HomeMy WebLinkAbout05/20/2008, BUS. 1 - RESULTS OF ""GASB 45"" ANALYSIS: ACCOUNTING FOR RETIREE HEALTH CARE BENEFITS" I
counat M�D.W 5-20-2008
j acEnaa RepoRt i
CITY OF SAN LUIS OBISPO
FROM: Bill Statler, Director of Finance & Information Technology ✓
SUBJECT: RESULTS OF"GASB 45" ANALYSIS:ACCOUNTING FOR RETIREE
HEALTH CARE BENEFITS
CAO RECOMMENDATION
1. Review and discuss the results of an actuarial valuation by Bartel & Associates of the City's
retiree heath care plan prepared for compliance with Governmental Accounting Standards
Board Statement No. 45 (GASB 45).
2. Conceptually approve funding the City's retiree health care obligations on an actuarial basis
in the 2008-09 Financial Plan Supplement via an irrevocable trust but do not execute an
agreement and commit funding until State budget issues (and potential impact on cities) are
resolved.
REPORT-M-BRIEF
New financial reporting standards (GASB 45) require state and local governments to begin
disclosing their retiree health care obligations on an actuarial basis, much like standards for
reporting pension costs. GASB 45 does not require agencies to change their funding policies: if
they have budgeted and accounted for these types of costs on a cash, pay-as-you-go basis, they
can continue to do so. In short, how to fund the commitments that agencies have made is a
policy decision for each of them to make on their own. However, GASB 45 requires that these
costs be disclosed if an agency wants to issue financial statements in accordance with generally
accepted accounting principles and receive a"clean" audit opinion.
Provided in Attachment 1 are the results of the actuarial valuation of the City's obligation as
prepared by Bartel & Associates, which is a leading firm in California in preparing this type of
analysis. (They have prepared similar reports for 180 agencies in California.) The results show
that:
1. The cost and unfunded liability will be more than we would like. As described below, this is
largely due to the passage of AB 2544 in 2006.
2. However, the City's obligation is modest in comparison with other California agencies. As a
percentage of payroll costs, the City's obligation is lower than that in 80% of other California
cities. (And not much different than the other 20%).
Stated simply, the City's retiree health care commitments were low before we prepared this
analysis, and they are low now. In fact, the City's commitment is the minimum level allowed for
agencies that participate in the CaIPERS health care program.
C
Results of"GASB 45" Analysis: Accounting for Retiree Health Care Benefits Page 2
Additionally, this is not "new" news: the only change is that we have quantified the actuarial cost
of the modest commitments we have already made..
As discussed above, GASB 45 does not require the results of this analysis to have an impact on
how the City funds its retiree health care obligations: the City can continue to fund this modest
commitment on a pay-as-you-go basis. However, as discussed in'greater detail below, in the not.
so distant future, it becomes cheaper to pre-fund this cost on an actuarial basis than continuing to
fund it on a pay-as-you-go basis.
For this reason, staff recommends pre-funding the City's retiree health obligations on an actuarial
basis beginning in 2008-09:
1. The cost of this modest benefit is unlikely to become less expensive in the future.
2. And the City's ability to fund this modest cost is unlikely to improve in the future.
Stated simply; this is the best time for the City to begin funding the cost obligations it has already
made. For context, annual payments under this approach will account for about 0.5% of the
City's annual budget.
As discussed later in this report, the most cost-effective approach in funding this cost is via an
irrevocable trust, since it allows for higher actuarial yields on investments, which in turn reduces
contribution rates. Staff also believes that the trust that Ca1PERS has established for this purpose
is the best vehicle for this in assuring effective stewardship of these assets. While other options
exist, the fact is that CaIPERS has an outstanding, long-term track record in managing these
types of assets.
However, at this time staff does not recommend executing an agreement and committing funding
until State budget issues (and potential impact on cities) are resolved, which is not likely to occur
until Fall 2008.
DISCUSSION
Background
GASB 45. What it is—and what it isn't
What it requires. Adopted in May 2004, GASB 45 requires the disclosure of liabilities for
"other post employment benefits than pensions" (OPEB) on an actuarial basis. While it could
include other benefits, it most commonly refers to retiree health care benefits. Conceptually,
OPEB obligations are no different than pensions, which most government agencies (including the
City), budget and account for on an actuarial basis. On the other hand, most government
agencies (including the City) currently budget and account for OPEB on a pay-as-you-go basis.
What it doesn't require. GASB 45 does not require government agencies to change how it
budgets or funds its OPEB obligations: this is a policy decision for elected officials. It simply
requires that these obligations be disclosed in the audited financial statements.
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Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 3
Who is GASB?
The Governmental Accounting Standards Board (GASB) is the authoritative body in setting
generally accepted accounting principles for state and local governments in the United States.
There is no "legal" requirement to follow GASB standards. On the other hand, it is not possible
to get a"clean" audit opinion without doing so.
In short, unless the City implements the disclosure requirements of GASB 45, it will not be
possible to issue audited financial statements that fairly present the City's financial condition in
accordance with generally accepted accounting principles (GAAP). For this reason, in meeting
its stewardship obligation to the community in accounting for the use of public resources, it is the
City's policy to follow GAAP in preparing our financial statements. And based on this, staff
plans to implement GASB 45 reporting requirements for 2008-09, when it becomes effective for
the City.
Summary of GASB 45 Disclosure Requirements
Provided in Attachment 2 is concise summary of GASB 45 requirements prepared in a "Q&A"
format by GASB. The following summarizes key provisions as they relate to the City:
1. Effective date. GASB 45 will be effective for the City in 2008-09. Implementation
requirements are phased, with the largest agencies (annual revenues greater than $100
million) required to implement GASB 45 in 2007-08; mid-sized agencies (like us) in 2008-
09; and smaller agencies (annual revenues of$10 million or less) in 2009-10.
2. Recording of liabilities is "prospective." Liabilities incurred before the GASB 45 effective
date are initially disclosed in "notes" but not in the financial statements. With this
prospective approach, agencies start with a clean slate in reporting liabilities incurred prior to
the effective date.
3. What's reported in the financial statements? Only the "Net OPEB Obligation" is reported
in the financial statements, which is the cumulative difference between the actuarially
determined "Annual Required Contribution" (ARC), related "Annual OPEB Cost" (AOC)
and actual payments or contributions. In short, liabilities are not reported until the first year
of implementation; and even then, only the difference between what was actually paid and the
amount that should have been paid (generally the ARC, with some adjustment to account for
amortized unfunded liabilities) under an actuarial analysis, is reported in the financial
statements.
4. How is the "Annual Required Contribution" determined? The "ARC" is composed of
two factors: the "normal contribution" required to meet current obligations as they are
incurred; and an amortization of the unfunded liability, typically over 30 years. As long as an
agency makes its "ARC" payment, no liabilities are recorded on the balance sheet. Liabilities
are only recorded for cumulative differences between the amount actually paid and the annual
OPEB cost. If there is no difference, then no liabilities are recorded.
I 1
Results of"GASB 45" Analysis: Accounting for Retiree Health Care Benefits Page 4
5. How are any liabilities reported? Under generally accepted accounting principles, the
City's financial operations are presented in two ways:
a. Government-wide statements, under which all City operations are consolidated on a full
accrual basis of accounting and reflect all assets, including infrastructure like streets,
sidewalks, storm drains and bridges.
b. Fund-based statements for individual funds, under which governmental funds like the
General Fund are accounted for on a modified accrual basis and enterprise funds like the
Water Fund. are accounted for on an accrual basis. Under this model, any long-term
assets or liabilities related to governmental funds like the General Fund are reported only
in the government-wide statements.
