HomeMy WebLinkAboutMinutes - March 13, 2012 SSLODI CITY COUNCIL
SHIRTSLEEVE SESSION
CARNEGIE FORUM, 305 WEST PINE STREET
TUESDAY, MARCH 13, 2012
A. Roll Call by City Clerk
An Informal Informational Meeting ("Shirtsleeve" Session) of the Lodi City Council was held
Tuesday, March 13, 2012, commencing at 7:00 a.m.
Present: Council Member Hansen, Council Member Katzakian, Mayor Pro Tempore Nakanishi,
and Mayor Mounce
Absent: Council Member Johnson
Also Present: City Manager Bartlam, Deputy City Attorney Magdich, and City Clerk Johl
B. Topic(s)
B-1 Discuss Other Post Employment Benefits (CM)
City Manager Bartlam introduced the subject matter of other post employment benefits (OPEB).
Deputy City Manager Jordan Ayers provided a PowerPoint presentation regarding OPEB.
Specific topics of discussion included what is OPEB, auditor's findings and recommendation,
actuarial valuation, accounting requirements, disclosures, OPEB history, current process, other
community comparisons, and options for consideration.
In response to Mayor Mounce and Mayor Pro Tempore Nakanishi, Mr. Ayers stated that, while
the City does not pay for health care for employees after retirement, there is a Cobra -like option
for certain employees depending upon their hire date whereby if selected the City will pay
the CalPERS 112, which equates to approximately $1,000 annually.
In response to Council Member Hansen, Mr. Bartlam stated the auditors have made the
recommendation to collect OPEB funding from departments although staff has a different
recommendation consistent with the pay-as-you-go option. Further, Mr. Ayers stated every two
years a request for proposals is put out for an actuarial study to be performed by a licensed
actuary independent of the auditors.
In response to Mayor Mounce, Mr. Ayers stated staff will provide City Council with copies of the
2012 actuarial study when it is received.
In response to Mayor Pro Tempore Nakanishi, Mr. Ayers stated the discount rate is anticipated
earnings based on the City's assumptions for its actuarial.
In response to Mayor Mounce, Mr. Ayers stated the sick leave conversion benefit is transferable
to a surviving spouse.
In response to Council Member Hansen, Mr. Ayers stated life expectancy rates are considered in
the actuarial process through the use of mortality tables.
In response to Mayor Mounce, Mr. Ayers stated the fund balance after the June 30 close is
approximately $3 million.
In response to Council Member Hansen, Mr. Ayers stated the sick leave participation rates
are calculated based upon an assumption of how many of the current 117 employees eligible for
Continued March 13, 2012
the program will take the conversion option versus other options such as service credit or cash.
In response to Mayor Mounce, Mr. Bartlam stated the $17 million number for Lodi is very different
from the number in Stockton because it is considerably smaller, the program participant number
is smaller, the program itself was capped in 1994/95, and there has been no program expansion.
In response to Council Member Hansen, Mr. Ayers stated with pension obligation bonds it is
assumed that the annual debt service would be lower than what the ongoing pension payment is
and the interest earnings would help offset the liability, although that is not what happened in
Stockton with market conditions. Further, Mr. Ayers and Mr. Bartlam stated while the $900,000
number will continue to grow for a period at some point that number will start to shrink because
there will be less employees in the system and even fewer in this particular program.
In response to Council Member Hansen, Mr. Ayers stated the actual costs with the pay-as-you-go
option are budgeted annually while the fluctuating liability number is not.
In response to Mayor Mounce, Mr. Ayers stated Elk Grove is a fairly new City and has a
combination of a defined contribution plan, a trust, and a defined benefit program with a total
unfunded liability of approximately $1.5 million. In addition, Mr. Ayers and Mr. Bartlam stated the
time frame of when the liability amount will start to decrease is unknown because the number of
employees who are going to retire from the City are unknown and what option they will select at
that time is unknown.
In response to Council Member Hansen, Mr. Ayers stated there is no stand-alone fund for
employee retirements as it is all a part of the pay-as-you-go option with an unfunded liability
amount. Mr. Bartlam stated staff is recommending that the City continue with the pay-as-you-go
option as it is doing currently.
In response to Council Member Katzakian, Mr. Ayers stated the CalPers payment is set by
statute and does have a Consumer Price Index type of increase and the 112 liability exists with
all agencies that participate in CalPers. Mr. Ayers stated the worst case scenario deals with the
number of people retiring at a given time and the option they select for sick leave conversion.
In response to Council Member Hansen, Mr. Bartlam stated staff will return to Council with details
regarding the budget stresses that would result by funding the $3 million and $17 million figures
of currently unfunded liability.
In response to Myrna Wetzel, Mr. Bartlam stated contracting with a third -party administrator
would include hiring an investment firm to professionally manage the funds.
Mayor Mounce requested a list of exempt employees in the City who receive administrative pay.
C. Comments by Public on Non -Agenda Items - None
D. Adjournment
No action was taken by the City Council. The meeting was adjourned at 8:00 a.m.
ATTEST:
Randi Johl
City Clerk
N
AGENDA ITEM
CITY OF LODI
COUNCIL COMMUNICATION
TM
AGENDA TITLE: Discuss Other Post Employment Benefits
MEETING DATE:
PREPARED BY:
March 13, 2012
Deputy City Manager
RECOMMENDED ACTION: Discuss Other Post Employment Benefits.
BACKGROUND INFORMATION: During the presentation of the Comprehensive Annual Financial
Report (CAFR) for FY 2010/11, it was noted that our auditors made
a recommendation that the City develop a plan to charge
departments for Other Post Employment Benefits (OPEB). Council asked that this item be brought back
for a Shirtsleeve discussion.
Attached are a variety of documents associated with OPEB:
• The most recent actuarial valuation report for OPEB for the City dated November 12, 2010
• Pages from the FY 2010/11 CAFR that address OPEB recording and disclosure
• Auditor finding and recommendation for the year ended June 30, 2011
• Government Finance Officers Association Best Practices.
Staff will provide additional information regarding funding options during the Shirtsleeve.
FISCAL IMPACT:
FUNDING AVAILABLE
JAra
Attachments
Dependant upon Council direction.
Dependant upon Council direction.
