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Home My WebLink AboutCMR 331-09 (1)TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DATE: AUGUST 3, 2009 DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 331:09 REPORT TYPE: REPORTS OF OFFICIALS SUBJECT: Adoption of a Budget Amendment Ordinance to Increase the Budget for Retiree Medical Costs Related to the Updated Retiree Medical Actuarial Study -Valuation Date January 1,2009 EXECUTIVE SUMMARY This report provides the City Council with the actuarial study results required by the Government Accounting Standards Board's (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The results of the study as compared to the 2007 study show an increasc in costs across all City funds. Staff recommends that the attached budget amendment ordinance be approved to allocate these costs in the Fiscal Year 2010 budgct for all funds except the General Fund. The General Fund increase will come from a draw on trust assets from prior years pre-funding. RECOMMENDATION Staff recommends that the Council adopt the attached budget amendment ordinance (BAO) to allocate the increase in retiree medical costs to all City funds except the General Fund. (Attachment C). BACKGROUND Per GASB Statement No. 45, beginning in Fiscal Year 2008, the City of Palo Alto was required to recognize in its financial statements any unfunded, earned retiree medical costs including those for current active employees. GASB 45 also requires the City to completc an actuarial study on a bicnnial basis, to determine the retiree medical liability and how much the City should be setting aside each year to fund that liability, the armual required contribution (ARC). There are several ways of treating unfunded liabilities, including (1) establishing and funding an irrevocable trust with CalPERS or other financial institution; (2) pay as you go and booking the unfunded ARC on the financial statements; (3) setting aside dedicated reserve and (4) issuing debt to fund the liability. These options were discussed with the Finance committee and full Council in May 2007 (see Attachement D) and the Council directed staff to establish a trust with CalPERS. In Fiscal Year 2008, the City established an irrevocable trust with California Employers Retirees Benefit Trust (CERBT) for retiree medical benefits. In Fiscal Year 2008, the CMR; 331;09 Page I of6 City transferred $33.8 million to the trust. The trust is administered by Califoruia Public Employees Retirement System (CaIPERS). The City established an irrevocable trust for many reasons, including the following • For long-term planning the CERBT sets the expected rate of return at 7.75 percent compared to the City's rate of return on investments of 4.21 percent for FY 2009 (CMR:319:09, July 27, 2009). The CERBT rate was set in FY 2008 and it is possible that the CERBT will adjust the rate at some point in the future. • A higher expected rate of return results in a lower liability and ARC for the City. The 2007 actuarial study compared 7.75 percent to 4.5 percent for the liability and the ARC. The total liability as of 2007 was $102.2 million at 7.75 percent compared to $159.2 million at the 4.5 percent rate of return, a difference of $57 million. The 2007 ARC was $7.7 million at 7.75 percent compared to $11.9 million at the 4.5 percent rate of return, a difference of $4.2 million (Attachment 6, page 12). • The trust funds are protected in an irrevocable trust and cannot be used for any other purpose and cannot be taken by the State. • The trust funds are considered an asset and decrease the liability. If the funds were not in an irrevoeable trust the liability and the ARC would increase. Funds in a reserve or internal service funds would not be considered as plan assets and would not reduce the liability or the ARC. • Over the past 20 years, CalPERS averaged rate of return was 7.75 percent on their investments for pensions, this includes the decline of 23.4 percent for year ending June 30,2009. • Administrative costs are expected to be significantly lower with CalPERS than with a private financial institution. • Using intemal staff or a provider other than CaiPERS would require significantly more work, would require a trust or financial planner; legal services, establishmcnt of an investment policy and risk program, and the creation of a review tcam possibly including members of bargaining units. • Establishing a trust administered by CalPERS allows the City to fund the ARC in a variety of ways, including direct payment to CalPERS for current retirees and utilization ofttust pre-funding. DISCUSSION The actuarial study completed by Milliman, Inc. in June 2009, using a valuation date of January I, 2009, valued the City's retiree medical liability at $129.7 million, assuming a 7.75 percent investment rate of return on the funds. The $129.7 million is an increase of $27.5 million from the previous actuarial study using a valuation date of January 1, 2007, which valued the City'S retiree medical liability at $102.2 million, assuming a 7.75 percent investment rate of return on the funds. The $129.7 million is reduced by the value of the trust assets, $24.6 million, for an unfunded retiree medical liability of $105.1 million. The ARC or amount the City must recognize in the finaneial statements is $9.8 million for Fiscal Years 2010 and 2011. CMR: 331:09 Page 2 of6 The following table shows the allocations of both the liability and the ARC across the City's funds assuming 7.75 percent rate of return, based upon actual staff demographics within each fund. Fund Actuarial Liability ARC , General Fund $91,218,476 $6,797,923 • Capital Improvement Fund 1,563,882 141,351 Electric Fund 13,128,983 943,097 • Fiber Optics 84,585 10,251 i Gas Fund 4,588,835 343,577 Printing -Internal Service Fund 270,363 27,980 Refuse Fund 3,063,013 244,889 Storm Drain Fund 493,835 36,173 Technology Fund -Internal 2,226,335 214,454 Service Fund Vehicle -Internal Service Fund 1,224,905 94,688 Wastewater Colleetion Fund 2,012,681 168,995 Wastewater Treatment Fund 5,112,442 377,095 Water Fund 4,672,615 385,754 Citywide Total $129,660,950 $9,786,227 As per the above table, the General Fund share of the citywide ARC totals approximately $6.8 million annually. For Fiscal Year 2010, this is an increase of $1.2 million from the January 1, 2007 valuation of $5.6 million. A variance analysis for each Fund and each General Fund department is attached in Exhibit A. The variance analysis reflects the change in actuarial liability and ARC from the January I, 2007 valuation. The actuarial report also provides the actuarial liability for each bargaining group including Management and Professionals. The Service Employee's International Union (SEIU) had the greatest increase of $13.3 million and is 48.3 percent of the total City liability. The Management and Professionals group had an increase of $6.6 million and is 24.0 percent of the total City liability. A variance analysis for each group is attached in Exhibit B. Increases to the accrued actuarial liability are primarily due to: • The cost of benefit accruals since the last valuation as. of January I, 2007; benefits earned for two years ($6 million), plus interest on the priO!: liability ($102 million • 7.75 % = $16 million), less benefit payments ($8 million) -for a total of approximately $14 million • Changes in medical premiums and expected growth rate of future premiums -an increase ofapproximately $2 million. • Changes in the City's employee demographic composition increasing the number of new retirees since the last valuation -an increase of approximately $12 million. The current valuation included an increase of 115 retirees. This was more than expected in the last actuarial valuation which was 55 based on assumed retirement rates. When an employee CMR: 331:09 Page 3 of6 retires sooner than expected, the City must pay more benefits than if they retired at a later date. This cost might be offset by actual medical costs for current employees if a position is left vaeant. California Employers Retirees Benefit Trust (CERBT): Once the CERBT is established there are three ways to fund the ARC: (I) continued direct payments to CalPERS for current retirees: (2) contributions to the trust; (3) use of the initial prefunding to the trust asset. In Fiscal Year 2008, the City transferred $33.8 million to the trust. The $33.8 million included $4.7 million toward the 2008 ARC. In addition, the City made direct contributions to CalPERS for current retirees in the amount of $4.6 million, for a total ARC of $9.3 million. The $9.3 million ARC is the computed ARC without recognition ofthc trust as an asset; this is required by GASB in the first year of the trust. The trust asset value as of June 30, 2008 is recognized,in the Comprehensive Annual Financial Report (CAFR) at $29.2 million. In Fiscal Year 2009, the City transferred $0.7 million (from all funds except the General Fund) to the trust. The $0.7 million is to be used toward funding the ARC. 'Inc decision to transfer from all funds except the General Fund is part of the FY 2009 budget strategy to balance the General Fund. In addition, the City made direct contributions to CalPERS for current retirees in the amount of $5.2 million (from all funds) and used $1.8 million (from the General Fund's portion of the trust) of the asset value toward the ARC, for a total ARC 0[$7.7 million (the ARC for FY 2009 is less than FY 2008 because the computed ARC recognizes the trust as an asset). The estimated trust asset value as of June 30, 2009 to be recognized in the CAFR will be $27.0 million. The ARC and the trust asset are reported in the CAFR, however any gains or losses on the investment of the trust assets are not including in the CAFR. In Fiscal Year 2010, the City will fund the revised ARC of $9.8 million. The General Fund will contribute through direct contributions (current retirees), transfer of $1.0 million to the trust (based on anticipated savings from capital projects of $1.0 million) and use of the asset value. All other funds will fully contribute to the ARC through direct contributions and transfers to the trust. The actuarial valuation uses the trust assct value as it is reported on CERBT statements; thesc include investment gains and losscs which are not included in the City'S CAFR. Due to economic conditions, the asset value as of January I, 2009 as reported on the CERBT statement was $24.6 million. The asset value as of March 31, 2009 is $2 L 7 million. This asset value includes total investment losses sincc inception of the trust in FY 2008 of $12.1 million and administrative costs of $16,092. The markets have improved since Mflrch 31, the DOW Jones index has risen from 7,609 to 8,447 (11% increase) as of June 30, 2009. The asset value of the trust fund is expected to reflect improved performance and the statement is expected in the next month. To recognize the updated ARC in the City'S financial statements for FY 2010 and 2011, an increase in budget is needed. Due to continued expected challenges of reduced revenues and budget deficits, the actual funding of the ARC will continue to come from multiple sources: continucd direct payments to CalPERS for current retirees; contributions to the trust; and use of the initial prefunding to the trust asset. The City can continue to use the trust to fund the ARC as CMR: 331:09 Page 4of6 long as annual contributions are made or there is a balance in the net OPEB asset (over funding of the ARC). RESOURCE IMPACT The FY 2010 budget allocated $8,362,902 towards the ARC, but this amount was an estimate before the actuarial study was completed. The ARC contained in the actuarial study was $9,786,226 representing an increase of $1,423,324 across all City funds. The General Fund portion of the increment of the increase is $735,286. The General Fund portion will come from a portion of the pre-funded trust asset. The attached budget amendment ordinance adjusts the FY 2010 budget to allocate the remaining cost of $688,038 aeross all remaining funds. (Attachment C). ENVIRONMENTAL REVIEW The action recommended is not a project for the purposes of the California Environmental Quality Act. CMR: 331:09 Page50f6 PREPARED BY: Accounting Manager, Administrative Services DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: ATTACHMENTS LALO Director, Administrative Services . Q'"' ( I)~ JAMES KEENE City Manager Attachment A: City of Palo Alto, GASB 45 Actuarial Valuation of Post Employment Benefits Other than Pensions, As of January 1,2009. Prepared June 25, 2009 Exhibit A Actuarial Liability and Annual Required Contribution Variance analysis by Fund and General Fund Departments Exhibit B -Actualial Liability Variance analysis by Bargaining Group Attachment B: City of Palo Alto, GASB 45 Actuarial Valuation of Post Employment Benefits Other than Pensions, As of January 1, 2007, prepared January 16,2008 Attachment C: Budget Amendment Ordinance AttachmentD: CMR:195:07, May 1,2007, Autholization to Proceed with Establishing an Irrevocable Trust with California Public Employees Retirement System (CaIPERS) for Retiree Benefits CMR: 331:09 Page 6 of6 ATTACHMENT A City of Palo Alto GASB 45 Actuarial Valuation of Post Employment Benefits Other than Pensions As of January 1, 2009 Prepared by: John R. Botsford, FSA, MAAA June 25, 2009 Milliman June 25, 2009 City of Palo Alto 250 Hamilton Avenue Palo Alto, California 9430 1 City of Palo A Ito - GASB 45 Actuarial Va/u/llion of po .