CPFO Compensation & Benefits Exam

What is the GASB standard on other post-employment benefits?

Book as fair market value. Recognize the net OPEB liability on the face of the financial statements.

Does GFOA recommend early retirement incentives?

No, because of the potential cost and complexity.

Does Employee Retirement Income Security Act (ERISA) apply to public entities?

No, only private.

Benefits that can be offered in a cafeteria plan:

1. Accident and health benefits 2. Adoption assistance 3. Dependent care assistance 4. Group-term life insurance coverage 5. Health savings accounts

Core elements of a pension funding policy are:

1. Actuarial cost method 2. Asset smoothing 3. Amortization 4. Surplus management

FMLA applies to:

1. All public employers 2. Private employers if they have 50 or more employees for 20 or more weeks per year

An actuarial firm and supervising actuary should have the following:

1. Credentials 2. Experience, including OPEB 3. Clarity

What are some health benefits cost-containment measures?

1. Healthcare management programs 2. Influencing participant behavior 3. Cost-sharing measures such as higher deductibles, co-payments, and employee contributions 4. Regularly review retiree benefits

Does GASB require OPEB to be prefunded?

No.

When determining an OPEB funding approach...

1. Require employee contributions 2. Don't offer incentive packages for early separation 3. Do not issue OPEB bonds to fund liabilities

Ensuring OPEB sustainability includes:

1. Structural considerations 2. Managing costs of benefits offered 3. Create a qualified trust fund to prefund obligations 4. Communicate with and educate affected stakeholders.

Pass-through costs resulting from new ACA fees and taxes are

1. Transitional Reinsurance Fee 2. Comparative Effectiveness Research Fee 3. Health Insurance Industry Fee 4. Cadillac Excise Tax

Trust personnel include

1. Trust administrator - can be internal or external, responsible for authorizing disbursements, carrying out the directives of the governing body, and other oversight tasks 2. Custodian - should be independent of the investment advisor 3. Investment advisor - A discretionary advisor is typically a named co-fiduciary, while a non-discretionary advisor leaves primary fiduciary responsibility with the trust's oversight officials.

Hybrid plans

A pension plan that offers a combination of defined benefit (DB) and defined contribution (DC) plan features, and can be offered as a primary, optional, or supplemental plan.

What are the three main options for the legal form of the trust and its governance structure?

1. Voluntary employees beneficiary association (VEBA) - typically operate independently of the sponsoring employer 2. Section 115 trust - the governing body is responsible 3. 401(h) trust - governed by the pension board

Actuarial services can include:

1. actuarial valuation 2. studies, modeling, projections to measure risk 3. calculating the effect of benefit changes 4. studying the differences between assumed experience and actual experience 5. provide info to meet GASB reporting requirements 6. provide calculations needed to administer plan 7. provide modeling for ACFR requirements

FMLA qualifying conditions

1. birth and bonding of child 2. adoption/foster care and bonding of child 3. to care for immediate family member 4. serious health condition 5. immediate family member on covered active duty

FSA Qualifying LIfe event changes:

1. employment status 2. legal marital status 3. number of dependents 4. dependent's eligibility 5. child or elder care provider

GFOA recommends the following steps to procuring actuarial services:

1. identify the actuarial services required 2. establish selection criteria 3. develop a clear and concise request for proposals (RFP) 4. determine, to the degree possible, the level of independence and objectivity of the actuary 5. establish procedures for working with the actuary 6. periodically review and rebid actuarial contracts

Minimum wage was last set in

2009 and is $7.25/hour

FLSA, non-discretionary bonus

A bonus that is included in the employee's regular rate of pay. Typcially, the employee knows and expects this type of bonus. Examples are bonuses for quality and accuracy of work and attendance. Does not include severance, employee of the month, or bonus because of a stressful situation.

What is the purpose of asset allocation?

A fundamental principle of sound investing. Diversifying the investment portfolio by including asset categories with investment returns that increase or decrease under different market conditions can protect against significant investment losses.

Defined benefit plan

A pension plan that guarantees a specified level of retirement income, and all investment-related risk is borne by the plan sponsor. This plan is funded by contributions from employer, employee, and investment earnings.

Defined contribution plan

A pension plan that provides funds for retirement based solely on the assets available in an employee's individual account and all investment-related risk is borne by the employee. Funded primarily by employee contributions. This is the most portable option.

