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CPFO Exam Risk, Benefits, Procurement Questions and Answers AHow many full-time public employees are covered by defined benefit plans? - โ Ninety-one percent How many full-time public employees are covered by defined contribution plans? - โ nine percent Prudent-Person Rule - โ Requires each retirement board member to perform his or her duties as a prudent person would when acting in a like capacity and in a similar situation. Defined Benefit Plan - โ Provides for a guaranteed benefit at retirement using a formula generally based on age, length of service and salary. Defined Contribution Plan - โ Provides for benefits based on the assets available in employees' individual accounts. Defined Benefit Plan - Employer Perspective - โ "Funding Certainty: Liabilities change based on actuarial assumptions regarding future salary increases, investment earnings, employee turnover and plan experience. Predictable Costs: Annual contributions can vary from year to year based upon actuarial assumptions. Many plans are funded based on a consistent rate of contribution set by statute. Recruitment Tool: Typically not portable between employers, unless under same umbrella system (e.g. WRS). Reward Long-service Employees: Benefits typically based on final year(s) salary. Administrative Expenses: Include actuarial valuation, record keeping and investment management. Investment Risk: Assumed by the employer." Defined Benefit Plan - Employee Perspective - โ "Benefit Potential: Benefits paid at retirement are for life and are guaranteed by the plan's formula. COLAs are common. Understanding benefits: Require explanation as they are based on a set of variables. Typically, there are no separate accounts. Access to Assets while Employed: Benefits may not be withdrawn while actively employed. Reward long-service Employees: Based on final year(s) salary. Recruitment Tool: Benefits have limited portability Investment Risk: Risk is assumed by the employer." Defined Contribution Plan - Employer Perspective - โ Funding Certainty: Employer liability is fulfilled annually as contributions are made to employee accounts typically based on a percentage of payroll. Predictable Costs: Annual cash expenditures are more predictable as they are based on a set percentage of employee salaries. Recruitment tool: benefits are portable Reward long service: Benefits are based upon accumulated contributions and earnings Admin Expenses: Lower, as no actuarial valuation is
necessary. Employee education costs and recordkeeping may be higher. Investment Risk: Assumbed by the employee." Defined Contribution Plan - Employee Perspective - โ "Benefit Potential: Based on contributions and earnings. The final retirement benefit can be eroded by pre-retirement distributions and inflation. Understanding benefits: Benefits based on a percentage of salary. No other variables need to be considered. Each individual has a separate account. Access to Assets while Employed: Benefits may be withdrawn under certain circumstances (e.g. loans, death, or disability) per IRS guidelines. Rewards long- service employees: Not really, based on accumulated earnings and contributions." Retirement plan funding objectives - โ 1. Maintain stable contribution rates 2. eliminate the unfunded accrued liability wihtin a certain time frame 3. Maintain inter-generational equity by not passing current costs on to future generations 4. Utilize techniques to hedge against unexpected adverse experience. Retirement plan funding methods - โ Level: produce contribution rates based on an even percentage of payroll. Graduated: funds benefits by increasing the percentage of payroll contribution over an individual's career. Unfunded Accrued Liability (UAL) - โ The excess of the total liabilities, both present and prospective, over the present assets and present value of future normal costs. Closed Amortization - โ Financing the UAL over a specific number of years with the number of years declining as each year passes. Open Amortization - โ Number of years to pay off the UAL may remain constant from year-to-year. Three methods of valuing assets - โ 1. Book Value: Represents the cumulative actual cost of acquiring the assets. 2. Market Value: Values the assets at their sale price, producing the fluctuation in asset values. 3. Smoothed Market Value: Recognize only a portion (i.e. 20%) of the unrealized gains and losses each year. This creates a smoother trend in the assets, and best supports a funding policy of stable contributions rates over time. Annuity - โ A series of periodic payments for a fixed future period or for life. Fiduciary - โ An individual, corporation or association to whom certain property is given to hold in trust according to a trust agreement.