• t Employment Benefits as of January 1,2009 650 California Slree1, Floor 17 Sen Francisco, CA 94100·2702 USA Tel +14154031333 Fa/( +14154031334 milliman.com At the request of the City of Palo Alto, we have completed an actuarial valuation of post employment benefits as of January 1,2009. The purpose of this report is to determine the Annual Required Contribution and required financial disclosures under the Governmental Accounting Standards Board Statement No. 45 -Accounting and Financial Reporting by Employers for Postemp/oyment Benefits Other Than Pensions (GASB 45). Our determinations reflect the procedures and methods prescribed in GASB 45. In preparing our report, we relied on financial information and employee data furnished to us by the City of Palo Alto. While Milliman has not audited the financial and census data, they have been reviewed for reasonableness and are, in our opinion, sufficient and reliable for the purposes of our calculations. If any of this information as summarizl){] in this repOli is inaccurate or incomplete, the results shown could be materially affected and this repmi may need to be revised. The assumptions and cost method were selected by the City to satisfY CaIPERS' required assumptions and methods for funding agency OPEB liabilities through CalPERS OPEB trust. In our opinion, all assumptions and methods used in this valuation are reasonable for this purpose. The values provided in this report are estimates only. They represent results if actual experience exactly matches the'assumptions used. Actual experience will likely differ and continued monitoring of experience should be performed and adjustments made to the assumptions as nocessa.y. The actuarial computations under GASB 45 are for purposes of fulfilling employer accounting requirements. The calculations reported herein have been made on a basis consistent with our understanding of GASB 45. Determinations for purposes other than meeting employer financial accounting requirements may be significantly different fi'om the results reported herein. Reliance on information contained in this repmi by anyone for anything other than the intended purpose puts the relying entity at risk of being misled. . This report has been prepared for use by City of Palo Alto for the purposes described herein. Accordingly, this repmi may not be distributed to any third party outside the City without Milliman's written consent unless public disclosure is required by law. Milliman hereby consents to the distribution of this report to the City's auditor for the purpose of preparing the audit of the City's financial statements. Offices in PrinCipal Cl!le& WQlidw!de- City of Palo Alto June 25, 2009 Page 2 If distribution of the report is made outside the City, the report must be provided in its entirety. This report is a complex, technical analysis that assumes a high level of knowledge concerning the City of Palo Alto's operations, and uscs the City of Palo Alto's data, which Milliman has not audited. Any third party recipient of Milliman's work product who desires professional guidance should not rely upon Mi11iman's work product, but should engage qualified professionals for advice appropriate to its own specific needs. On the basis of the foregoing, we hereby certiJy that, to the best of our knowledge and belief, the report is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the applicable Actuarial Standards of Practice of the American Academy of Actuaries. The undersigned is a member of the American Academy of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Sincerely, ~ 2fo!~, !'SA, MAAA Pl'incipal and Consulting Actuary JRB:tah II :'&po\(;orn2Q09\cpa09gn1b.dw Milliman TABLE OF CONTENTS Section Page I Management Summary Introduction ............................................................................................................................... J Background ................................................................................................................................ I Assumptions .............................................................................................................................. I Resu Its 0 f Study ......................................................................................................................... 2 Impact of Changes from Last Valuation ................................................................................... 3 Variability of Results ................................................................................................................. 4 II Exhibits Exhibit 1. Projected Benefit Payments ............................................................................. 5 Exhibit 2. Projected Number ofRetirees .......................................................................... 6 Exhibit 3. Liabilities and Nonnal Cost ............................................................................. 7 Exhibit 4. Breakdown of Liabilities Beforo and Afl.er Age 65 ........................................ 8 Exhibit 5. Unfunded Actuarial Accrued Liability ............................................................ 9 Exhibit 6. Required Financial Statement Disclosures .................................................... 10 Exhibit 7. Required Supplementary Information ........................................................... II Exhibit 8. Valuation Summary by Bargaining Group .................................................... 12 Exhibit 9. Valuation Breakdown by Fund ...................................................................... 13 Exhibit 10. Valuation Breakdown by General Fund Departments ................................... 14 m Appendices Appendix A. Summary of Benefits ..................................................................................... 15 Appendix B. Actuarial Cost Method and Assumptions ...................................................... 17 Appendix C. Summary of Participant Data ........................................................................ 21 City of Palo Alto <lASB 45 Actuarial Vall/atlon lIS of January I, 101J') This wOfk product was prepured solely for City of Palo Aim for the purposes described herein find may no! be appropriate to lise for other PilrpoSes, Milliman does oot ioteoo to be~efit and assumes no duty or liability to other putties who reeeive this work, Milliman SECTION I. MANAGEMENT SUMMARY Introduction Milliman, Inc. ("Milliman") has been retained by the City of Palo Alto ("City") to provide a GASB 45 actual"ial valuation of its post employment benefit (OPEB) plans. In our valuation we: • Project expected payouts and number of retirees for future years • Calculate the present value of lola I benefits • Calculate the actuarial liability (present value of benefits attributable to past service) • Determine the Annual Required Contribution (ARC) and annual OPEB expense under GAgB Statement No. 45 • Provide a breakdown of the City's OPEB costs by Ilepar\ment and bargaining group Background Employees who retire directly from the City are eligible for retiree health benefits ifthey retire on or after age 50 with 5 years of service and are receiving a monthly pension from CalPERS. For employees hired before January 1,2004, and all PAPOA employees, the City pays for the entire cost of retiree health benefits for retirees for their lifetimes. The City also pays a portion of medical costs for dependents of retirees equal to 80% of the premiums for 2009 and incl'easing 5% per year until the City's share reaches 100% of dependent premiums for 2013 and beyond. For management employees, IAFF and FCA members hired on or aftcr January I, 2004, and SEIU employees hired on or after January I, 2005, the City pays for the 50% of the above described benefits after 10 years of service, and the city's portion increases by 5% for each additional year of service up to 20 years. For FCA, IAFF, and managemen1iconfidential employees who retire on or after January I, 2006, and for SEIU employees who retire on or after January 1,2007, the maximum premium amount the City will pay toward health insurance will be equal to the second highest CalPERS Bay Area Basic plan premium (currently the Blue Shield HMO premium). The City contracts with CalPERS to prov ide medical benefits for its retirees. Appendix A provides a more detailed summary of benefits. Assumptions With any valuation of future benefits, assumptions of anticipated future events are required. If actual events differ from the assumptions made, the actual cost of the plan will vary as well. The following assumptions should be reviewed for appropriateness. City of Palo Alto GASH 45 ActuarIal Valuation as of January 1. 2009 This work product wns prepared solely for City orpulo Alto for the purposes described herein and may not be appropriate to use for other purposes, Milliman dOoes MI intend to benefit and ll5Sumes no duty or liability tOo Oother parties whoo receive lhis work Milliman SECTION I. MANAGEMENT SUMMARY Discollnt Rate. GASB 45 requires that the interest rate used to discount fut\lfe benefit payments back to the present be based on the expeeted rate of return on any investments set aside to pay for these benefits. The City has funded its GASB OPEB liabilities by contributing to California Employers' Retiree Benefit Trust ("CERBT") Fund. We have, therefore, used a discount rate of 7.75% for this valuation based on CaIPERS' expected return on assets held in their OPEB trust. Health Cost Trend. We have assumed health costs will inerease according to the health cost inflation trend derived by using the "Getzen" model developed by the Society of Actuaries. Please see Appendix B for an explanation of this trend model. Demographic Assumptions. We are using the same rates used by the California Public Employees Retirement System (CaIPERS) in their actuarial valuations of retirement benefits under a 2.7% at age 55 benefit formula for miscellaneous employees, and a 3% at age 50 formula for Poliee and Fire employees. A complete summary of the actuarial assumptions is presented in Appendix B. Results a/Study The valuation results are summarized in the following exhibit and use the following terms: The Present Value of Benefits is the present value of projected benefits discounted at the valuation interest rate (7.75%). the Aetllarlal Accrued Liability (AAL) is the present value of benefits that are auributed to past service only. The portion attributed to future employee service is excluded. For retirees, this is equal to the present value of benefits. For active employees, the actuarial present value of the ,proJected benefits of each individual is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hh'e) and assumed exit (until maximum retirement age). The portion attributed to service between entry age and the valuation date is the actuarial accrued liability. The Normal Coot is that pOltion of the City'S provided benefit attributable to employee service in the current year. City of Palo A 110 GASB 45 AClllariol VOlllOlloll as of Jalluary I, 2009 This work product was prepared solely for City ofPaiQ Alto forthe purposes described herein and may not bo appropriate t(j use for other purposes, Mlllirnon 'llOCS not intend to benefit lind assumes no dUlY or liability to other parties who receive this work. Milliman 2 SECTION I. MANAGEMENT SUMMARY The Annual Required Contribution (ARC) is equal to the Normal Cost plus an amount to amortize the unfunded AAL over a period of 30 years. This is the amount the City would be required to report as an expense each year under GASB 45 assuming the amount is fully funded. Active Employees Retirees Total Partic ipants Covered Retired Spouses Present Value of Benefits Actuarial Accrued Liability Assets Unfunded Actuarial Accrued Liability Normal Cost (as of July I) Annual Required Contribution (ARC) Budgeted City Payroll ARC as a Percent of Budgeted Payroll Expected first year benefit payments Impact o/Changes/rom Last Valuation January 1, 2009 955 --1!Q 1,665 345 $157,214,589 $ 129,660,950 24,616,071'. $ 105,044,879· $ 3,478,193 ~, $ 9,786,227 $ 98,940,490 9.9% $ 5,869,495 January 1, 2007 1,018 ---21l 1,630 257 $ 126,935,275 $ 102,237,022 0 $ 102,237,022 $ 3,173,722 $ 9,313,142 $ 97,600,000 9.5% $ 4,175,915 The Actuarial Accrued Liability increased by approximately $28 million since the last valuation. The following is a summary of changes to the valuation assumptions that contributed to the changes in AAL: • The cost of benefit accruals since the last valuation (i.e. the cost attributed employee service since the last valuation), plus interest on the pl'ior year's AAL due to the passage of time, less benefit payments since the last valuation date contl'ibuted to the change in Actuarial Accrued Liability. The combined impact of these factors was an increase in AAL of approximately $14 million. • Actuarial valuations of retiree medical benefits include assumptions for future increases in medical premiums. The AAL will change from one valuation to the next to the extent actual premiums are different than expected and expectations of future premium increases change. Changes in premiums and the expected growth rate of future premiums resulted in an increase in AAL of appl'Oximately $2 million. City of Palo Alto GASB 45 Actuarial Valuation as of January I, 2009 This work prodUCf was prepilTed solely for City OfPillo Alto for the purposes described herein lind may not be appropriate to use for other purposes. Milliman does not intend to benefit and assumes no dUly or liability 10 other parties who receive Ihis work. Milliman 3 SECTION I. MANAGEMENT SUMMARY • OlhcJ' factors such as changes in the city's demographic composition also contl'ibuted to the change in Actuarial Accrued Liability. The impact of these factors was an increase in liability of approximately $12 million. A large p0l1ion of this increase was due to significantly more new retirees than expected since the last valuation, There were 115 new retirees since the last valuation compared with apPl'Oximately S5 expected new retirees based on assumed retirement rates, Variability of Results The results contained in this report represent our best estimates. However, variation from these or any other estimates of future retiree medical costs is not only possible but probable, Actual future costs may vary significantly from estimates in this report, City 0/ Palo Alto GASB 45 Actuarial Valuation as of January 1,2009 Ihls work product was prepared solely tbr City of Palo Alto jor the purposes described herein end may not be appropriate to use for other purposes, Milliman does not intend to benefit and assumes no duty or liability II) I)thcr pnrties who rooelve this work, Milliman 4 SECTION II. EXHIBITS Exhihit 1. Projected Benefit Payments The table below illustrates the projected pay-as-you-go City costs of providing retiree health benefits. The projections only consider the closed group of existing employees and retirees and is based on the current labor agreements. Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 Current Retirees $ 5,712,539 5,786,856 6,050,624 6,249,934 6,479,804 6,548,819 6,589,057 6,612,967 6,647,574 6,641,232 6,643,157 6,597,783 6,500,339 6,519,904 6,538,876 6,522,034 6,510,135 6,440,529 6,348,334 6,258,289 6,185,440 6,099,083 5,986,017 5,869,043 5,691,608 5,506,567 5,306,553 5,076,830 4,859,746 4,628,631 Future Retirees $ 156,956 494,138 864,287 1,306,009 1,797,455 2,292,822 2,799,332 3,338,173 3,920,154 4,517,109 5,113,827 5,760,613 6,388,871 7,062,298 7,706,370 8,334,626 9,002,806 9,627,431 10,154,850 10,732,264 11,289,240 11,779,669 12,275,080 12,909,334 13,491,708 13,965,762 14,505,116 15,027,264 15,412,719 15,748,991 Clly of Pulo Alto CiASB 45 Actuarial Vuluulion as of January 1, 2009 $ 5,869,495 6,280,994 6,914,911 7,555,943 8,277,259 8,841,641 9,388,389 9,951,140 10,567,728 11,158,341 11,756,984 12,358,396 12,889,210 13,582,202 14,245,246 14,856,660 15,512,941 16,067,960 16,503,184 16,990,553 17,474,680 17,878,752 18,261,097 18,778,377 19,183,316 19,472,329 19,811,669 20,104,094 20,272,465 20,377,622 This work prQducl ","'llS prepared s{llely for City of Palo Alto for thc purpos~ described herein and may not be appropriate to usc for other purposes. MlIIimlln d{lcS not intend to benefit and assumes no duty or liability to olher parties who receive this work. Milliman 5 SECTION II. EXHIBITS Exhibit 2. Projected Number of Retirees The table below illustrates the projected number of retirees and spouses. The projections only consider the closed group ofexisting employees and retirees. Current Future Year ketirees ketlrees Total 2009 7\0 17 727 2010 683 51 734 2011 664 83 747 2012 645 119 764 2013 625 154 779 2014 604 190 794 2015 584 222 806 2016 563 257 820 2017 541 289 830 2018 519 320 839 2019 498 349 847 2020 476 375 851 2021 453 400 853 2022 431 422 853 2023 409 443 852 2024 387 460 847 2025 364 476 840 2026 342 489 831 2027 321 499 820 2028 299 506 805 2029 278 511 789 2030 257 513 770 2031 237 514 751 2032 218 513 731 2033 199 509 708 2034 181 503 684 2035 163 495 658 2036 147 485 632 2037 132 473 605 2038 117 459 576 City oj Palo Allo GASH 45 Actuarial Valuation as oj Ja/luary I, 2009 This work product was prepared solely for City ofPaio Alto for the purposes described herein and may not be appropriate to usc for other purposes. Milliman does not intend to benclilllnd Ilssumes no duty or liability to other parties who receive this work. Milliman 6 SECTION II. EXHIBITS Exhibit 3. Liahilities and Normal Cost The Present Value of Benefits is the present value of projected benefits (premium costs less retiree contributions) discounted at the valuation interest rate (7.75%). The Actuaria I Accrued Liability (AAL) is the present value of benefits that are attributed to past service only. The portion attributed to future employee service is excluded. For retirees, this is equal to the present value of benefits. For active employees, the actuarial present value of the projected benefits of each Individual is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit (until maximum retirement age). The pOltlon attributed to service between entry age and the valuation date Is the actuarial accrued liability. The Normal Cost is that portion of the City's provided benefit attributable to employee service in the current year. January f, 2009 January f,2007 Present Vlllue of Benefits Actives $ 78,830,905 $ 72,105,749 Retirees 78,383,684 54,829,~26 Total $ 157,214,589 $ 126,935,275 Actuarial Accrued Liability Actives $ 51,277,266 $ 47,407,496 Retirees 78,383,684 54,829,526 Total $ 129,660,950 $ 102,237,022 Normal Cost (as of July 1) $ 3,478,193 $ 3,173,722 Clly 0/ Palo Alto GASB 45 Actuarial Valualion as 0/ January I, 1009 This work product WflS prepared solel,Y for City ofPIll0 Alto for the purposes d<0~crjbed Ilerein and may not be appropriate to use for other purposes. Milliman does not intend to benefit and assumeS' no duty or liabitity fO Glner parties who rece~ye this ' .... ork. Milliman 7 SECTION II. EXHIBITS Exhibit 4. Breakdown of Liabilities Before and After Age 65 The following table shows a breakdown of liabilities and costs attributes to benefits paid prior to age 65 and after age 65. JonuarJ!. 1,3009 Benefits < Age 65 Benefits> Age 65 Total Present Value of Benefits Actives $ 33,740,944 $ 45,089,961 $ 78,830,905 Retirees 25,891,863 52,491,821 Z8,~8J,684 Total $ 59,632,807 $ 97,581,782 $ 157,214,589 Actuarial Accrued Liability Actives $ 20,942,071 $ 30,335,195 $ 51,277,266 Retirees 25,891,863 78,383,684 Total $ 46,833,934 $ 82,827,016 $ 129,660,950 Normal Cost (CIS of July J) $ 1,556,310 $ 1,921,883 $ 3,478,J 93 CIty of Palo A/lo GASH 4.~ Acluar/al Valuallon as of JanunryJ, 1009 This work pIQdtlct was prepared soleI)' for City 'Of P{llo Alto for the purposes described herein and may not be nppropriate [() lise for other ptlfPOSes, MilHman does I10t intend to benefit and assumes no duty or liability to otber parties who roooive this work. Milliman 8 SECTION II. EXHIBITS Exhibit 5. Unfunded Actuarial Accrued Liability The Unfunded Actuarial Accrued Liability (UAAL) is the actuarial accrued liability offset by any assets set aside to provide retiree health benefits. This is equal to the value of the retiree health benefits accrued to date that has not been funded. The UAAL must be amortized over a period not exceeding 30 years and included in the ARC amount (shown in Exhibit 5) each year. We have calculated the amortization of UAAL as a level percentage of payroll over 30 years. This means the amortization amount would be expected 10 increase at the same rate as payroll increases each year. We have assumed the City's payroll will increase 3.25% per year for this purpose. Janaary 1, 2009 January 1, 2007 Unfunded A ctuar/al Liabilily (UAAL) Actuarial Accrued Liabil!ty $ 129,660,950 $ 102,237,022 Assets Held in nuS! 24,616,071 Unfunded Actuarial Accrued Liability $ 105,044,879 $ 102,237,022 Funded percentage 19.0% 0.0% Amortizalion ofUAALfor ARC UAAL $ 105,044,879 $ 102,237,022 Amortization Period 30 years 30 years Level % of Payroll Amortization Factor 17.2858 17.2858 Amortization Amount -January 1" $ 6,076,946 $ 5,914,509 Interest to beginning of fiscal year -July I" $ 231,088 $ 224,911 Amortization Amount --beginning of fiscal year $ 6,308,034 $ 6,139,420 CI(y of Palo Allo GASB 4S AclUarlal Valuallon a. of January 1,20119 This work product was prepared solely fot City of Palo Alto for the purposes described herein and may not be appropriate LQ use for other purposes. Milliman docs not intend to benefit and assumes no duty or liability to other parties who receive this work, Milliman 9 SECTION II. EXHIBITS Exhibit 6. Required Financial Statement Disclosures The following table shows the calculation of the Annual Required Contribution and Net OPEB Obligation. For the Fiscal Year Emling Determination a/Annual Required Contribution Normal Cost at beginning of fiscal year Amortization of UAAL Anl)ual Required Contribution (ARC) Determination 0/ Net OPES Obligation I (Asset) Annual Required Contribution Interest on prior year Net OPEB Obligation 1 (Asset) Adjustment to ARC Annual OPEB Cost City Contributions made' Increase in Net OPEB Oblig alion 1 (Asset) Net OPEB Obligation 1 (Asset) -beginning of year Net OPEB Obligation 1 (Asset) -end of year June 30, 2010 $ 3,478,193 6,308.034 $ 9,786,227 $ 9,786,227 TBD TBD TBD TBD TBD TBD TBD June 30, 2008 $ 9,313,000 $ 9,313,000 o $ 9,313,0000 38,490,000 $ (29,177,000) $ 0 $ (29,177,000) • Amounts shownJal'fiscal year ending June 30. 2008. were reported by Ihe City on ils CAFR as oj June 30. 2008. GASH 45 define, contribution, Jar Ihis purpose to be actual benefil payments made dlreclly by Ihe City during the year and contributions made to a seporate, in'evocable Irusl. This exhibit will need 10 be completed at Ihe end of the fiscal year once actual contributions are known. The following table shows the annual OPEB co st and net OPEB obi igation for the prior yeal's. Fiscal Year Ended 06/30/2008 06/30/2009 06/3012010 " See above jootnote, Annual OPEn Cost $ 9,313.000 8,740,000 TBD' Percentage 0/ OPES Cost Contributed 413% TBD' TBD' NetOPEB Obligation I (Asset) $ (29,177,000) TBD' TBD' Funded Slalas and Funding Progress. As of January 1,2009, the most recent actuarial valuation date, the plan was 19.0% funded. The actuarial accrued liability for benefits was $129.7 million, and the actuarial value of assets was $24.6 million, resulting in an unfunded actuarial accrued liability of $105.0 million. Clly oj Palo Alto GASB 45 Acruarlal Valuallon as oj January J, 2009 This work product was prepared solely for City of Palo Alto for the purpos~ described herein and may not be. appropriate to use , for other purposes Milliman dQes not intend to benefit and assumes no duty or liability to other parties who receive this work. Ml1Iiman 10 SECTION II. EXHIBITS Exhibit 7. Required Supplemeutary Information The following table shows a schedule of Funding Progress required unde;' GASB 45. Acluarial AClaarlal VAAL asa Valuallon Vallie of AAL Funded Covered % of Covered Dale Assets EAN VAAL Ralio Payroll Payroll 0110112005 nla nia nia nia ni. ni. 01i0112007 $ 0 $102,237,022 $102,237,022 0.0% $97,600,000 105% OliO 112009 $ 24,616,071 $129,660,950 $105,044,879 19.0% $98,940,490 106% City oj Palo Alto GASB 45 Actuarial Valuation as oj January J, 2009 11 This work product was prepared solely for City QfPalo Alto for the purposes described herein and may not be appropriate to use for other purposes. Milliman does not intend 10 benefit and assumes no duty or liability to other parties who receive this work. Milliman SECTION II. EXHIBITS Exhibit 8. Valuation Summary by Bargaining Group Valuation results shown below are based on a 7,75% discount rate. At the request of the City, we did not provide a breakdown of the ARC by bargaining group since a breakdown of assets by bargaining group was not available, FCA IAFF Mgml/ColI( PAPOA SEIU Tot(tl COllnts Actives 3 102 207 79 564 955 Retirees and Dependents --1Q±. ~ ~ .....ill.. Total 3 206 402 159 895 1,665 Presellt VlIllle of Benefits Actives $ 339,438 $ 12,118,133 $ 17,660,537 $ 7,173,119 $ 41,539,678 $ 78,830,905 Retirees 11,460,562 21,756,345 10,802,428 34,364,309 78,383,684 Total $ 339,438 $ 23,578,695 $ 39,416,882 $ 17,975,587 $ 75,903,987 $157,214,589 A cllmrllli AccfIled L/llbtllly Actives $ 268,508 $ 8,105,421 $ 12,423,191 $ 4,120,760 $ 26,359,386 $ 51,277,266 Retirees 11,460,522 21,756,345 10,802,468 34,364,309 78,383,684 Total $ 268,508 $ 19,565,983 $ 34,179,536 $ 14,923,228 $ 60,723,695 $129,660,950 City 0/ Pillo Allo GASB 45 ACluI"lal Valuotlon lIS 0/ Jallua,., I, 2009 12 This work producL was prepared solely for City ofPillo Alto for the purposes described herein and may not be appmprlate to use for other purposes. Milliman does not Intend to benefit and assumes no duty or liability to other parties WllO receive this work. Milliman SECTION II. EXHIBITS Exhibit 9. Valuation Breakdown by Fund Valuation results shown below are based on a 7,75% discount rate. The counts, Actuarial Liability, and ARCs include actives and retirees. In determining the ARC for each fund, we used the breakdown of assets by Fund provided to us by the City. Fund Description CERBTFund# Count Actuur;fI/ Liability ARC GF 102 1,097.30 $ 91,218,476 $ 6,797,923 GFCIP 471 21.95 1,563,882 141,351 Elce-Supply 513 0.80 44,373 (14,752) Gas-Supply 514 OA5 33,012 (4,990) Water-Opor •• 522 58.77 4,672,615 385,754 Elce-Operating •• 523 164.30 13,084,610 957,849 Gas-Operating •• 524 59.24 4,555,823 348,567 Refuse-Oper 525 41.95 3,063,013 244,889 WWT-Oper. 526 71.92 5,112,442 377,095 WWC-Oper. .