HomeMy WebLinkAboutCC AG PKT 2008-01-14 #BB
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January 14, 200B
MEMORANDUM
TO: Honorable Mayor and Members of the City Council
FROM: OCsavld N. Carmany, City Manager
SUBJECT: Retiree health benefits
INTRODUCTION:
The purpose of this report is to introduce this topic as a study item. No Council
action is requested. Following a brief introduction of the topic by city staff,
Actuary John Bartel will provide an overview of the actuarial report and will be
available to answer questions.
DISCUSSION:
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The Governmental Accounting Standards Board (GAS B) Statement No. 45,
Accounting Standards for Other (than pension) Post Employment Benefits
(OPEB), establishes new financial reporting requirements. The City is required
to implement Statement 45 dunng the 'OB -'09 fiscal year.
Historically, the City has budgeted and accounted for retiree healthcare benefits
as they were paid. Instead, Statement 45 will require the City account for these
promises on an accrual basis (as benefits are earned). In connection with the
recent collective bargaining and in preparation for implementation of Statement
45, the City retained Bartel & Associates to prepare an actuarial study to
determine the City'S potential unfunded liability.
Bartel's study has been positively revised to reflect recent changes to the City's
collective bargaining agreements. The City Will be meeting with the employee
associations to discuss further changes to the collective bargaining agreements.
The City of Seal Beach budgeted $232,000 for retiree health care costs in fiscal
2007. Implementation of Statement 45 will result in those expenditures nearly
tnpling from the current amount. Completion of thiS actuarial study now helps
determine the City's exposure and allows time to determine a course of action for
the 'OB -'09 and subsequent budgets. The City has the opportunity to address
this unfunded liability by pre-funding using a trust.
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Agenda Item LJg
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If the City Council decides that fully funding the unfunded liability is in the Interest
of the City, it may wish to direct staff to explore this further. Attached is "Retiree
Healthcare Plan January 1, 2007 Actuarial Valuation Executive Summary", dated
November 2007, by Bartel Associates LLC.
RECOMMENDATION:
It is recommended that the City Council:
1) Receive and file this informational report on issues relating to
retiree medical benefits
2) Provide follow-up direction to staff as appropriate
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CITY OF SEAL BEACH
RETIREEHEALTHCAREPLAN
January 1, 2007 GASB 45 Actuarial Valuation
Preliminary Results
JOHN E. BARTEL
It-lRTEL
.' S~llll/\rr~ IIC
December 10, 2007
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Agenda
Thpic Page
What Is GASB 45? 1
Definition of Terms 2
Benefit Summary 3
Participant Statistics 4
Actuarial Methods & Assumptions 5
Valuation Results 6
e Projections 7
6}V
o'clllllll'a",or_~~;dJr4_lbadlopob-rrIllltb.07.ll.ID_
What is GASB 45?
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. OPEB: (Qther than pension Post Employment Henefits)
. Historically accounted for as Pay-As-You-Go:
. Generally ignored until employees stop rendering service
. Pay $1 / Account for $1
. GASB Statement No. 45, Issued June 2004:
· Requires agencies recognize their OPEB cost over the active
service life of their employees rather than on a pay-as-you-go basis
. Effective date:
· Based on GASB 34 Phase in
· City will be Phase III
· Mandatory implementation for 2009/1 0 Fiscal Year
· Early implementation encouraged
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(ij:1) December 10. 2007
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Defmition of Terms
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. Actuarial Accrued Liability (AAL):
· Liability for benefits "earned" for past service using actuarial
assumptions
. Annual Required Contribution (ARC):
· Normal Cost - value of benefits "earned" during the current year,
plus
· Amortization of unfunded AAL
. Net OPEB Obligation (NOO):
· Historical difference between ARC and actual contribution
. Annual Other Post Employment Benefit Cost (AOC):
· Equals ARC adjusted for:
> Interest on NOO
> Amortization ofNOO
(ij4) December 10, 2007
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Benefit Summary
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Eligibility: Full-tune employees that retire dIrectly from the City under CalPERS
Benefit:
Police (Recently Negol1ated Benefits)
. TIer 1- DOR < 111/2010: Full cost
of any plan except PERSCare
Service Coverage
< 15 PEMHCA Min only
15-24 EE + 1
~ 25 Family
. Tier2-DOR~ 11112010' Average
of2lowest cost Southern CA plans
ServIce Coverage
<15 PEMHCAMinonly
15-19 EE Only
20-24 EE + 1
~ 25 Family
. Tier 3 - DOH ~ 11112010:
PEMHCA Mm Only
Miscellaneous
. City pays portion of monthly
medical & dental premiums up to
a dollar cap whIch vanes by
bargaining unit
ServIce Coverage
< 20 PEMHCA Mm
(unequal method)
EE Only (Exec-Family)
FlllIIlly
20-29
~30
(i}1) December 10. 2007 3 G
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Participant Statistics
Supervisors Executive!