โ An amount designed to gradually eliminate the difference between the present value of future benefits and the value of the assets accumulated in the pension trust fund to pay those benefits. Statement of Net Position - โ Government wide financial statement, functional equivalent of a private sector balance sheet. Statement of Activities - โ Government wide financial statement, similar of the private sector operating statement. Pension expense - โ employers report the cost of pension benefits as pension expenses in the statement of activities Amount reported as a liability by the employer (Net Pension Liability) - โ Difference between present value of pension benefits attributable to past service (total pension liability) and resources currently available in pension trust to pay benefits (net fiduciary position) New Pension Accounting - โ Employers report the full amount of their unfunded obligation as a liability, even if they have been fully funding their annual acturarilly determined contributions. Traditional Pension accounting - โ Employers only reported a pension liability if they failed to fully fund their annual actuarily determined contributions. New Pension Accounting-Expense - โ Requires that pension expense be based on cost rather than funding. As a result, there will no longer be a direct tie between what an employer would have to contribute to the pension trust fund in a given period to ensure the sustainabile funding of benefits (=actuarially determined contribution and what the employer reports as pension expense in its financial statements. Frequency of actuarial valuations in pension accounting - โ Old: Could be up to 3 years old. New: must take place within 18 months of the start of the reporting period. Objectives of a sound pension funding policy - โ "1. Base Funding on actuarially determined contributions 2. Ensure an appropriate balance between stable contribution rates and intergenerational equity 3. Maintain funding discipline 4. Be accountable and transparent"
Smoothing investment experience - โ Maximum of a 5 year period is suitable. Key factors in assessing the sustainability of a defined benefit pension plan - โ "1. An employer's funding progress 2. Actual employer contributions as a percentage of actuarially determined employer contributions" Risk - โ Chance of a loss Operational Risk - โ Risks encountered during the delivery of public services Pure risks - โ Risks that erode a government's financial strength. Here, there is no upside; either the government incurs a loss or there is no loss at all. Speculative Risks - โ Have an upside and a downside, such as an investment (e.g. a stock making money but falling below expectations). Goal of risk management - โ "1. To create a safe workplace 2. To prevent catastrophic financial losses that have the potential to bankrupt a government 3. To provide budgetary stability" Comprehensive Risk Mgmt program benefits - โ "1. Allows for a more effective use of government funds 2. Increases worker productivity
- Reduces uncertainties associated with future projects, including budgetary uncertainty" Risk Management Process - โ Identify Risks - >Evaluate Risks - >Develop measures to treat risks - >Implement and finance risk management Risk Identification - โ Determining where there is potential exposure to loss. Risk Evaluation - โ Viewing potential for loss on the basis of the frequency and severity of an event, using historical and other data. Risk Treatment - โ Planning and developing a risk management program using appropriate tools and techniques, such as risk control and risk financing
Tasks of a risk management committee - โ Create the risk mgmt. policy, developing inspection programs, designing safety orientation program for new employees, creating accident/claims investigation systems, identifying safety measures that require funding, developing disciplinary procedures, establishing review boards. Risk Retention - โ Assumes financial responsibility for some loss (e.g. self insures). When done as part of a full, risk mgmt. plan, retaining some risk (i.e. paying deductible) can lower the government's premiums and align its incentives with the insurance company to create a safer work environment. Risk Avoidance - โ Most complete way to manage risk, by avoiding it completely. But in the hcase of emergency services, usually not possible or very difficult. Property Insurance - โ Protects against damage or loss of property, directly. Liability Insurance - โ Covers losses related to a government being found negligent in the performance of operations. Protects against indirect loss. Worker's compensation - โ Provides employees with coverage for all medical bills resulting from job-related injuries or disabilities as well as lost income. Projects against indirect loss. Risk Pools - โ Provide a vehicle for local governments to pool their funds to provide for their insurance needs. Also function as a govt's comprehensive risk manager; providing services that include training and workshops, loss control audits, risk assessments, and onsite safety inspections. Risk Pool Factors - โ Services offered (e.g. risk control, risk finance), lines of insurance coverage offered (e.g. worker's compensation), type of government member, "a la carte" options versus a single package of services, degree of state regulation, financial resources available to the pool, extent of risk transference, and primary vs. excess coverage. Primary Coverage - โ Risk Pool that assumes the obligation to pay the entire claim Excess Coverage - โ Risk pool that assumes that it will only pay on claims over a certain threshold (e.g. $100,000)
Risk Finance Alternative-Commercial Insurance - โ Variability in Cost: Highly variable due to market cycles. Financial Capacity: Large. Reserving Practice: Done at the company level, as required by stockholders or state regulators. Profit Incentive: For Profit. Covered Risks: clearly defined by policy Risk Finance Alternative-Risk Pool - โ Variability in Cost: Stable (adequate reserves maintained). Financial Capacity: Medium to Large. Reserving Practice: Funds are set aside to pay member claims; additional reserves are established for unreported claims and contingencies. Profit incentive: Nonprofit, unused funds may be returned to members. Covered Risks: Defined by contract among members. Risk Finance Alternative-Self Insurance - โ Variability in Cost: Variable (if govt does not maintain adequate reserves or follows a pay- as-you-go approach. Financial Capacity: Intermediate. Reserving practice: Funds may be set aside, but this is subject to govt's discretion. Profit incentive: Nonprofit, unused funds are retained by govt. Covered risks: Subject to interpretation. Typical Expenditure Breakdown for Risk Mgmt. - โ 52% - Worker's Compensation, 35% - Liability, 13% - Property Insurance Brokers - โ Brokers that assist governments in procuring insurance coverage. Insurance companies - โ Commercial carriers that underwrite and accept financial risk. Risk Pools - โ Nonprofit entities that underwrite or share the risk of their members. Attorneys - โ Assist in preventing and/or defending against litigation Third-party claims administrators - โ Business that process claims Actuaries - โ Provide risk managers with a credible estimate of how much they need to budget for risk mgmt claims and other expenses (actuarial services are used by governments that choose to self insure and that establish self-insurance reserves for claim payouts). Asset Allocation Strategy - โ The primary determinent oof the variation in investment return.
