Bottom Line Up Front

• When auditing pension and OPEB valuations under GASB standards, census testing is one of the most effective and practical ways to evaluate the accuracy of a valuation without becoming an actuary yourself.
• Auditors should focus their review on high-impact census data fields such as birth dates, hire dates, Medicare eligibility, benefit eligibility, compensation (for pension plans) and special employee populations like public safety personnel and teachers.
• A risk-based, materiality-driven approach to census testing can help auditors identify potential issues, perform meaningful audit procedures, and gain confidence in pension and OPEB valuation results.

AUDITING THE ACTUARY: WHERE SHOULD YOU FOCUS?

GASB standards for pension and OPEB valuations have placed an increased burden on the audit community to “audit the actuary.” What exactly that means remains somewhat ambiguous. It seems obvious that auditors should not need to become actuaries themselves to understand every aspect of an actuarial valuation. Yet auditors must perform procedures sufficient to demonstrate that the valuation has been appropriately reviewed.

Two of the most productive and reasonable areas to focus on are:

• Census testing
• Reviewing actuarial assumptions

This article focuses on census testing and the practical steps auditors can take to perform an effective review.

Prefer video? Watch our Ask an Actuary discussion on census testing and what auditors should focus on when reviewing pension and OPEB valuations under GASB standards.

Step 1: Understand the Census Fields

Actuaries often use specialized software that requires specific data fields, and they may create additional fields for valuation purposes. While many fields are self-explanatory, such as birth date or higher date, others might not be.

If there are fields on the census file that you don’t understand, it is entirely reasonable to ask the actuary what they represent and how they are used in the valuation process. Understanding the purpose of each field is the first step toward performing an effective review.

Step 2: Verify that the population makes sense

Before reviewing individual records, step back and consider the census population as a whole.

A lot can happen during the process of gathering and consolidating data. For example:

• A department’s census file may have been omitted.
• Employees who are not benefit-eligible may have been included.
• Certain groups or departments, such as retirees or teachers, may have been unintentionally excluded.

Reviewing overall employee and retiree counts can help identify these types of issues before they materially affect valuation results.

STEP 3: PAY SPECIAL ATTENTION TO PUBLIC SAFETY AND TEACHER POPULATIONS

Many retirement systems provide different retirement eligibility provisions for designated public safety personnel (pro tip: it’s not just police & fire. As an example, lineman at Light Departments are easy to miss). As a result, failure to properly identify public safety status may materially understate liabilities and service cost. Verifying that these populations have been properly identified can be an important audit procedure.

Teachers also warrant special attention. Although the impact is generally less pronounced than for public safety employees, teachers often have different mortality, termination, and retirement assumptions than other employees, which can materially affect liabilities.

For employers with municipal utility districts or similar organizations, it may also be worth reviewing whether employees eligible for public safety retirement benefits have been properly coded.

Looking for an OPEB-specific checklist? We got you! 9 Things to Review for Your OPEB Census Audit

THE MOST IMPORTANT CENSUS ELEMENTS TO REVIEW

Birth Date

Birth date is one of the most important components of any pension or OPEB valuation because age directly impacts liabilities.

For active employees, incorrect birth dates may understate liabilities if employees are older than reported. For retirees and covered spouses, younger ages generally produce higher liabilities.

It is often worthwhile to select five to ten active and retired participants and verify that the dates on the census file agree with supporting records.

Spouse Birth Date

For retirees with covered spouses, spouse age can materially affect liabilities.

When actual spouse dates of birth are unavailable, actuaries frequently rely on assumptions such as assuming male spouses are three years older than female spouses or that same-sex spouses are the same age. While these assumptions are reasonable, actual spouse dates of birth are preferable and can materially affect results when spouses are significantly younger.

Hire Date

Hire date is another critical census element because many pension and OPEB plans require minimum years of service before employees become eligible for benefits.

If prior credited service is omitted, liabilities may be understated. Conversely, if an employer uses a more recent date due to promotions, transfers, or position changes, employees may incorrectly appear ineligible for benefits.

A common issue occurs when employers update hire dates whenever an employee changes positions or departments. From an actuarial perspective, the relevant date is generally the employee’s original hire date as benefits are earned/accrued over the entire working lifetime. This normally should align with the date recognized under the pension system.

Medicare Eligibility

Medicare eligibility status has a significant impact on OPEB liabilities.

Retirees who remain enrolled in active healthcare plans after age 65 often have liabilities that are three to four times higher than retirees enrolled in Medicare supplement plans. Therefore, if retirees over age 65 remain coded as participants in active plans, it is worth verifying that the information is correct.

Employers may also identify employees who are expected to be ineligible for Medicare at age 65, such as certain teachers hired before March 1986. However, these cases can be difficult to verify because individuals may have earned Medicare credits through other employment.

Medical Coverage Level for OPEB Plans

For retirees, the level of medical coverage elected can materially affect liabilities.

In particular, whether a retiree has covered dependents or a covered spouse can significantly change projected healthcare costs and should be verified when possible.

Compensation (mainly for Pension Plans)

While not generally important for OPEB plans (there are some pay based life insurance benefits), the large majority of public sector pension plans have pay related benefits (often a final three or five year average). So, it’s important to validate the pay is correct and also that the pay provided matches the plan’s compensation definition (e.g., should bonuses, overtime, and certain other pay types be included or excluded).

Form of Payment for Pension Plans

While we care about “coverage level” for OPEB plans, a key data element for retirees in pension plans is the form of payment (e.g., life annuity, joint & survivor, certain & life, cash refund, etc.). This along with the spouse birth date noted earlier can have a material impact on the pension liability for a retiree.

Benefit Eligibility

Some employers provide census files that include all employees, including those who are not eligible for retiree benefits.

Failure to identify employees who are not benefit eligible can result in overstated liabilities. Therefore, auditors should confirm that only employees eligible for benefits are included in the valuation population.

REMEMBER: IT’S ABOUT MATERIALITY

As with any audit procedure, materiality should guide your review.

Birth dates that differ by a few days, months, or even years may not materially impact liabilities. However, if errors appear to be systemic, they should be investigated further.

Similarly, the size of the employer and the census population will influence whether a particular anomaly is material.

If questions arise regarding the impact of a census issue, auditors should consult with the actuary to determine the size of the issue, its materiality, and whether a revised valuation report may be necessary.

FINAL THOUGHTS

Auditors should not be expected to become actuaries in order to review pension and OPEB valuations. However, performing thoughtful census testing is one of the most effective ways to gain confidence in valuation results and satisfy audit requirements under GASB standards.