The net OBEP obligation will only be reported in the "government-wide" financial
statements, along with net assets for buildings, bridges, roads and storm drains. Given the
size of net assets in the government-wide statements (in the City's case, $278 million), the
reported net OPEB obligation is unlikely to have a material affect on many agencies.
Funds like the General Fund are unaffected. On the other hand, individual funds —like the
General Fund and enterprise funds — will be unaffected by this change. OPEB costs will be
reflected in these funds based on the financing policies of the agency. In short, even under
GASB 45, agencies can continue to budget and account for their OPEB obligations on a pay-
as-you-go basis as they have in the past without any direct affect on their financial statements.
On the other hand, there may be excellent reasons why agencies may decide to fully fund their
"ARC" on an annual basis. For example, the long-term costs may be significantly greater on a
pay-as-you-basis than if they are"pre-funded" (expensed on an actuarial basis so costs are level).
However, this decision of how to fund the ARC, if at all, is determined by elected officials
through the budget process, not by GASB.
Stated simply, all GASB 45 changes is that the cost of commitments that agencies have already
made need to be calculated and disclosed: it doesn't create new liabilities; and it doesn't make
policy decisions about how to fund them.
Actuarial Valuation Findings
Provided in Attachment 1 are the results of the actuarial valuation prepared by Bartel &
Associates on behalf of the City.
The Short Story
As discussed above, the cost and unfunded liability will be more than we would like. As
described below, this is largely due to the passage of AB 2544 in 2006. On the other hand, the
City's obligation is modest in comparison with other California agencies. As a percentage of
payroll costs, our obligation is lower than that in 80% of other California cities (and not much
�-y
Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 5
different than the other 20%). In fact, the City's commitment is the minimum level allowed for
agencies that participate in the Ca1PERS health care program.
Additionally, GASB 45 does not require the results of this analysis to have an impact on how the
City funds its retiree health care obligations: we can continue to fund this modest commitment on
a pay-as-you-go basis. However, as discussed in greater detail below, in the not so distant future,
it becomes cheaper to fund the "ARC" than continuing to fund this cost on a pay-as-you-go basis.
What Is the City's Benefit Commitment?
The City's primary OPEB obligation is the minimum contribution that the City is required to
make under its participation in the Ca1PERS health care program. When the City joined the
Ca1PERS plan in 1993, it immediately experienced an increase in the plan choices available
along with a significant reduction in rates. And due to Ca1PERS purchasing power, the City has
continued to experience competitive health care rates since then.
However, as a condition of joining the Ca1PERS health program, the City agreed to contribute a
minimum of$16 per month towards retiree health care coverage. Under the regulations in place
at the time, this was scheduled to increase by 5% per year. By 2007, this had risen to only $20
per month. However, legislation adopted
in 2006 (AB 2544) significantly altered Minimum Mon ly Contributions
this formula, resulting in significant Year Pre-AB 2544 Post-AB 2545
increases in the City's required 2007 $20.30 $20.30
contribution. 2008 25.15 72.75
2009 30.47 85.16
The sidebar chart compares projected 2010 36.28 98.71
2011 42.57 113.33
contribution rates, pre-AB 2544 and post- 2012 49.36 128.93
AB 2544. As reflected in this chart, 12013 56.63 1 145:38
contributions take a big jump in 2008.
The only good news is that under AB 2544, the increases in contribution rates should level-off by
2013 at about $145 per month. While higher than we expected, this is still much lower than the
costs incurred by most California agencies.
The City has historically paid these modest costs on a pay-as-you-go basis. For example, the
City's OPEB costs in 2006-07 were $25,300. However, based on scheduled increases, these are
going to increase significantly. Projected OPEB costs on a cash basis are $124,000 in 2007-08
and $188,000 in 2008-09. These are funded in the City's 2007-09 Financial Plan; and while
higher than we would have projected just two years ago, they.still represent a small percentage of
the City's budget(about 0.2%).
Key Role of the Discount(Investment)Rate in Determining Costs
There are a number of assumptions that determine the actuarial cost of OPEB obligations,
including:
� 1
Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 6
1. Amount of the benefit
2. Projected cost increases of the benefit
3. Projected retirees and their level of participation in the program
4. Age distribution
5. Mortality and spousal coverage
6. Current unfunded liabilities
7. Discount (investment) rate
While each of these assumptions plays an important role in determining costs and contribution
rates, the discount (investment) rate is a critical factor and one of the few that the City has some
control over, depending on how it chooses to fund OPEB costs.
Three basic funding options. There are three basic funding options and each carries its own
assumed discount (investment) rate by the actuary under GASB 45 guidelines:
Discount
Pay-As-You-Go 4.25%
Pre-Fund Internally 4.25%
Pre-Fund Via an Irrevocable Trust* 7.75%
* This is how the City accounts for pension costs via
participation in CaIPERS.
As discussed below, the difference between 4.25% and 7.75% is significant in determining
annual required contributions.
Summary of OBEP Costs
As detailed in Attachment 1, the sidebar summarizes annual OPEB liabilities and costs on an
actuarial basis assuming discount rate options of 4.25% and 7.75%. Key conclusions:
1. Keeping all other 2008-09OPEB Liabilities andAnnual
assumptions the same, it is Discount Rate
much less expensive to fund 4.2507c 7.757o
annual OPEB costs via an Actuarial Liability $10,765,000 $5,918,000
irrevocable trust, where the For context, the City's total net assets
discount rate is 7.75%, than at June 30, 2007 were$278.3 million
other options, where the Annual Required Contribution(ARC)
discount rate is 4.25%. Normal Cost 595,000 277,000
Amortization of Prior Accrued Cost 467,000 409,000
2. As a percentage of payroll, Total "ARC" 1,062,000 686,000
OPEB costs under the 7.75% Pay-As-You-Go Cost 188,000 188,000
discount assumption are Variance: ARC vs Pay-as-You-Go 874,000 498,000.
2.7%. Of this rate, 1.1% is Payroll
the"normal cost" and 1.6% '
is to amortize the accrued Normal Cost 2.3% 1.1%
Amortization of Prior Accrued Cost 1 1.8% 1_6%
liability over 30 years. Total "ARC" 1 4.1%1 2.7%
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Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 7
For context, the health care retirement benefits proposed by the police association, which are now
the subject of binding arbitration, are 30% of payroll at the 4.25% discount rate and 20% at the
7.75% discount rate.
Pay-As-You-Go Versus Pre-Funded Cost Trends
As reflected above, pre-funding OPEB costs is initially more expensive than pay-as-you-go
funding: about $498,000 in 2008-09, assuming funding via an irrevocable trust. GASB 45 does
not require that the City budget
or fund OPEB costs at this $3.000
higher level — now or in the
future. $,Soo �.
However, as reflected in the SIM
sidebar excerpts from $1.500
Attachment 1, the cost in the
not-so-distant future (about 15
$11.000 '
years from now) becomes much
more expensive under pay-as-
you-go versus pre-funding.