Jordan Ayers
Deputy City Manager
APPROVED:
radt Bartlam, City Manager
November 12, 2010
Van Iwaarden Associates 840 Lumber Exchange Ten South Fifth Street Minneapolis MN 55402-1010
612.596.5960 to//free: 888.596.5960 f.• 612.596.5999 www.vaniwaarden.com
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Table of Contents
Page
Summary
Introduction and Actuarial Certification....................................................................................... 1
Summaryof Results..................................................................................................................... 2
Data
ValuationCensus Data.................................................................................................................. 3
Accounting Information
Statement of Plan's Benefit Obligations....................................................................................... 4
Schedule of Funding Progress and Annual OPEB Cost - GASB 45 ............................................... 5
Current and Projected Reconciliation of Net OPEB Obligation - GASB 45 ................................... 6
Projection of Retirees' and City's OPEB Cash Flows..................................................................... 7
Other Information
Summaryof Plan Provisions......................................................................................................... 8
ActuarialAssumptions.................................................................................................................. 10
AccountingRequirements............................................................................................................. 15
Glossaryof Selected Terms.......................................................................................................... 17
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Introduction and Actuarial Certification
The City of Lodi (the City) has hired Van Iwaarden Associates to perform an actuarial valuation of the City's
Other Post -Employment Benefits (OPEB's). The 'other' refers to post-employmentbenefits other than pensions.
Accounting for these OPEBs is now required under Government Accounting Standards Board Statement No. 45
(GASB 45).
This valuation has been prepared to present information for financial reporting purposes. It is important to
recognize that calculations performed for other purposes may yield significantly different results.
In conducting the valuation, we have used the following information as of January 1, 2010:
• the provisions of the medical plans
• census data
• premium information
All premium and census data were provided by the City.
The premium information and census data were used with a review of reasonableness but without formal audit.
The premium trend rate was confirmed with Health Risk Strategies, LLC.
The valuation has been conducted in accordance with generally accepted actuarial principles and practices. In
our opinion, the actuarial assumptions represent reasonable expectations of anticipated plan experience.
To fulfill the applicable accounting requirements, each actuarial assumption should be management's "best
estimate" solely with respect to that individual assumption.
The undersigned credentialed actuaries are members of the American Academy of Actuaries and meet the
Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.
We are available to answer questions on the material contained in the report or to provide explanations or
further detail, as may be appropriate.
Mark W. Schulte, FSA, EA, MAAA
Consulting Actuary
November 12, 2010
Mary P. Ratelle, FSA, MAAA
(Medical premium trend analysis only)
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Summary of Results
A. Valuation Census Data January 1, 2010
1. Active employees 399
2. Covered retirees and beneficiaries 163
3. Total 562
B, GASB 45 Funded Status
1. Actuarial Accrued Liability (AAL) at valuation date $17,710,456
2. Market value of assets 0
3. Unfunded Accrued Liability (UAL) (1. - 2.) 17,710,456
4. Covered payroll 9,409,782
5. Unfunded Accrued Liability as a percentage of payroll 188.2%
6. Projected UAAL at fiscal year-end 18,128,398
C. Reconciliation of Net OPEB Obligation (NOO)
1. Net OPEB Obligation as of July 1, 2009 1,195,521
2. Annual OPEB Cost 1,333,881
3. Estimated City contributions to be made during the fiscal year 510,338
4. Estimated Net OPEB Obligation as of June 30, 2010 (1. + 2. - 3.) 2,019,064
D. Effect of a 1 % increase in Discount Rate (expected investment return)
.49%
-9
1. Percentage change in AAL -
2. Percentage change in Annual OPEB Cost -9'95%
E. Key Assumptions
1. Discount rate for liabilities (expected long-term investment return) 4.00%
2. Health care cost trend rate 8.2% to 5.5%
in 9 years
3. Percentage of employees expected to continue health coverage at retirement see page 11
i
CITY Of LOW 3
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Valuation Census Data
This section presents the demographic information for the active and retired participants included in the
OPEB valuation. The actuarial valuation was based on January 1, 2010 census data provided by the City. The
following exhibits summarize the personnel characteristics of the data used for the study.
A. Retired Participants and Widow(er)s Total
1. Number receiving benefits under the "Conversion" option 56
2. Number only receiving minimum required contribution ($105 for 2010) 66
3. Number receiving benefits under the "Bank" option* 41
163
4. Total 66.29
5. Average age
*Liability due to the "Bank" option falls under GASB 16 and is not included in this report
**There were five additional employees listed in the original data that were excluded due to a hire date after
1/1/2010
Total
B, Active Participants
1. Fire
16
a. Number eligible to receive SLC benefits
b. Number not eligible to receive SLC benefits
41
57
c. Subtotal
2. Police
23
a. Number eligible to receive SLC benefits
b. Number not eligible to receive SLC benefits
49
72
c. Subtotal
3. Other employees
88
a. Number eligible to receive SLC benefits
b. Number not eligible to receive SLC benefits
182
270
c. Subtotal
399
4. Total**
43.24
5. Average age
*Liability due to the "Bank" option falls under GASB 16 and is not included in this report
**There were five additional employees listed in the original data that were excluded due to a hire date after
1/1/2010
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Statement of Plan's Benefit Obligations
A. Actuarial Accrued Liability at January 1, 2010
January 1, 2010
1. Total actuarial present value of OPEB
$24,9641276
2. Postretirement benefit obligation attributable to future service
7,253,820
3. Actuarial Accrued Liability (AAL) on January 1, 2010 (1. - 2.)
17,710,456
4. AAL Summary Fire
Police
Other
Total
a. Active i. CaIPERS minimum contribution $654,952
$881,763
$3,933,252
$5,469,967
fl. Conversion benefit 0
679,371
4,562,999
5,242,370
iii. Total 654,952
1,561,134
8,496,251
10,712,337
b. Inactive i. CalPERS minimum contribution 143,029
329,238
3,262,559
3,734,826
fl. Conversion benefit 0
858,444
2,404,
3,263,293
iii. Total 143,029
1,187,682
5,667,408
6,998,119
c. Total i. CaIPERS minimum contribution 797,981
1,211,001
7,195,811
9,204,793
ii. Conversion benefit 0
1,537,815
6,967,84
8,505,663
iii. Total 797,981
2,748,816
14,163,659
17,710,456
H. Changes in the Actuarial Accrued Liability from July 1, 2008
1. Expected actuarial accrued liability (AAL)
a. AAL as of July 1, 2008 $23,323,165
b. Normal cost as of July 1, 2008 854,741
c. Normal cost as of July 1, 2009 (half year) 448,739
d. Expected benefit payments from July 1, 2008 through July 1, 2009 (566,723)
e. Expected benefit payments from July 1, 2009 through January 1, 2010 (309,901)
f. Interest to January 1, 2010 on a. through e. 1,452,997
g. Expected AAL on January 1, 2010 (sum of a. through f.) 25,203,018
2. Actual AAL on
a. Actual AAL at January 1, 2010 with changes to census data and plan experience 21,655,881
b. Actual AAL at January 1, 2010 including offset for minimum required contribution and a 21,161,003
decrease in the premium paid after age 65 for those eligible for the Conversion benefit
c. Actual AAL at January 1, 2010 with widow continuation assumption change 19,151,713
d. Actual AAL at January 1, 2010 with updated premium amounts 17,710,456
4
3. Difference from the expected AAL
a. (Gain) or loss due to plan experience different from expected, and census (3,547,137)
updates/changes (2a. - lg.)
b. Change due to programming differences (2b. - 2a.) (494,878)
c. Change due to premium changes (2c. - 2b.) (2,009,290)
d. Change due to assumption changes (2d. - 2c.) X1,441,257)
e. Total change in AAL from expected (sum of a. through d.) (7,492,562)
CITY OF LODI 5
January 1, 2010 Actuarial Valuatlon of Post -Employment Benefits
Schedule of Funding Progress and Annual OPEB Cost - GASB 45
The following tables show the income statement figures if the City follows GASB 45 accounting. The unfunded
accrued liability is amortized as a level dollar amount over a closed 30 year period beginning June 30, 2009.