By understanding the census data, verifying key demographic information, reviewing special employee populations, and focusing on material items, auditors can perform meaningful procedures without becoming valuation experts themselves.

If you have questions regarding a particular census issue or would like to discuss best practices for pension and OPEB census testing, the actuarial team at Odyssey Advisors is always happy to help.

Frequently Asked Questions

What is census testing in a pension or OPEB audit?
Census testing is the process of verifying the accuracy and completeness of participant data used in an actuarial valuation. Auditors review key demographic and eligibility information to gain confidence that pension and OPEB liabilities are reasonably stated under GASB standards.

Why is census testing important when auditing an actuarial valuation?
Actuarial valuations rely heavily on participant data. Errors in birth dates, hire dates, benefit eligibility, Medicare status, or employee classifications can materially impact reported pension and OPEB liabilities, making census testing a critical audit procedure.

What census data fields should auditors review?
The most important fields typically include:

• Birth date
• Hire date
• Benefit eligible status
• Medicare eligibility
• Spouse date of birth
• Medical coverage level
• Compensation (mainly for pension plans)
• Form of payment (the retiree’s benefit options for pension plans)
• Employee classification (such as public safety or teacher status)

How many records should auditors test during census testing? There is no universal number. Sample sizes should be determined based on the size of the population, audit materiality, risk assessment, and applicable audit standards.

What should auditors do if they identify census errors? Auditors should discuss the issue with the actuary to determine the impact on liabilities, evaluate materiality, and determine whether additional testing or a revised actuarial valuation may be necessary.

What documentation should auditors use to verify census data?
Auditors should compare census data to reliable source documentation, such as payroll records, personnel files, benefit enrollment records, retirement system records, or other supporting documentation maintained by the employer. The appropriate source will depend on the data field being tested.

The post Census Testing Audits: What Auditors Should Review Under GASB Standards appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Tight municipal budgets and rising pension costs have led some towns to consider Pension Obligation Bonds (POBs) as a funding strategy.
• POBs can improve a plan’s funded status and offer temporary budget relief if investment returns exceed borrowing costs, but that outcome depends heavily on market performance and timing.
• Significant risks remain: poor investment returns, added debt, and shifting costs to future taxpayers can leave municipalities in a worse financial position than before issuance

Many towns and cities today are operating under increasing fiscal pressure. Rising costs, slow revenue growth, and competing demands on limited resources have made it harder than ever to balance municipal budgets. At the same time, long-term obligations such as pension liabilities continue to grow, placing additional strain on financial stability. In response, some municipalities have turned to Pension Obligation Bonds (POBs) as a strategy to address these challenges.

What is a Pension Obligation Bond?

A Pension Obligation Bond is a taxable bond issued by a municipal entity to help fund the unfunded portion of its pension liability. The municipality issues the bond and invests the proceeds alongside the pension plan’s existing assets, typically in higher-yielding investments.

The goal is to earn a rate of return on those invested proceeds that exceeds the interest rate owed on the bond over its term. If that occurs, the municipality can improve its pension funding status and potentially reduce its long-term costs. However, the strategy also introduces additional financial risk.

The Government Finance Officers Association (GFOA) has cautioned municipalities against using POBs in most circumstances. In its official advisory, the GFOA cites the inherent risks of market volatility, timing uncertainty, and added debt burden. While POBs can appear beneficial on paper, they often increase overall financial risk if investment returns fall short of expectations.

Why Consider Pension Obligation Bonds?

Municipalities typically explore POBs for two primary reasons: budget stabilization and potential financial upside.

1. Budgetary Relief

Many local governments are operating under tight budgets and are forced to prioritize limited resources. Issuing debt to fund part or all of the pension liability can temporarily relieve pressure on annual budgets. This may stabilize required pension contributions and free up funds to support other essential public services.

2. Potential Financial Advantage

In theory, municipalities can borrow at a relatively low, fixed interest rate and invest the proceeds in assets expected to earn a higher return over time. If the pension investments outperform the bond’s interest rate, the municipality may realize a net gain.

However, these benefits depend on favorable market conditions and long-term investment performance. If those assumptions don’t hold, the financial outcome can quickly turn negative, leaving the municipality in a worse position than before the bonds were issued.

The Risks

While POBs can offer short-term relief and potential long-term benefits, they are not a cure-all. These transactions carry several significant risks that municipalities should thoroughly consider before proceeding.

1. Investment Risk

The greatest risk is that investment returns fail to exceed the bond’s interest rate.

For example, if a city issues bonds at a 5% interest rate and expects its pension assets to earn 7%, the 2% spread seems advantageous. But market performance is unpredictable, and a few years of underperformance can quickly erase those gains.

It is also important to remember that POBs are taxable instruments. This means issuers pay taxable market interest rates which increases the hurdle rate for the pension fund’s investment returns to exceed the taxable bond’s interest rate to achieve the desired advantage. Because POB proceeds are typically invested immediately, issuing bonds during an overvalued market can magnify the downside if asset values decline soon after.

2. Timing Risk

Timing is critical as POBs tend to be most effective when interest rates are low and market conditions are favorable. However, predicting either is challenging.

Municipalities are often drawn to POBs after periods of strong market performance, when the potential for future underperformance is higher. Conversely, when interest rates are high, borrowing costs increase and the “spread” between the bond rate and expected investment returns narrows. This can undermine the core financial logic behind the transaction.

3. Credit Rating Risk

Credit rating agencies typically view POBs with caution. While a POB may improve a plan’s funded status on paper, it also adds a fixed debt obligation to the municipality’s balance sheet.

This can be seen as a sign of fiscal stress or an attempt to leverage future resources, which may result in a credit rating downgrade. Such a downgrade increases borrowing costs for future projects, offsetting much of the anticipated savings.

4. Shifting Costs to Future Tax Payers

A key concern from a public policy perspective is intergenerational equity. This means the fair distribution of costs between current and future taxpayers.

Issuing POBs can transfer risk to future residents if investment performance falls short of expectations. While today’s taxpayers may experience short-term relief, future taxpayers could be left paying off the debt for assets that failed to meet return assumptions.

This outcome is particularly troubling when POBs are issued primarily as a short-term budget solution rather than as a part of a comprehensive, disciplined pension funding strategy. In such cases, the municipality is effectively kicking the can down the road and betting that future market conditions will deliver enough return to bail it out.

Conclusion

On the surface, Pension Obligation Bonds can seem like an attractive shortcut to improve pension funding and ease budget pressures. LIke any investment tool, there is a place for them when used appropriately. However, the GFOA generally advises against POBs unless paired with structural reforms and strict funding discipline.