Competition - โ Methods of selecting a provider of goods or services should be as competitive as possible, and a competitive sealed bid or proposal should be used unless there are justifiable reasons for using another method. Documentation - โ All steps in the procurement cycle should be recorded in writing. Compliance - โ Both the government and the contractor are legally required to adhere to the written commitments they make. Solicitations (advertising documents) - โ These are invitations for/to bid, requests for quotations, requests for information, and requests for proposals. Offers - โ These are bids, proposals, and quotes made by prospective businesses to supply goods or services. Contracts - โ These are the signed agreements between the government and the supplier to buy/sell. Amendments - โ These are modifications to solicitation documents, to offers, and to contracts. Grants in aid - โ The government's objective is to support or stimulate a public purpose. Joint ventures - โ Government and private entity become partners in achieving a public purpose. Ways procurement activities can be subject to abuse - โ External influence, circumventing competitive bidding requirements, splitting purchases in order to remain within small purchase limits, using emergency procedures in the absence of an emergency, using sole source when competition is available, denying one or more vendors the opportunity to bid or propose, using unnecessarily restrictive specifications, prequalifying some bidders on a discriminatory basis, removing companies from the bidders list without just cause, requiring unnecessarily high bonding, making info available to some but not all vendors. Abusive procurment practices by the private sector -
โ Collusion or price fixing, providing kickbacks or offering bribes, low-balling to win a contract followed by requests for change orders, falsifying certifications. UPPCC - โ Universal Public Purchasing Certification Council CPPO - โ Certified Public Purchasing Officer CPPB - โ Certified Public Purchasing Buyer Objective Procurement Performance Measures - โ Avg. length of time to complete a solicitation, avg. number of bidders for each soliciation, number and type of vendor complaints, percent of early payment discounts taken. Invitations to bid (ITB) - โ Preferred method of announcing a government's desire to purchase through competitive sealed bidding. Bidders or vendors list - โ Useful tool for encouraging competition and ensuring that all interested vendors are notified when the government wishes to engage in trade. Specifications - โ Description of the item or services sought via design or performance. Reasons for prefered vendors - โ Local or in-state vendors, small businesses, minority owned businesses, sheltered workshop products, vendors in areas of high unemployment, and government institutions. Competitive Sealed Bids - โ Preferred method for purchases larger than the small purchase threshold. Competitive Sealed Proposals - โ Method used for selling goods and services above the small purchase threshold where the specifications cannot be developed so that they are sufficiently precise to make selection solely based on price. Requests for quotation - โ Less formal than a bid, and may be verbal. Based on lowest price. Faster and less formal than RFP or IFB. Emergency preparedness -
โ When the government procures the services of a vendor to perform a function for which the government retains control, responsibility and accountability. Franchising - โ When the government gives to a private entity the right to provide a service and run it as its own business. Govt continues to regulate the service monopoly to ensure adequate consumer protection. 2 aspects of contract administration - โ Quality assurance and contract management Quality Assurance - โ Quality of the goods or services which were provided are monitored. Contract management - โ Invoices are reviewed and approved, compliance with the terms and conditions of the contract is ensured, and modifications are made if needed. 6 Leverage Points to manage employee health care benefit costs - โ "1. Change the level of the benefit provided: Modify how many and what type of benefits the plan provides and who they provide them to 2. Manage participants' choice of providers: Direct or even limit health plan participants choices to lower-cost providers. 3. Share cost with employees: Structure the health plan so that employees bear part of the burden of benefit costs. 4. Reduce use of health care services by employees: Address the economic incentives and actual need for health care services. 5. Right-source health benefit services: Use the right combination of outsourced service providers and providers within a network to deliver health benefits. 6. Maximize the value received for the health care dollar: Rather than just minimizing costs, consider the benefit received per dollar spent on health benefits. " Best ROI benefit investments - โ Onsite clinics, variable premium contributions, high-deductible health plan and health savings accounts, wellness programs, self insurance, cooperative purchasing, and value- based insurance design disease management. Ways to incentivize use of onsite clinic - โ Waive or substantially reduce co-pays when visiting the clinic, provide convenient scheduling options such as web-based appointment setting, develop advantageous time-of policies for using the clinic, make sure the clinic staff is professional and friendly, provide services that are focused but cover major employee needs. Re-bidding health insurance providers - โ Effective strategy to reduce costs, but can only be used every 3-5 years due to the time and effort needed. Also, must be prepared to change vendors or risk a loss of credibility.