$1
And at the end of the 200309 2001114 20:3019 200.31_3 202" 203334 2035139
amortization period, costs �Fay-Arl^�� +Fa03cFm3 sF
become much less expensive,
as there are no longer any
unfunded liabilities. $45.000
54,000
Moreover, under the pay-as-
you-go approach, the >35.00o `
unfunded liability never goes 530.000
away. In fact, as shown in the $75000
sidebar chart, it continues to .-
grow. On the other hand,
funding at the "ARC level $15000
results in no liabilities at the
510.000
end of the amortization
period.
f5,00C
S- a a_
ALTERNATIVES :.0°s 2-013 1,01E zsr� 7.072 103 2.039
—tr-Pay.1:7'au-Go �-Fu13 PraF"
The following summarizes the
pros and cons of the three basic options available to us:
1. Do nothing: continue pay-as-you-go funding
2. Phase-in higher contributions
3. Implement pre-funding in 2008-09 (in-house or irrevocable trust)
/-7
Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 8
Do Nothing: Continue Pay-As-'You-Go Funding
Pros Cons
1. No requirement to do anything 1. Much more expensive in the medium and
2. Much cheaper in the short-term long-term
3. Perception that the cost is not real: "just"a 2. Unlikely to ever have lower cost
paper cost obligations than we have now
4. Saves $498,000 to do something else
5. Rules might change: wait to see what they
may be in the future
6. For others: may be able to negotiate lower
benefits that lowers cost
Phase-In
Pros Cons
1. Shows we're doing something, without an 1. More expensive than doing nothing
obligation to do anything. 2. Doesn't necessarily achieve liability
2. Acceptable strategy for rating agencies reductions: if added contribution are
3. May be able to better afford this in the modest, impact will be modest
future 3. No guarantee that we will be better able to
afford this in the future than we can now
Implement Pre-Funding in 2008-09
Pros Cons
1. Relatively affordable: 0.5% of budget 1. Can't do$498,000 of something else in
2. Unlikely to be able to better afford this in 2008-09
future 2. Assuming irrevocable trust(lowest cost
3. Cost obligation as low as it is likely to ever option), annual contributions are
be irrevocable
4. Sets precedence for costing requests for
higher contributions
FISCAL IMPACT
As discussed above, implementing pre-funding in 2008-09 will cost $498,000 more than
continuing to fund OPEB costs on a pay-as-you-go basis. About 80% of this cost ($398,000) will
be incurred in the General Fund and the balance (20%) in the enterprise funds. Overall, this
represents about 0.5% of the total budget for 2008-09. While this is more than we would like this
cost to be — which is largely driven by the impacts of AD 2544 — it represents a very modest
increase now in City costs while preventing much higher costs in the future.
Results of"GASB 45"Analysis: Accounting for Retiree Health Care Benefits Page 9
SUMMARY
Implementing GASB 45 in and of itself does not result in higher City costs: how to fund OPEB
costs continues to be a policy decision to be made by local elected officials. However, it does
require that we calculate and disclose these costs on an actuarial basis if we want to issue
financial statements with a"clean" auditors' opinion.
Based on the information provided in the actuarial valuation prepared by Bartel & Associates,
staff recommends pre-funding the City's retiree health obligations via an irrevocable trust
beginning in 2008-09 for three key reasons:
1. The cost of this modest benefit is unlikely to become less expensive in the future.
2. The City's ability to fund this modest cost is unlikely to improve in the future.
3. Continuing to fund this cost on a pay-as-you-go basis will become much more expensive in
the not-so-distant future.
Stated simply, taking this step now while costs are relatively modest will prevent much higher
costs in the future. On the other hand, we do not recommend executing an agreement and
committing funding until State budget issues (and potential impact on cities) are resolved, which
is not likely to occur until Fall 2008. Once the dust settles on the State budget process, assuming
we are not too adversely affected by the outcome, we will return to the Council for approval of a
trust agreement with Ca1PERS.
ATTACHMENTS
1. Retiree Health Care Plan Actuarial Valuation Prepared by Bartel &Associates
A Executive Summary
B. Technical Appendix
2. GASB 45 "Questions and Answers
771
G:GASB 45/Study Results/"B 45 CAR,5-20-08
r"
Attachment 1.A
City of San Luis Obispo
RTL L
i t S S 0 C I ATL-S. L LC
Retiree Healthcare Plan
June 30, 2007 Actuarial Valuation
Executive Summary
May 2008
Attachment 1.A
Executive Summary
City of San Luis Obispo
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 assumes the City will
implement these standards for its 2008/09 fiscal year. Historically the City has accounted for retiree
healthcare benefits as they were paid,projected to be approximately $124,000 for the 2007/08 fiscal
year and$188,000 for 2008/09. GASB 45 will require the City 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's
retiree healthcare plan is not currently funded. 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 paid from the City's investment fund which is assumed to earn a
4.25%long-term rate of return.
■ Full Pre-Funding—Contributions made to the California Employers' Retiree Benefit Trust
(CERBT),the CalPERS irrevocable OPEB trust; with diversified assets which are assumed to
earn a 7.75% long-term return.
The following table summarizes the plan's June 30,2007 funded status (000s omitted):
No Full
Pre-Funding Pre-Funding
4.25% 7.75%
■ Actuarial Accrued Liability (AAL)
• Actives $ 5,120 $ 2,485
• Retirees 5.645 3,433
• Total $ 10,765 $ 5,918
s Plan Assets 0 0
® Unfunded AAL(UAAL) $ 10,765 $ 5,918
0
Q` catyor
May 12,2008 . SM WIS 0ntsp0 '_46
Attachment 1.A
Executive Summary
City of San Luis Obispo Retiree Healthcare Plan
June 30,2007 Actuarial Valuation
Page 2
Annual Required Contribution (ARC): Even if an agency chooses to fully fund its Annual Required
Contribution,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 ARC 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 2008/09 ARC as the Normal Cost plus a 30-year)
amortization (as a level percentage of payroll)of the Unfunded Actuarial Accrued Liability (000s
omitted):
No Full
Pre-Funding Pre-Funding
4.25% 7.75%
■ Normal Cost $ 595 $ 277
■ UAAL Amortization 467 409
® 2008/09 Annual Required Contribution $ 1,062 $ 686
® Annual Required Contribution as a
percentage of estimated 2008/09 payroll 4.1% 2.7%
■ Estimated 2008/09 Payroll $ 25,603 $ 25,603
Net OPEB Obligation (NOO): An agency's Net OPEB Obligation is the historical difference (from
implementation)Z between actual contributions made and the Annual Required Contributions3. 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 accrual of the Annual OPEB Cost in the
Government-wide financial statement and disclosure in the notes. The Annual OPEB Cost is equal to
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 Full
Pre-Funding Pre-Funding
4.25% 7.75%
■ 2008/09 Annual Required Contribution $ 1,062 $ 686
s Interest on Net OPEB Obligation 0 0
■ Amortization of Net OPEB Obligation 0 0
o Total.2008/09 Annual OPEB Cost $ 1,062 $ 686
1 GASB 45 allows up to a 30-year amortization.
Z GASB 45 specifies the initial Net OPEB Obligation(at implementation)be set to zero.
3 Benefits paid for current retirees are considered contributions.
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May 12,2008 sail kas X70 /'
Attachment t.A
Executive Summary
City of San Luis Obispo Retiree Healthcare Plan
June 30,2007 Actuarial Valuation
Page 3
The following illustrates the City's June 30, 2009 Net OPEB Obligation if the City implements GASB
45 reporting standards for the 2008/09 fiscal year(000s omitted):
No Full
Pre-Funding Pre-Funding
4.25% 7.75%
■ June 30,2008 Net OPEB Obligation $ 0 $ 0
■ 2008/09 Annual OPEB Cost 1,062 686
■ 2008/09 Contributions LLE ^ (686)5
E June 30, 2009 Net OPEB Obligation $ 874 6 $ 0
Projected Benefit Payments: Following are 10-year benefit payout projections (000s omitted):
Benefit Benefit
Year Payments Year Payments
2008/09 $ 188 2013/14 $408
2009/10 224 2014/15 451
2010/11 266 2016/16 494
2011/12 311 2016/17 538
2012/13 361 2017/18 581
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 Full
Pre-Funding Pre-Funding
4.25% 7.75%
■ 20-year amortization
• Total 2008/09 ARC $ $ 1,264 $ 792
• Total 2008/09 ARC% 4.9% 3.1%
■ 30-year amortization
• Total 2008/09 ARC $ $ 1,062 $ 686
• Total 2008/09 ARC % 4.1% 2.7%
Estimated 2008/09 benefit payments.