Assumptions and methods used are described in subsequent sections.
A. Schedule of funding progress
1. Actuarial valuation date
2. Plan assets at fair value
3. Actuarial accrued liability (AAL)
4. Unfunded AAL (UAAL) (3. - 2.)
5. Funded ratio (2. / 3.)
6. Covered payroll
7. UAAL as a percentage of covered payroll (4. / 6.)
8. Projected UAAL as of June 30, 2010
B. Annua/Required Contribution (ARC)*
1. Normal cost at June 30, 2010
2. Amortization of UAAL over 29 years as of June 30, 2010
3. Total fiscal year-end ARC
C. Annual OPER Cost
1. Annual required contribution as of June 30, 2010
2. Interest on net OPEB obligation (NOO)
3. Adjustment to ARC (amortization of NOO)
4. Annual OPEB cost (expense) (1. + 2. + 3.)
D. Three year history of OPER information
January 1, 2010
$0
17,710,456
17,710,456
0.00%
$9,409,782
188.21%
18,128, 398
$642,907
690,512
1,333,419
1,333,419
47,821
(47,3591
1,333,881
Percentage of
Annual
Fiscal Year
Annual
Plan Sponsor
Ended
OPEB Cost
Contribution **
6/30/2008
N/A
N/A
6/30/2009
1,785,173
589,652
6/30/2010
1,333,881
510,338
January 1, 2010
$0
17,710,456
17,710,456
0.00%
$9,409,782
188.21%
18,128, 398
$642,907
690,512
1,333,419
1,333,419
47,821
(47,3591
1,333,881
Percentage of
Annual OPEB
Net OPEB
Cost Contributed
Obligation
N/A
N/A
33.03%
1,195,521
38.26%
2,019,064
*This is a misleading term, but it is prescribed by GASB 45. No contribution is actually required to be
made in cash.
** Estimated contribution for fiscal year.
CITY OF LODI
January 1, 2010 Actuarial Valuation of post -Employment Benefits
Current and Projected Reconciliation of Net OPEB Obligation - GASB 45
The following tables show the balance sheet figures when the City follows GASB 45 accounting. Assumptions
and methods used are described in subsequent sections.
A. Reconciliation of estimated Net OPER Obligation (NOO) for 2010
1. Net OPEB obligation as of July 1, 2009
2. Annual OPEB cost
a. Annual required contribution
b. Interest on net OPEB obligation
c. Adjustment to ARC (amortization of N00)
d. Total (a. + b. + c.)
3. Contributions made including implicit subsidy (estimated)
4. Estimated net OPEB obligation as of June 30, 2010 (1. + 2. - 3.)
B. Reconciliation of estimated NOO for 2011
1. Estimated net OPEB obligation as of July 1, 2010
2. Annual OPEB cost
a. Annual required contribution
b. Interest on net OPEB obligation
c. Adjustment to ARC (amortization of NOO)
d. Total (a. + b. + c.)
3. Contributions made including implicit. subsidy (estimated)
4. Estimated net OPEB obligation as of June 30, 2011 (1. + 2. - 3.)
1,333,419
47,821
(47,359)
1,415,969
80,763
(82,550)
1,195, 521
1,333,881
510,338
2,019,064
2,019,064
1,414,182
576,894
2,856,352
M
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post-EmPloyment Benefits
Projection of Retirees' and City's OPEB Cash Flows
Note: Projections are based on a "closed group": current participants only, no future entrants.
7
OPEB
(a)
(b)
(a) + (b)
Fiscal Year
CalPers Minimum
Conversion
Ending
Contribution
Benefits
Total
2010
$171,044
$339,294
$510,338
2011
200,841
376,053
576,894
2012
218,009
416,779
634,788
2013
238,087
511,334
749,421
2014
260,230
581,978
842,208
2015
285,068
653,980
939,048
2016
311,813
733,938
1,045,751
2017
340,335
782,714
1,123,049
2018
370,164
826,368
1,196, 532
2019
403,314
869,451
1,272,765
2020
437,794
921,167
1,358,961
2021
473,363
905,199
1,378, 562
2022
509,898
917,243
1,427,141
2023
546,607
881,870
1,428,477
2024
584,329
863,551
1,447,880
2025
622,212
818,705
1,440,917
2026
659,859
736,252
1,396,111
2027
699,106
659,128
1,358,234
2028
737,839
592,179
1,330,018
2029
776,216
523,242
1,299,458
2030
815,519
429,024
1,244,543
2031
854,673
368,362
1,223,035
2032
893,952
267,397
1,161,349
2033
934,163
197,212
1,131,375
2034
972,926
152,765
1,125,691
2035
1,010,273
96,486
1,106,759
2036
1,045,706
70,645
1,116,351
2037
1,079,026
50,855
1,129,881
2038
1,109,794
38,118
1,147,912
2039
1,135,965
27,005
1,162,970
2040
1,157,654
19,264
1,176,918
Note: Projections are based on a "closed group": current participants only, no future entrants.
7
CITY OF LODI 8
January 1, 2010 Actuarial Valuation of Post-EmPloyment Benefits
Summary of Plan Provisions
This section describes the "substantive plan" upon which the valuation was based. This summary reflects
relevant provisions used as the basis for the actuarial valuation.
Eligibility for Participation An employee of the City of Lodi that is eligible to receive a pension from
CaIPERS.
Eligibility for retirement benefits Age 50 with 5 years of service for the minimum contribution. Additional
requirements below for Sick Leave Conversion benefit.
Premium paid by City The City will pay the minimum required premium under Government
Code Section 22892 ($105 per month for 2010 and $108 for 2011) of the
Public Employee Medical and Hospital Care Act towards a retiree's
medical premium for the life of the retiree and their surviving spouse.
In addition, after 10 years of service, the following employee groups are
eligible for a Sick Leave Conversion benefit (described on the next page)
used to pay medical premiums after retirement.