What is a cafeteria plan?

A plan in which employees can choose from a minimum of two or more benefits that consist of cash and qualified benefits. It provides participants an opportunity to receive certain benefits on a pretax basis.

Surplus management policy

A proactive policy that helps guide the system in the prudent management of potential "surplus," including considerations for items such as contribution levels, risk reduction opportunities, stabilization reserves and benefit levels.

Who is responsible for the overall management of the retirement plan?

A retirement plan is governed by boards of trustees (i.e., boards, governing boards, trustees).

What is a function of position management?

A system for keeping track of who does what.

Brokerage Window Options

A type of defined contribution plan which allows plan participants to select a much larger number of investments through a broker. They enjoy the same tax advantages as a regular defined contribution plan. GFOA advises caution.

Target-risk funds

A type of investment fund with a portfolio asset allocation that holds a diversified mix of stocks, bonds, and other investments to create a desired risk profile.

Section 218 Agreement

A voluntary agreement between the State and SSA to provide Social Security and Medicare Hospital Insurance for State and local government employees. All states have this agreement.

Who can take FMLA leave?

An employee must: 1. work for a covered employer 2. have worked 1,250 hours during the 12 months prior 3. worked for the employer for 12 months

Consolidated Omnibus Budget Reconciliation Act (COBRA)

An employee's option to continue group health benefits for limited periods of time, typically 18 - 36 months.

Fringe benefit

An extra benefit supplementing an employee's salary, for example, retiree health insurance, retiree pension, a company car, subsidized meals, bonus, etc.

What is carried interest?

An incentive that rewards the manager for enhancing performance, which is expressed as a percentage of net profits over a specified minimum return.

How does the ACA define a full-time employee?

As an individual who works an average of at least 30 hours per week.

How often should an investment portfolio performance be reviewed?

At least annually (preferably quarterly), to ensure compliance with the strategic and annual investment targets.

How often should a comprehensive actuarial audit of the actuarial valuations be performed?

At least once every five years.

Actuaries are bound by what code?

Code of Professional Conduct

Anti-spiking provisions

Consider provisions that exclude extraordinary income from final average compensation calculations.

What is the tax advantage of a 457 (b) retirement plan?

Contributions and earnings are tax-deferred

DROP

Deferred retirement option program

What are the retirement plan design options?

Defined benefit, defined contribution, and hybrid

What type of pension and retirement plan is portable?

Defined contribution

Importance for employer to track employees time include:

Determine how much to pay people Determine how much leave time to deduct Understand what employees are doing Promote a culture of accountability

GFOA recommends that employees make what type of contribution to their defined contribution plan?

Employee should make a contribution that is a percentage of their pay.

Hybrid - Cash balance plans

Employee's account is periodically credited with a pay credit— typically a set percentage of pay—and an investment credit, can be defined as a fixed rate, an external benchmark, or the actual investment return of the plan's assets or a portion of the plan's assets.

What is a key component of position control?

Ensures that the number of filled positions authorized and funded by the governing body is not exceeded by staff

FLSA

Fair Labor Standards Act. Sets a minimum wage, maximum number of hours, bans child labor, comp time, Fire and Law enforcement employees

Financing considerations of OPEB

Financing benefits as they are earned (prefunding) rather than as they come due (Pay-as-you-go)

FSA

Flexible Spending Account. Set up though employer to cover health costs. Pre-tax. What's not used goes back to employer "use it or lose it".

Data warehousing

Involves gaining access to participant data from all vendors, in a compatible electronic format.

FMLA birth and bonding

Leave must conclude withing 12 months of birth or placement; intermittent leave is subject to employer's approval and, if medically necessary, is not subject to the 12-month limitation.

What is extraordinary income?

Lump sum payouts of vacation, sick, and compensatory time as well as extraordinary overtime pay.

What counts towards FMLA 1,250 hours requirement?

Only those hours worked for the employer. Leave hours are not included.

PTO

Paid time off: More common in private sector than local government; discourages people from accruing significant sick leave banks

Merit Pay Model of Compensation

Pay for performance system Typically within an overall pay range The range typically grows with inflation Should be as objective as possible Requires on-going analysis to provide pay equity across the organization

What analytical tools are used to measure the cost drivers and health risk factors of plan participants?

Predictive modeling, data warehousing, measuring the plan's efficiency ratio, or the ratio of covered claims to paid claims.