-527 30.93 2,012,681 168,995 Storm Drai n-Oper 528 7.65 493,835 36,173 External Svc. 529 0.00 0 0 Fiber Optics 533 1.39 84,585 10,251 Vehicle Main 681 20.00 1,224,905 94,688 Technology 682 34.35 2,226,335 214,454 Printing & Mailing 683 4.00 270,363 27,980 Unknown Fund (Rets) • 50.00 nla nla Total 1,665.00 $129,660,950 $ 9,786,227 • Actuarial Liability and ARC for 50 retirees with no Fund code were allocated to each Fund in proportion to the Actuarial LIability and ARC fund allocation for current employees, as requested by the City . •• Actuarial Liability for active and refired un Admin employees were allocaled 10 the FUND 522 (WATER), FUND 523 (ELEC), FUND 524 (GAS), and FUND 527 (WWC) In proportion to each of those Fund's Actuar/al Liability. City Of Palo Alto GASH 45 Actuarial Valullllon lIS of January I, 2009 This work product was prepared solely for City ofPalQ Alto for the purposes described herein and may nol be appropriate ro use for other purposcs. Milliman does not inlend to benefit and as~uJTIes no duty or liability to other parties who receive this work. Milliman 13 SECTION II. EXHIBITS Exhibit 10. Valuation Breakdown by General Fu~d Departments Valuation "esults shown below are based on a 7.75% discount rate. The counts, Actuarial Liability, and ARCs include actives and reti,·ees. A breakdown of assets by General Fund Department was not available; therefore, assets attributed to the General Fund were allocated to 'each Department based on the pl"Oportion of each Department's AAL to the total AAL for the General Fund. General Fund Department Count Actuarial Llabill(v ARC ASD 84.30 $ 5,932,007 $ 489,570 ATT 15.10 1,303,589 104,024 AUD 2.00 115,611 15,08 I CLK 13.10 1,035,745 70,366 COU 10.00 885,029 44,592 CSD 153.60 10,182,568 820,473 FIR 245.00 24,576, 151 1,729,712 HRD 25.10 2,087,623 142,962 LIB 49.20 3,026,209 307,718 MGR 17.10 1,329,760 86,010 PLA 73.30 4,652,780 401,621 POL 275.00 24,242,749 1,761,351 PWD 134.50 11,848,655 824,443 ULT 0.00 0 Total 1,097.30 $ 91,218,476 $ 6,797,923 Actuarial Liability and ARC for 50 retirees with no Fund code were allocated to each Fund in proportion to the Actuarial Liability and ARC fund allocation for current employees, as requested by the City, Cit, of Palo Alto GASB 45 Actuarial Valuation as of Janullr, /, 1009 1 tus work product \\'IJS preIWred solely for City ufPulo Alto for the purposes described herein and msy not be appropriate to usc for oUler JlUrpC>ses, Milliman does not intend to benefit and assumes 110 duty or liability to other parties who reecive this work. Milliman 14 SECTION III. ApPENDICES Appendix A. Snmmary of Benefits The following description of retiree health benefits is intended to be only a brief summary. For details, reference should be made to Summary Plan Descriptions, Plan Documents, labor agreements, and employee booklets. Eligibility Employees hired before January 1,2004 and PAPOA members (Tie,' I employees) are eligible for retiree health benefits if they retire from the City after age 50 with at least 5 years of service, and are eligible for a CalPERS pension. Management, IAFF, and FCA employees (Tier 2 employees) hired on or after January 1,2004, and SElU employees hired on 01' after January 1,2005 (Tier 2 employees), are eligible for retiree health benefits if they retire from the City with at least 10 years ofCalPERS service, including 5 years of service with the City, and are eligible for a CalPERS pension. Health Benefits The City contracts with the CalPERS health plan to provide retiree health benefits to its retirees and spouses. For Tier I reti"ees, the City pays for the entire cost of health benefits for retirees and a portion of their dependents' premiums. The portion of dependent premiums paid by the City is 80% for 2009, and will increase by 5% per year until the City pays the entire dependent premium in 2013 and beyond. Tier 2 employees are entitled to a portion of the Tier I benefits depending on their years of service. After 10 years of service, Tiel' 2 employees are entitled to 50% of Tier 1 benefits, and this portion increases by 5% with eaeh additional year of service beyond 10 years up to a maximum of 100%. The portion of dependent premiums paid by the City is 90%, subject to the above vesting schedule. For FCA, IAFF, and management/confidential employees who retire on or after January I, 2006, and for SElU employees who retire on or after January I, 2007, the maximum premium amount the City will pay toward health insurance will be equal to the second highest CalPERS Bay Area Basic plan premium (eurrently the Blue Shield HMO premium). Surviving Spouse Benefits Upon the death of a retiree, benefits continue to surviving spouses of retirees for their lifetimes. The City's portion of premiums is the same as the portion paid on behalf of the retiree. Dental and Vision The City does not pay Dental or Vision Benefits for retirees. City oj Palo Alto GASH 45 Actuarial Valuation as oj January I, 2009 This work product W(lS prep<lred solely for City of Palo Alto for the purposes described herein and may not be appropriate to use for other purposes, Milliman does not intend to benefit lind assumes no duty Of liability to other parties who receive this work. Milliman 15 SECTION III. ApPENDICES Appendix A. Snmmary of Benefits (contlnned) Health Insurance Premium Rates The following table shows monlhly relil'ee health insurance premiums for Ihe 2009 and 2010 pl'emium years for coverage under the CalPERS Health Plan for the Bay Area Region: Moo/kly Premium Rales -2009 2-ParfJ!. Family Under 65 Over 65 Under 65 Over 65 Under 65 Over 65 Plans Blue Shield HMO $560.57 $341.44 $1,121.14 $682.88 $1,457.48 $1,024.32 Blue Shield NetValue 495.50 304.66 991.00 609.32 1,288.30 913.98 Kaiser Permanente 508.30 280.17 1,016.60 560.34 1,321.58 840.51 PERSCure 749.83 404.60 1,499.66 809.20 1,949.56 1,213.80 PERSChoiee 482.48 349.11 964.96 698.22 1,254.45 1,047.33 PERSSeiect 453.16 349.11 906.32 698.22 1,178.22 1,047.33 PORAC 484.00 330.00 906.00 657.00 1,151.00 1,052.00 Monthly Premium Rates -2010 Single 2-Par~ Family Under 65 Ovor65 Under 65 OVer 65 Under 65 Over 65 Plans Blue Shield HMO $577.33 $299.53 $1,154.66 $599.06 $1,501.06 $898.59 Blue Shield NetValue 500.35 299.53 1,000.70 599.06 1,300.91 898.59 Kaiser Pennanente 532.56 298.36 1,065.12 596.72 1,384.66 895.08 PERSCare 868.[7 410.60 1,736.34 821.20 2,257.24 [ ,231.80 PERS Choice 508.74 356.09 1,017.48 712.18 1,322.72 1,068.27 PERS Select 474.93 356.09 949.86 712.18 1,234.82 1,068.27 PORAC 484.00 363.00 906.00 723.00 1,151.00 1,157.00 City of Palo Alto GASB 45 Actuarial Valuation as Of January 1, 2009 16 This work product was prepared s()lely for City of Palo Alto for the purposes described herein and rnay not be appropriate to use for ()Iher purposes. Milliman does nol inlend to benefit and assumes no duty or liability 10 other parties who receive this work. MIlliman SECTION III. ApPENDICES Appendix B. Actuarial Cost Method and Assumptions Actuarial Cost Method The actuarial cost method used for determining the benefit obligations is the Entry Age Normal Cost Method. Under the principles of this method, the actuarial present value of the projected benefits of each individual included in the valuation is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit. The portion of this actuarial present value allocated .to a valuation year is called the normal cost. The pOition of this actuarial present value not provided for at a valuation date by the sum of (a) the actuarial value of the assets, and (b) the actuarial present value of future normal costs is called the Unfunded Actuarial Accl'Ued Liability (UAAL). In determining the Annual Required Contribution, the UAAL is amortized as a level percentage of expected payroll over 30 years. Economic Assumptions Discount Rate Oiabilities): 7.75% effective annual rate Salary Increases: 3.25% pel' year growth in overall payroll for purposes of amortizing unfunded liability. For purposes of calculating entry age normal costs, merit salary increases are applied for individual members according to assumptions rates used by CalPERS in its actuarial valuation of retirement benefits. For all employees, assumed merit salary increases are based on an entry age of30. Demographic Assumptions Demographic assumptions regarding retirement, disability, and turnover are based on statistics taken from pension valuations for California PERS under a 2.7% @ 55 formula for Miscellaneous employees, and a 3% @ 50 formula for Police and Fire employees. Below is a summary of the assumed rates for retirement, disability, and turnover. Disability: Misc. 2.7% @ 55 3%@50 Age Males Females Police Fire 30 0.02% 0.04% 0.58% 0.22% 35 0.08% 0.10% 0.87% 0.32% 40 0.15% 0.16% 1.16% 0.42% 45 0.24% 0.23% 1.45% 0.53% 50 0.37% 0.35% 1.75% 0.67% City oj'PaloAlto GASB 45Actuarlal Valuation as oj'January 1,2009 This work product was prepared solely rOT City orPalo Alto ror fhe purposes deseribed herein and may not be appropriate to use rOT other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. Milliman 17 SECTION III. ApPENDICES Appendix B. Actuarial Cost Method and Assumptions (continued) Demographic Assamptions (continued) Retirement: Mise. 2.7% @55 3%@50 Ac.e Males Females 50 5.00% 7.00% 12.08% 6.79% 51 2.00% 5.00% 10.71% 9.22% 52 3.00% 5.00% 17.05% 13.77% 53 3.00% 6.00% 19.16% 16.61% 54 4.00% 6.00% 19.74% 20.38% 55 9.00% 10.00% 24.97% 25.16% 56 7.00% 8.00% 19.10"1. 24.07% 57 8.00% 7.00% 22.32% 20.10% 58 8.00% 10.00% 21.98% 23.54% 59 10.00% 9.00% 22.79% 19.93% 60 17.00% 13.00"10 100.00% 100.00% 61 16.00% 11.00% 100.00% 100.00% 62 28.00"10 23.00"10 100.00% 100.00% 63 23.00% 20.00% 100.00% 100.00"10 64 16.00% 14.00% 100.00% 100.00"10 65 27.00% 27.00% 100.00"1. 1 00.00"10 70 100.00% 100.00"/. 100.00% 100.00"10 I Sample probabilities/or a Police or Fire emp/oyee with 25 years 0/ service. Withdrawal: Sample probabilities ofmiscetlaneous employees terminating within one year for an employee with five years a/service with selected ages and sample llrobabilities of Safety employees terminating within one year for an employee with a given number of years ofservice are shown below: Misc. 2.7% @ 55 3%@50 Age Males Females Service Police Fire 30 5.5% 7.5% I 8.2% 7.4% 35 3.9% 5.5% 3 3.3% 3.2% 40 2.9% 4.1% 5 3.0% 2.6% 45 2.2% 3.1% 10 2.1% 0.9% 50 0.6% 0.9% 15 1.3% 0.8% 55 0.4% 0.6% 20 1.0% 0.7% 60 0.0% 0.0% 25 0.8% 0.6% City of Palo Alto GASB 4J Actoarilll VIII.alion liS of Jllnullry I, 2009 This work product was prepared solely for City QfPalo Alto for the purposes destribed herein and may not be appropriate 10 use ror other purposcs. Milliman does 110t intend to benefit and assumes no duty or liability to oloor parties who receive Ibis work. Milliman 18 SECTION III. ApPENDICES Appendix B. Actuarial Cost Method and Assumptions (continued) Demographic Assumptions (continued) Mortality: Rates used by CalPERS in its actuarial valuati'on of retirement benefits. Spouse Coverage: 60% of employees are assumed to elect spouse coverage upon retirement (among them, 70% will elect 2-pal1y coverage and 30% will elect Family coverage before age 65, no dependent children are assumed after age 65). For Current retirees, actual data was used to value spouse and dependent coverage. We have assumed that retirees who are married will have spouse coverage only after age 65. Spouse Age: Female spouses are assumed to be three years younger than male spouses, on average. Medical Inflation Assumption Milliman reviews all valuation assumptions on a regular basis in order to provide our clients with current and reliable information. As part of a recent review, we evaluated the Society of Aetuaries (SOA) recently published report on long-term medical trend. That report includes detailed research performed by a committee of economists and actuaries (including a Milliman representative) and proposes the use of the "Getzen Model" named after the professor that developed the model. We believe that the research and the model are fundamentally and technically sound and will advance the body of knowledge available to aetuaries to more accurately project long-term medical trends. At this time, we believe this model is the industry standard for projecting long term medical trends. Milliman has decided to use that model as the foundation for the trend that it I'e commends to our clients for OPEB valuations. The health cost inflation trend we derived based on the "Getzen Model" is shown in the following table: Year 2009 2010-2014 2015 -2032 2033 -2047 2048 -2076 2077 and beyond % Inflation Actual Increase 6.50% 6.00% 5.50% 5.00% 4.50% The CalPERS OPEB assumption model currently states that the select period of the medical cost inflation trend cannot be more than \0 years. We therefore derived a constant medical cost inflation trend of 5.85% for the 10" year and beyond that produces approximately the same valuation results as the above trend model. This trend assumption used in our valuation is shown on the following page. City of Palo Alto GASB 45 Actuarial Valuatioll (IS of January 1, 2009 This work product was prepared solely rOT City orPalo Alto rOT the purposes described herein and may not be appropriate to usc rOT other pmposes. Millimun does not intend to benefit and assumes no duty or liubility to other parties who receive fhis work. Milliman 19 SECTION III. ApPENDICES Appendix B. Actuarial Cost Metbod and Assumptions (continued) Medica/Inflation As.vumplion (continued) The following table shows the medical cost inflation trend used in our valuation. Year 2009 2010-2014 2015 2017 2018 and beyond City oJ Palo Alto GASH 45 Actuarial Valuation as oJ January I. 2009 % Inflation Actual Increase 6.50% 6.00% 5.85% This work prodoot was prepared soleI)' for City ofFal;) Alto f(lr the purposes described herein and may not be appropriate to use for other purposes. Milliman does nOI intend to benefit and assumes no duty or liability to ulner parties who rceeive this work. Milliman 20 SECTION III. ApPENDICES Appendix C. Summary of Participant Dnta The following census of participants as of January 1 ",2009 was used in the actuarial valuation and provided by the City of Palo Alto. Covered Active Employees A[{.e FCA M /imflCon[ PAPOA SEW Total Under 25 0 2 0 1 II 14 25 -29 0 6 3 17 45 71 30-34 0 6 7 16 60 89 35 39 0 17 19 13 52 101 40-44 0 26 26 13 71 136 45 -49 3 23 41 12 112 191 50-54 0 17 54 6 87 164 55-59 0 5 36 1 71 113 60-64 0 0 18 0 42 60 65 & Over .....Q _3 ~ ..J.2 Total 3 102 207 79 564 955 Average Attained Age at Valuation Date: 45.3 Average Years of Service at Valuation Date: 11.2 Current Kef trees A[{.e IAFF MgmtiCon[ PAPOA SEW Tolal Under 55 13 14 17 23 67 55-59 7 31 16 39 93 60 -·64 14 '38 14 64 130 65 -69 26 37 II 70 144 70 74 20 34 7 49 110 75 79 14 17 8 36 75 80-84 4 15 5 26 50 85 & Over -2. ---1 24 ..3:l Total 104 195 80 331 710 Average Attained Age at Valuation Date: 67.2 City Of Palo Alto GASH 45 ActuarIal Valuatlo1l as of Jal/uary I, 2009 '(his y,.t'lrk proouet was prepared solely for City of Palo Alto for the purposes described herein !'Iltd may not be appropriate to. tlSC for other purposes. MiIIlman does not intend to. benefit and assumes no duty o.r liability to olhcr parties Who. receive this work, Milliman 21 EXHIBIT A Actuarial Liability and Annual Required Contribution Variance Analysis by Fund and General Fund Departments Actuarial Valuation Aetuarlal Valuation Jan. 1, 2007 (~g 14) . Jan. 1, 2009 (~a 13) Change Actuarial Actuarial Actuarial % % Fund Llablltlr ARC Llablltlr ARC Llablltll Change ARC Chanaa GF 73,008.348 5,598,512 91,218,476 6,797,923 17,610,128 23.92% 1,199,411 21.42% GFCIP 1,110,244 97,878 1,563,882 141,351 453,038 40.86% 43,673 44.110/" E!ectric 11,341,482 758,679 13,128,983 943,007 1,787.501 15.76!)