Contract Group
Hired prior to:
• Executive management
July 1, 1994
• Mid -management
July 1, 1994
• Fire mid -management
July 1, 1994
• Police mid -management
July 1, 1994
• Dispatchers
July 9, 1994
• Police
October 10, 1994
• IBEW
January 1, 1995
• General Services
July 1, 1995
• Maintenance and Operators
July 1, 1995
• Fire
December 6, 1995
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Summary of Plan Provisions (continued)
Sick Leave Conversion Benefit (an eligible retiree may choose between the following options):
Bank Option Accumulated unused sick leave is converted to a dollar amount and becomes the
employee's "Bank." Medical premiums are paid out of this account until it is
depleted. The City will then pay the minimum amount required by law towards the
retiree's premium until death or discontinuation of coverage.
Conversion Option Accumulated unused sick leave is converted to a period of time during which the City
will pay for a retiree's health premiums. The amount of premium paid by the City
each year shall be the same amount as paid at the time of retirement. Retirees are
responsible for paying for future increases in the health premiums. Once the time
period is over, the City will then only pay the minimum amount required by law
towards the retiree's medical premium until death or discontinuation of coverage.
The Conversion Option is described in detail as follows:
"The number of accumulated hours shall be multiplied by 501/o and converted to
days. The City shall pay one month's premium for employee and dependents for
each day after conversion. For each year of employment in excess of 10 years, 2.5%
shall be added to the 50% before conversion. The amount of premium paid shall be
the same as the premium paid by the City at the time of retirement. In the event
any differences are created by an increase in premiums the difference must be paid
for by the employee. The City shall allow a surviving dependent of a retiree enrolled
in the Sick Leave Conversion program to purchase medical insurance at the
employee -only premium for the same period as if the retiree had not died."
This valuation does not include benefits paid for through the "Bank Option."
Those benefits are valued
under GASB 16.
Total monthly premium effective January 1, 2010 (Bay
Area Region):*
Basic Plans
Employee Only
Employee + 1
Employee + 2
Blue Shield
$577.33
$1,154.66
$1,501.06
Blue Shield NetValue
500.35
1,000.70
1,300.91
1,384.66
Kaiser
532.56
1,065.12
1,017.48
1,322.72
PERS Choice
508.74
474.93
949.86
1,234.82
PERS Select
868.17
1,736.34
2,257.24
PERS Care
484.00
906.00
1,151.00
PORAC
Supplement/ Managed Medicare Monthly Rates
$ 868.59
Blue Shield
$299.53
$599.06
868.59
Blue Shield NetValue
299.53
599.06
895.08
Kaiser
298.36
596.72
PERS Choice
356.09
712.18
1,068.27
PERS Select
356.09
712.18
1,068.27
PERS Care
410.60
821.20
1,231.80
PORAC
363.00
723.00
1,157.00
*In 2010, the CalPERS medical premiums for the Bay Area/Sacramento Region were split into two separate
regions. This valuation assumes
that future retirees will be covered by the Bay Area premiums.
Health Trend Rates Year
CITY of LODI 10
January 1, 2010
Actuarial Valuatlon of Post -Employment Benefits
2011
Actuarial Assumptions
This section describes the actuarial assumptions and methods used in this valuation of postretirement benefit cos
Valuation Date
January 1, 2010
Actuarial Cost Method
OPEB benefits were calculated under the Entry Age Normal (level
with a 30 -year amortization of unfunded
7.00%
percent of pay) cost method
liability (closed basis). The present value of future benefits were
6.70%
allocated on a level basis over the expected earnings of each employee
6.40%
between the hire date and assumed retirement age.
Amortization of Unfunded Actuarial
Amortized as a level percent of payroll over a closed 30 year period. As
Accrued Liability
of July 1, 2010, 28 years remain.
Discount Rate
4% per year
Salary Increase
Salaries are assumed to increase 3.25% per year
Payroll Growth
Total City payroll is assumed to increase 3.25% per year.
Age -based Monthly OPEB Costs
The CalPERS medical plan is a "Community -rated" plan as described in
45. Each of employers in the region pays the same
GASB participant
premium even though the costs to older retirees tend to be higher.
This higher cost is offset by the younger participants paying a premium
that tends to be higher than their medical costs.
Under GASB 45 accounting rules, it is assumed that the City has no
OPEB implicit subsidy liability due to the fact that the City is a relatively
small component of the CalPERS community -rated plan.
Health Trend Rates Year
Rates
8.20%
2010
2011
7.90%
2012
7.60%
2013
7.30%
2014
7.00%
2015
6.70%
2016
6.40%
2017
6.10%
2018
5.80%
2019 & later
5.50%
It is assumed that the minimum required premium under Government
Code Section 22892 ($105 per month for 2010 and $108 for 2011) of
the PEMHCA towards a retiree's medical premium will increase at 5%
per year after 2011.
Medicare Eligibility We have assumed that all retirees will become eligible for Medicare
when they reach age 65.
Administrative Expenses No administrative expenses were included in this valuation.
CITY OF LODI 11
January 1, 2010 Actuarial Valuation of Post-EmPloyment Benefits
Actuarial Assumptions (continued)
Duration of It is assumed that all future retirees electing the Conversion benefit will receive it for 9 years.
Conversion Current retirees receive the Conversion benefit until the end of their actual conversion period.
Benefit These assumptions were developed by the prior actuary based on analysis of participant
data.
Spouse ages Wives are assumed to be three years younger than husbands.
Participation Rates Actives
It is assumed that 100% of future retirees elect to continue medical coverage and 75% elect
spouse coverage. Participants are assumed to continue in their current medical plan. It is
assumed that 109/6 of widows elect to continue the CalPERS minimum benefit after the
participant's death.
Eligible future retirees are assumed to elect the Conversion option over the Bank option as
follows:
100% General Service 50% Mid Management
100% Maintenance and Operations 50% Police
100% Dispatchers 00/0 IBEW
50% Executive Management 00/0 Fire
Inactives
It is assumed that 1000/o of retirees will continue in their current coverage until death. 10%
of married participants are assumed to have spouses that elect to receive the CalPERS
minimum benefit after the participants death.
Mortality The mortality rates are the same as those used in the January 1, 2008 actuarial valuation
and are from the 2008 CalPERS retirement plan valuation.
Sample rates are as follows:
Pre -Retirement post-retirement
Age Male Female Male Female
55 0.248% 0.178% 0.429% 0.253%
60 0.344% 0.256% 0.721% 0.442%
65 0.480% 0.369% 1.302% 0.795%
70 0.671% 0.537% 2.135% 1.276%
75 3.716% 2.156%
80 6.256% 3.883%
85 10.195% 7.219%
90 17.379% 12.592%
Disability The disability rates are the same as those used in the January 1, 2008 actuarial valuation and
are from the 2008 CalPERS retirement plan valuation.