Brokerage investment options

Provides access to funds outside of the lineup selected by the plan's governing body.

Participant education for defined contribution plans

Public plan sponsors should invest in high-quality education for participants that direct their own investments.

QDIA

Qualified Default Investment Alternative(s) provide an appropriate default investment fund for plan participants who do not select investment options.

Civil Service Model of Compensation

Step and grade system Different grades, and steps within each grade Steps may be spaced out with incremental pay increases Can also include longevity

SPD

Summary Plan Description. An important document that tells participants what the pension plan provides and how it operates, and describes all the significant features of the plan. Can be legally binding, describes how to file a claim, and describes when an employee can participate.

FMLA

The Family and Medical Leave Act of 1933 provides eligible employees up to 12 workweeks of unpaid leave a year, and requires group health benefits to be maintained during the leave. Employees are entitled to return to their same or an equivalent job at the end of their FMLA leave.

Hybrid - Pension equity plans

The balance in the employee's account equals a given percentage of the employee's final average salary for each year of service.

Amortization policy

The length of time and the structure selected for increasing or decreasing contributions to systematically eliminate any unfunded actuarial accrued liability. Never exceed 25 years, but ideally falls within 15-20 years.

Duty of loyalty

The obligation to act for the exclusive benefit of the plan participants and beneficiaries.

Duty of prudence/duty of care

The obligation to act prudently in exercising authority or discretion over the interests of the fiduciary relationship.

Asset allocation

The practice of dividing an investment portfolio among major asset categories.

A health care plan's efficiency ratio

The ratio of covered claims to paid claims.

Actuarial cost method

The technique used to allocate the total present value of future benefits over an employee's working career (normal cost/service cost).

Asset smoothing method

The technique used to recognize gains or losses in pension or OPEB asset return over some period of time so as to reduce the effects of market volatility and stabilize contributions.

Multiple employer trusts

These are turnkey programs in which a governmental entity, an intergovernmental organization, or a private firm has already established the trusts investments and governance.

What is the purpose of an actuarial valuation?

To determine the amount of contributions needed to pay benefits over time.

What agency does GFOA recommend as a better measure of inflation?

U.S. Bureau of Labor Statistics Employment Cost Index

When should an employer notify and request feedback from plan participants?

When there is a material increase to deductible/copay, change in dependent coverage, and/or a change to provider network

Can a 457(b) plan include designated Roth accounts?

Yes, a governmental 457(b) plan may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts.

Life cycle or target date funds are

a mix of stocks, bonds, and cash, that start out with a more aggressive mix of investments and gradually become more conservative as the investor ages or nears retirement

Life-style funds are

actively managed in response to market conditions.

SPD should be reviewed and updated at least:

annually and when the plan is modified or when legal changes would affect participants.

A section 125 cafeteria plan permits employees to choose from

at least one taxable benefit, such as cash, and one qualified benefit.

GFOA recommends creating a qualified trust fund to

prefund OPEB obligations

Discretionary advisor

can make investment decisions within the parameters of the trust's investment policy; typically a named co-fiduciary.

Actuarial services are used to

determine the funded status of a plan and the necessary contributions which, when combined with investment earnings, will pay the promised benefits when they are due.

Health Reimbursement Arrangements (HRAs) are an

employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. Unused amounts may be rolled over to be used in subsequent years.

GFOA recommends that actuarial audits be done at least...

every five years, unless there is a change in the actuary.

The fundamental financial objective of public employee defined benefit and hybrid plans is to

fund the long-term cost of benefits in a fiscally sustainable manner

Due to the costly and time-consuming nature of changing actuaries, GFOA recommends that contracts for actuarial valuations be for...

multiyear periods of at least five years.

GFOA recommends an actuarial experience study be conducted

no less than once every five years

When does GFOA recommend that governments prefund their obligations for postemployment benefits other than pensions (OPEB)?

once an employer has incurred a substantial long-term liability.

Non-discretionary advisor

similar to a pension plan consultant and requires pre-approval of investment decisions; leaves primary fiduciary responsibility with the trust's oversight officials.

Actuaries act as

technical advisors - providing plan design, actuarial assumptions and methods.

A single-employer trust is controlled by

the employer and administered by either the employer or an independent board of trustees.

Predictive modeling

using data analytics to identify individual high-risk and high-cost users.