If your municipality is considering a POB, it’s essential to:

• Use realistic actuarial and investment assumptions
• Conduct robust scenario and stress testing
• Commit to long-term funding discipline to avoid repeating past shortfalls

It is also important to consider whether your municipality may require State approval or changes in local ordinances to allow for the issuance of a POB. To improve the odds of success on your POB issuance, it’s recommended that you obtain the required permissions so that you can “strike while the iron is hot” to take advantage of that period of low interest rate or equity market declines.

If you have questions about Pension Obligation Bonds or your community’s retirement benefit liabilities, please reach out to one of our team members. We’re here to help municipalities make informed, sustainable decisions for the future.

The post What is a Pension Obligation Bond? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• S&P now gives more weight to debt when evaluating municipalities, making pension and OPEB liabilities more impactful on your Bond Rating. 
• Communities with higher mandated benefits may feel greater pressure on their Individual Credit Profile (ICP) scores. 
• Proactively managing and funding your pension and OPEB obligations is now a critical lever for strengthening your ICP score and protecting your community’s financial position.

When we talk with municipalities across the U.S. about their OPEB and pension plans, one question consistently rises to the top: “How does this impact our bond rating?”

It’s a fair question. Bond ratings influence everything from borrowing costs to long-term capital planning, and most communities are feeling increased pressure to show strong financial management in a challenging fiscal environment.

While many factors play into a rating, long-term liabilities, especially pension and OPEB obligations, have taken on greater importance. This became even more pronounced in September 2024 when S&P updated its municipal rating model and increased the weight of debt to 20%. 

That shift means that the structure, funding, and management of your retirement benefit programs may have a more meaningful impact on your rating than in prior years, particularly for communities in states with more “generous” benefits or limited flexibility to adjust plan designs. 

How S&P Evaluates Municipal Debt

Under S&P’s updated methodology, municipal ratings are built on five equally weighted factors, each contributing 20% to the overall score. Together, they provide a comprehensive view of a community’s financial strength and long-term resilience.

1. Economy
   Evaluates the underlying economic base, including income levels, employment trends, and tax base stability.
2. Financial Performance
   Assesses your ability to generate consistent operating results and manage annual revenues and expenditures.
3. Reserves
   Reviews the strength and reliability of available fund balances and long-term financial flexibility.
4. Liquidity Management
   Measures how effectively your community manages cash flow, short-term obligations, and access to liquidity during financial stress. 
5. Debt & Liabilities
   Captures all forms of long-term obligations—traditional municipal debt as well as pension and OPEB liabilities, which can be significant depending on state policies and benefit levels. 

With the Debt & Liabilities category now carrying increased emphasis in the overall model, pension and OPEB obligations can meaningfully influence your rating trajectory, especially for communities with higher mandated benefit levels or historically underfunded plans.

Why the Increased Debt Weighting Matters

For communities that offer more generous pension and OPEB benefits, these long-term obligations appear as a much larger “debt” on the balance sheet. In contrast, municipalities that offer modest retirement benefits—or none at all—carry a comparatively lighter burden. 

Some factors are within your control. For example, you can:

• Build and follow policies around financial reserves
• Maintain strong liquidity management practices 
• Support healthy financial performance
• Manage traditional municipal construction and infrastructure debt

However, the economy is largely out of your hands. And in many states, so are the benefit levels for pension and OPEB programs. State-mandated designs can lead two communities with similar demographics and income levels to have dramatically different debt loads depending on their state’s pension and OPEB policies. 

For municipalities in more “generous” states, maintaining a AAA rating may become increasingly challenging under S&P’s updated model. 

What Should Municipalities Be Doing?

Despite the current budgetary headwinds, it remains critical to work toward funding the existing pension & OPEB promises. Reducing these long-term liabilities helps decrease your overall “debt” and demographic trends suggest that delaying action will only make future reductions more difficult and more expensive. 
If you have more questions about this update or broader retirement and financial considerations, please reach out to your Odyssey Advisors consultant. We’re here to help you navigate the shifting landscape and strengthen your financial outlook.

The post Impact of Pension and OPEB Debt on Municipal Bond Ratings appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• IRC Section 415 sets limits on retirement plan benefits and contributions, and exceeding them can trigger significant tax penalties and administrative complications.
• Defined Benefit and Cash Balance plans are especially vulnerable to overfunding, particularly when investment returns or contributions outpace allowable limits.
• Proactive monitoring—across funding, investments, and plan design—is essential to avoid surplus issues, stay compliant, and maintain long-term plan flexibility.

Download a PDF version of this article (Understanding IRC Section 415)

IRC Section 415 governs the maximum benefits and contributions allowed in qualified retirement plans. These rules are designed to prevent disproportionately large tax-advantaged benefits and ensure plans operate within IRS guidelines. While the limits may seem straightforward at first glance, the operational impact, especially for Defined Benefit and Cash Balance Plans, can be significant.

What is IRC Section 415?

IRC Section 415 sets maximum benefit and contribution limits for qualified retirement plans to ensure compliance and prevent excessive tax advantages. The limits differ depending on whether the plan is a Defined Benefit (DB) plan or a Defined Contribution (DC) plan. 

• Defined Benefit (DB) Plans: Annual benefit is capped at $290,000 for 2026 for a life annuity at age 65, adjusted for retirement age, payment form, and service years. 
• Defined Contribution (DC) Plans: Annual additions (employee + employer contributions) are limited to $72,000 for 2026 (excluding catch-up contributions).

Why It Matters

Section 415 isn’t just a technical rule, it directly affects funding strategies, plan design, investments, and tax outcomes. Exceeding the limit can create major issues, including taxes, penalties, and administrative complexity. 

Examples of Key Risks

• Surplus Assets: If plan assets exceed the 415 limit, any excess at termination may face a 50% reversion tax assessed by the Internal Revenue Service (IRS), plus corporate income tax on the remainder — potentially a 90% effective tax rate. 
• Funding risks: Large contributions or high investment returns can push plans beyond allowable limits, requiring extended plan duration to absorb surplus. 
• Investment Strategy: Cash Balance Plans invested aggressively (e.g., 100% equities) often generate returns far above the intended crediting rate, accelerating surplus risk.

Common Challenges for Plan Sponsors

Even well-managed plans face recurring complexities under Section 415, including: 

• Managing contributions to prevent overfunding
  Especially in years with strong investment performance. 
• Handling early retirement factors
  Benefits must be actuarially reduced, and the calculations can be complicated. 
• Accounting for joint & survivor or other optional forms of benefit
  Payment forms must be converted to an actuarial equivalent of a straight life annuity for 415 testing. 
• Monitoring potential legislative changes
  For example, if cost-of-living adjustments (COLA) are frozen due to legislation, current limits could stagnate even while plan liabilities continue to increase. 