/~ 184,416 24.31% Ga. 2,938,389 187,420 4,588,835 343,577 . 1,652,446 56.27% 156,157 83.32% Water 2,838,751 236,847 4,672,615 385,754 1,833,004 64.60% 146,907 61.51% Refuse 1,907,563 148.571 3,063,013 244,889 1,155,450 60.57% 96,318 (34.8:,3010 WNT 3,782,400 261,384 5,112,442 377,095 1,330,042 35.16% 115.711 44.27% WlVC 1,290,119 99,772 2.012,681 168,995 722,562 56.01% 69,223 69.3tlO/l) Storm Drain . 502,517 35,038 493,835 30,173 ·8,682 ·1.73% 1,137 3.25% Fiber optlcs ...... 84,585 10,251 84,585 10,251 Vehicle main 1,028,273 73,900 1,224,905 94,688 100,632 19,12% 20,788 26.13% Technology 1,587,856 144,325 2,226,335 214,454 638,479 4Q.21% 70,129 46.59% Printing and Mailing 142.203 13.669 270,368 27,980 126,160 90.120/1) 14,291 104.40% External Service u" 160,877 28,350 .160,677 .28,350 $102,237,022 $7,600,163 $129.660,950 $9,766,227 $27,42'3,928 $2.100,064 Ulnc!uded in Electric Fund in FY 2007 . ..-" "uFund WM cloeed in FY 2009 Actuarial ValuatIon Act\1arial Valuation Jan. 11 2007 ~~g 15~ Jan. I, 2009 (~g 14) Chaneo Actuarial Aetu!'IiTlal Actuarial % % General Fund Ooet. Llablltl~ ARC Llablltll ARC Llablltl~ Chansa ARC Chango ASD 5,707,361 469,503 5,932,007 489,570 224,646 3.94% 20,067 4.27% ATT 960,869 80,918 1,303,589 104.024 342,720 35.67% 23,108 28.55% AUD 252,422 32,164 115,611 15Ml ·136,811 ~54,20% ·17,083 ·53.11% ClK 824,736 79,466 1.035,745 70,366 211,009 25.59% ·9.102 ·11.45% COU 993,450 92,931 '. 005,029 44,592 ·108,421 -10.91% ·48,339 ·52.02% CSD 8,692,640 692,954 10,132,586 62ll,473 1,589,926 Ht5Qo/e 127,519 18.40% FIR 19,350,296 1,346.396 24,576,151 1,729,712 5.217,855 28.95% 383,316 23.47% HRD 1,529,498 122.500 2,087,623 142,962 556,127 36.490/{I 20,372 16,62% LIB 2,172,224 257.458 3,026,200 307.718 853,965 39.31% 50,260 19.52% MGR 1,256,030 93,122 1,329,780 66,010 73.730 5.87% ·7,112 ~7,a4% PlN 3,946,689 326,581 4,652,780 401,621 706,111 17.89% 75.040 22.98% POL 18,559,469 1.346.565 24,242,749 1,761.351 5,663,280 30.62% 414.786 30.80% PWO 9,454,690 651,862 11,848,655 624.443 2,393,965 25.32% 166,581 25,32(1/(1 $73,608,352 $5,598,512 $91,218,476 $8,797,923 $17,610,124 $1,199,411 EXHIBIT B Actuarial Liability Variance Analysis by Bargaining Group Actuarial Valuation Jan. 1. 2007 fDg 131 Actives Retiress FCA IAFF MgmtiProf PAPOA SEIU 279,694 6,516,045 13,934,504 3,432,414 23,244,839 o 8,746,250 13,678,104 8,179,029 24,226,143 $279,694 $15,262,295 $27,612,608 $11,611,443 $47,470,982 Actuarial Valuation Jan. 1. 2009 fDg 12) Actives Retiress Change Actives Retiress % Change %ofTolal FCA IAFF MgmtiProf PAPOA SEIU 268,508 8,105,421 12,423,191 4,120,760· 26,359,386 o 11,460,562 21,756,345 10,802,468 34,364,309 $268,508 $19,565,983 $34,179,536 $14,923,228 $60,723,695 FCA IAFF MBmtlProf PAPOA SEIU -11,186 1,589,376 -1,511,313 688,346 3,114,547 0 2,714,312 8,078,241 2,623,439 10,138,166 -$11,186 $4,303,688 $6,566,928 $3,311,785 $13,252,713 -4.00% 28.20% 23.78% 28.52% 27.92% -0.04% 15.611% 23.95% 12,08% 48.33% TOTAL 47,407,496 54,829,526 $102,237,022 TOTAL 51,277,266 78,383,684 $129,660,950 TOTAL 3,869,770 23,554,158 $27,423,928 26.82% 100.00% ATTACHMENT B City of Palo Alto GASB 45 Actuarial Valuation of Post Employment Benefits Other tban Pensions As of January 1,2007 Prepared by: Jonn R. Botsford, FSA, MAAA January 16,2008 Milliman January 16, 2008 City of Palo Alto 250 Hamilton Avenue Palo Alto, California 94301 City of Palo Alto- GASB 45 Actuarial Valuatiou of Post Employment Benefits as of January 1,2007 650 California Sireet, Floor 17 San FranciS:CO, CA 94108·2102 USA Tel +1415400 1333 Fax +1 4154031334 mllilmaftcom At the request of the City of Palo Alto, we have completed an actuarial valuation of post employment . benefits as ofJamiary 1,2007, The purpose of this report is to detennine the Annual Required Contribution and required financial disclosures under the Governmental Accounting Standards Board Statement No. 45 -Accounting and Financial Reporting by Emplayers for Postemployment Benefits Other Than Pensions (GASB 45), Our determinations reflect the procedures and methods prescribed in GASB 45. Our calculations assume that the City will adopt the GASB 45 accounting standard effective with the 2007-2008 fiscal year. The results shown from the prior valuation are for comparison purposes only, In preparing our report, we relied on financial infornlation and employee data furnished to us by the City of Palo Alto. While Milliman has not audited the financial and census data, they have been reviewed for reasonableness and are, in our opinion, sufficient and reliable for the purposes of our calculations, If any of this information as summarized in this report is inaccurate or incomplete, the results shown could be materially affected and this report may need to be revised. The assumptions and cost method were selected by the City to satisfy CalPERS' required assumptions and methods for funding agency OPEB liabilities through CalPERS newly established OPEB trust. In our opinion, all assumptions and methods used in this valuation are reasonable for this purpose, The values provided in this report are estimates only, They represent results if actual experience exactly matches the assumptions used. Actual experience will likely differ and continued monitoring of experience should be performed and adjustments made to the assumptions as necessary. The actuarial computations under OASB 45 are for purposes of fulfilling employer accounting requirements. The calculations reported herein have been made on a basis consistent with our understanding of OASB 45, Determinations for purposes other than meeting employer financial accounting requirements may be significantly different from the results reported herein, Reliance on information contained in this report by anyone for anything other than the intended purpose puts the relying entity at risk of being misled, This report has been prepared for use by City of Palo Alto for the purposes described herein, Accordingly, this report may not be distributed to any third party outside the City without Milliman's written consent unless public disclosure is required by law, Milliman hereby consents to the distribution Offices in PrinCipal Cities Worldwide City of Palo Alto - January 16,2008 Page 2 of this report to the City's auditor for the purpose of preparing the audit oftbe City's fmandal statements. If distribution of the report is made outside the City, the report must be provided in its entirety. This report is a complex, technical analysis that assumes a high level of knowledge concerning the City of Palo Alto's operations, and uses the City of Palo Alto's data, which Milliman has not audited. Any third party recipient of Milliman's work product who desires professional guidance should not rely upon Milliman's work product, but should engage qualified professionals for advice appropriate to its own specific needs. On the basis of the foregoing, we hereby certify that, to the best of our knowledge and belief, the report is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and pr~ctices which are consistent with the applicable Actuarial Standards of Practice of the American Academy of Actuaries. The undersigned is a member of the American Academy of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. JRB:tah ":\cplI\va!UOO7\w.'lcpn07rerv.dOG sincU7 R. ~ 2: R. Botsford, FSA, MAAA Principal and Consulting Actoary Milliman T ABLE OF CONTENTS Section Page I Management Summary Introduction ............................................................................................................................... I Background ................................................................................................................................. 1 Assumptions .............................................................................................................................. 2 Selection i Approval of Actuarial Assumptions ....................................................................... 2 Results of Study .......................................................................... , ................................. , ............ 2 Impact of Changes from Last Valuation ........ , .................................... , .................................... , 3 Variability of Results .... , ............................ , ............ , .................................................................. 4 II Exhibits Exhibit 1. Projected Benefit Payments ............................................................................. 5 Exhibit 2. Projected Number of Retirees .......................................................................... 6 Exhibit 3. Liabilities and Nonnal Cost.. ........................................................... : ............... 7 Exhibit 4. Unfunded Actuarial Accrued Liability ............................................................ 8 Exhibit 5. Required Financial Statement Disclosures ...................................................... 9 Exhibit 6. ReqUired Supplementary Information ........................................................... 10 Exhibit 7. Valuation Results -Alternative Diseount Rates ............................................ 11 Exhibit 8. Valuation Summary by Bargaining Group .................................................... 12 Exhibit 9. Valuation Breakdown by Fund ..... : ................................................................ 13 .Exhibit 10. Valuation Breakdown by General Fund Departments ................................... 14 III Appendices " Appendix A. Summary of Benefits ..................................................................................... 15 Appendix B. Actuarial Cost Method and Assumptions ..................................................... , 17 Appendix C. Summary of Participant Data ........................................................................ 