Sample rates are as follows:
Age Fire Police
25 0.10% 0.28%
30 0.21% 0.56%
35 0.31% 0.84%
40 0.41% 1.12%
45 0.51% 1.40%
50 0.62% 1.67%
55 6.01% 5.81%
CITY OF LODI 12
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Actuarial Assumptions (continued)
Retirement Rates The retirement rates are the same as those used in the January 1, 2008 actuarial valuation.
Fire and Police rates are based on the 2008 CalPERS 3% @ 50 valuation, and other City
employee rates are based on the 2008 CalPERS 2% @ 55 miscellaneous valuation.
Sample annual rates of retirement are as follows:
Fire
Years of Service
Age
5
10
15
20
25
30
35
50
3.41%
3.41%
3.41%
4.77%
6.79%
8.04%
8.61%
51
4.63%
4.63%
4.63%
6.47%
9.22%
10.91%
11.69%
52
6.93%
6.93%
6.93%
9.67%
13.77%
16.30%
17.46%
53
8.35%
8.35%
8.35%
11.66%
16.61%
19.65%
21.05%
54
10.25%
10.25%
10.25%
14.31%
20.38%
24.12%
25.84%
55
12.65%
12.65%
12.65%
17.66%
25.16%
29.77%
31.90%
56
12.10%
12.10%
12.10%
16.90%
24.07%
28.48%
30.52%
57
10.10%
10.10%
10.10%
14.11%
20.10%
23.78%
25.48%
58
11.84%
11.84%
11.84%
16.52%
23.54%
27.86%
29.85%
59
10.02%
10.02%
10.02%
13.99%
19.93%
23.58%
25.26%
60
100.000/,
100.00%
100.00%
100.000/0
100.000/0
100.00%
100.00%
Police
Years of Service
Acme
5
10
15
20
25
30
35
50
4.35%
4.35%
4.35%
8.21%
12.08%
15.59%
19.10%
51
3.85%
3.85%
3.85%
7.28%
10.71%
13.82%
16.93%
52
6.14%
6.14%
6.14%
11.59%
17.05%
22.00%
26.95%
53
6.89%
6.89%
6.89%
13.03%
19.16%
24.72%
30.28%
54
7.10%
7.10%
7.10%
13.42%
19.74%
25.47%
31.20%
55
8.98%
8.98%
8.98%
16.98%
24.97%
32.22%
39.47%
56
6.87%
6.87%
6.87%
12.99%
19.10%
24.65%
30.19%
57
8.03%
8.03%
8.03%
15.18%
22.32%
28.80%
35.28%
58
7.91%
7.91%
7.91%
14.95%
21.98%
28.37%
34.75%
59
8.20%
8.20%
8.20%
15.49%
22.79%
29.40%
36.02%
60
100.000/0
100.000/0
100.00%
100.00%
100.00%
100.00%
100.00%
CITY OF LODI 13
January 1, 2010 Actuarial Valuation of Post-EmP/oyment Benefits
Actuarial Assumptions (continued)
are the same as those used in the January 1, 2008 actuarial valuation.
Retirement Rates
The retirement
rates
2008 CalPERS
3% @ 50 valuation, and other City
Fire and Police
rates are based
on the
employee rates are based
on the 2008
CalPERS 2%
@ 55 miscellaneous
valuation.
Sample annual rates of retirement
are as follows:
All other City
employees
Years of Service
Age
5
10
15
20
25
30
35
50
1.45%
1.84%
2.24%
2.69%
3.07%
3.66%
4.11%
51
1.06%
1.35%
1.64%
1.98%
2.26%
2.69%
3.02%
52
1.14%
1.45%
1.76%
2.12%
2.41%
2.87%
3.23%
53
1.50%
1.90%
2.31%
2.78%
3.18%
3.78%
4.25%
54
1.99%
2.52%
3.07%
3.69%
4.21%
5.02%
5.64%
55
4.75%
6.04%
7.34%
8.83%
10.08%
12.00%
13.49%
56
3.95%
5.02%
6.11%
7.35%
8.38%
9.98%
11.23%
57
4.27%
5.42%
6.59%
7.93%
9.05%
10.78%
12.12%
58
4.73%
6.01%
7.30%
8.79%
10.03%
11.94%
13.43%
59
5.10%
6.48%
7.88%
9.48%
10.82%
12.87%
14.48%
60
7.15%
9.08%
11.04%
13.28%
15.16%
18.04%
20.30%
61
7.15%
9.08%
11.04%
13.28%
15.16%
18.05%
20.30%
62
12.75%
16.20%
19.69%
23.69%
27.04%
32.19%
36.21%
63
12.87%
16.36%
19.88%
23.92%
27.31%
32.50%
36.56%
64
9.31%
11.82%
14.38%
17.29%
19.74%
23.50%
26.43%
65
17.38%
22.09%
26.86%
32.31%
36.88%
43.90%
49.38%
66
10.85%
13.78%
16.75%
20.16%
23.01%
27.39%
30.81%
67
11.09%
14.09%
17.13%
20.61%
23.53%
28.01%
31.50%
68
8.78%
11.16%
13.56%
16.32%
18.63%
22.17%
24.94%
69
10.35%
13.15%
15.99%
19.23%
21.96%
26.14%
29.40%
70
12.24%
15.55%
18.90%
22.74%
25.96%
30.90%
34.76%
71
9.41%
11.95%
14.53%
17.48%
19.950/0
23.75%
26.72%
72
10.35%
13.15%
15.98%
19.23%
21.95%
26.13%
29.39%
73
8.34%
10.60%
12.89%
15.51%
17.70%
21.07%
23.70%
74
6.44%
8.18%
9.95%
11.97%
13.66%
16.26%
18.30%
75
100.00%
100.00%
100.00%
100.00%
100.00%
100.000/0
100.00%
CITY OF LODI
January 1, 2010 Actuarial Valuation of Post-EmPloyment Benefits
14
Actuarial Assumptions (continued)
The withdrawal rates are the same as
those used in
the January
1, 2008 actuarial
Withdrawal Rates
Police employees are based on the 2008 CalPERS 3% @ 50
valuation. Rates
for Fire and
based
on the 2008 CalPERS miscellaneous
valuation. Rates
for other City employees
are
employees valuation.