5 Assumes full ARC is contributed.
6 The City's actual June 30,2009 Net OPEB Obligation will differ slightly from the above because actual
benefit payments will be different from estimated.
P BI,
May 12,2008 sAn hu5 omsp0
Executive Summary Attachment 1_A F
City of San Luis Obispo Retiree Healthcare Plan
June 30,2007 Actuarial Valuation
Page 4
Cash and Accrual Projections: The City should consider the above ("No Pre-Funding"and"Full
Pre-Funding") scenarios as book-ends in deciding funding levels as part of its budget process,with an
infinite number of alternatives between them. For illustration purposes we are showing the two book-
ends.
s No Pre-Funding: The City contributes only the Pay-As-You-Go cost(PayGo)
■ Full Pre-Funding: The City contributes the ARC every year
Contributions are based on a 30-year amortization(000s omitted):
$3,000
$2,500 --
i
$2,000
$1,500
$1,000
$500
$-
2008/09 2013/14 2018/19 2023/24 2028/29 2033/34 2038/39
-a-Pay-As-You-Go —N—Full Pre-Funding
PB�. cmyof
May 12,2008 San lies OBISPO -/�//
Attachment 1.A
Executive Summary C —
City of San Luis Obispo Retiree Healthcare Plan
June 30,2007 Actuarial Valuation
Page 5
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 $16.7 million using a 4.25%discount rate ($8.0 million using a 7.75% discount rate), with
$5.6 million of this for former employees who have already retired ($3.4 million using a 7.75%
discount rate).
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 $10.8 million using a 4.25%discount rate
($5.9 million using a 7.75%discount rate), with$5.6 million of this for former employees who have
already retired($3.4 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 2008/09 retiree healthcare
Normal Cost is $595,000 (2.3%of payroll)using a 4.25%discount rate and$277,000 using a 7.75%
discount rate(1.1%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.
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 investment fund and California law restricts agencies'
investment vehicles,this valuation uses a relatively low,4.25%,discount rate. If the City establishes a
Trust(that could only be used to pay plan benefits),and diversifies assets,then the discount rate would be
based on the Trust's expected long-term investment return. This might result in a higher(such as 7.75%)
discount rate. However,the appropriate discount rate will be determined based on the plan's actual asset
diversification.
May 12,2008 Safi Wts -/���
Attachment 1.A.
Executive Summary
City of San Luis Obispo Retiree Healthcare Plan
June 30,2007 Actuarial Valuation
Page 6
Another key assumption is future healthcare inflation rates. The inflation rate for HMO's starts at 9.7%
(the increase in 2009 premiums over 2008)and grades down to 4.5%(2017 premiums over 2016)and
remains at 4.5%into the future. The inflation rate for PPG's starts at 10.1%(the increase in 2009
premiums over 2008)and grades down to 4.5%(2017 premiums over 2016)and remains at 4.5% into the
future. This assumption means healthcare is assumed to increase,on the average, 7.1%for HMO's and
7.5%for PPG's a year for the next 9 years. Furthermore, since the valuation's general inflation
assumption is 3%, it also means healthcare is assumed to level off at 1.5%over general inflation.
RETIREE HEALTHCARE BENEFITS'
■ Eligibility • Service(age 50 and 5 Ca1PERS years)or disability retirement
• Retire directly from City
■ Medical Benefit • PEMHCA (Ca1PERS medical program) Benefit under"unequal method"
➢ City contribution phased in to City contribution for actives
➢ City contribution for actives (PEMHCA minimum):
2007 $80.80
2008 97.00
2009+ Medical Trend
• Pre-AB 2544: Prior year's City contribution for retirees plus 5% of City
contribution for active employees
• Post AB 2544(starting in 2008):
Retiree Contribution=5%of City contribution towards active premium
times years in PEMHCA (max$100/month increase)
➢ Joined PEMHCA in 1993
• City pays 50%of the premium for executive management employees hired
prior to August 20007
■ Dental,Vision, & • None
Life Benefit
■ Surviving Spouse • Retiree benefit continues to surviving spouse if retiree elects Ca1PERS
survivor annuity.
There are 3 active employees and 8 retirees in this group.
? cawf
May 12,2008 San Wis OBSM "-��
Attachment 1.6
CITY OF SAN LUIS OBISPO
RETIREE HEALTHCARE PLAN
June 30, 2007 Actuarial Valuation
JOHN E. BARTEL
B r,rEr
SSOO;rI U-
May 9,2008
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i
Contents
I
Topic Page
Benefit Summary 1
Data Summary 6
I
Actuarial Assumptions 17
Definitions 21
Actuarial Methods 24
Simplified Example 25
Results 29
I
Projections 35
Bartel Associates GASB 45 Database 39 j
Other Issues 42
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l 1' May 9.2008 u.�n. ...Yi�ednermw.mw'wm�wr+m�a�nm�.mmu�rma�muueo� / —�/
BENEFIT SUMMARY Attachment 13
■ Eligibility • Service (age 50 and 5 Ca1PERS years) or disability retirement
• Retire directly from City
■ Medical Benefit • PEMHCA Benefit under"unequal method"
➢ City contribution phased in to City contribution for actives
City contribution for actives (PEMHCA minimum):
2007 $80.80
2008 97.00
2009+ Medical Trend
• Pre-AB 2544: Prior year's City contribution for retirees plus 5% of City
contribution for active employees
• Post AB 2544 (starting in 2008):
➢ Retiree Contribution= 5%of City contribution towards active
premium times years in PEMHCA (max $100/month increase)
Joined PEMHCA in 1993
• City pays 50% of the premium for executive management employees
hired prior to August 2000'
i
Data indicates that there are currently 3 active employees and 8 retirees in this group.
1
March 9,2008 _
I
I
BENEFIT SUMMARY
i
i
■ Dental, Vision, & • None
Life Benefit
■ Surviving Spouse • Retiree benefit continues to surviving spouse if retiree elects Ca1PERS
survivor annuity.