20 CUy of Palo Allo GASB 45 Actuarial Valuation as of January 1, 2007 This work product was prepared solely for City of Palo Alto for the purposes deseribed herein and may not be appropriate!O us:e for other purposes Milliman does not intend to benefit and assumes no duty or liability to .other panies who receiyc this WOrk Milliman SECTION I. MANAGEMENT SUMMARY Introduction Milliman, Inc. ("Milliman") has been retaincd by the City of Palo Alto ("City") to provide a GASB 45 actoarial valuation of its post employment benefit (OPEB) plans. In our valuation we: • Project expected payouts and number of retirees for future years • Calculate the present value of total benefits • Calculate the aetuarialliability (present value of benefits attributable to past service) • Determine the Annual Required Contribution (ARC) and annual OPEB expense under GASB Statement No, 45 • Prepare the financial statement disclosures relating to the funded status of the plan • Provide a breakdown of the City's OPEB costs by department and bargaining group Background Employees who retire directly from the City are eligible for retirce health benefits ifthey retire on or after age 50 with 5 years of service and are receiving a monthly pension from CaIPERS. For employees hired before January 1,2004, and all PAPOA employees, the City pays for the entire cost of retiree health benefits for retirees for their lifetimes. The City also pays a portion of medical costs for spouses of retirees equal to 70% of the premiums for 2007 and increasing 5% per year until the City's share reaches 100% of spouse premiums for 20 13 and beyond. For management employees, IAFF and FCA members hired on or after January I, 2004, and SEIU employees hired on or after January 1, 2005, the City pays for the 50% of the above described benefits after 10 years of service, and the city's portion increases by 5% for each additional year of service up to 20 years. For FCA, IAFF, and management/confidential employees who retire on or after January I, 2006, and for SEIU employees who retire on or after January I, 2007, the maximum premium amount the City will pay toward health insurance will be equal to the second highest CalPERS Bay Area Basic plan premium (currently the Blue Shield HMO premium). The City contracts with CalPERS to provide medical benefits for its retirees, Appendix A provides a more detailed summary of benefits, Assumptions With any valuation of future benefits, assumptions of anticipated future events are required, If actual events differ from the assumptions made, the actual cost of the plan will vary as well. The following assumptions should be reviewed for appropriateness. Discount Rate. GASB 45 requires that the interest rate used to discount future benefit payments back to the present be based on the expected rate of return on any investments set aside to pay for these benefits. The City has indicated that it intends fund its GASB OPEB liabilities by contributing to a trust City Of Palo Alto GASH 45 Actuarial Valuallon as of January ], 2007 This work product was prepared solely for City of Palo AII;Q for Ine purposes described herein and may not be appropriate 10 use for other purpose. .. Milliman does not intend to benefit and fl3sumes no duty or liability to othet parties who reecive this work Milliman SECTION I. MANAGEMENT SUMMARY established by ColPERS for this purpose. We have, therefore, used a discount rate of 7.75% for this valuation based on CaIPERS' expected return on assets held in their OPEB trust. Health Cost Trend .. We have reflected the actual medical premium increases from 2007 to 2008. After 2008, we have assumed premium increases of8.0% from 2008 to 2009, graded down 1% per year to 5.0% per year. Demoflrovhic Assumptions. We are using the same rates used by the California Public Employees Retirement System (CaIPERS) in their actuarial valuations of retirement benefits under a 2.7% at age 55 benefit formula for miscellaneous employees, and a 3% at age 50 formula for Police and Fire employees. A complete summary of the actuarial assumptions is presented in Appendix B. Selection/Approval of Actuarial AssumptiollS An actuarial valuation of post-employment benefits includes estimates of uncertain future events. The economie and demographie actuarial assumptions to anticipate future plan experience were selected to comply with CalPERS required assumptions for participation in their OPES trust. The demographic assumptions were developed by CalPERS based on the actual experience of the pool of public agencies, including the City of Palo Alto, that participate in CalPERS for pension benefits. Although the City's actual experience may differ for the overall experience of the pool, we believe it is reasonable for purposes ofthis valuation to assume that the City of Palo Alto's future experience will be similar to the experience of the pool of other California public agency employers covered under the same pension formulas as the City, Ultimately, the City and its auditor must select/approve the set of actuarial assumptions used in reporting liabilities on its financial statements. Results of Study The valuation results are summarized in the following exhibit and use the following terms: The Present Value of Benefits is the present yalue of projected benefits discounted at the valuation interest rate (7.75%). The Actuarial Accrued Liability (AAL) is the present value of benefits that are attributed to past service only. The portion attributed 10 future employee service is excluded. For retirees, this is equal to the present value of benefits. For active employees, the actuarial present value of the projected benefits of each individual is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit (until maximum retirement age). The portion attributed to service between entry age and the valuation date is the actuarial accrued liability. The Normal Cost is that portion of the City's provided benefit attributable to employee serviCe in the current year. The An~'lUal Required Contribution (ARC) is equal to the Normal Cost plus an amount to amortize the unfunded AAL over a period of 10 to 30 years. This is the amount the City would be required to report as an expense each year under GASB 45 assuming the amount is fully funded. Note, the ARC represents an City vj'Palo AlfO GASH 45 ACluatial Valuation as oj' January 1. 2007 This \'I.'Ork product was prepared solely for City orPah) Alto for the purposes described herem lind may not be appropriate to use for other purposes Milliman does not intend to benefit and assumes no duty Of liflbillty to other parties who receive this work, Milliman 2 SECTION I. MANAGEMENT SUMMARY accounting expense, but the City is not required to contribute the ARC to a separate trust. If the City does not set aside funds equal to the ARC each year, then the Annual OPEB Expense (less actual benefit payments) will accumulate as a liability (Net OPEB Obligation) on the City's balance sheet. January 1, 2007 July 1, 2005 Active Employees 1,018 1,038 Retirees ---.ill _.J92 Total Participants 1,630 1,630 Covered Retired Spouses 257 217 Present Value of Benefits $ 126,935,275 $ 129,305,421 Actuarial Accrued Liability $ 102,237,022 $ 91,486,759 Assets I 27,093.351 $~OO,OOO Unfunded Actuarial Accrued Liability $ 75,]43,671 $ 73,286,759 Normal Cost ' $ 3,173,722 $ 4,011,490 Annual Required Contribution (ARC) , $ 7,686,163 $ 8,937,739 Budgeted City Payroll $ 97,600,000 $ 81,600,000 ARCilS a Percent of Budgeted Payroll 7.9% $ 11.0% Expected first year benefit payments $ 4,175,915 $ 3,286,972 I These assets are currently held in Ihe City's Internal Service Fund. At the City's request, we have included these assets in our actuarial valuation since the city intends 1o transfer these assets 10 a qualifYing separate Irust prior to Ihe end oj the fiscal year ending June 30, 201J8, 1 The Normal Cost and ARC were determined as oj the end oj the fiscal year Jor the last valuation. For this valuation, the Normal Cost and ARC were determined as oj the beginning oj the fiscal year to accountJor the City's intention to Jund its ARC at the beginning oj eachfiscal year. Impact of Changes from Last Valuation The Actuarial Accrued Liability increased by approximately $11 million since the last valuation. The following is a summary of changes to the valuation assumptions that contributed to the changes in AAL: • The discount rate was increased from 7% [0 7.75% to reflect the City's intention to fund its liabilities through the CalPERS trust. This resulted in a decrease in actuarial accrued liability of approximately $10 million. • The actuarial cost method changed from Projected Unit Credit to Entry Age Normal to conform with CaIPERS' OPEB assumption model for funding GASB 45 liabilities in its trust. This City of Palo Allo GASB 45 Actnariat flalnation as of January I, 1007 This W{)(k product was preparM s{)lely for City of Palo AIt{) fm the purposes described herein and may not be appropriate to use for other purposes. Milliman does IlQl intend to benefit and assumes 00 duty or liability tQ other parties who receive this work Milliman 3 SECTION I. MANAGEMENT SUMMARY resulted in an increase in AAL of approximately :b4 million. Note that a change in cost method does not affect the present value of future benefits. It only impacts the accrual pattern of costs. This change resulted in a higher AAL, but current and future "normal c!'sts" will be slightly lower under the new cost method. • The plan's demographic assumptions were also updated to reflect the latest CalPERS demographic assumptions used for California public agency pension valuations. This resulted in an increase in AAL of approximately $3 million. • The cost of benefit accruals since the last valuation (Le. the cost attributed employee service since the last valuation), plus interest on the prior year's AAL due to the passage of time, less benefit payments since the last valuation date also contributed to the change in Actuarial Accrued Liability. The combined impact of these factors was an increase in AAL of approximately $10 million. • Other factors such as changes in the city's demographic composition and changes in health premiums also contributed to the change in Actuarial Accrued Liability. The combined impact of all other factors was. an increase in liability of approximately $3 million. Variability of Results The results contained in this report represent our best estimates. However, variation from these or any other estimates of future retiree medical costs is not only possible but probable. Actual future costs may vary significantly from estimates in this report. City of Palo A 110 GAsn 45 ACluarial Valuation as oj January 1, 2007 This wurk product was prepared SOlely fOT City of Palo Alto fur the purposes described herein and may not be appropriate ttl use for (lther purposes, Milliman does not inle·lld to benefit and assumes no duty or liability 10 other parties who receive ih~s work. Milliman 4 SECTION II. EXHIBITS Exhibit 1. Projected Benefit Payments The lable below illustrates the projected pay-as-you-go City costs of providing retiree health benefits. The projections only consider the closed group of existing employees and retirees and is based on the current labor agreements. Current Future Year Retirees Retirees Total 2007 5; 3,979,387 5; 196,528 $'4,175,915 2008 4,054,178 478,129 4,532,307 2009 4,264,172 844,434 5,108,606 2010 4,440,151 1,277,685 5,717,836 2011 4,601,923 1,746,207 6,348,130 2012 4,676,922 2,259,792 6,936,714 2013 4,760,639 2,800,638 7,561,277 2014 4,762,598 3,326,619 8,089,217 2015 4,736,343 3,853,155 8,589,498 2016 4,754,499 4,393,906 9,148,405 2017 4,755,070 4,976,335 9,731,405 2018 4,744,882 5,540,062 10,284,944 2019 4,729,190 6,123,412 10,852,602 2020 4,683,342 6,738,145 11,421,487 2021 4,612,778 7,305,951 11,918,729 2022 4,572,562 7,917,554 12,490,116 2023 4,544,547 8,511 ,041 13,055,588 2024 4,479,050 9,086,551 13,565,601 2025 4,408,123 9,656,825 14,064,948 2026 4,319,047 10,203,794 14,522,841 2027 4,203,837 10,653,211 14,857,048 2028 4,092,084 11,134,144 15,226,228 2029 3,982,172 11,583,894 15,566,066 2030 3,872,845 11,956,337 15,829,182 2031 3,747,734 12,323,553 16,071,287 2032 3,611,257 12,730,802 16,342,059 2033 3,448,905 13,084,733 16,533,638 2034 3,299,285 13,338,127 16,637,412 2035 3,137,019 13,610,513 16,747,532 2036 2,957,793 13,859,643 16,817,436 City of Palo Alto GASB 45 Acluar;al Valulltion as of January 1, 2007 This WQrk product was prepared solely forC!!:), of Palo Alto fur the purposes described herein and mlly no! be appropIfate tQ use for olher purposes. Millimah does not intend to benefit and assumes no dUty or liability to other parties who receive this work. Milllrnan 5 SECTION II. EXIDBITS Exhibit 2. Projected Number of Retirees The table below illustrates the projected number of retirees and spouses. The projections only consider the closed group of existing employees and retirees. Current Future Year Retirees Retirees Total 2007 605 25 630 2008 589 59 648 2009 572 95 667 2010 556 132 688 2011 538 170 708 2012 521 208 729 2013 503 245 748 2014 485 282 767 2015 466 316 782 2016 447 350 797 2017 428 380 808 2018 409 411 820 2019 389 438 827 2020 370 463 833 2021 350 485 835 2022 331 505 836 2023 312 522 834 2024 292 536 828 2025 274 547 821 2026 255 557 812 2027 237 562 799 2028 219 565 784 2029 202 565 767 2030 185 561 746 2031 169 556 725 2032 154 549 703 20;l3 139 540 679 2034 125 527 652 2035 112 513 625 2036 100 497 597 City 0/ Palo Allo GASB 45 Actuarial Valuation as 0/ January 1, 2007 This work product was prepared solely fo! City of Palo Alto for the purposes desCttbed herein and may hot be Ilppropriate [(I use for tither pUrp05es. Millitnatl does not intend to 'benefit and assumes no duty or liability to other parties who receive this work. Milliman 6 SECTION II. EXHIBITS J;:xhibit 3. Liabilities and Normal Cost The Present Value of Benefits is the present value of projected benefits (premium costs less retiree contributions) discounted at the valuation interest rate (7.75%). The Actuarial Accrued Liability (AAL) is the present value of benefits that are attributed to past service only. The portion attributed to future employee service is excluded. For retirees, this is equal to the present value of benefits. For active employees. the actuarial present value of the projected benefits of each individual is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit (until maximum retirement age). 'The portion attributed to service between entry age and the valuation date is the actuarial accrued liability. The Normal Cost is that portion of the City's provided benefit atlributeble to employee service in the current y eur. January 1, 2007 _~lyl,2005 Present Value of Benefits Actives $ 72,105,749 $ 77,597,402 Retirees 54,829,526 51,708,019 Total $ 126,935,275 $ 129,305,421 Actuarial Accrued Liability Actives $ 47,407,496 $ 39,778,740 Retirees 54,829,526 51,708,019 Total $ 102,237,022 $ 91,486,759 Normal Cost $ 3,057,456 $ 3,749,056 City of Palo Alto GASB 4$ AClnoriol Volaolion os of Jonuory 1, 2007 This work product W8.s prepated solely fOf City QfPalo Alia ror Ihe purposes described herein and may not be appropriate to usc fOf other purposes, Milliman does not intend to benefit and assumes no duty or liability to other parties who receIVe this work Milliman 7 SECTION IL EXHIBITS The following table shows a breakdown of liabilities and costs attributes to benefits paid prior to age 65 and after age 65. JanuarvI, 2007 Benefits <Age 65 I}ell~(its > Age 65 Total Present Value of Benefits Actives $ 29,202,226 $ 42,903,523 $ 72,105,749 Retirees 16,156,219 38,673,307 ...... 