California State Employees Retiree Healthcare Benefits GASB 45 Projections December 13, 2007

2 Agenda – GASB 45 Projections  Background  Updates to valuation as of July 1, 2007  Trend sensitivity scenarios ► Closed group projections  Open group projections ► Funding policy scenarios

3 Background  Key economic assumption used in GASB 45 valuation includes future healthcare trend ► Long-term GASB 45 projections assume select and ultimate trend pattern After 10 to 15 years, ultimate trend rate approaches price inflation plus 100 to 200 basis points ► Based on GDP model If trend increases by 10% in all future years, healthcare would comprise a significant portion of GDP Not sustainable, so long term projections assume trend decreases to lower ultimate trend ► But historical data over the past 15 years indicates trend increased by approximately 8% to 10% or about five to seven percentage points over price inflation Select and ultimate pattern has not materialized

4 Background  Purpose of study is to evaluate the sensitivity of healthcare inflation assumption ► Perform 30-year projections of GASB 45 accrual and cash costs under various healthcare trend scenarios ► Based on closed group, i.e. no future hires included in projections Alternative is to evaluate sensitivity on an open group basis  Also, adjusted valuation at July 1, 2007, to reflect updated premiums effective as of January 1, 2008

5 Updated Valuation as July 1, 2007  Premiums for calendar year 2008 increased by 5.9% for PPO and 2.8% for HMO ► Based on information developed by CalPERS staff ► Recognizes impact of plan design changes and recent claims experience  Updated costs are for illustration purposes only ► FY 07/08 financial reporting based on valuation released on May 7, 2007 ► Updated valuation decreases costs by approximately 3.5%

6 Updated Valuation as July 1, 2007 ($ in Billions) Actuarial Accrued Liability Annual Required Contribution At July 1, 2007For FY 07/08 Pay-As-You-Go Funding (4.5%) Baseline$47.88$3.59 After Trend and Design Changes$46.21$3.47 Decrease$1.67$0.12 Percentage Decrease3.50%3.30% Full Funding (7.75%) Baseline$31.28$2.59 After Trend and Design Changes$30.20$2.50 Decrease$1.08$0.09 Percentage Decrease3.50%

7 Trend Sensitivity Scenarios  Trend scenarios include – ► Baseline trend 9.5% in CY 2009, decreasing by 50 basis points each year until ultimate rate of 4.5% is reached in CY 2017 ► Increase trend by 100 basis points 10.5% in CY 2009, decreasing by 50 basis points each year until ultimate rate of 5.5% is reached in CY 2017 ► Flat trend 10.0% from CY 2009 to CY 2017, and 6% on and after CY 2018

8 Trend Sensitivity Scenarios – Actuarial Liabilities Actuarial Liabilities Closed GroupPAYGOFull Funding ($ in Billions)7/1/20077/1/20387/1/20077/1/2038 Baseline trend$46.2$62.3$30.2$ basis point increase$54.7$91.3$34.5$68.8 (percent increase over baseline)18%47%14%44% Flat trend at 10% for 10 years$63.5$119.9$39.0$89.6 (percent increase over baseline)37%92%29%87%

9 Trend Sensitivity Scenarios – Actuarial Liabilities  Compounding effect of healthcare trend increases actuarial liabilities  After 30 years, pay-as-you-go baseline actuarial liabilities increase by – ► 47% if trend increased by 100 basis points ► 92% if trend is flat at 10% for first 10 years, and 6% thereafter  After 30 years, full-funding baseline actuarial liabilities increase by – ► 44% if trend increased by 100 basis points ► 87% if trend is flat at 10% for first 10 years, and 6% thereafter

10 Trend Sensitivity Scenarios – Annual Required Contributions Annual Required Contribution Closed GroupPAYGOFull Funding ($ in Billions)7/1/20077/1/20387/1/20077/1/2038 Baseline trend$3.47$4.64$2.50$ basis point increase$4.28$6.81$2.93$0.33 (percent increase over baseline)23%47%17%32% Flat trend at 10% for 10 years$5.11$8.94$3.38$0.41 (percent increase over baseline)47%93%35%64%

11 Trend Sensitivity Scenarios – Annual Required Contribution  After 30 years, pay-as-you-go baseline ARC increase by – ► 47% if trend increased by 100 basis points ► 93% if trend is flat at 10% for first 10 years, and 6% thereafter ► Similar to increase in actuarial liabilities  After 30 years, full-funding annual required contribution approaches zero under each scenario ► But employer contributions are higher during the 30- year projection if trend is increased

12 Actuarial Liabilities – PAYGO Closed Group

13 Actuarial Liabilities – Full Funding Closed Group

14 Annual Required Contribution – PAYGO Closed Group

15 Annual Required Contribution – Full Funding Closed Group

16 Benefit Payments Closed Group

17 Open Group Projections  Open group projections assumes stable active population  Based on current trend assumptions with CY 2008 plan design changes  Three funding scenarios – ► Pay-as-you-go, full-funding, and bifurcated funding

18 Open Group Projections  Bifurcated funding policy ► Explicit subsidies earned after July 1, 2007, are fully funded Represents future normal costs of explicit subsidy Explicit subsidy is cash premium paid by employer ► All other benefits funded on a pay-as-you-go basis Actuarial accrued liability at July 1, 2007 Future implicit subsidy earned after July 1, 2007

19 Open Group Projections Key Valuation Results PAYGOFull FundingBifurcated ($ in Billions) 7/1/20077/1/20387/1/20077/1/20387/1/20077/1/2038 Actuarial Liability$46.2$176.6$30.2$118.0$46.2$128.2 ARC$3.47$13.5$2.50$6.50$2.70$6.86 Employer Contribution$1.36$7.22$2.50$6.50$1.99$6.86

20 Open Group Projections  Key observations: ► After 30 years, Bifurcated policy actuarial liability is 8% higher than full funding actuarial liability Funded ratio is 40% under bifurcated policy and 48% under full funded policy Balance sheet liability is controlled ► Over 30-year projection period, Bifurcated ARC is 5% to 10% higher than full funding ARC ► When compared to full funding policy, employer contributions under bifurcated policy are lower during first six years and slightly higher after the sixth year

21 Actuarial Liability – Open Group

22 Funded Ratio – Open Group

23 Annual Required Contribution – Open Group

24 Annual Required Contribution – Employer Contributions

25 Balance Sheet Liability – Open Group

26 Summary  Questions and Answers  Thank you Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor. This presentation shall not be construed to provide tax advice, legal advice or investment advice. This presentation expresses the views of the author and does not necessarily express the views of the employer, Gabriel, Roeder, Smith & Company.