Best Practices for Staying Compliant

Plan sponsors can reduce risk by being proactive and building 415 monitoring into annual strategic planning. 

• Monitor Annually
  Compare projected DB benefits or DC contributions against annual 415 limits.
  
• Align Investments
  Investment policies for DB/Cash Balance plans should support—not conflict with—interest crediting assumptions and long-term funding strategies.
  
• Plan for the Long Term
  Consider how contributions, plan amendments, and demographics may impact compliance over time. 

Recommended Actions

1. Annual Compliance Review
   Conduct an annual audit of plan assets, contributions, crediting rates, and projected benefits to identify potential 415 issues early. 
2. Investment Policy Alignment
   Ensure investment strategies match plan objectives and avoid excessive growth that could create surplus. 
3. Contribution Planning
   Coordinate with your actuary to structure employer contributions that meet objectives without pushing the plan toward overfunding. 
4. Scenario Testing
   Model early retirement, optional forms of payment, and alternative plan designs to ensure 415 compliance in all circumstances. 
5. Legislative Monitoring
   Stay current on IRS updates, cost-of-living adjustments, and proposed policy changes that could affect benefit limits.

Bottom Line

IRS Section 415 limits are technical, nuanced, and often misunderstood—but compliance isn’t optional. With the right monitoring and planning, employers can maintain tax-advantaged status, avoid costly penalties, and ensure long-term plan sustainability. 

If you have questions about how Section 415 applies to your retirement plan, your Odyssey consultant is here to help.

The post Understanding IRC Section 415 Limits and Key Issues appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Cash Balance plans enable high-income self-employed individuals, particularly those over 40, to supercharge their retirement savings beyond what traditional plans allow.
• Contributions are fully tax-deductible, creating immediate tax savings.
• While powerful, these plans come with strict funding obligations, administrative costs, and complex compliance rules, making them ideal for those with stable income and a long-term mindset.

When you’re self-employed, you’re in charge of everything – from client work to finances to your future retirement. And unlike traditional employees, you don’t have a built-in retirement plan waiting for you. That makes it even more important to find tax-smart, high-impact savings tools. One option that’s gaining traction among high-earning business owners? The Cash Balance Plan.

So, What Is a Cash Balance Plan?

Think of it as 401(k)’s sophisticated cousin. It looks like a retirement account with a balance that grows over time, but it’s actually a type of defined benefit pension plan with a modern twist.

Here’s how it works:

• You (as the employer) contribute a pay credit each year. This can be a percentage of pay or a fixed dollar amount (e.g., 25% pay for owners, 3% for others).
• Then, the account earns an interest credit, a guaranteed rate defined in your plan document. It might be a fixed rate or tied to something like U.S. Treasury yields.
• While it feels like a personal retirement account, it’s actually a company-funded benefit governed by specific pension rules.

Bottom line: You get the structure of a pension with the transparency of an account-based plan.

Why Cash Balance Plans Work So Well for the Self-Employed

1. Higher Contribution Limits – Especially As You Age

If you’re over 40 and looking to make up for lost time, a Cash Balance Plan (CB Plan) offers much higher annual contribution limits than IRAs or Solo 401(k)s. Contributions are calculated using actuarial methods and increase as you age.

Here’s what that might look like:

(Actual limits vary based on income and plan design)

This makes it a standout option for late starters or those finally hitting their financial stride.

2. Major Tax Deduction Power

Contributions to a Cash Balance Plan are fully tax-deductible as a business expense. For self-employed professionals in higher tax brackets, such as doctors, attorneys, business owners, etc., this can lead to substantial savings. Since the contributions reduce your adjusted gross income (AGI), they may also improve eligibility for other tax benefits and deductions. A CB Plan not only helps build retirement wealth but also serves as a highly effective tax planning tool, lowering your immediate tax liability while increasing long-term savings.

3. Catch-Up Power for Late Savings

Many entrepreneurs spend their early years reinvesting profits or weathering financial ups and downs. Saving for retirement typically takes a back seat. As a result, many find themselves in their 40s or 50s with a strong income but a sizable gap in their retirement planning. If you’re in a more stable position but feel behind on your retirement planning, a CB plan can help you catch up fast, especially if you’re aiming to retire in the next 10-20 years.

4. Can Be Paired with a Solo 401(k)

One of the best-kept secrets? You don’t have to choose between plans.

One highly effective strategy used to help self-employed individuals save for retirement is pairing a CB plan with a Solo 401(k) or profit-sharing plan. This approach allows you to maximize your retirement savings across two different vehicles. Together, they can push your total annual retirement contributions well over $300k – $400k, depending on your age and income.

Heads up: When using both plans together, the IRS combined plan limit comes into play. This rule typically caps employer contributions to defined contribution plans to 6% of pay when paired with a Cash Balance plan. So while it may slightly reduce what you can contribute to your 401(k), you’ll still unlock a much larger deductible contribution through the CB plan.

Not only does this dramatically increase your retirement nest egg, but it also provides substantial tax relief in the current year. That’s a powerful one-two punch: accelerated savings and reduced tax liability.

What You Should Know Before You Dive In

These plans aren’t for everyone. They work best for those who have:

• Consistent income
• A long-term view
• The willingness to follow the rules (or have someone help you do so)

These are the things you should consider:

Ongoing Funding Requirements

Cash Balance plans come with strict ongoing funding requirements that distinguish them from more flexible retirement options, such as 401(k)s. Since CB plans are a type of Defined Benefit plan, you’re obligated to contribute an amount each year based on actuarial calculations designed to meet the promised benefit at retirement. 

Contributions must be made consistently to stay compliant and cannot be skipped without potentially facing IRS penalties or plan disqualification. Annual funding must meet minimum thresholds, and underfunding in one year may require catch-up contributions in future years.

More Administrative Complexity (But It’s Manageable) 

Yes, these plans are more complex than an IRA. You’ll need: 

• An actuary to calculate annual contributions 
• A third-party administrator (TPA) for compliance testing and filings
• Annual IRS filings like Form 5500 

But here’s the thing: Most high-income business owners feel the tax and savings benefits far outweigh the admin fees, especially with the right team in your corner. 

Lots of Rules = A Need for Pros

Since Cash Balance plans are a type of Defined Benefit pension plan, they are governed by a web of IRS and Department of Labor regulations. They must comply with the rules that apply to DB plans, such as nondiscrimination testing, minimum funding standards, and benefit accrual limits. Trying to DIY this would be like doing your own root canal. 