54,829.526 Total $ 45,358,445 $ 81,576.830 $ 126,935,275 Actuarial A ccrued Liability Actives $ 18,161,889 $ 29,245,607 $ 47,407,496 Retirees 16,156,219 38,673,307 54,829,526 Total $ 34,318,108 $ 67,918,914 $ 102,237,022 Norma/Cost $ 1,304,115 $ 1,753,341 $ 3,057,456 City of Pato Alto GASH 45 Actuarial ValuQtion as of January 1, 2007 This work product was prepared roleJy for City of Palo Alto for t~e purposes descri~ herein and mlly not be appropriate to use for other purposcs, Milliman does not intend to benefit ilod assumes no duty or liilbility 10 olher panies who reccive this work. Milliman SECTION II. EXHIBITS Exhibit 4. Unfunded Actuarial Accrued Liability The Unfunded Actuarial Accrued Liability (UAAL) is the actuarial accrued liability offset by any assets set aside to provide retiree health benefits. This is equal to the value cfthe retiree health benefits accrued to date that has not been funded. The UAAL must be amortized over a period not exceeding 30 years and included in the ARC amount (shown in Exhibit 5) each year. For illustrative PUlpOSes, we have calculated the amortization of UAAL as a level percentage of payroll over 30 years. This means the amortization amount would be expected to increase at the same rate as payroll increases each year. We have assumed the City's payroll will increase 3.25% per year for this purpose. Unfunded Actuarial Uahilit)' (UAAL) Actuarial Accrued Liability Assets Held in Trust Unfunded Actuarial Accrued Liability Funded percentage Amortization of UAALfor ARC UAAL Amortization Period Level % ofPayro]] Amorti?.ation Factor Amortization Amount -January 1,2007 Interest to July 1,2007 Amortization Amount July 1,2007 City of Palo Alto GASB 45 Actuarial Yaluotion as of January J, 2007 January /, 2007 $ 102,237,022 27,093,351 $ 75,143,671 26.5% $ 75,143,671 30 years 17.2858 $ 4,347,133 $ 165,308 $ 4,512,441 ThJs work product was prepared sOleJy for City afPalo Alto for the purposes described herejn and may not be appropriate to use for other purposes Milliman does 1Iot intend to benefit tl1id assumes no duty or liability to other parties who receive Ihis work. Milliman 9 SECTION II. EXHIBITS Exhibit 5. Required Financial Statement Disclosures The following table shows the calculation of the Annual Required Contribution and Net OPEB Obligation. For the Fiscal Year Ending June !l0, 2008 JUlie 30, 2007 Determination 0/ Annual Required Contrlbul/on Normal Cost at beginning of fiscal year $ 3,173,722 $ nla Amortization ofUAAL 4,512,441 Annual Required Contribution (ARC) $ 7,686,163 $ nla Determination 0/ Net OPEB Obligation Annual Requited Contribution $ 7,686.163 $ nla Interest on prior year Net OPEB Obligation 0 nla Adjustment to ARC nla Annual OPEB Cost $ 7.686.163 nla City Contributions made • 7,686,163 Increase in Net OPES Obligation $ 0 nla Net OPEB Obligation beginning of year $ 0 $ nla Net OPEB Obligation 1 (Asset) ~ end of year $ 0 $ nla '" GASB 45 defines contributions for lhis purpose to be actual benefit payments made directly by the City during Ihe year and contributions made to a separatel irrevocable trust. This exhibit will need to be completed at the end of the fiscal year once actual contributions are known. The following table shows the annual OPEB cost and net OPEB obligation for the prior 3 years. Percelltage 0/ Fiscal Annual OPEB Cost NetOPEB YeatEnded OPEB Cost Contributed Obligation 06/3012006 nla nla nla 06130/2007 nla nla nla 06/30/2008 $7,686,163 $7,686.163 100% Funded Status and Funding Progress. As of January 1,2007, the most recent actuarial valuation date, . the plan WaS 26.5% funded.' The actuarial accrued liability for benefits was $102.2 million, and the actuarial value of assets was $27.1 million, resulting in an unfunded actuarial accrued liability of $75.1 million. --_ .. ------------------------------------------------- City of Palo Alto GASB 45 ACinarial Valuation as of January i, 2007 This work product was prepared 801ely for City of Palo AlIQ fur the purposes described herein and may no! be appropriate to use for other purposes. Milliman does nol intend to benefit and ;,ssumes no duty or liability to other parties who reeeive this work. Milliman 10 SECTION II. EXHIBITS Exhibit 6. Required Supplementary Information The following table shows a schedule of Funding Progress required under GASB 45. Actuarial Actuarial UAAL as a Valuation Value 0/ AAL Funded Covered % o/Covered Date Assets EAN UAAL Ratio Payroll Payroll 01/0112003 nla nla nla nla nla nla 01/0112005 nla nla nla nla nla nla 01/0112007 $27,093,351 $102,237,022 $75,143,671 26.5% $97,600,000 77% City of Palo Alto GASB 45 Actuarial Valuation as of January I. 2007 11 This work product. was prepared solely for City of Palo Alto for the purposes described herein and may not be appropriate to use for other purposes Milliman docs not intend to benefit and assumes no duty or liability to other parties who receive this work. Milliman SECTION II. EXHIBITS Exhibit 7. Valuation Results -Alternative Discount Rates The following exhibit shows the results of the valuation based on alternative discount rates of 7.75% (funded basis) and 4.5% (unfunded basis). The discount rate is uscd to calculate the present value of expected future benefit payments. The lower the discount rated used, the higher the present valued will be. GASB 45 requires that the discount rate be reflective of the assets used to pay benefits. For unfunded OPEB liabilities, the rate would be the expected return on the City's general funds. For funded OPEB liabilities (ARC set aside in a separate trust each year), the discount rate would be the expected return on assets invested in such a trust. A higher expected return and discount rate would result a much lower OPEB liability and ARC for the City. Present Value of Benefits Actuarial Accrued Liability Assets Unfunded Actuarial Accrued Liability (UAAL) Normal Cost (beginning fiscal year) Amortization ofUAAL Annual Required Contribution (ARC) Annual benefit payments City oj Palo Alto GASB 45 Actuarial Valuation as oj January 1, 2007 7.75% Discount Rale $126,935,275 $102,237,022 27,093,351 $ 75,143,671 $ 3,173,722 4,512.441 $ 7,686,163 $ 4,175,915 4.5% Discount Rale $225,257,556 $159,157,754 27,093,351 $132,104,403 $ 6,547,102 5,330,672 $ 11,878,074 $ 4,175,915 Thiswork product was prepared solely for City OfP810 Alto for th~ purposes described herein and m<ly not be appropriate to use for other purposes. Milliman does not intend 10 benefit and assumes no duty or liability to other p<lrties who receive this work Milliman 12 SECTION II. EXHIBITS Exhibit 8. Valuation Summary by Bargaining Group Valuation results shown below are based on a 7,75% discount rate, At the r4quest oftha City, we did not provide a breakdown of the ARC by bargaining group since a breakdown of assets by bargaining group was not available. FCA IAFF MgmilConf PAPOA SEIU Total Counts Actives 4 105 270 75 564 1,018 Retirees and Dependents ..Q 2Q 154 -1l .2.ll.2 --<ill Total 4 201 424 148 853 1,630 Present Value Of Benefits Actives $349,253 $ 9,850,205 $20,340,146 $ 5,500,912 $36,065,233 $ 72,105,749 Retirees 8,746,2:JQ 13,678,104 8,179,029 24,22~,143 54,829,526 Total $349,253 $18,596,455 $34,018,250 $13,679,941 $60,291,376 $126,935,275 ACluarialAccrued Liability Actives $279,694 $ 6,516,045 $13,934,504 $ 3,432,414 $23,244,839 $ 47,407,496 Retirees 8,746,250 13,678,104 8,179,022 24,22~,14J 54,829,526 Total $279,694 $15,262,295 $27,612,608 $J 1,611,443 $47,470,982 $102,237,022 City oj Palo Alto GASB 45 Actuarial Valuallon as oj January I, 2007 13 This Work product was prepared solely for City of Palo AUo fur the purposes described herein and may not be appropriate Co me for other purposes" Milliman does nOI mien<.! to beneflt and assumes no duty Of liability to otlier parties who receive this w('lfk" Mmiman SECTION II. EXHIBITS Exhibit 9. Valuation Breakdown by Fund Valuation results shown below are based on a 7.75% discount rate. The counts, Actuarial Liability, and ARCs include actives and retirees. In determining the ARC for each fund, we used the breakdown of assets by Fund provided to us by the City. Fund Coullt Actuarial Liability ARC CIP 22.45 $ 1,110,244 $ 97,678 ELEC 126.84 11,341,482 758,679 External SVC 5.00 160,877 28,350 GAS 44.72. 2,936,389 187,420 General Fund 1,084.10 73,608,348 5,598,512 ISP -Printing 3.00 142,203 13,689 lSI" -Technology 29.00 1,587,856 144,325 ISP -Vehicle 17.00 1,028,273 73,900 Refuse 38.45 1,907,563 148,571- STORM Dr. 8.20 502,517 35,036 UTL -Admin 63.00 0 0 WATER 45.02 2,838,751 238,847 WWC 23.42 1,290,119 99,772 WWT 74.80 3,782,400 261,384 Unknown Pund (Rets) • 45.00 nla Total 1,630.00 $ 102,237,022 $ 7,686,163 • Actuarial Liability and ARC for 45 relirees wilh no Fund code were allocated 10 each Fund in proportion to Ihe Actuarial Liabilily and ARC fond alldeation for current employees. as requested by the City, •• Actuarial Liability for active and retired UTL Admin employees were allocaled to the GAS, ELEC, WATER, and WWC Funds in proporlion 10 each of those Fund's Actuarial Liability. City of Palo Alio GASB 45 Actuarial Valuation as of January I, 2007 This. work product was prepared solely for City of Palo Alto for the purpl,)$es described herein and may not be appropriate 10 use for ()Ilier purposes" Milliman does not intend 10 benefit and assumes 00 duty or liability to other parties who re~jve this work. Milliman 14 SECTION II. EXHIBITS Exhibit 10. Valuation Breakdown by General Fund Departments Valuation results shown below are based on a 7,75% discount rate. The counts, Actuarial Liability, and ARCs include actives and retirees, A breakdown of assets by General Fund Department was not available; therefore, assets attributed to the General Fund were allocated to each Department based on the proportion of each Department's AAL to the total AAL for the General Fund, Gelleral FUlld Department Count Actuarial Liability ARC ASD 89 $ 5,289,514 $ 449,360 ATT IS 960,869 80,918 AUD 5 252,422 32,164 CLK 12 824,736 79,468 COU 17 993,450 92,931 CSD 154 8,592,640 692,954 FIR 241 J9,358,296 1,346,396 HRD 26 J,529,496 122,590 LIB 45 2,]72,224 257,458 MGR 17 1,256,030 93,122 PLA 68 3,946,669 326,581 POL 260 18,559,469 1,346,565 PWD 133 9,454,690 657,862 UTL 2 417 ,847 20,143 Total 1,084 $ 73,608,352 $ 5.598.512 Actuarial Liability and ARC for 45 retirees with no Fund code were allocated to each Fund in proportion to the Actuarial Liability and ARC fund allocation for current employees, as requested by the City. , City of Palo Alto GASB 45 Actllarial Valualion as of January 1, 2007 This work product was prepared solely for City of Palo Alto fur the purposes described herein and may not be apprnpriale to use for other purposes, Mill1man does not intend to benefit and assumes no duty or liability to Qlber parties who receive this wotk Milliman 15 SECTION III. ApPENDICES Appendix A. Summary of Benefits The following description of retiree health benefits is intended to be only a brief summary. For details, reference should be made to Summary Plan Descriptions, Plan Documents, labor agreements, and employee booklets. Eligibility Employees hired betore January 1,2004 and PAPOA members (Tiel' 1 employees) are eligible for retiree health benefits if they retire from the City after age 50 with at least 5 years of service, and are eligible for a CalPERS pension. Management, IAFF, and ]lCA employees (Tier 2 employees) hired on or after January 1,2004, and SEIU employees hired on or after January 1,2005 (Tier 2 employees), are eligible for retiree health benefits if they retire from the City with at least 10 years of CalPERS service, including 5 years of service with the City, and are eligible for a CalPERS pension, Health Benefits The City contracts with the CalPERS health ,plan to provide retiree health benefits to its retirees and spouses, For Tier I retirees, the City pays for the entire cost of health benefits for retirees and a portion of their spouses' premiums for their lifetimes, The portion of spouse premiums paid by the City is 60% for 2005, and will increase by 5% per year until the City pays the entire spouse's premium in 2013 and beyond, Tier 2 employees are entitled to a portion of the Tier 1 benefits depending on their years of service, After !O years of service, Tier 2 employees are entitled to 50% of Tier 1 benefits, and this portion increases by 5% with each additional year of service beyond 10 years up 10 a maximum of 100%, For FCA, IAFF, and management/confidential employees who retire on or after January I 2006, and for SEITJ employees who retire on or after January I, 2007, th~ maximum premium amount the City will pay toward health insurance will be equal to the second highest CalPERS Bay Area Basic plan premium (currently the Blue Shield HMO premium). Surviving Spouse Benejils Upon the death ofa retiree, benefits continue to surviving spouses of retirees for their lifetimes, The City's portion of premiums is the same as the portion paid on behalf of the retiree, Dental and Visioll The