Sample annual rates of withdrawal are as follows:
Completed
Completed
Years of
Years of
Fire
Service ice
Fire
Police
Service
0
9.47%
12.99%
8
o
1.56 /o
2.47%
1
°
7.39 /o
8.16%
9
1.23%
2.30%
0
2
5.31%
3.48%
10
0.90%
3
3.23%
3.31%
15
0.79%
1.29%
1.29%
4
0
2.90/0
3.14%
20
0.69%
0.2%
5
2.57%
2.97%
25
0
0.57%
0.882%
6
0
2.23/0
2.81%
30
0.54%
0.2%
7
1.89%
2.63%
35
0.09%
0.112%
All other City employees
Entry Age
qgg
20
25 30
16.910% 16.220%
35
15.525%
40
14.830%
45
14.140%
50
13.450%
0
17.600%
15.610%
14.920% 14.230%
13.535%
12.840%
12.150%
11.460%
1
2
13.620%
12.930% 12.240%
11.545%
10.850%
10.160%
9.470%
3
11.630%
10.940% 10.250%
9.555%
8.860%
8.170%
7.480%
4
9.640%
8.950% 8.260%
7.565%
6.870%
6.180%
5.490%
5
7.650%
6.965% 6.270%
5.575%
4.880%
3.085%
1.290%
6
7.270%
6.580% 5.880%
5.190%
4.500%
2.810%
1.120%
7
6.890%
6.190% 5.500%
4.815%
4.110%
2.535%
0.960%
8
6.500%
5.805% 5.120%
4.425%
3.730%
2.265%
0.800%
9
6.120%
5.430% 4.730%
4.040%
3.350%
2.000%
0.650%
10
5.740%
5.045% 4.350%
3.660%
0.950%
0.730%
0.510%
15
4.460%
3.755% 3.070%
6.450%
0.460%
0.270%
0.080%
20
3.180%
2.490% 0.410%
0.250%
0.090%
0.055%
0.020%
25
1.900%
0.215% 0.090%
0.055%
0.020%
0.020%
0.020%
30
0.100%
0.060% 0.020%
0.020%
0.020%
0.020%
0.020%
35
0.200%
0.200% 0.020%
0.020%
0.020%
0.010%
0.000%
It is assumed that current retirees entitled to a future Sick Leave Conversion
"Frozen" Sick Leave
Conversion:
benefit will begin
receiving these
benefits 3 years from the valuation date.
continuing the
CalPERS
minimum benefit
Changes since prior
valuation
The assumed percentage of widows
after a participant's death was changed from 100% to 10%.
CITY OF LODI 15
January 1, 2010 Actuarial Valuation of Post -Employment Benefits
Accounting Requirements
This section presents the actuarial calculations used to fulfill the applicable accounting requirements for the plan.
Accounting Information under GASB 43 and GASB 45
The Governmental Accounting Standards Board (GASB) finalized Statements No. 43 (GASB 43 for funded OPEB
plans) and 45 (GASB 45 for employers) in 2004. The statements' objectives are to establish uniform standards
of financial reporting by state and local governmental entities for postemployment benefit plans other than
pension benefits (OPER plans). This includes benefits such as postemployment healthcare benefits, dental
insurance and life insurance.
For OPEB plans sponsored by governmental entities, these GASB Statements require certain standards and
disclosures of plan and fund information including financial reporting of plan assets, liabilities of plan, changes in
net assets, funded status and funding progress of the plan, and contributions to the plan in comparison to the
annual required contributions of the employer (ARC).
Valuing Postretirement Health Benefits
Determining the value of future health care benefits is challenged by the fact that assumptions must be made
about many future events that are especially hard to predict. Future increases in health care costs are affected
by many factors, including:
• OPEB inflation
• Changes in utilization patterns
• Technological advances
• Cost shifting (i.e., increases in private plans' costs in non -managed programs due to uninsured claims,
changes in the Medicare payment structure, and increased emphasis on managed care programs)
• Cost leveraging (i.e., erosion of fixed deductibles and out-of-pocket maximums)
• Changes to government medical programs, such as Medicare, when applicable. Under the Medicare
Modernization Act of 2003 (MMA), a new prescription drug program called Medicare Part D was established.
GASB requirements state that the determination of the actuarial accrued liabilities, the annual required
contribution, and the annual OPEB cost should be done without reduction for Medicare Part D payments.
CITY OF LODI
January 1, 2010 Actuarial Valuation of post -Employment Benefits
Accounting Requirements (continued)
OPEB obligations are also heavily influenced by demographic assumptions such as:
• Withdrawal rates (i.e., employees terminating before receiving benefits)
• Retirement rates (i.e., employees retiring at various ages and subsidy levels)
• Participation (i.e., retirees electing coverage, the percentage married, and elections to
contribute for coverage of spouses)
• Mortality rates (i.e., how long employees and spouses will receive benefits)
The Actuarial Assumptions section outlines the assumptions used in this valuation.
16
Estimating Health Care Costs
In addition to estimating future increases in health care claims costs, it is necessary to develop a starting claims
cost value on a per covered individual basis for self-insured plans and even some insured plans.
For insured plans, the premiums represent a blended average cost of both active and retired individuals. Since
older, pre -65 retirees generally incur higher claims than younger active employees, GASB requires employers to
value retiree liability based on estimated retiree costs rather than premiums. Age-adjusted claims are developed
and used to value the OPEB liability.
CITY OF LODI 17
January 1, 2010 Actuarial valuat/on of Post -Employment Benefits
Glossary of Selected Terms
This section provides the definitions of applicable terminology in the actuarial valuation, with references to
both the Governmental Accounting Standards Nos. 43 (GASB 43) and 45(GASB 45).
Actuarial Cost Method - a procedure for determining the actuarial present value of benefits and for developing
an allocation of such value to time periods.
Actuarial Present Value - the value of an amount or series of amounts payable or receivable at various times,
determined as of a given date by the application of a set of actuarial assumptions.
Actuarial Accrued Liability - the portion of the actuarial present value which is not provided for by future
normal costs, determined under the actuarial cost method.
Annual OPEB Cost - the OPEB expense recognized in the employer's financial statements.
ARC - the Annual Required Contribution (ARC) - the basis for the annual OPEB cost shown in the employer's
financial statements. This term is misleading: no annual cash contribution is actually required to fund OPEB
benefits.
Discount Rate - the interest rate used to adjust liabilities and obligations for the time value of money.
GASB Statement No. 43 - the Governmental Accounting Standards Statement Financial Reporting for
Postemployment Benefit Plans Other Than Pension Plans
GASB Statement No. 45 - the Governmental Accounting Standards Statement Accounting and Financial
Reporting for Postemployment Benefits Other Than Pensions
Implicit Subsidy or Implicit Rate Subsidy - the difference between the actual and apparent cost of OPEB
coverage. The actual cost for early retirees is higher than the average per -person premium for the
active/retiree group. Plans in which retirees pay the average active/retiree rate (the apparent cost) give rise
to an implicit rate subsidy: the employer pays the difference between the actual and apparent cost.
Net OPEB obligation - the OPEB liability (asset) at transition, if any and the cumulative difference since the
effective date of Statement No. 45 between annual OPEB cost and the employer's contributions.
