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HomeMy WebLinkAboutStaff Report 9213 City of Palo Alto (ID # 9213) Finance Committee Staff Report Report Type: Action Items Meeting Date: 5/15/2018 City of Palo Alto Page 1 Summary Title: OPEB Title: June 30, 2017 Actuarial Valuation of Palo Alto’s Retiree Healthcare Plan and Annual Actuarially Determined Contributions (ADC) for Fiscal Years 2019 and 2020 From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee recommend that City Council review and accept the June 30, 2017 actuarial valuation of Palo Alto’s Retiree Healthcare Plan and approve full funding of the annual Actuarially Determined Contributions (ADC) f or Fiscal Years 2019 and 2020. Executive Summary Per the Governmental Accounting Standards Board (GASB), bi-annually the City Council is required to review and approve the actuarial valuation for retiree healthcare plan for the upcoming two fiscal years and approve funding of the annual ADC. Background The City of Palo Alto offers its employees and retirees a Retiree Healthcare benefit plan which is managed and administered by the California Public Employees’ Retirement System (CalPERS), a State of California Retiree Healthcare Trust program. Bi-annually staff contracts with an actuary firm which provides an actuarial report detailing the latest status of the City of Palo Alto ’s Retiree Healthcare plans for employees and retirees. The actuarial report is used to calculate the annual ADC to the trust. In addition, updates on the rate of return, funding status, and changes to the trust based on various impacts are detailed in the report. Unlike the pension actuary reports, this actuary details impacts by Fund, Department, Employee Group, and Healthcare Plans selected. As a refresher on the CalPERS Retiree Healthcare benefits, there are four groups of benefits within the plan. Table 1 below outlines the different benefits levels by Group. City of Palo Alto Page 2 Table 1: City of Palo Alto Retiree Healthcare Benefit Plans and Tiers Miscellaneous Safety: Fire Safety: Police Group 1 Retired before January 1, 2007; eligibility starting at the age 50 and 5 years of service; full premium up to family coverage Retired before January 1, 2007; eligibility starting at the age of 50 and 5 years of service; full premium up to family coverage Retired before March 1, 2009; eligibility starting at the age of 50 and 5 years of service; full premium up to family coverage Group 2 Retired between January 1, 2007 and May 1, 2011; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Retired between January 1, 2007 and December 1, 2011; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Retired between March 1, 2009 and April 1, 2015 (POA), between January 1, 2007 and June 1, 2012 (PMA) ; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Group 3 (Retirees) Retired after Group 2, did not elect into Group 4, benefit same as active employees Group 3 (Active EEs) Currently active, not in Group 4. UTLM: 90% of premium up to 90% Group 2 Cap; Other Misc: Flat Dollar Caps equal to actives N/A (All active Group 3 IAFF & FCA elected into Group 4) N/A (All active Group 3 POA & PMA elected into Group 4) Group 4 (Government Code 22893) Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount City of Palo Alto Page 3 Discussion Staff contracted with Bartel Associates, LCC (BA) for this retiree healthcare actuarial report (Attachment A) since the firm is familiar with the City and has the format set -up from the previous actuary report assumptions and calculations. Staff previously selected BA in a competitive process (August 2015) in which 3 responses were received and ranged from $41,010 to $43,000 in cost with Bartel’s contract award being at $42,575. Since BA is very familiar with Palo Alto and our benefits structure, BA was selected. The current agreement (October 2017) was for $50,000; the cost for the actuarial report was the same, but this contract included additional funding for pension calculations requested by the Finance Committee and staff. BA prepared the actuarial analysis to determine the City’s retiree healthcare l iability and the ADC for Fiscal Years 2019 and 2020 – update on the funding status, results of assumptions such as discount rate (DR), the healthcare plan premiums, and projected future healthcare costs. On December 21, 2016, the CalPERS Board of Administration lowered the discount rate from 7.25 percent to 6.75 percent for Fund 1, which the City Council approved as the investment option. The actuarial analysis is based on current employees’ accrued benefit, and retired employees as of June 30, 2017. Employees and retirees have an open enrollment window in October each year in which they can make changes to their healthcare plans that take effect in January of the following year. CalPERS Projected Contribution levels The actuary report has two components to the annual billing of the employer portion of retiree healthcare contributions that comprise the Actuarial Determined