Additionally, these plans need to be formally documented and amended as needed to reflect regulatory updates. An annual Form 5500 filing will also be required. CB plans also have strict rules regarding how and when benefits can be distributed, including required minimum distributions and vesting schedules.  

That’s why most self-employed folks work with retirement plan experts (like us) who specialize in small business and self-employed solutions.

Is a Cash Balance Plan Right for You?

For the right self-employed, high-earning business owner, a Cash Balance Plan could be the most powerful retirement tool you haven’t considered yet. While it’s not a fit for every business owner, those with the income and stability to fund it can be a total game changer. 

Let’s Talk Strategy

At Odyssey Advisors, we’ve helped countless self-employed professionals design and manage Cash Balance Plans that fit their goals and cash flow. If you’re curious about what your retirement picture could look like, let’s explore it together. 

The post Are Cash Balance Plans a Good Option for the Self-Employed? appeared first on Odyssey Advisors, Inc.

I’ve been in your shoes. When I first joined Odyssey, I felt like a fish out of water and Google was my constant friend. If you had peeked at my search history four years ago, it would’ve looked something like this:

“What is OPEB?”
“Is it Other Postemployment Benefits or Other Post-Employment Benefits?”
“What’s the difference between TOL and NOL?“

Without an actuarial background, I needed time to catch up. But with the invaluable support from our amazing team, I soon found my footing. This guide is designed to help you find yours. I hope it helps!

Top Actuarial Terms & Definitions:

• Actuarial Accrued Liability (“AAL”): AAL is the present value of benefits earned by employees to date, calculated based on actuarial assumptions.

• Actuarial Assumptions: Actuarial Assumptions are estimates used by actuaries to calculate future benefit obligations, including rates of retirement, turnover, and salary growth.

• Amortization: The process of spreading out payments or expenses over time. In the context of OPEB (our area of expertise), it often refers to the period over which changes in unfunded liabilities are recognized through the expense.

• Actuarially Determined Contribution (“ADC”): “ADC”, not to be confused with “ACDC” is the contribution amount determined or calculated by an actuary for a pension or OPEB plan for a year which includes the normal cost and an amortization payment for any unfunded liability. This figure is designed to help a plan reach “full” funding over some time.

• Assumption Testing: This is the process by which both actuaries and auditors evaluate the reasonableness and appropriateness of actuarial assumptions used in valuations. For our auditor friends, we recently published this article: Auditing the Actuary: Assumption Testing

• Cash Balance Plan (“CB Plan”): CB Plans are a type of defined benefit retirement plan (“DB plan”) that combines features of both traditional DB plans and defined contribution plans (“DC plans”) and is often used by small business owners with high, predictable income. It allows for significant tax-deductible contributions each year and the accumulation of retirement assets which are both tax-deferred and protected from creditors. To learn more about CB plans and their benefits, check out this article:  What is a Cash Balance Plan?

• Census Testing: Census Testing is the process used by auditors to verify the accuracy and completeness of the participant data used in an actuarial valuation by checking the demographic and employment information, such as age, service duration, and benefit data to ensure that it is correct and corresponds to the actual records of the participants.

• Defined Benefit Plan (“DB Plan”): A Defined Benefit Plan is a retirement plan that promises a specified monthly benefit at retirement, which is typically based on salary and years of service (collectively bargained or union plans often will use a fixed dollar amount multiplied by years of service). The key thing to remember is that the plan sponsor or the employer bears any investment or mortality risk. These plans are also known as a pension plan.

• Defined Contribution Plan (“DC Plan”): A DC plan is a retirement plan where the employer, employee, or both, contribute to an individual account for the employee, with benefits based on the account balance at retirement. Unlike a DB plan, with a Defined Contribution Plan, the employee or participant is normally responsible for some or all investment decisions.

• Discount Rate: The discount rate is the interest rate used to determine the present value of future benefit obligations. Essentially, the discount rate is a tool that helps our actuaries determine how much money needs to be set aside today to cover the future pension or OPEB benefit payments owed to employees. To learn more, check out this article: Top 5 Factors That Determine Your OPEB Discount Rate

• Funding Ratio: The ratio of a plan’s assets to its liabilities, indicating the financial health of the plan.

• Governmental Accounting Standards Board (“GASB”):  GASB is the organization that sets accounting and financial reporting standards for U.S. state and local governments, including standards for pension and OPEB plans.

• GASB 67: GASB 67 is a specific set of rules created by GASB that focuses on how state and local government pension plans should report their financial information to ensure they are accurate, consistent, and provide a true reflection of their financial position.

• GASB 68: GASB 68 is a similar set of rules issued by GASB that focuses on how government employers should report their pension obligations in their financial statements.

Still curious about the GASB 67 & 68? Check out this article: GASB 67 & GASB 68: What’s the Difference?

• GASB 74: GASB 74 is a standard set by GASB that focuses on the financial reporting of Other Post-Employment Benefits (OPEB). The focus of GASB 74 is on the OPEB plans’ financial reporting.

• GASB 75: GASB 75 is a standard set by GASB that focuses on the financial reporting by the government employers who sponsor OPEB plans related to their participation in those plans.

Want to learn more? Read this article: What is the Difference Between GASB 74 and GASB 75?

• Healthcare Cost Trend Rate: The rate at which healthcare costs are expected to increase over time. This is an important assumption in OPEB valuations.

• Income-Related Monthly Adjustment Amount (“IRMAA”): IRMAA is an additional charge that some higher-income Medicare beneficiaries must pay for their Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage) premiums.

• Net OPEB Expense: This is the expense (on an accrual basis) that is recognized annually on the financial statement.

• Net OPEB Liability (“NOL”): NOL is the difference between the total OPEB liability (TOL) and the plan’s fiduciary net position (assets), representing the unfunded portion of OPEB obligations. 
  • Calculation: NOL = TOL – FNP

• Net Pension Liability (“NPL”): This is the difference between Total Pension Liability (TPL) and the plan’s fiduciary net position (assets). In simpler terms, it’s the amount by which the pension plan’s obligations for both current and future retirees exceed the current assets available. 
  • Calculation: NPL = TPL – FNP

• Normal Cost: The portion of the present value of projected benefits allocated to the current year, reflecting the cost of benefits earned by employees in the current year. 

• OPEB (“Other Post-Employment Benefits”): Refers to the benefits, other than Pensions, that employees receive after they retire from service. These benefits typically include health insurance, dental, vision, prescription, life insurance, long-term care, and other similar benefits. 

