HomeMy WebLinkAboutCC Resolution 12480 (GASB 45; Bartel Associates)RESOLUTION NO. 12480
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN
RAFAEL ACCEPTING THE BARTEL ASSOCIATES' REPORT
REGARDING SAN RAFAEL'S GASB 45 COMPLIANCE
WHEREAS, the Governmental Accounting Standards Board (GASB) establishes financial
accounting and reporting standards for state and local governmental entities, which recognize
GASB as the official source of generally accepted accounting principles for state and local
government; and
WHEREAS, GASB 45 establishes standards for accounting and financial reporting of
"Other Post Employment Benefits" (OPEBs) and requires each public agency to engage a
certified actuary to calculate several actuarial measures estimating the current and future costs
and liabilities of an agency's OPEBs; and
WHEREAS, on March 15, 2007, the City of San Rafael entered into a contract with Bartel
Associates, LLC for actuarial services related to GASB 45; and
WHEREAS, the agreement was amended on September 21, 2007 solely to correct the
date of termination of the original agreement and on December 3, 2007 to include the preparation
of a valuation report, draft GASB 45 financial statement footnote, a study of how possible OPEB
alternatives would affect our results, pre -funding results, and additional meetings; and
WHEREAS, in San Rafael, the only OPEB offered is medical which varies by bargaining
unit; and
WHEREAS, there have already been a number of steps taken to control retiree health
costs in San Rafael and additional measures to control costs are necessary; and
WHEREAS, the City's goal is to take fiscally responsible measures to control costs while
honoring existing employee agreements and keeping an eye on our overall competitiveness in the
employee market to continue to employ excellent staff to deliver services desired by our
community.
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of San Rafael
hereby accepts the report from Bartel Associates, LLC (attached herein), and directs staff to hold
employee meetings to discuss the results.
I, ESTHER C. BEIRNE, Clerk of the City of San Rafael, hereby certify that the foregoing
resolution was duly and regularly introduced and adopted at a regular meeting of the City Council
of said City held on Monday the 21 st day of April, 2008, by the following vote, to wit:
AYES: COUNCIL MEMBERS:
NOES: COUNCIL MEMBERS:
ABSENT: COUNCIL MEMBERS:
Brockbank, Connolly, Heller, Miller & Mayor Boro
None
None
ESTHER C. BEIRNE, City Clerk
City of San Rafael
Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
For Fiscal Year 2007/08
Summary Report
April 2008
Summary Report
City of San Rafael
Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
On June 21, 2004, the Governmental Accounting Standards Board approved Statement No. 45
(GASB 45), Accounting Standards for Other (than pensions) Post Employment Benefits (OPEB). This
report is based on the financial reporting standards established under GASB 45 and illustrates results if
the City were to implement GASB 45 for the 2007/08 fiscal year. The City is required to implement
GASB 45 for its 2008/09 fiscal year. Historically the City has accounted for retiree healthcare benefits
as they were paid, estimated to be approximately $1,678,000 for the 2007/08 fiscal year. GASB 45
will require the City to account for this promise on an accrual basis (as benefits are earned).
STUDY RESULTS
Funded Status: The plan funded status is equal to the Actuarial Accrued Liability (see definitions and
assumptions section below) less plan assets. When assets equal liabilities, a plan is considered on
track for funding.
To consider a retiree healthcare plan funded for GASB 45 purposes, assets must be set aside in a trust
that cannot legally be used for any purpose other than to pay retiree healthcare benefits. The City has
an IRC Section 401(h) account with approximately $14.6 million. However, the City is evaluating
trust alternatives for funding the plan, including Ca1PERS Section ] ] 5 Trust. This has important
implications for the discount rate assumption used to calculate plan liabilities (see definitions and
assumptions section below). We have prepared valuation results under 2 scenarios:
■ No Pre -Funding — Benefits first paid from the City's 401(h) account and then remaining
payments from the City general fund. The general fund is assumed to earn a 4.5% long-term
rate of return. For simplicity, the 401(h) account is assumed to also earn 4.5%. Results on
this basis are for illustrative purposes since the 401(h) account returns are expected to exceed
4.5%.
■ Pre -Funding — Contributions made to an irrevocable trust through Ca1PERS with diversified
assets which are assumed to earn a 7.75% long-term return. Assets in the 401(h) account are
assumed to also earn 7.75%.
