Under GASB 43 and 45, public sector employers are required to account for retiree medical benefits under special rules for Other Post-Employment Benefits (OPEB). Many have chosen to pre-fund these liabilities in a trust similar to a retirement plan trust. At the recent Minnesota School Board Association convention, Van Iwaarden Associates teamed up with an investment advisor to emphasize how actuaries and investment advisors should work together to develop a prudent investment policy based on projected benefit payments.
Most policy makers at public sector employers are not investment experts nor are they experienced with pre-funding long term liabilities. Too often, the decision is made to invest trust assets in “safe” investments just as they do with operating funds. This is potentially a major mistake, especially now with short term interest rates near zero!
The best practice is to pre-fund retiree medical liabilities and to invest the trust assets in a way that is consistent with the projected cash flow. Certainly, a substantial portion of the assets should be invested for the short term to meet short term cash flow. However, the balance of the assets should be invested for the long term to meet projected cash flows twenty to thirty years away.
The recommended action plan for decision makers includes:
1. Estimate the projected life of the OPEB Trust
2. Review investment policy and its handling of OPEB
3. Amend policy and investment strategy appropriately
A detailed actuarial report is the start of the process to manage OPEB liabilities and assets. The actuarial report can and should be much more than just a perfunctory exercise to meet GASB accounting requirements.
The full presentation can be found through this link.