• OPEB Trust: An OPEB Trust is a financial arrangement established by a government or public sector employer to pre-fund Other Post-Employment Benefits for their employees. Essentially it’s an account to set aside funds today to meet the future OPEB obligations of retired employees to ensure that these benefits can be paid when due. The funds can be invested, potentially earning returns that help reduce the total cost of providing OPEB over time.

• Pay-as-You-Go (“Pay-Go”) Funding: A method of funding OPEB benefits where benefits are paid from current revenues rather than pre-funding through a trust. 

• Plan Fiduciary Net Position: The market value of assets held in trust to pay OPEB or pension benefits. 

• Present Value: When we talk about determining the present value of future benefit obligations, we’re talking about figuring out how much those future payments are worth in today’s terms. 
  
• Safe Harbor 401(k) Plan: A type of 401(k) plan designed to automatically pass the IRS nondiscrimination tests, which ensure that the plan benefits both rank-and-file employees and highly compensated employees. To qualify, employers must make mandatory contributions that are fully vested immediately. This plan simplifies administration and ensures that all employees benefit fairly from the plan.

• Service Cost: Another term for normal cost, which is the value of the benefits that eligible employees accrue each year.  
  
• SIMPLE 401(k) Plan: A SIMPLE (“Savings Incentive Match Plan for Employees”) 401(k) plan is a retirement plan designed for businesses with 100 or fewer employees. It combines the features of a traditional 401(k) with those of a SIMPLE IRA. Employers are required to make either matching contributions or non-elective contributions to employee accounts. Contributions are tax-deferred, and the plan is subject to simpler and less costly administration than traditional 401(k) plans.
  
• Third-Part Administrator (“TPA”): A TPA for retirement plans is an independent entity that provides administrative services to employers sponsoring retirement plans, such as 401(k)s and pension plans. TPAs handle various tasks such as plan design, recordkeeping, compliance testing, reporting and filings, regulatory updates, and more to ensure the plan operates smoothly and remains compliant with requirements.

Want to learn more? Read this article: Here’s Why You Need a Third Party Administrator (and How to Hire the Right One)

• Total OPEB Liability (“TOL”): TOL is the value of OPEB benefits that have been earned by active and retired employees. 

• Total Pension Liability (“TPL”): Similar to TOL, TPL is the present value of all future pension payments owed to employees based on their service to date.
  
• Traditional 401(k) Plan: An employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax basis. Contributions are invested in various investment options chosen by the employee, and the funds grow tax-deferred until they are withdrawn in retirement.

• Unfunded Actuarial Accrued Liability (“UAAL”): The portion of the actuarial accrued liabilities not covered by plan assets, indicating the amount by which the plan is underfunded.

• Vesing: The process by which employees earn the right to receive benefits from a pension, OPEB, or retirement plan, usually after the completion of required years of service.

So, the next time someone calls you to ask about TOL or how NOL is calculated on your next OPEB valuation report, you’ll be able to answer with confidence! 

Want to learn more? Visit our insights page and check out our new video series, “Ask an Actuary,” for in-depth articles and videos covering these topics and much more. 

If you still have questions, feel free to reach out to us here. Whether your question is simple or complex, we’re here to help!

The post Actuary Vocabulary 101: Essential Terms and Definitions appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Lifespan, the average length of life, and healthspan, the average length of healthy living, are two crucial concepts gaining attention recently.
• While lifespans have generally increased over generations, recent trends show a slight decline, while healthspans have decreased even more, leading to increased time spent battling health issues later in life. 
• These trends have significant implications for Pension and OPEB plans, with longer lifespans increasing costs for both, and a widening gap between healthspan and lifespan driving up healthcare expenses and liabilities for OPEB plans in particular.

Lifespan receives considerable attention, often being viewed as a measure of human development, especially as it continues to increase. However, there’s a growing focus on another concept called Healthspan, which hasn’t received as much recognition until recently. Healthspan refers to the length of time an individual remains healthy and functional, as opposed to simply living longer. Understanding the difference between these two concepts is crucial, particularly in considering the future implications for OPEB (Other Post-Employment Benefits) and Pension Plans.

Understanding Lifespan and Healthspan

Lifespan is the average length of time people live today, often used synonymously with “life expectancy”. As a matter of course people are very interested in how long they can expect to live based on the average lifetime of other people. Until recently there has been a general trend of lifespans growing longer and longer every generation. Even with some recent decreases in life expectancy, a person born today can expect to live a longer life than their grandparents.

Healthspan is the average length of time that people can expect to remain in optimal health. Over the last ten years, this concept has gotten more focus, especially with attention-grabbing ideas like Dr. Ezekiel Emanuel’s article “Why I Hope to Die at 75”. The most recent data shows that even as lifespans have decreased slightly over the last several years, healthspans have been decreasing by more than lifespan resulting in the average American spending more time late in life battling serious health issues.

Impact on Pension and OPEB Plans

How do these changes affect Pension and OPEB plans? Longer lifespans are going to mean higher costs for both Pensions and OPEB plans. The Actuary has mortality assumptions built into the valuation, and if more and more people outlive their projected life expectancy that means the plans must make benefit payments for more years than expected. Recent declines in lifespan help contain costs on Pension and OPEB plans as people don’t live as long as expected and therefore receive fewer years of benefit payments than expected.

Healthspan has a different effect on Pension versus OPEB plans. For Pension plan liabilities, healthspan doesn’t matter at all. A participant doesn’t need to be healthy to receive a benefit payment, they just need to be alive. For OPEB plans the story is different. A widening gap between people’s healthspan and lifespan means more years of what will tend to be more expensive medical care. This will tend to have the effect of driving up health insurance premiums, therefore increasing the OPEB plan’s expected benefit payments and liabilities.

Forecasting Future Trends

Some think the recent trend of shortening lifespans will reverse back to the trend of increasing lifespans. However, it seems possible that the gap between healthspan and lifespan will continue to grow as more medical treatments become available to extend lives. A reversion to the trend of increasing lifespans and decreasing healthspans could drive up the cost in the future for both Pension and OPEB plans.

Navigating The Intersection of Lifespan and Healthspan in Retirement Planning

When it comes to retirement planning, the concepts of lifespan and healthspan play pivotal roles in shaping the future of Pension and OPEB plans. While longer lifespans forecast increased financial obligations, the widening gap between healthspan and lifespan presents unique challenges, particularly when it comes to healthcare. With thoughtful and strategic foresight, you can navigate these complexities to ensure the sustainability and resilience of retirement benefits. 