■ Pay-As-You-Go Year Total
2006/07 (est) 60,600
■ Sample Retirees Retirees
Contribution Year Actives Pre AB2544 Post AB2544
Projection under 2007 $ 80.80 $ 20.30 $ 20.30
"unequal 2008 97.00 25.15 72.75
method" 2009 106.45 30.47 85.16
2010 116.13 36.28 98.71
2011 125.92 42.57 113.33
2012 135.71 49.36 128.93
2013 145.38 56.63 145.38
2 Projected using valuation assumptions
B/1 March 9,2008 _
i
BENEFIT SUMMARY Attachment 12
■ Implied Subsidy . Participating retirees paying active rates vs. actual cost
5600
$550 °
$500
5450
5400
$350
$300
$250 -�
$200
Age 35 As,40 Age 45 Age 50 Age 55 Age 60
1—o--PmmivaRaw 5369 5369 $369 $369 $369 $369
J-0-Emi aawd Cost $205 $233 $269 1 $339 1 $438 5558
• Community rated plans not required to value implied subsidy
• PEMHCA is for most employers, community rated plan
3
'March 9,2008
I
BENEFIT SUMMARY
PEMHCA Premiums j
Non-Medicare Eligible
Other Southern California
2007 Premiums 2008 Premiums
Plan Single 2-Party Family Single 2-Party Family
Blue Shield $407.02 $814.04 $1,058.25 $447.97 $895.94 $1,164.72
Blue Shield NetValue n/a n/a n/a 401.98 803.96 1,045.15
Kaiser 360.60 721.20 937.56 393.63 787.26 1023.44
PERS Choice 432.64 865.28 1,124.86 458.59 917.18 1,192.33
PERS Select n/a n/a n/a 444.05 888.10 111-54.5-3
PERSCare 731.40 1,462.80 1,901.64 712.71 1,425.42 1,853.04
PORAC 1 439.00 1 822.00 1,045.00 452.00 847.00 1 1,076.00
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/L March 9,2008
BENEFIT SUMMARY Attachment 1.B
PEMHCA Premiums
Medicare Eligible
2007 Premiums 2008 Premiums
Plan Single 2-PartyFamily Single 2-Party Family
Blue Shield $318.95 $637.90 $956.85 $341.44 $682.88 $1,024.32
Blue Shield NetValue n/a n/a n/a 304.66 609.32 913.98
Kaiser 289.68 579.36 869.04 273.36 546.72 820.08
PERS Choice 341.75 683.50 1,025.25 349.11 698.22 1,047.33
PERS Select n/a n/a n/a 349.11 698.22 1047-33
PERSCare 1 371.68 743.36 1115.04 404.60 809.20 1,213.80
PORAC 351.00 701.00 1049.00 308.00 614.00 983.00
E�`March 9,2008
5
DATA SUMMARY
f� f1
Active Participant Statistics
(CalPERS PEMHCA Data)
I
Mise Safety Total
■ Actives:
• Count 298 103 401
• Average age 44.6 40.2 43.5
• Average service (City) 8.4 10.8 9.0
• Average service (all CaIPERS) 10.2 13.4 11.0
• Average pay $55,319 $80,695 $61,837
• Total payroll (000s) 16,485 8,312 241797
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6
1'March 9,2008
DATA SUMMARY Attachment 113
Retired Participant Statistics
(Ca1PERS PEMHCA Data)
Mise Safety Total
■ Retirees:
• Count
Service 139 42 181
Disability 11 56 67
Total 150 98 2483
• Average age
Service 64.4 62.0 63.9
Disability 62.5 55.5 56.6
Total 64.3 58.3 61.9
• Average retire age
•Service 58.2 54.7 57.4
•Disability 49.0 46.0 46.5
•Total 57.6 49.8 54.5
3 Includes 145 retirees who are currently waiving medical coverage and 2 survivors.
I
BA- .March 9,2008
DATA SUMMARY
Active Medical Coverage
i
Medical Plan Single 2-Party Family Total
Blue Shield 24 16 45 85
PERS Choice 41 24 62 127
PORAC 2 3 5 10
Waived n/a n/a n/a 179
Total 67 43 112 401
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1'March 9,2008 -/�G`
DATA SUMMARY Attachment 1.B
Retired Participant Medical Coverage
Pre-65
Medical Plan Region Single 2-Party .Family Total
Blue Shield Bay Area/Sac 1 - - 1
South 6 10 2 18
PERSCare South 1 - 1 2
PERS Choice Bay Area/Sac - 1 - 1
Out of State 1 5 - 6
South 9 25 7 41
PORAC - 1 1 2
Waived n/a n/a n/a 97
Total 18 42 11 168
/-I 9•March 9,2008
DATA SUMMARY
Retired Participant Medical Coverage
Post-65
Medical Plan Region Single 2-Party Total
Blue Shield Bay Area/Sac - 1 1
South 1 4 5
I
Kaiser Bay Area/Sac - 1 1
PERSCare Bay Area/Sac 4 4 8
South - 1 1
PERS Choice Bay Area/Sac 3 6 9
South - 7 7
Waived n/a n/a 48
Total 8 24 80
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E �0 _
�•March 9,2008
DATA SUMMARY Attachment 1.6
Retiree Medical Coverage by Age Group
Miscellaneous
Age Single 2-Party Family Waived Total
Under 45 - - - 1 1
45-49 - - - - -
50-54 1 2 - 6 9
55-59 6 10 2 28 46
60-64 4 10 1 20 35
65-69 3 10 - 9 22
70-74 1 4 - 16 21
75-79 1 3 - 6 10
80-84 - - - 6 6
85 & Over - - - - -
Total < 65 11 22 3 55 91
Total> 65 5 17 - 37 59
Total 16 39 3 92 150
Average A e 63.0 64.4 58.6 64.6 64.3
A/
March 9,2008
DATA SUMMARY
Retiree Medical Coverage by Age Group
Safety
i
Age Single 2=Party Family Waived Total
Under 45 1 - 1 7 9
45-49 - - 1 6 7
50-54 1 1 3 9 14
55-59 1 4 10 2 12 28
60-64 1 9 1 8 19
65-69 1 3 6 10
70-74 1 2 - 5 8
75-79 1 2 - - 3
80-84 - - - - -
85 & Over - - - -
Total < 65 7 20 8 42 77
Total> 65 3 7 - 11 21
Total 10 27 8 53 98
Average Age 59.5 62.8 52.7 56.6 58.3
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12 _
B11'March 9,2008
DATA SUMMARY Attachment 1_B
Actives by Age and Service
Miscellaneous
Service
Age Under 1 1-4 5-9 1 10-14 1 15-19 .20-24 25&Over Total
Under 25 Count 11 7 _ _ _ _ 18
Average Salary 26,151 35,035 29,606
25-29 Count 9 8 1
Average Salary 35,841 45,522 46,488 40,735
30-34 Count 6 13 7 1 - - 27
Average Salary 43,036 54,740 63,988 45,214 54,184
35-39 Count 9 13 6 2 _ - _ 30
Average Salary 45,702 43,261 78,390 69,563 52,773
40-44 Count 6 IS 10 4 8 1 - 44
Average Salary 44,600 47,213 61,831 1 61,991 61,734 1 96,876 - 55,291
45-49 Count 6 13 8 8 6 6 2 49
Average Salary 42 839 61 368 66 164 72485 68,8 9 75,578 61,217 64,346
50-54 Count 6 11 6 5 8 5 12 53
Average Salary 33,372 56,123 48,513 50;305 77,532 69,077 66,625. _ 58,968
55-59 Count 10 8 6 6 10 3 11 54