The following table summarizes the plan's June 30, 2007 funded status (000s omitted):
No
Pre -Funding
4.5%
■ Actuarial Accrued Liability (AAL)
• Actives $ 26,967
• Retirees 29,657
• Total 56,624
■ Plan Assets' 14,563
■ Unfunded AAL (UAAL) 42,061
June 30, 2007 MCERA 401(h) Account balance.
April 2008
Pre -Funding
7.75%
$ 16,011
20,477
36,488
14,563
21,925
0
Summary Report
City of San Rafael Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Page 2
Annual Required Contribution (ARC): GASB 45 doesn't require an agency make up any shortfall
(unfunded liability) immediately, nor does it allow an immediate credit for any excess assets. Instead,
the difference is amortized over time. An agency's Annual Required Contribution is nothing more
than the current employer Normal Cost, plus the amortized unfunded liability or less the amortized
excess assets. Simply put, this contribution is the value of benefits earned during the year plus
something to move the plan toward being on track for funding. For the City's valuation we calculated
the 2007/08 ARC as the Normal Cost plus a 30 -year' amortization (as a level percent of pay) of the
Unfunded Actuarial Accrued Liability (000s omitted):
■ Normal Cost
■ UAAL Amortization
■ 2007/08 Annual Required Contribution
■ Annual Required Contribution as a
percentage of estimated 2007/08 payroll
■ Estimated 2007/08 Payroll
No
Pre -Funding
Pre -Funding
4.5%
7.75%
$2,297
$1,118
1,735
1,367
$4,032
$2,485
13.6% 8.4%
$29,719 $29,719
Net OPEB Obligation (NOO): An agency's Net OPEB Obligation is the historical difference (from
implementation)' between actual contributions made and the Annual Required Contributions4. If an
agency has always contributed the required contribution, then the Net OPEB Obligation equals zero.
However, an agency has not "made" the contribution unless it has been set aside and cannot legally be
used for any other purpose.
Annual OPEB Cost (AOC): GASB 45 requires the Annual OPEB Cost equal the Annual Required
Contribution, except when an agency has a Net OPEB Obligation at the beginning of the year. When
that happens an agency's Annual OPEB Cost will equal the ARC, adjusted for expected interest on the
Net OPEB Obligation and reduced by an amortization of the Net OPEB Obligation (000s omitted):
No
Pre -Funding
4.5%
■ 2007/08 Annual Required Contribution $4,032
■ Interest on Net OPEB Obligation 0
■ Amortization of Net OPEB Obligation 0
■ Total 2007/08 Annual OPEB Cost $4,032
GASB 45 allows up to a 30 -year amortization.
3 GASB 45 specifies the initial Net OPEB Obligation (at implementation) be set to zero.
d Benefits paid for current retirees are considered contributions.
April 2008
Pre -Funding
7.75%
$2,485
0
$2,485
Summary Report
City of San Rafael Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Page 3
The following illustrates the City's June 30, 2008 Net OPEB Obligation if the City adopts GASB 45
for the 2007/08 fiscal year (000s omitted):
No
Pre -Funding Pre -Funding
4.5% 7.75%
■ June 30, 2007 Net OPEB Obligation $ 0 $ 0
■ 2007/08 Annual OPEB Cost 4,032 2,485
■ 2007/08 Contributions (1,678)' (2,485)6
■ June 30, 2008 Net OPEB Obligation $2,354 $ 0
The City's actual June 30, 2008 Net OPEB Obligation will differ slightly from the above because
actual benefit payments will be different from estimated.
Projected Benefit Payments: Following are 10 -year open group benefit payout projections, assuming
the number of active City employees remains constant (000s omitted):
■ 30 -year amortization
• Total 2007/08 ARC $
• Total 2007/08 ARC %
■ 20 -year amortization
• Total 2007/08 ARC $
• Total 2007/08 ARC %
5 Estimated 2007/08 benefit payments.
6 Assumes full ARC is contributed.
ro
April 2008
$4,032 $2,485
13.6% 8.4%
$ 4,755 $ 2,837
16.0% 9.5%
Benefit
Benefit
Year
Pavments
Year
Pavments
2007/08
$1,678
2012/13
$2,666
2008/09
1,864
2013/14
2,871
2009/10
2,068
2014/15
3,070
2010/11
2,261
2015/16
3,264
2011/12
2,461
2016/17
3,459
Sensitivity: The above results are based on a 30 -year amortization of the
unfunded liability.