OCEA & Prof Mid-M2mt POA PMA Total
. Actives:
. Count 21 16 17 22 8 84
. Average age 44.8 50.6 43.3 423 463 45.1
. Average servIce 128 139 4.5 115 16.3 11.3
. Average Pay $ 44,726 $ 51,575 $ 99,732 $ 74,199 $ 97,062 $ 69,866
· Total Payroll $939,240 $825,204 $1,695,444 $1,632,372 $776,496 $5,868,756
. Retirees:
. Count
. Average age
· Average ret age
. Total:
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. Count
6
629
538
7
64.5
56.8
27
23
~ December 10, 2007
4
7
66.8
59.6
13
63.1
49.4
16
62.6
49.0
49
63.7
52.3
24
35
24
133
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Actuarial Methods & Assumptions
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Funding Method
UAAL Amortization
Discount Rate
Inflation
Payroll Increases
Healthcare Trend
Retirement Age
January I. 2007 Valuation
Entry Age N orrnal
30 Years as Level Percent of Payroll
. 4.50% No pre-funding, assets invested in General Fund
. 7.75% Pre-funded through CalPERS
3.00%
3.25%
Year HMO PPO
2008 Actual premiums
2009 10.3% 10.7%
2017+ 4.5% 4.5%
CaIPERS: Misc 2%@55 Average = 60
Police 3%@50 Average = 55
Termination, Mortality CaIPERS
(i}1) December 10, 2007
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Valuation Results
Recently Negotiated Benefits for Police, No Change for Miscellaneous
(Amounts in $OOO's)
Continue
PayGo
4.50%
$ 14,316
. Present Value of Benefits
. Funded Status
. AAL
. Assets
. UAAL
. 2007/08 ARC
. Normal Cost
. UAAL Amortization
· ARC
· ARC as % of payroll
. Estimated 2007/08 Payroll
~ December 10. 2007
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Full
Pre-Funding
7.75%
$ 7,938
6
10,609 6,667
10,609 6,667
376 169
447 431
823 600
13.6% 9.9%
$ 6,059 $ 6,059
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Projections
Pay-As-You-Go lliustration
e 4.5% Discount Rate, 30-Year Amortization
(Amounts in SOOO's)
Beginning of Year Annual Benefit
Fiscal Net OPEB Benefit OPEB Cost Payout as %
Year ObliRation Payout (AOC) Payroll of Payroll
2007/08 $ $ 232 $ 823 $ 6,059 3.8%
2008/09 591 265 877 6,256 4.2%
2009/10 1,203 301 932 6,459 4.7%
2010/11 1,834 340 989 6,669 5.1%
2011/12 2,483 385 1,047 6,886 5.6%
2012/13 3,145 434 1,108 7,110 6.1%
2013/14 3,819 485 1,169 7,341 66%
2014/15 4,503 541 1,233 7,579 7.1%
2015/16 5,195 599 1,297 7,826 7.7%
2016/17 5,893 655 1,363 8,080 8.1%
~ Dccember 10. 2007 7 0
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Projections
Full Pre-Funding lliustration
7.75% Discount Rate, 30-Year Amortization
(Amounts in SOOO's)
Beginning of Year Annual Contribution
Fiscal Net OPED OPEB Cost as%of
Year ObliRation Contribution (AOC) Payroll Payroll
2007/08 $ - $ 600 $ 600 $ 6,059 9.9%
2008/09 620 620 6,256 9.9%
2009/10 640 640 6,459 9.9%
2010/11 661 661 6,669 9.9%
2011/12 682 682 6,886 9.9%
2012/13 705 705 7,110 9.9%
2013/14 727 727 7,341 9.9%
2014/15 751 751 7,579 9.9%
e 2015/16 775 775 7,826 9.9%
2016/17 801 801 8,080 9.9%
~ December 10. 2007
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~ " .. .
Unfunded liabiliti~s, part II
. ..' Our goals can only be reached through a
, vehicle of a plan, in which we must fervently
believe, and upon which we must vigorously
. " act. There is no other route to success.