Average Salary 44,839 54,853 61,338 64,307 76,968 51,090 57,911. 59,279
60-64 Count - I - I I I - 4
Average Salary 38,740 91.1 70,304 46,488 61,666
65&Over Count I _ _ _ _ _ 1
Average Salary .14,025 14,025
Total Count 64 89 44 27 33 16 25 298
Average Salary 38,548 50,386 62,988 64,469 71,732 68,468 62,358 55,319
BA' ]3
March 9,2008
DATA SUMMARY
, I
Actives by Age and Service
Safety
Service
Age Under 1 14 5-9 10.14 15-19 20-24 25&Over Total
Under 25 Count _ _ _ _ _
Average Salary
25-29 Count 2 8 1 - II
Average Salary 64,064 68 614 67,444 67 680
30-34 Count 3 7 10 2 - - - 22
Average Salary 60,181 67 537 74 144 74 360
70,157
35-39 Count 3 5 7 4 1 - 20
,Average Salary 64,801 83,585 74,520 78,345 78,650 76,300
40-44 Count _ 4 4 5 4 5 - 22
Average Salary 74,724 79,105 94,146 92,755 90,360 86,767
4549 Count - 2 2 1 4 1 1 11
Average Salary 102,440 85.800 78,650 94,608 78,650 74P724 89,721
50-54 Count _ _ I - 1 9 11
Average Salary 74 724 - 87 880 91,693 89,804
55-59 Count 1 1 4 6
Average Salary - 128,752 - - 87,880 99,340 102,332
60-64 Count _ _ _ _ _
Average Sala
65&Over Count _
Average Salary
Total Count 8 27 24 13 10 7 14 103
Average Sub 62,884 76,745 75,773 83,554 91,598 88,333 92,666 80,695
t'March 9,2008
DATA SUMMARY
Attachment 13
I - �
Actives by Age and Service
Total
Service
Age Under 1 1.4 5.9 -114 15-19 20.24 25&Over Total
Under 25 Count 11 7 _ - _ 18
Average Salary 26,151 35,035 29,606
25-29 Count 11 16 2 - - - - 29
Average Salary 40,972 57,068 56,966 - - 50,956
3634 Count 9 20 17 3 - - - 49
Avera a Salary 48,751 59,219 69 962 64645 - 61 356
35-39 Count 12 I8 13 6 I - - 56
Average Salary 50,477 54,462 76 306 75,417 78,650 62,183
40-44 Count 6 19 14 9 12 6 - 66
Average Salary 44 600 53 005 66 767 79 855 72 074 91 446 65,783
4549 Count 6 15 10 9 10 7 3 60
Average Salary 42 839 66,844 70 091 73 170 79 147 76 017 65,719 68,998
50-54 Count 6 11 6 6 8 6 21 64
Average Salary 33 372 56 123 48 513 54 375 77.532 72,211 77,369 64,268
55-59 Count 10 9 6 6 11 3 15 60
Average Salary 44,839 63.064 61,338 64,300
7 77,960 51,090 68,959 63,584
60-64 Count - I I 1 I - 4
Average Salary - 38,740 91,130 70,304 46,488 61,66o
65&Over Count
Average S 14 025 - - - - - 14,025
Total Count 72 116 68 40 43 23 39 401
Average Salary 41,252 56,521 67,500 70,672 76,352 74,514 73,238 61,837
IS
1'March 9,2008
I
DATA SUMMARY
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March 9,2008 16
I
ACTUARIAL ASSUMPTIONS _ Attachment 1.6
6/30/2007 Valuation
® Valuation Date • June 30, 2007
• 2008/09 ARC as of ear-end
i Discount Rate a 4.25% Not pre-funded; assets held in Investment Fund
• 7.75% Pre-funded with Ca1PERS CERBT - diversified
trust
■ General Inflation . 3%
■ Aggregate Payroll . 3.25%
Increase
■ Medical Trend Non-Medicare Medicare
Year HMO PPO HMO PPO
2007 & 2008 Actual Premium Actual Premium
2009 9.7% 10.5% 10.1% 10.9%
1 1 1 1 1 i
2017+ 4.5% 4.5% 4.5% 4.5%
® PEMHCA Minimum s Increases with HMO trend
F/j17 March 9,2008 --
i
ACTUARIAL ASSUMPTIONS
6/30/2007 Valuation
® Mortality, Withdrawal, e Ca1PERS 1997-2002 Experience Study
Disability
Retirement • Ca1PERS 1997-2002 Experience Study
Misc &feety
Benefit 2.7%@55 3%@50
Hire Age 34.4 26.8
Exp Ret Age 59.9 54.3 j
E Participation at e Actives
Retirement .➢ Pre 65 — 60%
Post 65 — 90%
Exec Mgmt EE hired < 8/2000— 100%
• Retirees
Currently Covered— 100%
Current] Waived—20%
i
(B/�J\J i s
1-March 9,2008 -
ACTUARIAL ASSUMPTIONS Attachment 1.B
-6/30/2007 Valuation
® Medical Plan at . Currently covered: same as current active elections
Retirement
• Currently waived;- PERS Choice plan
® Medicare Eligible Rate . 100%
• Everyone eligible for Medicare will elect Part B coverage
■ Spousal Coverage at o Actives: 80% married
Retirement . Retirees: current coverage level
■ Spouse Age • Males 3 ears older than females
■ Dependents at • Family coverage at retirement
Retirement ➢ Miscellaneous— 10%
Safety— 30%
• No family coverage after age 65
■ Future New Entrants a None—Closed group
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:/ 1'March 9,2008
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ACTUARIAL ASSUMPTIONS
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March 9,2009
DEFINITIONS Attachment 13
� I
Present Value of Projected Benefits
(PVPB)
Without Assets With Assets
Future Normal m. AceroallAssets Future Norma
CoCosts
Uaf laded AAL
i
Unfunded AAL
Current Normal - Current Normal
Cat Cost
■ PVPB - Present Value of all Projected Benefits
• Discounted value, at measurement (valuation date– 6/30/2007), of all future
expected benefit payments.
• Expected benefit payments based on various (actuarial) assumptions
21 ^
E March 9,2008
DEFINITIONS
■ AAL–Actuarial Accrued Liability /Actuarial Obligation
• Discounted value, at measurement (valuation date– 6/30/2007), of benefits
"earned" (based on actuarial cost method) through measurement.
• Portion of PVPB "earned" at measurement.
I
■ NC - Normal Cost
• Value of benefits "earned" during current year.
• Portion of PVPB allocated to current year.
i
■ Actuarial Cost Method
• Determines how benefits are "earned" (or allocated) to each year of service.
• Has no effect on PVPB.
• Has significant effect on Actuarial Obligations and Normal Cost.
i
(Q)/' )/\ 22 —�
1'March 9,2008
i
DEFINITIONS Attachment 13
_GASB:45 _ _ Definition.
• Annual Required • Actuarially determined contribution, using
Contribution (ARC) funding method, amortization period,
assumptions, etc.