Following illustrates the impact of changing the amortization period to 20 years (000s omitted):
No
Pre -Funding
Pre -Funding
4.5%
7.75%
■ 30 -year amortization
• Total 2007/08 ARC $
• Total 2007/08 ARC %
■ 20 -year amortization
• Total 2007/08 ARC $
• Total 2007/08 ARC %
5 Estimated 2007/08 benefit payments.
6 Assumes full ARC is contributed.
ro
April 2008
$4,032 $2,485
13.6% 8.4%
$ 4,755 $ 2,837
16.0% 9.5%
Summary Report
City of San Rafael Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Page 4
Cash and Accrual Projections: Following are City contribution illustrations under 2 scenarios
assuming the City will adopt GASB 45 for the 2007/08 fiscal year:
■ No Pre -Funding: The City contributes only the pay-as-you-go cost. The Annual OPEB Cost
(AOC) is included for comparative purposes.
■ Full Pre -Funding: The City contributes the ARC every year.
The illustrations are based on a 30 -year amortization and discount rate of 4.5% and 7.75% under the
no pre -funding and full pre -funding approach, respectively.
No Pre -Funding
If the City chooses the no pre -funding method, the Net OPEB Obligation will increase to
approximately $26.1 million at June 30, 2017.
BASIC DEFINITIONS AND ASSUMPTIONS
Present Value of Benefits: When an actuary prepares an actuarial valuation, (s)he first gathers
participant data (including active employees, former employees not in payment status,, participants and
beneficiaries in payment status) at the valuation date (for example June 30, 2007). Using this data and
actuarial assumptions, (s)he projects future benefit payments. (The assumptions predict, among other
things, when people will retire, terminate, die or become disabled, as well as what salary increases,
general and healthcare inflation and investment return might be.) Those future benefit payments are
discounted, using expected future investment return, back to the valuation date. This discounted
present value is the plan's present value of benefits. It represents the amount the plan needs as of the
valuation date to pay all future benefits -- if all assumptions are met and no future contributions
(employee or employer) are made. The City's June 30, 2007 retiree healthcare Present Value of
Benefits is $77.4 million using a 4.5% discount rate ($44.5 million using a 7.75% discount rate), with
$29.7 million of this for former employees who have already retired ($20.5 million using a 7.75%
discount rate).
7 Assumes 401(h) assets are not drawn down to make (approximately 8 years) of benefit payments.
April 2008
No Pre-
Full Pre -
Pay -As -You -Go
Funding
Funding
Year
Cost
AOC
Contribution
2007/08
$ 1,678
$ 4,032
$ 2,485
2008/09
1,864
4,269
2,566
2009/10
2,068
4,512
2,649
2010/11
2,261
4,762
2,735
2011/12
2,461
5,019
2,824
2012/13
2,666
5,283
2,916
2013/14
2,871
5,554
3,011
2014/15
3,070
5,834
3,109
2015/16
3,264
6,122
3,210
2016/17
3,459
6,420
3,314
If the City chooses the no pre -funding method, the Net OPEB Obligation will increase to
approximately $26.1 million at June 30, 2017.
BASIC DEFINITIONS AND ASSUMPTIONS
Present Value of Benefits: When an actuary prepares an actuarial valuation, (s)he first gathers
participant data (including active employees, former employees not in payment status,, participants and
beneficiaries in payment status) at the valuation date (for example June 30, 2007). Using this data and
actuarial assumptions, (s)he projects future benefit payments. (The assumptions predict, among other
things, when people will retire, terminate, die or become disabled, as well as what salary increases,
general and healthcare inflation and investment return might be.) Those future benefit payments are
discounted, using expected future investment return, back to the valuation date. This discounted
present value is the plan's present value of benefits. It represents the amount the plan needs as of the
valuation date to pay all future benefits -- if all assumptions are met and no future contributions
(employee or employer) are made. The City's June 30, 2007 retiree healthcare Present Value of
Benefits is $77.4 million using a 4.5% discount rate ($44.5 million using a 7.75% discount rate), with
$29.7 million of this for former employees who have already retired ($20.5 million using a 7.75%
discount rate).