Contribution (ADC), 1) the Normal Cost (NC), and 2) the Unfunded Actuarial Accrued Liability (UAAL). - NC: This reflects a rate of contribution for the plan of retirement healthcare benefits provided to current employees based on the current set of assumptions. - Employer Amortization of UAAL: This is an annual payment calculated to pay down an agency’s unfunded accrued pension liability. Assuming every assumption in the actuarial valuation was accurate, an organization would eliminate its unfunded pension liability if it made these payments annually for 30 years. The City Council approved a closed amortization period and is at year 26 as of June 30, 2017. The liability grows when the assumptions goals, such as discount rate, are not met. This ADC for FY 2019 is $16.0 million, which is $0.9 million less than FY 2018 mostly due to premium caps, changes in mortality assumption s, and some retirees/spouses being eligible for Medicare premium plans, which are much lower in cost. For FY 2020 the ADC is $16.5 million, an increase of $0.5 million over the FY 2019 payment. The General Fund share for FY 2019 is $10.2 million and $10.5 million for FY 2020. This reflects a decrease of $0.1 million compared to FY 2018. These payments reflect the blended or combined cost of both the “Normal Cost” and the “Unfunded Actuarial Accrued Liability”. City of Palo Alto Page 4 Future ADC’s are estimated to grow from $16.5 million in FY 2020 to $21.0 million in FY 2028 or by about 27 percent. This is based on a 6.75 percent discount rate. The following graph shows historical returns back to FY 2009. It uses the unaudited actual investment return for the first half of Fiscal Year 2018 and the assumed rate of return for the last half of Fiscal Year 2018. Table 2: Historical Returns of the OPEB Trust Projected Actuarial Unfunded Accrued Liability Included in the actuary report is the plan ’s “Funded Status.” Overall, the Retiree Healthcare Trust is funded at 37 percent, which is up from 33 percent in FY 2015. The unfunded UAAL is $153.5 million as of June 30, 2017 for all funds and $100.4 million for the General Fund. A couple of years ago, GASB made a change in the calculation of UAAL by requiring the calculation of “implied subsidy”, which requires an agency to recognize that it pays the same medical premiums for active employees as those that are retired. The implied subsidy is that the cost of medical for active employees is lower than retirees, but the agency pays the same premium. For Palo Alto, this is an issue since it has 967 active employees and 959 retirees. The calculation increases the UAAL by $29.2 million or 19 percent, without the implied subsidy the UAAL would be at $124.3 million. City of Palo Alto Page 5 TABLE 3: Actuarial Unfunded Accrued Liability As of June 30, 2015 As of June 30, 2015 Projected as of June 30, 2015 Citywide $156,217 153,509 $143,926 Funded Ratio 33% 37% 44% General Fund $100,408 $100,408 $94,127 % Change from Prior Year Citywide -2% -6% CalPERS recognizes the varying assumptions that may impact a plan’s unfunded actuarial accrued liability and therefore a retiree healthcare plan’s funding status, especially the implications of the discount rate assumption. Therefore, in addition to the actuarial assumptions used to develop this annual evaluation, BA includes an Analysis of Discount Rate Sensitivity section in their reports in order to provide some level of sensitivity analysis of the retiree healthcare plan. At a 6.25 percent discount rate, the plan is estimated to have a total unfunded accrued liability of $169.1 million compared to $153.5 million at a 6.75 percent discount rate, and a 35 percent funded status at 6.25 percent discount rate compared to a 37.3 percent funded status at 6.75 percent. The ADC would increase from $16.0 million to $16.7 million for FY 2019. Conclusion The City of Palo Alto has already proactively mitigated the increasing costs of healthcare plans for current and future retirees. It started with cost sharing with employees, capping the plans covered, and establishing a flat contribution that can be adjusted with each labor agreement. Staff began funding this Trust in May 2008 at a level of $33 million and it has grown to $102 million as of April 2018. This has proved very beneficial; each year the City Council has approved the full funding of the ADC, helping to close the unfunded gap. The closing of the amortization period will allow for funding relief in future years since the City Council can use the Trust to pay healthcare benefits from deposits and earnings for current and future retirees. Staff anticipates discussions at the May 15, 2018 Finance Committee meeting and staff from Bartel Associates will be available for questions and answers. Staff has incorporated the results of this actuarial valuation into the City Managers Proposed FY 2019 Budget. Environmental Review This report is not a project for the purposes of the California Environmental Quality Act. Environmental review is not required.