® Annual Other Post • Similar to GASB 27 Annual Pension Cost
Employment Benefit . ARC, adjusted for:
(OPEB) Cost (AOC) ➢ Interest on NOO and
➢ Amortization of NOO
■ Net OPEB Obligation • Historical difference between actual contribution
(NOO) and AOC
• NOO (end of year) —
➢ NOO (beginning of year)
➢ + AOC (for year)
➢ - actual contributions (made during year)
I
23
I
INA-)march 9,2008
I
ACTUARIAL METHODS
Method 6/30/2007 Valuation
I
■ Plan Assets • None
■ Cost Method • Entry Age Normal
(same as Ca1PERS)
® Amortization Period • 30 years
• 20 years (for sensitivity analysis)
® Amortization Method • Level percent of payroll
(same as CalPERS)
■ Future New Entrants • None—closed group
■ "Implied Subsidy" • Employer cost for allowing retirees to
participate irrespective of employer contribution
I
• Not valued for PEMHCA
t'March 9,2008 24
SIMPLIFIED EXAMPLE Attachment 13
Active Employee
(Assumes 0% Discount Rate and Other Simplifying Assumptions)
If: Age Service Pay
® At Hire: 35 0 -
■ Current: 45 10 $ 60,000
■ At Retirement: 60 25 -
Then:
i PVPB45 = $ 100,000 j
■ AAL45 = (10/25) x 100,000 = 40,000
■ Assets = 0
■ UAAL = 40,000
■ NC45/46 = (1/25) x 100,000 = 4,000
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BA- 25 March 9,2008
SIMPLIFIED EXAMPLE
Active Employee
(Assumes 0% Discount Rate and Other Simplifying Assumptions)
Annual Required Contribution
■ Normal Cost = $ 43000
® UAAL Amortization = (1/20) x 40,000 = 2,000
■ ARC - $ _ 6,000
i ARC - % = 6,000 / 60,000 = 10%
® Pay as You Go Cost 0
Net OPEB Obligation Pay-As-You-Go Pre-Fund
Without Trust With Trust
■ BoY NOO = $ 0 $ 0
■ + ARC = 6,000 6,000
■ - Payments = 0 (6,000)
® EoY NOO = 6,000 0
3
�-
` /-I26'March 9,2008 ,_/_
SIMPLIFIED EXAMPLE Attachment 1.B
Retiree
(Assumes 0% Discount Rate and Other Simplifying Assumptions)
If: Age Service Annual
Payment
• At Retirement: 60 25 -
® Current Age: 62 25 $ 4,000
I
i
Then:
i
■ PVPBfi2 = $ 100,000
■ AAL62 = (25/25) x 100,000 = I00,000
■ Assets = 0
® UAAL = 100,000
■ NC62/63 = (0/25) x 100,000 = 0
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27
GA-)March 9,2008
SIMPLIFIED EXAMPLE
Retiree
(Assumes 0% Discount Rate and Other Simplifying Assumptions)
Annual Required Contribution
® Normal Cost = $ 0 j
■ UAAL Amortization = (1/20) x 100,000 = 5,000
■ ARC - $ = 5,000
■ ARC - % = N/A
■ Pay as You Go Cost 4,000
Pay-As-You-Go Pre-Fund
Net OPEB Obligation Without Trust With Trust
■ BoY NOO = $ 0 $ 0
■ + ARC = 5,000 5,000
■ - Payments = (4.000) (5.000)
■ EoY NOO = 1,000 0
28
t'March 9,2008 _.
I
RESULTS - Attachment 13
Actuarial Obligations
4.25% Discount Rate
June 30, 2007
(000's Omitted)
Misc. Safety Total
• Present Value of Benefits
• Actives $ 7,494 $3,603 $ 11,097
• Retirees 3,169 2,477 5,645
• Total 10,663 6,080 16,742
• Actuarial Accrued Liability
• Actives 3,532 1,588 5,120
• Retirees 3,169 2,477 52645
• Total 6,701 4,065 10,765
• 2008/09 Normal Cost 419 176 595
• Pay-As-You-Go Cost (2007/08) 76 47 124
• Pay-As-You-Go Cost (2008/09) 115 73 188
B��t1 29
/ 1'March 9,2008 ---_.-:
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RESULTS
I
Annual Required Contribution (ARC)
4:25% Discount Rate
2008/09 Fiscal Year
(000's Omitted)
Misc. Safety Total j
• ARC - $
• Normal Cost $ 419 $ 176 $ 595
• UAAL Amortization 292 174 467 j
• ARC 711 350 1,062
i
• Projected 2008/09 Payroll 17,021 8,582 25,603
■ ARC - %
• Normal Cost 2.5% 2.1% 2.3%
• UAAL Amortization 1.7% 2.0% 1.8%
• ARC 4.2% 4.1% 4.1%
Amortized as a level percent of payroll over 30 years.
30 3
-F�'March 9,2008
RESULTS Attachment 1.6
Actuarial Obligations
7.75% Discount Rate
June 30, 2007
(000's Omitted)
I
Misc. Safety Total
■ Present Value of Benefits
• Actives $ 3,216 $ 1,337 $ 4,553
• Retirees 1,978 1455 3,433
• Total 5,194 2,792 7,986
■ Actuarial Accrued Liability
• Actives 1,759 726 27485
• Retirees 1,978 1455 3,433
• Total 3,737 2,181 5,918
■ 2008/09 Normal Cost 206 71 277
■ Pay-As-You-Go Cost (2007/08) 76 47 124
® Pay-As-You-Go Cost(2008/09) 115 73 188
I
1'March 9,2008 31
RESULTS
Annual Required Contribution (ARC)
7.75% Discount Rate
2008/09 Fiscal Year
(000's Omitted)
Misc. Safety Total
■ ARC - $
• Normal Cost $ 206 $ 71 $ 277
• UAAL Amortizations 260 149 409
• ARC 466 220 686
■ Projected 2008/09 Payroll 17,021 8,582 25,603
■ ARC - %
• Normal Cost 1.2% 0.8% 1.1%
• UAAL Amortization 1.5% 1.8% 1.6%
• ARC 2.7% 2.6% 2.7%
�5(/[��JAmortized as a level percent of payroll over 30 years.
1'March 9,2008 32
RESULTS Attachment 1.6
Discount Rate and.Amortization Sensitivity
(000's Omitted)
■Discount Rate 4.25% 7.75%
■Amortization Period 20 Years 30 Years 20 Years 30 Years
E Present Value of Benefits $ 16,742 $ 16,742 $ 7,986 $ 7,986
■ Funded Status
• AAL6 10,765 10,765 5,918 5,918
• Assets 0 0 0 0
• UAAL 10,765 10,765 5,918 5,918
0 2008/09 ARC
. Normal Cost 595 595 277 277
• UAAL Amortization 669 467 515 409
e ARC 1,264 1,062 792 686
• ARC as % of payroll 4.9% 4.1% 3.1% 2.7%
AB 2544 increased the AAL by approximately$2.8 million at 4.25%discount rate,and by approximately$2 million at
7.75%discount rate.
Ezj_ 33
.March 9,2008
RESULTS
Estimated Net OPEB Obligation
(000's Omitted)
I
I
No Full
Pre-Funding Pre-Funding
4.25% 7.75%
s NOO 6/30/2008 $ - $ -
• 2008/09 ARC7 1,062 686
• Contributions (188) (686)
■ Estimated NOO
6/30/20099 874 -
r UAAL amortized as a level percent of payroll over 30 years.
' Includes benefit payments.