7 Assumes 401(h) assets are not drawn down to make (approximately 8 years) of benefit payments.
April 2008
Summary Report
City of San Rafael Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Page 5
Actuarial Accrued Liability: This represents the portion of the present value of benefits that
participants have earned (on an actuarial, not actual, basis) through the valuation date. The City's June
30, 2007 retiree healthcare Actuarial Accrued Liability is $56.6 million using a 4.5% discount rate
($36.5 million using a 7.75% discount rate), with $29.7 million of this for former employees who have
already retired ($20.5 million using a 7.75% discount rate).
Normal Cost: The Normal Cost represents the portion of the present value of benefits expected to be
earned (on an actuarial, not actual, basis) in the coming year. The City's 2007/08 retiree healthcare
Normal Cost is $2.3 million (7.7% of payroll) using a 4.5% discount rate and $1.1 million using a
7.75% discount rate (3.8% of payroll).
Actuarial Cost Method: This determines the method in which benefits are actuarially earned
(allocated) to each year of service. It has no effect on the Present Value of Benefits, but has significant
effect on the Actuarial Accrued Liability and Normal Cost. The City's June 30, 2007 retiree
healthcare valuation was prepared using the Entry Age Normal cost method.
Implied Subsidy: GASB 45 requires that the implied subsidy for retirees be included in the AAL and
the ARC for plans that are not community rated. An implied subsidy exists when the premium for a
group of employees is determined by aggregating the experience of the group. For example, assume
the premium for actives and non -Medicare eligible retirees is $600 per month. The underlying medical
cost varies by age and gender and might actually be $300 per month for a 40 year-old active employee
and $900 per month for a 60 year-old retiree. In this case, the younger employee is subsidizing $300
of the older retiree's cost.
We have not valued the implied subsidy for the Plan. Implied subsidy is not required for the
community rated PEMHCA (CaIPERS medical program) plans.
Actuarial Assumptions: Under GASB 45, an actuary must follow current actuarial standards of
practice, which generally call for explicit assumptions - meaning each individual assumption represents
the actuary's best estimate.
GASB 45 requires that the discount rate is based on the source of funds used to pay benefits. This means
the underlying expected long-term rate of return on plan assets for funded plans. Furthermore, since the
source of funds for an unfunded plan is usually the general fund and California law restricts agencies'
investment vehicles, this valuation uses a relatively low, 4.5%, discount rate. If the City establishes a
Trust (that could only be used to pay plan benefits) using CaIPERS Section 115 Trust then the discount
rate would be based on the Trust's expected long-term investment return (established by CaIPERS at
7.75%).
Another key assumption is future healthcare inflation rates. The pre -Medicare inflation rate for HMO's
starts at 10.4% (the increase in 2009 premiums$ over 2008) and grades down to 4.5% (2018 premiums
over 2017) and remains at 4.5% into the future. The pre -Medicare inflation rate for PPG's starts at 11.3%
(the increase in 2009 premiums over 2008) and grades down to 4.5% (2018 premiums over 2017) and
remains at 4.5% into the future. This assumption means pre -Medicare healthcare is assumed to increase,
on the average, 6.7% for HMO's and 7.1 % for PPG's a year for the next 10 years. Furthermore, since the
S Actual 2007 and 2008 premium rates used for PEMHCA plans.
jP
r
April 2008
Summary Report
City of San Rafael Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Page 6
valuation's general inflation assumption is 3%, it also means healthcare is assumed to level off at 1.5%
over general inflation.
In addition, the fixed dollar benefit amounts are assumed to increase according to general inflation in the
future and the premium related benefits are assumed to increase with the healthcare trend rate.
BENEFIT SUMMARY
...
9 Includes MCERA and CaIPERS agency service.
10 Varies by bargaining unit.
April 2008
Elected Officials, All other
Mid Management, Bargaining Units
& Unrepresented Management
■
Eligibility
■ Retire directly from City:
• Age 50 with 10 years service9; or
• 30 years service (Miscellaneous), 20 years service
(Safety); or
• Disability retirement
■
Benefit
■ Full premium I ■ Up to cap10
■
Spouse Benefit
■ Continuation to surviving spouse.
Medicare Part B
■ Full reimbursement ■ None
I
■
Other
■ No Dental Vision, or Life Benefits
9 Includes MCERA and CaIPERS agency service.
10 Varies by bargaining unit.
April 2008