If you have questions about the topic we covered, or if you’re seeking advice on any other challenges you may be facing, we’re here to help. Our team of experienced actuaries and actuarial consultants are always ready to offer guidance. Feel free to reach out to us here. 

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Bottom Line Up Front

• GASB standards require auditors to “Audit the Actuary,” scrutinizing pension and OPEB valuations, but ambiguity surrounds this requirement
• Auditors must assess the reasonableness of actuarial assumptions individually and collectively, posing a challenge without developing a full actuarial model.
• Below are various methods for auditors to prioritize and test the reasonableness of assumptions in actuarial valuations that are essential for compliance and accuracy. 

GASB standards concerning Pension and OPEB valuations have placed a burden on auditors to “Audit the Actuary,” but the exact meaning of this requirement is left with some ambiguity. It seems obvious that as auditors, you shouldn’t need to become an actuary, diving into the ins and outs of actuarial valuations. However, you must demonstrate that you are indeed scrutinizing these valuations. While we’ve previously covered census testing for auditors, this article will delve into methods auditors can employ to assess the assumptions underlying 

The benchmark for an actuary’s assumptions is that each assumption should be individually reasonable, and collectively, the assumptions should be reasonable in the aggregate. From an auditor’s standpoint, it’s far easier to evaluate assumptions individually, because it is very difficult to measure the reasonableness of assumptions in aggregate without developing a full actuarial model. So, which assumptions should you prioritize, and what methodologies can you use to test the reasonableness of these assumptions in actuarial valuations?

1. Prioritizing Key Assumptions

There are many assumptions that go into an Actuarial valuation, but some have significantly more impact than others. Thus, your audit energy is better spent reviewing the assumptions that count the most.

Discount Rate

GASB specifies for both OPEB and Pension plans how to calculate the discount rate. The main role of the Auditor is to ensure the Actuary is applying the GASB standards to the development of the discount rate in a way that is consistent with the appropriate standards. This may include a review of the crossover date analysis as well as projected contributions and withdrawals from the Trust if one exists. Review the reasonableness of the assumed rate of return on assets.

Trend Rate (Medical Trend for OPEB, Compensation Increase for Pension)

Trend rates are generally not prescribed by law or by GASB standards so there is more room for the Actuary’s interpretation. An audit of assumptions that are not prescribed by law means asking the question, “Is this assumption reasonable?” The standard of reasonableness is left up to the interpretation of the Auditor and the Actuary.

Fortunately, GASB standards say the Actuary should provide a sensitivity analysis on these two major assumptions showing the impact on Liability and Service Cost if they were 1% higher or lower. That will help with gauging the impact of these assumptions on the valuation and the level of scrutiny that they deserve.

2. Mandated Assumptions

Some assumptions are established by state law or by standards set by GASB/FASB, which outline the assumptions to be utilized. For example, GASB 67/68 and GASB 74/75 specify that the entry age normal cost method should be used when determining the service cost and the state of Tennessee mandates that you must fund 100% of the pension ADC each year. Others like California and Massachusetts require that you pay the assessed pension system appropriation each year. To ensure compliance with mandated assumptions, it’s advisable to cross-reference the Actuary’s work with these directives. 

3. Look for Consistency

The mechanics of a pension and OPEB valuation share many similar components and, often, the same assumptions are used for both valuations. In most cases, the actuarial assumptions used for both valuations should be the same or at least very similar. That makes testing the assumption a bit easier from your perspective because you can look at the two reports and compare assumptions to assess reasonability. If the assumptions appear consistent, it indicates a positive sign of reasonableness.

Key considerations for you to include: 

1. Consistency Across Clients: Does the Actuary employ the same assumptions for all or multiple clients? If variations exist, is there a clear rationale justifying the differences?
2. Consistency Among Actuaries: Are the Actuary’s assumptions consistent with other Actuaries and with the state system’s Actuarial assumption?

By addressing these points, you can effectively evaluate the reasonability of the assumptions used in the valuation process. 

4.  Seek Professional Sources

While some assumptions may originate from the Actuary’s own internal judgment, many will be based on or supported by external experts and data sources. For example, Mortality Tables are generally not formulated solely on an Actuary’s discretion or data. When external data sources are utilized, it’s essential to inquire whether the source is credible and if the assumption aligns with the intended purpose as defined by the external expert. 

Auditing the Actuary can certainly feel like a daunting task, but with these strategies  in your toolbag, hopefully, you’ll feel more confident signing off that you “audited the Actuary.” Remember, if you have any questions regarding the impact of specific census issues, it’s advisable to engage the Actuary to assess the significance, materiality, and necessity of issuing a new report. 

By incorporating these considerations, you can effectively evaluate the assumptions underpinning the valuation process and ensure the integrity of the Actuary’s work.  

Connect With Us for Further Guidance

We hope this article has provided you with valuable insights into assumption testing for pension and OPEB valuations. At Odyssey Advisors, our commitment extends beyond providing actuarial services; we are dedicated to fostering a deeper understanding and clarity in this complex field. 

If you have questions about the topic we covered, or if you’re seeking other advice on challenges you’re facing, we’re here to help. Our team of experienced actuaries and actuarial consultants is always ready to offer guidance to help you navigate through the nuances of actuarial valuations and audits. 

Feel free to reach out to us here. Every detail matters in the pursuit of accuracy and compliance. 

Odyssey Advisors – Empowering Auditors with Expertise and Insight

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Bottom Line Up Front

• There are 5 common pension payout methods (also known as annuities) –  Single Life Annuity, Joint and Survivor Annuity, Certain and Life Annuity, Certain Annuity, and Lump Sum Payment. 
• It’s important to understand each of these options to make an informed decision when selecting a pension plan that aligns with your retirement needs. 
• Below, we emphasize the crucial differences between each annuity option, such as beneficiary benefits and duration of payments. 

As you approach retirement, navigating your annuity options can be overwhelming. You’re likely to encounter a package full of choices, each with its implications. Understanding these options is crucial in making an informed decision that aligns with your retirement goals. Here’s a simplified guide to the most common pension payout methods: 

1. Single Life Annuity

What it is: The quintessential pension plan, offers a monthly payment for the duration of your life. 

Key feature: Payments will cease upon your death; no benefits are extended to your heirs or spouse. Also, if you’re married, it will require the notarized consent of your spouse. 

2. Joint & Survivor Annuity (50%, 100%, etc.)

What it is: Similar to single life annuity, it is paid to you for the rest of your life. 

Key feature: Now this is where it differs, when you choose this option you select a “Survivor” (usually a spouse) who receives a percentage of the original payment (50%, 100%, etc.) if you were to pass away before them. The payments end after both you and your survivor pass away. 