-Pablo Picasso
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GoverJ,"Imental Accounting Standards
Board (GASB) Statement-45
The mission of Statement 45 is to
establish and improve standards of state
and local governmental accounting and
financial reporting:
Provides useful information for users of
financial reports
Guide and educate the public, including issuers,
auditors, and users of those financial reports
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GASS 45: Who is affected?
All public employers in the U.S. who follow
Generally Accepted Accounting Principles
(GAAP) and who offer Other Post-
Employment Benefits after active service:
State systems
Local cities/towns
Counties
Boards of Education
Public Utilities & Water Districts
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,
GASS 45: why the new standard?
. .
Statement 45 focuses attention on an important
national issue: funding retiree health care.
Liability of Other Post-Employment Benefits
(OPEB) benefits is substantial, and potential
lenders should be aware of its magnitude.
Resulting actuarial valuation and reporting will
provide greater transparency.
Other Post-Employment Benefits and pension
benefits should be treated the same way.
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GASS ,45: why pay attention now?
Get an idea of the magnitude of the liability
Plan for the cash flow needed in coming
years.
Examine ways in which the overall cost of
providing retiree medical benefits can be
reduced.
Inform stakeholders: taxpayers, elected
officials, collective bargaining units
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GASS 45: When will it take effect?
Effective dates vary based on size of
budget of the public agency:
Phase I, Fiscal year 08, if annual revenues are
>$100 million
Phase II, Fiscal year 09, if annual revenues are
$10 - $100 million
Phase III, Fiscal year 10, if annual revenues are
<$10 million
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GASS 45: Actuarial assumptions
What is the present value of all of those
future benefits, in today's dollars?
If we put money aside today, what rate of
return can we expect to earn on it?
If city doesn't fund these benefits, what
rate of return is realized on general fund
investments?
What discount rate is assumed? (7.5%?)
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GASS 45: what are th~ i~plications.?
Disclosure of the unfunded liability leads to
an examination of the current viability and
long-term deliverability of the current
benefit levels
City of Seal Beach actuarial valuation
showed, as of 1-1-07, an unfunded retiree
health care liability of $12.3 million.
Due to changes in collective bargaining
agreements, as of 11-1-07, $6.7 million
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. . GASB ~5: City's $6.7 million unfunded
actu~Hal accrued liability (presumes pre-
funding)
Statement 45 does not require governments to
fund Other Post-Employment Benefits.
The way that the City of Seal Beach actually
finances benefits is a policy decision made by
the City Council
Statement 45 does, however, require the
disclosure of information about the funded status
of the city's plan, including the Unfunded
Actuarial Accrued Liability, in the notes to the
financial statements.
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GASB .45: the Annual R~quired
Contribution .
The key to understanding the components of
these liabilities is to get a handle on costs before
any funding method is considered. This work is
continuing.-
To fully fund the City's annual required
contribution (ARC) will need to be $600,000 or
9.9% of payroll. Of that amount, $431,000 is an
amortization. Pay-as-you-go is now $232K.
If annual required contribution is fully funded, 3
of 4 dollars needed long-term will be generated
by investment returns.
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GASB ,45: Pre-funding using a Trust
Public agencies may use a trust fund under
Internal Revenue Code (IRC) Section 115. A
Section 115 Trust allows employers to make
contributions and accumulate assets to offset
the liabilities that must be accrued under
Statement 45.
A trust starts with an asset allocation (and
expected return) similar to the CalPERS
Retirement Trust.
Trusts are offered via CalPERS, Public Agency
Retirement Services, the International
City/County Management Ass'n, and others.
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GASB,45: The CalPERS Trust
CalPERS has formed the California
Employers' Retiree Benefit Trust (CERBT)
Fund
CERBT is an investment vehicle that can
be used by employers that contract with
CalPERS for employee health benefits to
pre-fund future retiree health and Other
Post Employment Benefit (OPEB) costs.
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GASB 45: Next steps' .
A journey of a thousand miles begins with
a single step. Lao-tzu, The Way of Lao-
tzu Chinese philosopher (604 BC - 531
Be)
Actuary John Bartel will provide an
overview and answer questions about
the results of the actuarial valuation.
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Edvard -Munch, 1893
The Scream
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- '
Unfunded liabilities, part'll
, ,
Our goals Can only be reached through a
, vehicle of a plan, in which we must fervently
believe, and upon which we must vigorously
. act. Th~re is no other route to success.