Normal Cost - the portion of the actuarial present value which is allocated to the valuation year by the
actuarial cost method.
Valuation Date - the date as of which assets and liabilities are measured in determining the OPEB liability of
the plan.
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CITY OF LODI, CALIFORNIA
Report to City Council
Current Year Recommendation
For the Year Ended June 30, 2011
DEFICIT BENEFITS INTERNAL SERVICE FUND
Conditio�i
For the year ended June 30, 2011, the revenue charged to user funds and/or departments by the City's
Benefits Internal Service Fund was $255,951 less than the CaIPERS invoice billings of health insurance
premiums for active participants enrolled in the health care plans offered by CaIPERS. Absent a
reconciliation of the enrolled participants in the Ca1PERS health care plans and the City's internal
payroll and Human Resources system, the costs related to the Ca1PERS invoice billings of health
insurance premiums could be permanently stranded in the internal service fund, and therefore, the user
funds and/or departments not being charged their proportionate share of the costs.
In addition, the City isn't recovering its annual OPEB costs of $944,589 from user funds and/or
departments.
Internal service funds are expressly designed to function as cost -reimbursement devices. That is, an
internal service fund is simply a means of accumulating costs related to a given activity on an accrual
basis so that the costs can subsequently be allocated to the benefiting funds in the form of fees and
charges. This condition resulted in an increase in the net deficit of the Benefits Internal Service Fund of
$1,003,790 to $2,934,664.
Recommendation
Management and/or authorized employees should perform a monthly reconciliation of the enrolled
participants in the health care plans as reported by CalPERS in the monthly health invoice
roster detail with the City's internal payroll system and Human Resources records to ensure accuracy and
completeness of the roster.
Furthermore, the City should develop a plan to begin charging funds and/or departments their share of
the annual OPEB costs as opposed to limiting the charges to their share of the contributions made.
Management Response
Procedures for an annual reconciliation and adjustment are in place. However, due to staff turnover at
year-end, the reconciliation and adjustment were not performed timely.
With regard to Other Post Employment Benefit (OPEB) costs, the City Council has chosen to operate on
a pay-as-you-go basis. The City understands and accepts that an impact of this choice is a deficit net
assets position in this internal services fund.
4
1,0
BEST PRACTICE
Ensuring the Sustainability of Other Postemployment Benefits (2007) (CORBA & BUDGET)
Backiround. Employee compensation packages for active workers often include healthcare and similar benefits
following the completion of active service. Generically, such benefits are described as other postemployment
benefits (OPEB) to distinguish them from pensions.' For many years, employers have been required to recognize
expenses for the cost of pension benefits as those benefits are earned by employees during their active service life.
The Governmental Accounting Standards Board (GASB) has now extended this same requirement to OPEB.2 The
change in accounting standards has focused attention as never before on the costs of OPEB. These concerns are
exacerbated by rising healthcare costs and an aging public -sector workforce. The real issue is not the new
accounting for OPEB, as such, but rather the underlying budgetary and funding challenge that those accounting
standards highlight. Meeting this challenge will require that government finance officers ensure that any such
benefits they offer are sustainable over the long term (i.e., benefits are, and reasonably may be expected to
remain, affordable to the government, competitive and sufficient to meet employee needs).
Recommendation. Governments should develop a deliberative process to ensure the sustainability of any OPEB
they offer to their employees. These steps should include:
1) Developing principles and priorities to guide decision-making for OPEB that considers benefit design,
funding approaches, and the needs of all stakeholders. (Because OPEB are a form of employee
compensation, they should always be considered as an integral part of an employee's total compensation
package. Likewise, governments should strive to avoid benefit reductions that place an undue burden on
employees, or that risk making the government uncompetitive as an employer).
2) Carefully evaluating and designing benefits to ensure they are sustainable. In doing so, a government may
wish to consider the following possibilities of enhancing sustainability:
a) implementing healthcare cost containment measures3
b) improving coordination with Medicare benefits
c) establishing vesting rules that provide levels of benefits that are commensurate with years of
service
d) establishing eligibility rules that avoid including retirees, dependents, and spouses who are
otherwise insured
e) creating a tiered system of benefits based on hiring dates
f) replacing defined benefits with a defined contribution or hybrid model4
1 Some government employers choose to augment other elements of employee compensation rather than providing OPEB.
2 See GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than
Pensions (2004). The Financial Accounting Standards Board (FASB) has required the same of private -sector employers since
the implementation of FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
which was released in 1990 and first took effect for calendar fiscal year 1993.
3 See the GFOA Best Practice, Health Care Cost Containment, 2004.
4 A hybrid model combines elements of a defined benefit plan with elements of a defined contribution plan --for example,
fixed employer payments (i.e., a defined contribution) combined with a guaranteed minimum earnings rate on the resources
accumulated (i.e., a defined benefit).
g) considering whether to continue using the same blended or common premium to both retirees and
active employees (i.e., the implicit rate subsidy).
3) Once a government has satisfied itself that its plan design for OPEB is sustainable, it should intentionally
select an appropriate funding approach.
a) The government should refrain from offering incentive packages for early separation without first
considering their impact on the cost of OPEB5;
b) The government should decide whether it will fund benefits as they are being earned over an
employee's active service life (i.e., advance funding) or only as benefit payments come due (i.e.,
pay-as-you-go or pay -go funding)6;
c) If the government elects to advance fund benefits it should decide:
i) which actuarial cost allocation method is most appropriate to its objectives and
circumstances,
ii) whether to do so for all OPEB, or to exclude the implicit rate subsidy for healthcare,
iii) whether to fully pre -fund benefits or only partially pre -fund benefits, and
iv) whether to establish a separate trust fund for the purpose or earmark resources that
remain in the government's control (e.g., a separate fund or account).
4) If the government elects to establish a trust fund, it should consider all of the following:
a) potential need to seek new legislation to allow appropriate trust arrangements and investment
guidelines
b) impact on annual required contribution of prompt implementation and funding
c) possibility of collaborating with others including pension plans to lower administrative costs and
leverage investing expertise
d) advantages and disadvantages of each trust option
e) administrative and reporting requirements (including the need for a private letter ruling from the
IRS in certain circumstances)
f) governance structure (oversight board, investment policy, investing infrastructure)
g) appropriate flexibility (e.g., appropriate adjustments if a form of state or national universal health
care is adopted) without compromising compliance with GASB requirements to qualify as a
"trust" for accounting and financial reporting purposes.
5) Governments should exercise considerable caution before issuing debt to fund their unfunded actuarial
accrued liability.8
6) Governments should consider how to most effectively communicate with and educate affected
stakeholders on the impact of the decisions made regarding OPEB.
Approved by the GFOA's Executive Board, October 19, 2007.
s See GFOA's Best Practice, Evaluating the Use of Early Retirement Incentives, 2004.