9 Actual NOO will depend on actual benefit payment or contributions.
34
`�� March 9,2008
PROJECTIONS Attachment 1.B
- f
Pay-As-You-Go Illustration
4.25% Discount Rate & 30-Year Amortization
(000'9 Omitted)
Beginning of Year Annual Benefit Payout
FYE Net OPEB Benefit OPEB Cost as % of
June 30, Obligation Payout (AOC) Payroll Payroll
2009 $ - $ 188 $ 1,062 $ 25,603 0.7%
2010 874 224 1,134 26,435 0.8%
2011 1,784 266 1,208 27,294 1.0%
2012 2,727 311 11285 28,181 1.1%
2013 3,700 361 1,364 29,097 1.2%
2014 4,704 408 1,446 30,043 1.4%
2015 5,743 451 1,531 31,019 1.5%
2016 6,822 494 1,619 32,027 1.5%
2017 7,947 538 1,710 33,068 1.6%
2018 9,119 581 1,804 34,143 1.7%
B/^1 35
/ 1 March 9,2008 _
PROJECTIONS
Full Pre-Funding Illustration
7.75% Discount Rate & 30-Year Amortization
(000's Omitted)
Beginning of Year Annual Contribution
FYE Net OPEB OPEB Cost as % of
June 30, Obligation Contribution (AOC) Payroll Payroll
2009 $ - $ 686 $ 686 $ 25,603 2.7%
2010 - 709 709 26,435 2.7%
2011 - 732 732 27,294 2.7%
2012 - 755 755 28,181 2.7%
2013 - 780 780 29,097 2.7%
2014 - 805 805 30,043 2.7%
2015 - 831 831 31,019 2.7%
2016 - 858 858 32,027 2.7%
2017 - 886 886 33,068 2.7%
2018 - 915 915 34,1.43 2.7%
(BO1 March 9,2008 36
PROJECTIONS Attachment 1.6
Contributions
(000's Omitted)
$3,000
$2,500
$2,000
S1,500
$1,000
i
$500
$-
2008/09 2013/14 2018/19 2023/24 202829 2033/34 2038/39
Pay-As-You-Go -0-Full Pre-Funding
I
March 9,2008 37
I
PROJECTIONS
I
Unfunded Accrued Liability
(000's Omitted)
$45.000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$-
2,008 2,013 .2,018 2,023 2,028 2,033 2,038
_ I
-A--Pay-As-You-Go -s-Full Pre-Funding
i
38
�/ 1 March 9,2008 /_- ""`
i
".TEL ASSOCIATES GASB 45 DATA$. Attachment 1.B
I
I I
GASB 45
Retiree Medical Benefits Comparison
Sample Percentile Graph
60116
55% —tooth Percentile
50% —95th Percentile
45%
40% —75th Percentile
T
� 75% SOY.of 90%of 100%o!
results results Malo
e e are are we
_ —
a. �% 1 SOthPercentae within within within
w this this this
C6 235E range range rmee
20% —2Sth Percentae
Ir/.
10%. —ft Percendle
5% —Oth Percentile
March 9,2008 39 _
BARTEL ASSOCIATES GASB 45 DATABASE
I
GASB 45
Retiree Medical Benefits Comparison
Normal Cost&Annual Required Contribution
60%
Sa%
T
m
d ape
O
n
� JO%
a`
20%
to%
0•/
Miscellaneous Safety
NC ARC NC ARC
95th Percentile 17.5% 30.1% 17.8% 32.3%
75th Percentile 12.3% 21.3% 13.5% 23.1%
50th Perccmilc 7.6% 15.2% 7.1% 13.1%
25th Percentile 2,9% 5.1% 3.2% 7.3%
5th Percentile 1.2% 2.0% 1.4% 2.4%
Percent of Pay 2.5114 4.214 2.1%. - 4.1%,
Perccmilc 1914 19':;. 13% 1b%
Discount Rate=4.25%,Amortization Period=30 Years
I
40
'March 9,2008 �___�
'`TEL ASSOCIATES GASB 45 DATAB'" " Attachment 1.B
GASB 45
Retiree Medical Benefits Comparison
Actuarial Accrued Liability
1200%.
1 DOW..
aoox
a.
e
e 6W
V
a
aom/.
2000/.
1 -
oY.
Miscellaneous Safety
95th Percentile 340% 390%
75th Percentile .217% 263%
50th Percentile 132% 148%
25th Percentile 51% 76%
5th Percentile 18% 23%
Percent of Pay 391,
Percentile 21% 19111�
Discount Rate=4.25%,Amortization Period=30 Years
B 41
� March 9,2008
I
OTHER ISSUES
I
■ Timing:
• Preliminary Results January 29, 2008
• Update ARC and add projection graphs March 3, 2008
I
I
I
I
I
42
March 9,2008
tachme-pt 2-
GASB STATEMENT 45 ON OPEB ACCOUNTING BY GOVERNMENTS
A FEW BASIC QUESTIONS AND ANSWERS
1. Why was Statement 45 on OPEB accounting by governments necessary?
Statement 45 was issued to provide more complete, reliable, and decision-useful
financial reporting regarding the costs and financial obligations that governments
incur when they provide postemployment benefits other than pensions (OPEB) as part
of the compensation for services rendered by their employees. Postemployment
healthcare benefits, the most common form of OPEB, are a very significant financial
commitment for many governments.
2. How was OPEB accounting and financial reporting done prior to Statement 45?
Prior to Statement 45, governments typically followed a "pay-as-you-go" accounting
approach in which the cost of benefits is not reported until after employees retire.
However, this approach is not comprehensive—only revealing a limited amount of
data and failing to account for costs and obligations incurred as.governments receive
employee services each year for which they have promised future benefit payments in
exchange.
3. What does Statement 45 accomplish?
• When they implement Statement 45, many governments will report, for the first
time, annual OPEB cost and their unfunded actuarial accrued liabilities for past
service costs. This will foster improved accountability and a better foundation for
informed policy decisions about, for example, the level and types of benefits
provided and potential methods of financing those benefits.
The Standard also:
• Results in reporting the estimated cost of the benefits as expense each year during
the years that employees are providing services to the government and its
constituents in exchange for those benefits.
• Provides, to the diverse users of a government's financial reports, more accurate
information about the total cost of the services that a government provides to its
constituents.
• Clarifies whether the amount a government has paid or contributed for OPEB
during the report year has covered its annual OPEB cost. Generally, the more of
its annual OPEB cost that a government chooses to defer, the higher will be (a) its
unfunded actuarial accrued liability and (b) the cash flow demands on the
government and its tax or rate payers in future years.
• Provides better information to report users about a government's unfunded
actuarial accrued liabilities (the difference between a government's total
obligation for OPEB and any assets it has set aside for financing the benefits) and
changes in the funded status of the benefits overtime.
/ � 39
- Attachment 2
4. What are the most common misconceptions about Statement 45?
a. That it requires governments to fund OPEB. Statement 45 establishes
standards for accounting and financial reporting. How a government actually
finances benefits is a policy decision made by government officials. The objective
of Statement 45 is to more accurately reflect the financial effects of OPEB
transactions, including the amounts paid or contributed by the government,
whatever those amounts may be.
b. That it requires immediate reporting of a financial-statement liability for the
entire unfunded actuarial accrued liability. Statement 45 does not require
immediate recognition of the unfunded actuarial accrued liability (UAAL) as a
financial-statement liability. The requirements regarding the reporting of an
OPEB liability on the face of the financial statements work as follows:
• Governments may apply Statement 45 prospectively. At the beginning of the
year of implementation, nearly all governments will start with zero financial-
statement liability.
• From that point forward, a government will accumulate a liability called the
net OPEB obligation, if and to the extent its actual OPEB contributions are
less than its annual OPEB cost, or expense.
• The net OPEB obligation (not the same as the UAAL) will increase rapidly
over time if, for example, a government's OPEB financing policy is pay-as-
you-go, and the amounts paid for current premiums are much less than the
annual OPEB cost.
Statement 45 does, however, also require the disclosure of information about the
funded status of the plan, including the UAAL, in the notes to the financial
statements—and the presentation of multi-year funding progress trend
information as a required supplementary schedule.
c. That it requires governments to report "future costs" for OPEB. It is
misleading and incorrect to describe accrual accounting for OPEB as requiring the
expensing of"future costs." From an accrual accounting standpoint (the basis of
accounting required for all transactions in the government-wide financial
statements), the reported expenses relate entirely to transactions (exchanges of
employee services for the promised future benefits) that already have occurred.
Statement 45 requires governments to report costs and obligations incurred as a
consequence of receiving employee services, for which benefits are owed in
exchange. The normal cost component of annual expense is the portion of the
present value of estimated total benefits that is attributed to services received in
the current year. The annual expense also includes an amortization component
representing a portion of the UAAL, which relates to past service costs. Estimated
benefit costs associated with projected future years of service are not reported.
/� yd