3. Certain & Life Annuity (5-year, 10-year, etc.)

 What it is: A lifetime annuity with a twist.

 Key feature: Guarantees a minimum number of payments (5 years, 10 years, etc.). If you die before that period is over, payments will still be due to your family until the end of that period. After the guaranteed period, it will continue for the rest of your life with payments ceasing upon your death. Also, if you’re married, it will require the notarized consent of your spouse. 

4. Certain Annuities (5-year, 10-year, etc.)

What it is: A fixed-period annuity, meaning that it is paid to you for a set period, regardless of your lifespan. 

Key feature: Payments are made for a set period (5 years, 10 years, etc.). If you pass away before the end of this period, your family will still be eligible to receive further payments until the end of the certain period. After the period is over, payments will cease. Also, if you’re married, it will require the notarized consent of your spouse. Also, keep in mind that you will be responsible for investing these funds to ensure they last for your lifetime.

5. Lump Sum Payment

What it is: A one-off, large payment made at the time of your retirement. 

Key feature: After the lump sum is paid, no further payments are made. Also, if you’re married, it will require the notarized consent of your spouse. Also, keep in mind that you will be responsible for investing these funds to ensure they last for your lifetime.

6. Additional Annuity Options

There are more specialized options such as Joint & Survivor Annuity with Pop-Up and Social Security Level Dollar. If you’re interested in these less common choices, it’s advisable to consult your financial advisor for more detailed guidance. 

Other Considerations

Keep in mind that each person is different and has differing life goals & circumstances. If you’re married, your default form of payment will be a Joint & Survivor annuity. If you would like to select another form of payment, you will need your spouse’s consent and signature. If you’re in poor health, accelerated benefit options like a lump sum may make sense. You may have other pensions, IRA’s or Social Security benefits so it’s important to see how they all fit into your financial plan.

To Sum It Up 

Armed with this knowledge, you can now navigate your annuity (pension) options with greater confidence. Remember, each choice has its unique advantages and implications for your retirement planning. Consulting with a financial advisor can provide personalized insights tailored to your specific situation. 

If you’d like to know more, you can reach us here. We’d be happy to answer any questions you may have. 

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BOTTOM LINE UPFRONT

• Bond ratings are a way to measure how creditworthy bonds are which helps potential investors evaluate the risk of purchasing
• Rating agencies are placing a greater emphasis on pension and OPEB liabilities when determining bond ratings
• Improving your pension and OPEB liability management will increase your credit rating and reduce your borrowing costs

As part of our services, we often help clients manage their employee benefit plans. Beyond the desire to offer sustainable plans, we’ve discovered that most clients are also concerned with understanding how their liabilities affect their bond ratings.

The purpose of this article is to provide some insight into how both your pension and OPEB obligations affect your bond ratings.

What is a bond rating?

Bond ratings are a way to measure how creditworthy bonds are. Similar to a credit score, a bond rating helps a potential investor evaluate the risk of purchasing a particular bond. Unlike a credit score, these ratings are assigned a letter grade by private bond rating agencies like Moody’s, Standard & Poor’s (S&P), and Fitch Ratings.

The higher the rating of a bond, the stronger the financial strength is deemed, leading to lower interest rates and reducing your borrowing cost.

Why do bond ratings matter?

The government entity or bond issuer sells bonds to investors when it needs to complete a major capital project. Think of it as using a credit card for a purchase, where the bond issuer is the cardholder and the investors are the bank. Those who purchase bonds are lending money to the issuer which will be repaid with interest. 

A bond rating determines how much interest the government entity will pay on its bonds. It also provides an investor with an overview of how risky it would be to buy a bond from the issuer. If you have a poor rating, you may have a hard time finding buyers for your bond issuance or you’ll have to offer a much higher interest rate.

Now that you have an idea of the importance, let’s dive into how your pension and OPEB liabilities play a role in determining your bond rating. 

How much weight do rating agencies place on pension and OPEB liabilities?

While the exact weight varies by agency, rating agencies have placed greater significance on these liabilities as concerns about their affordability grow. In comparison with each other, rating agencies emphasize pension plans because OPEB plans are easier to modify to limit liabilities.

How do rating agencies evaluate pension and OPEB liabilities?

Below is a list of items reviewed by rating agencies to evaluate pension and OPEB liabilities:

• The size of the bond issuer’s current and future liabilities relative to potentially taxable property (grand list) and income, expenditures, and revenue.
• Actuarially determined pension contributions and annual OPEB payments as a percentage of expenditures.
• The management and governance of the issuer. Do they have unpredictable revenues and expenditures and, if so, are they minor or substantial?
• Fund balances as a percent of operating revenues. This ratio will be evaluated in relation to the stability of the issuer’s revenue.
• Review the issuer’s ability to make unreduced payments in the face of economic hardship.
• Review the existence (or lack thereof) of a plan to address these liabilities (funding policy, investment policy, benefit changes, etc.)
• Review the reasonableness of actuarial assumptions used to calculate liabilities.
  • If these are not deemed reasonable, rating agencies will adjust liabilities accordingly and they may view these unrealistic assumptions negatively.

How can we improve our bond rating and reduce borrowing costs?

It comes as no surprise that both pension and OPEB liabilities directly impact your bond ratings, therefore improving your liability management will increase your bond rating and reduce your borrowing costs. Here are a few of our recommendations:

• Review your OPEB plan design (e.g., benefit formula, eligibility, Medicare prescription drug benefit, etc.) and look for options to reduce costs both short-term and long-term.
• If your pension plan has a defined benefit structure (most do), look at the compensation definition (e.g., Does it allow for pay spiking? Does it count overtime & bonuses? How many years are considered? etc.), employee contributions and early retirement subsidies to ensure they meet your objectives
• Develop a clear funding policy – consider utilizing a dedicated funding source (similar to what is done for a revenue bond)
• Develop an investment policy that recognizes these long-term liabilities, but aligns with your risk tolerance
• Speak with your auditors to ensure that the assets you set aside are in a qualified trust
• Coordinate with your auditor and actuary to ensure that the assumptions you are using are reasonable

Your bond rating is dependent on many factors as noted above. As for what can be done for pension & OPEB plans, our best advice is to take action and establish plans to fully fund both your pensions & OPEB plans in order to reduce your total liabilities as these are often the largest liabilities on an issuer’s balance sheet. By following our recommendations above, you’ll be able to better understand your liabilities, make improvements to your funding policy, and enhance your bond rating while decreasing your borrowing costs.

For further information on what impacts your bond rating, please contact an Odyssey Advisors team member today or fill out the form below.

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