6 One clear benefit of advance funding over pay-as-you-go funding is that amounts accumulated for future benefits partially
offset their cost.
7 As already noted, earnings on amounts accumulated for future benefits help to offset the cost of these benefits. Thus, the
sooner the trust is funded, the greater the impact on the cost of the OPEB. This fact needs to be considered when a
government considers an OPEB funding strategy.
See GFOA's Advisory, Need for Considerable Caution in Regard to OPEB Bonds, 2007.
BEST PRACTICE
Considerations for Prefunding OPEB Obligations (2008) BUDGET and CORBA)
BackErround. Employee compensation packages for active workers often include healthcare and similar benefits
following the completion of active service. Generically, such benefits are described as other postemployment
benefits (OPEB) to distinguish them from pensions.' For many years, employers have been required to recognize
expenses for the cost of pension benefits as those benefits are earned by employees during their active service life.
The Governmental Accounting Standards Board (GASB) has now extended this same requirement to OPEB, in
GASB Statement 45.2
An actuarial accrued liability for OPEB can result from an employer's obligation to provide explicit benefit
payments (e.g., the employer will pay a percentage of retiree healthcare premiums or the employer will pay a
fixed dollar amount toward retiree healthcare premiums) or from an implicit rate subsidy (i.e., retirees are allowed
to pay the same rates as active employees, even though their age-adjusted premium would have been higher). For
financial reporting purposes, both situations are treated identically. That is, the cost of the benefit is actuarially
allocated to each period in the form of an annual required contribution (ARC). An employer's failure to fully fund
the ARC results in an accounting liability (i.e., net OPEB obligation) in financial statements prepared using the
accrual basis of accounting.
OPEB involving explicit benefit payments share the essential characteristics of pension benefits. Both are highly
resistant to changes that would reduce current benefit levels. In the case of OPEB arising in connection with an
implicit rate subsidy, the level of benefits for retirees will mirror changes in active employee benefits. This fact is
important because employers have been known to change healthcare benefits for active employees in response to
the budgetary challenge of increased healthcare costs (e.g., increases in deductibles, increases in employee
contributions, changes in covered services). Accounting standards, however, require actuaries to assume that
current healthcare benefit levels will remain unchanged for purposes of calculating the actuarial accrued liability
for OPEB, including those benefits resulting from an implicit rate subsidy.
Recommendation. The Government Finance Officers Association (GFOA) recommends that the financing of
postemployment benefits as they are earned (i.e., prefunding v. pay-as-you-go funding) offers significant
advantages from the vantage point of equity and sustainability. Just as important, the earnings on the resources
thus accumulated will lower the amount that ultimately must be budgeted by the employer.
GFOA strongly recommends that OPEB involving explicit benefit payments be prefunded on an actuarial basis,
as discussed in GFOA's Best Practice, Ensuring the Sustainability of Other Postemployment Benefits.
GFOA believes that the prefunding of OPEB resulting from an implicit rate subsidy also is desirable. Prefunding
provides equity among generations of taxpayers, levels annual retiree healthcare costs and helps ensure
sustainability of the benefit. At the same time, GFOA recognizes that maintaining pay-as-you-go funding or
t Some government employers choose to augment other elements of employee compensation rather than providing OPEB.
2 See GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits
Other Than Pensions (2004). The Financial Accounting Standards Board (FASB) has required the same of private sector
employers since the implementation of FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions, which was released in 1990 and first took effect for calendar fiscal year 1993.
prefunding an amount less than the annual required contribution (ARC) may be appropriate in some situations,
given the greater likelihood that benefit levels will be adjusted over time to counterbalance, at least in part, the
effects of healthcare inflation.3 If a government does decide to prefund less than the ARC each year, the level of
funding selected should be explained and documented following appropriate consultation with legal counsel and
actuaries.
Approved by the GFOA's Executive Board, October 17, 2008.
3 While the actuarial valuation takes into account plan design changes that have occurred since the last valuation,
they can not take into account prospective changes that may occur as governments adjust the plan design of active
employees to take into account budget constraints and industry changes. This is particularly relevant in cases where
the OPEB liability results from retiree participation in an employer group plan, which includes active employees and
is subject to ongoing benefit changes.
Other Post Employment
Benefits (OPEB)
City Council Shirtsleeve
March 13,, 2012
What is OPEB?
o Liability to the City for post -employment
benefits payable to retirees and
beneficiaries
. Sick Leave Conversion
o Limited to employees hired before July 1,
1994 or 1995, depending upon bargaining unit
o Finite group getting smaller each year
. City minimum required payment to PERS for
each retiree/surviving spouse for medical
premiums
z
Auditor's Finding & Recommendation
o Finding: ON isn't recovering annual
actuarial OPEB
departments
costs from
o Recommendation: City should
develop a plan to begin charging
departments their share of costs
3
Actuarial Valuation
o Every other year
. Last done as of January 2010
• Currently under way for January 2012
o Multiple Assumptions
• Discount Rate
• Payroll Growth
. Health Care Costs
• Duration
. 30 -year amortization -closed period
Accounting Requirements
o Book net OPEB liability on face of
statements
• City uses Benefits Fund
o Note disclosure
o Required Supplemental Information
5
June 30, 2011 Disclosures
o Annual actuarial OPER cost
. $1,414,182
o Payment made
• $469,593
o SLC $323,682
o PERS Medical $145,911
o Net actuarial OPEB Liability
. $3,0141788
o Unfunded actuarial accrued liability
• $17,710,456
o SLC $8,505,663
o PERS Medical $9,204,793
LV
OPEB History
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2009 2010 2011
Payments Made TAnnual Actuarial OPEB Cost
Net Actuarial OPEB Liability
7
Current Process
o City charges departments for
current year cost
• $469,593 for FY 2010/11
o Referred to as "Pay-as-you-go"
o Results in an increasing unfunded
liability
. Actual annual cost is covered
• Liability is highly variable due to
underlying actuarial assumptions
.1
What are others doing?
o Stockton:
o Manteca:
o Tracy:
o Elk Grove:
o Galt:
o Lathrop:
Pay-as-you-go
Pay-as-you-go
Pay-as-you-go
3 programs funded at
various levels
Pay-as-you-go
Pay-as-you-go
X
Options
o Continue pay-as-you-go processes
. Advantages
o Simplicity
o Covers current year costs
• Disadvantages
oActuarial liability likely to increase
10
Options
o Increase charges to departments to
set aside funds to cover actuarial
liability
• Advantages
o Reduces actuarial liability
. Disadvantages
o Budgetary stresses
11
Options
o Establish a trust with a third party
and fund the actuarial liability
. Advantages
o Reduces actuarial liability
o Professionally managed funds
. Disadvantages
o Budget stresses
12
Questions?