Frequently Asked Questions
1. What are municipal bonds yielding?
2. What is your portion of benefit payments each year?
3. What is your funding policy?
4. How much do you already have in assets?
5. How are you investing those assets?
An increase in your discount rate will significantly reduce disclosed liabilities and vice versa. It is important to note that this does not impact the benefits paid from the plan (e.g., the true cost).
We would be happy to work with you to customize a funding schedule that fits your needs.
The argument for OPEB bonds is that they allow the plan sponsor to take advantage of an “arbitrage” situation where the funds received can be invested to earn 6%-8% returns while paying 3%-5% on the bond. This leverage increases risk as the 3%-5% payment on the bond is guaranteed and the 6%-8% return on the investment is not. While there may be situations when an OPEB obligation bond makes sense, we recommend approaching OPEB obligation bonds with extreme caution.
• A plan sponsor whose main concern is preservation of capital
• A plan sponsor that wants consistent returns with little downside risk
• A plan sponsor that is willing to accept more volatility to achieve higher returns
• A plan sponsor that can bear large market swings in exchange for high potential returns
The right investment policy is one that aligns your long-term goals with your risk tolerance.
• Plan design – Talk with your provider about enrolling in more economical plans.
• Change eligibility requirements
• Change cost sharing (i.e. Retiree portion of premiums)
Please remember that you must weigh human resource concerns against potential savings. Also, certain states have restrictions on what municipalities can do to in regards to eligibility requirement and cost sharing arrangements.