to each employer based on proportionate share. For 2017 Plan Year, allocated based on retiree contributions For 2018 Plan Year and thereafter, allocated based on active and retiree contributions Non-employer Special Funding Arrangements State contributions for non-state agencies included in the plan Reporting of proportionate share is a major difference from GASB 45.

2017 CAFR RSI- Changes Required Beginning Balance Restatement Required New Discount Rate to be applied – 2.84% Administrative Expenses Exclude from benefit payments Applying the municipal bond rate of 2.84% instead of the 5.5% discount rate used for the 2016 valuations significantly changes the beginning balance of the net liability from $27 billion to approximately $41 billion. However, since we are now starting with a lower discount rate at the beginning of the period than at the end (3.51% rate), it decreases the expense to be reported by the employer in 2018 for the 2017 plan year. We are continuing to work with our actuaries and the SAO to ensure GASB 75 has been correctly applied. We will have audited schedules by the end of June.

New Terminology GASB 45 GASB 75 Normal Cost Service Cost Annual Required Contribution (ARC)/ Annual OPEB Cost OPEB Expense N/A Net OPEB Liability Accrued Liability Total OPEB Liability (TOL) Assets Fiduciary Net Position Unfunded Accrued Liability Net OPEB Liability (NOL)

Questions? Any questions before I turn this over to Shelly