-Pablo PicaSSO
e
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Governmental Accounting Standards
Boa~d JGASB) Statement 45
The purpose of Statement 45 is to
establish and improve standards of state
and local governmental accounting and
financial reporting:
Provides useful information for users of
financial reports
Guides and educates the public, including
issuers, auditors, and users of those financial
reports
, '
e
GASS' 45: who is affected?
, ,
All public employers in the United States who
follow Generally Accepted Accounting Principles
(GAAP) and who offer Other Post-Employment
Benefits after active service:
State systems
Local cities/towns
Counties
Boards of Education
Public Utilities & Water Districts
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2
e
GASS 45: why the new standard? .'
" .
Statement 45 focuses attention on an important
national issue: funding retiree healthcare.
Liability of Other (than pension) Post-
Employment Benefits (OPEB) is substantial, and
potential lenders should be aware of its
magnitude.
Resulting actuarial valuation and reporting will
provide greater transparency.
Other Post-Employment Benefits and pension
benefits should be treated the same way.
e
GASS 45: why pay attention now?
Get an idea of the magnitude of the
liability.
. Plan for the cash flow needed in coming
years.
Examine ways in which the overall cost of
providing retiree medical benefits can be
reduced.
Inform stakeholders: taxpayers, elected
officials, collective bargaining units
e
3
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GASS 45: when will it take effect?
. .
Effective dates vary based on size of
budget of the public agency:
Phase I, Fiscal year 08, if annual revenues are
>$100 million
Phase II, Fiscal year 09, if annual revenues are
$10 - $100 million
Phase III, Fiscal year 10, if annual revenues are
<$10 million
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GASS 45: actuarial assumptions
. ,
What is the present value of all of those
future benefits, in today's dollars?
. If we put money aside today, what rate of
return can we expect to earn on it?
If city doesn't fund these benefits, what
rate of return is realized on general fund
investments?
What discount rate is assumed?
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GASS 45: what are the implications?
Disclosure of the unfunded liability leads to
an examination of the current viability and
long-term deliverability of the current
benefit levels:
City of Seal Beach actuarial valuation showed,
as of 1-1-07, an unfunded retiree health care
liability of $12.3 million.
Due to recent changes in collective bargaining
agreements, as of 11-1-07, $6.7 million.
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GASB 45: City's unfunded actuari~1
accrl:led liability (presumes','pre-funding):
$6.7 million .
Statement 45 does not require governments to
fund Other Post-Employment Benefits.
- The way that the City of Seal Beach actually
finances benefits is a policy decision made by
the City Council.
Statement 45 does, however, require the
disclosure of information about the funded status
, of the city's plan, including the Unfunded
Actuarial Accrued Liability, in the notes to the
financial statements.
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GASS, 45: the Annual Required
ContritJution
The key to understanding the components of these
liabilities is to get a handle on costs before any funding
method is considered. This work is continuing, With the
help of the employee associations.
$600,000, or 9% of payroll, is the amount needed to fully
fund the City's Annual Required Contribution (ARC).
Most of that amount, approximately $430,000, is an
amortization of prior service costs. Pay-as-you-go is
now $232,000.
If Annual Required Contribution IS fully funded, 3 of 4
dollars needed long-term will be generated by
investment retums.
Fully funding the Annual Required Contribution is clearly
the most cost-effective way to go in the long run.
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GA~B 45: Pre-funding using a Trust
Public agencies may use a trust to make contributions
and accumulate assets to offset the liabilities that must
be accrued under Statement 45.
Legal requirements are established in Internal Revenue
Code (IRC) Section 115. A Section 115 trust starts With
an asset allocation (and expected retum) Similar to the
CalPERS Retirement Trust.
Trusts are offered via several entities Including
CaIPERS, the Intemational City/County Management
Association, Keenan Associates, PARS, and others.
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GASS 45: The CalPERS Trust
'oJ., .
CalPERS has formed the California
Employers' Retiree Benefit Trust (CERBT)
Fund.
The California Employers' Retiree Benefit
Trust is an investment vehicle that can be
used by employers to pre-fund future
retiree health and Other Post Employment
Benefit (OPEB) costs.
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GASS 45: Next steps
. .
A journey of a thousand miles begins with a
single step. Lao-tzu, The Way of Lao-tzu
Chinese philosopher (604 BC - 531 BC)
Actuary John Bartel will provide an
overview and answer questions about the
results of the actuarial valuation.
On future agendas, the City Council will be
asked to consider implementation of
Statement 45.
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City bf Seal Beach
. ~ I~
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