City does not pay Dental or Vision Benefits for retirees. City af Pala Alta GAS» 45 Actuarial Valuation as of Janua,y }, 2007 This work product was prepared solely fOf City of Palo Alto for the purposes described herein and may not be appropriate to use rQr olher purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work Milliman 16 SECTION III. ApPENDICES Appendix A. Summary of Benefits (continued) Health Insurance Premium Rales The following table shows monthly retiree health insurance premiums for the 2007 and 2008 premium years for coverage under the CalPERS Health Plan: Monthly Premium Rates -2007 Single 2·Party Under 65 Over 65 Under 65 Over 65 Bay Area Blue Shield HMO $ 484.21 $ 318.95 $ 968.42 $ 637.90 Kaiser Permanente 431.17 289.68 862.34 579.36 PERSCare 769.50 371.68 1,539.00 743.36 PERSCholce 455.18 341.75 910.36 683.50 PORAC 439.00 351.00 822.00, 701.00 Monthly Premium Rates -2008 Single 2.Party Under 65 Over 65 Under 65 Over 65 Bay Area Blue Shield HMO $ 532.93 $ 341.44 $ 1,065.86 $ 682.88 Kaiser Permanente 470.67 273.36 941.34 546.72 PERSCare 749.83 404.60 1,499.66 809.20 PERSChoice 482.48 349,11 964.96 698.22 PORAC 452.00 308.00 847.00 614,00 City of Polo jllto GASB 45 ACluarial Valuation as Of January I. 2007 ihis wor;': product was p.repared solely for City of Palo Alto for the purposes described herem and may not be appropriate to U;g; for ()Iller purposes. Milliman does not intend to beneflt and assumes no duty or liability to ather parties who receive this work Milliman 17 SECTION III. ApPENDICES Appendix B. Aetua rial Cost Method and Assu rnptions Actuarial Cost Method The actuarial cost method used for determining the benefit obligations is the Entry Age Normal Cost Method. Under the principles of this method, the actuarial present value ofthe projected benefits of each individual included in the valuation is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit. The portion of this actuarial present value allocated to a valuation year is called the normal cost. The portion of this actuarial present value not provided for at a valuation date by the sum of (a) the actuarial value of the assets, and (b) the actuarial present value of future normal costs is called the Unfunded Actuarial Accrued Liability (UAAL). In determining the Annual Required Contribution, the UAAL is amortized as a level percentage of expected payroll over 30 years. Economic Assumptions Di~Q()-''!!'LRale (liabilities): 7.75% effective annual rate Salarvlncreases: 3.25% per year growth in overall payroll for purposes of amortizing unfunded liability. For purposes of calculating entry age normal costs, merit salary increases are applied for individual members according to assumptions rates used by CalPERS in its actuarial valuation of retirement benefits. For all employees, assumed merit salary increases are based on an entry age of 30. Health Cost Trend: Actual increase from 2007 to 2008, 8% increase in health premiums from 2008 to 2009, and graded down I % per year to 5% per year. City of Palo Atto GASB 45Acluarial Valuatwn as of January i, 2007 This work product was prepared solely fnr City ofPal(l Alto f\lf the purposes described herein and may not be appropriate to use for .other purpo.ses Milliman does nOI intend t{l benefit alld assumes no dUly or liabIlity to other parties who receive this work. Milliman 18 SECTION Ill. ApPENDICES Appendix B. Actuarial Cost Method and Assumptions (continued) Demographic Assumptions. Demographic assumptions regarding retirement, disability, and turnover are based on statistics taken from pension valuations for California PERS under a 2.7% @ 55 fonnula for Miscellaneous employees, and a 3% @ 50 formula for Police and Fire employees. Below is a summary oflhe assumed rates for retirement, disability, and turnover. Disability.' Misc. 2.7% @55 3%@50 Age Males Females Police Fire 30 0.02% 0.Q4% 0.58% 0.22% 35 0.08% 0.10% 0.87% 0.32% 40 0.15% 0.16% 1.16% 0.42% 45 0.24% 0.23% 1.45% 0.53% 50 0.37% 0.35% 1.75% 0.67% Retirement: Misc. 2.7% @55 3%@50 __ A~ Males Females Police I Fire I 50 5.00% 7.00% 12.08% 6.79% 51 2.00% 5.00% 10.71% 9.22% 52 3.00% 5.00% 17.05% 13.77% 53 3.00% 6.00% 19.16% 16.61% 54 4.00% 6.00% 19.74% 20.38% 55 9.00% 10.00% 24.97% 25.16% 56 7.00% 8.00% 19.10% 24.07% 57 8.00% 7.00% 22.32% 20.10% 58 8.00% 10.00% 21.98% 23.54% 59 10.00% 9.00% 22.79% 19.93% 60 17.00% 13.00% 100.00% 100.00% 61 16.00% 11.00% 100,00% 100.00% 62 28.00% 23,00% 100.00% 100.00% 63 23.00% 20.00% 100.00% 100.00% 64 16.00% 14.00% 100.00% 100.00% 65 27.00% 27.00% 100.00% 100,00% 70 100.00% 100.00% 100.00% 100.00% I Sample probabilities for a Police or Fire employee wifh 25 yea/'s of service. Appendix B. Actuarial Cost Method and Assumptions (continued) City of Palo Alto c,'ASB 45 Actuarial Valuation as of January 1, 2007 This work product was prepllted solely for City orPalo Alto for the purposes described herein Ilnd may not be appropriate to use for other purposes. Mil1Jman does not intend to benefit and assumes 00 duty or liability to other parties who receive thIS work. Milliman 19 SECTION III. ApPENDICES Demographic Assumptions (continued) Withdrawal: Sample probabilities of miscellaneous employees terminating within one year for an employee with five years of service are shown below for selected ages: Misc. 2.7% @ 55 Age Males Females 30 5.5% 7.5% 35 3.9% 5,5% 40 2.9% 4.1% 45 2.2% 3.1% 50 0.6% 0.9% 55 0.4% 0,6% Sample probabilities of Safety employees tenninaling within one year for an employee with a given number of years ofscrvice are shown below: 3%@50 Service Police Fire I 8.2% 7.4% 3 3.3% ],2% 5 3,0% 2,6% 10 2.1% ,0.9% 15 1.3% 0.8% 20 1,0% 0.7% 25 0,8% 0.6% Mortality: Rates used by CalPERS in its actuarial valuation of retirement benefits, ~se Coverage: 60% of employees are assumed to elect spouse coverage upon retirement (no dependent children are assumed). For Current retirees, actual data was used to value spouse coverage, Spouse Age: Female spouses are assumed to be three years younger than male spouses, on average. City of Palo Alto GASB 45 Actuarial Valuation as Of January J, 2007 This work product was prepared solely fOf City of Palo Alto for the pmposes described heretli atld may not be appropriate to use for other purposes, Milliman does 1'101 intend to bene-fit and assumes no duty or liability to other parties who receive this work. Milliman 20 SECTION III. ApPENDICES Appendix C. Summary of Participant Data The following census of participants as of January 2007 was used in the actuarial valuation and provided by the City of Palo Alto. Covered Active Employees FCA IAFF jlfgmVCoIIL PAPOA SEW Under 25 0 0 0 2 4 6 25 -29 0 4 3 15 46 68 30 -34 0 9 13 18 42 82 35 -39 0 22 20 7 63 112 40 -44 I 2~ 32 12 83 154 45 -49 2 29 57 14 98 200 50 54 0 II 67 5 98 181 55·-59 0 2 50 2 75 129 60 -64 I 2 20 0 45 68 65 & Over ......Q ......Q ......Q -1Q Total 4 105 270 75 564 l,018 Average Attained Age at Valuation Date: 46 Average Years of Service at Valuation Date: 11.4 Currelll Retirees Age IAFF MgmtlCo!J[ PAPOA SEW Total ----- Under 55 1 1 9 20 23 63 55 -59 12 22 12 28 74 60-64 12 29 14 59 114 65 69 26 33 8 58 125 70 74 15 25 8 43 91 75-79 13 18 6 30 67 80-84 3 10 4 26 43 85 & Over ..,], _I 22 35 Total 96 154 73 289 612 Average Attained Age at Valuation Date: 67 City Of PaloAllo GASB 45 ACIuarlal Valualion as of January 1.2007 This \vork"proqucl was prepared solely for City of Palo Alto for the 'purposes desenbed herein and may no! be approptiate to use for other purposes. Millilll"n does not intend to benefit and assumes no duty or liability to other parties who receive this work. Milliman 21 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ATTACHMENT C ORDINANCE NO. ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING THE BUDGET FOR FISCAL YEAR 2010 TO PROVIDE ADDITIONAL APPROPRIATIONS OF $688,038 FOR RETIREE MEDICAL EXPENDITURES AS UPDATED WITH THE RETIREE MEDICAL ACTUALRIAL STUDY COMPLETED JUNE 2009 WHEREAS, pursuant to the provisions of Section 12 of Article III of the Charter of the City of Palo Alto, the Council on June 15, 2009 did adopt a budget for fiscal year 2010; and WHEREAS, per Governmental Accounting .Standards Boards (GASB) Statement No. 45, Financial Reporting for Retiree Medical Benefits, beginning in fiscal year 2008, the City of Palo Alto was required to recognize in its financial statements any unfunded, earned retiree medical costs, including those for current active employees; and WHEREAS, per GASB 45, the City is required to complete an actuarial study on a biennial basis to determine the retiree medical liability and how much the City should be setting aside each year to fund that liability WHEREAS, an actuarial study completed by Milliman, Inc. in June 2009, using a valuation date of January 1, 2009 valued the City's unfunded retiree medical liability at $105 million WHEREAS, the required annual contribution that the City must recognize in it's financial statements is $9.8 million for fiscal year 2010 WHEREAS, additional appropriations are requested to fund the retiree medical contribution for fiscal year 2010 WHEREAS, City Council authorization is needed to amend the fiscal year 2010 NOW, THEREFORE, the Council of the City of Palo Alto does ORDAIN as follows: SECTION 1. The Capital Fund Infrastructure Reserve is hereby decreased by the sum of Thirty Three Thousand Nine Hundred and Five dollars ($33,905). As a result of this change the Infrastructure Reserve will be reduced from $5,160,000 to $5,126,094 SECTION 2. Electric Fund is Hundred dollars The Supply Rate Stabilization Reserve in the hereby decreased by the sum of Fifteen Thousand One ($15,180) SECTION 3. The Distribution Rate Stabilization Reserve in the Electric Fund-is hereby decreased by the sum of One Hundred Thirty Three Thousand Two Hundred and Seventy-Seven dollars ($133,277) SECTION 4. The Rate Stabilization Reserve in the Water Fund is hereby decreased by the sum of One Hundred Twenty Three Thousand and Twenty-Two dollars ($123,022) SECTION 5. The Supply Rate Stabilization Reserve in the Gas Fund is hereby decreased by the sum of Eleven Thousand Nine Hundred and Eleven dollars ($11,911) SECTION 6. The Distribution Rate Stabilization Reserve in the Gas Fund is hereby decreased by the sum of One Hundred Twenty Five Thousand Five Hundred and Four dollars ($125,504) SECTION 7. The Rate Stabilization Reserve in the Refuse Fund is hereby decreased by the sum of Eighty One Thousand Four Hundred and Sixty-One Dollars ($81,461) ==~~~~8. The Rate Stabilization Reserve in the Wastewater Treatment is hereby decreased by the sum of Eighty Nine Thousand Five Hundred and Seventy-Three Dollars ($89,573) SECTION 9. The Rate Stabilization Reserve in the Wastewater Collection Fund is hereby decreased by the sum of Fifty Nine Thousand Two Hundred and Forty-Six Dollars ($59,246) SECTION 10. The Rate Stabilization Reserve in the Storm Drainage hereby increased by the sum of Two Thousand Three Hundred and Sixty-Seven Dollars $2,367 SECTION 11. The Rate Stabilization Reserve in the Fiber Optics Fund is hereby increased by the sum of Thirty Three Thousand Two Hundred and Fifty-Six Dollars $33,256 SECTION 12. The Retained Earnings in the Vehicle Replacement Fund is hereby decreased by the sum of Thirteen Thousand One Hundred and Forty-Nine Dollars ($13,149) SECTION 13. The Retained Earnings in the Information Technology Fund is --hereby decreased by the sum of Twenty Four Thousand Five Hundred and Eleven Dollars ($24,511) SECTION 14. The Retained Earnings in the Printing and Mailing Fund is hereby decreased by the sum of Twelve Thousand Nine Hundred and Twenty-Two Dollars ($12,922) As specified in Section 2.28.080(a) of the Palo Alto Municipal Code, a two-thirds vote of the City Council is required to adopt this ordinance SECTION 16. The Council of the City of Palo Alto hereby finds that this is not a project under the California Environmental Quality Act and, therefore, no environmental impact assessment is necessary. SECTION 17. As provided in Section 2.04.350 of the Palo Alto Municipal Code, this ordinance shall become effective upon adoption. INTRODUCED AND PASSED: AYES: NOES: ABSTENTIONS: ABSENT: ATTEST: City Clerk APPROVED AS TO FORM: Senior Asst. City Attorney APPROVED: Mayor ·City Manager Director Services of Administrative TO: ATTENTION: FROM: DATE: SUBJECT: ATTACHMENT D City of Palo Alto City Managelf.,'s Report HONORABLE CITY COUNCIL }<'INANCE COMMITTEE CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES MAY 1,2007 CMR: 195:07 AUTHORIZATION TO PROCEED WITH ESTABLISHING AN IRREVOCABLE TRUST WITH CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM (CALPERS) FOR RETIREE BENEFITS RECOMMENDATION The purpose of this report is to seek Council's approval to: (a) entering into a contract with California Public Employees Retirement System (CalPERS) to begin process of establishing an irrevocable trust fund for retiree medical benefits; and (b) transfering funds in the amount of $26.5 million currently set aside in the Retiree Health Benefits Internal Service Fund to CalPERS to establish the trust. BACKGROUND Per GASB 45, the City of.Palo Alto will be required to recognize in its fmancial statemcnts any unfunded, earned retiree medical costs including those for cnrrent active employees bcgilllling in fiscal year 2007-08. In December 2006, staff presented an update on funding options for retiree medical (Attachment A). The Finance Committee was supportive of the idea of establishing a trust with CaIPERS. DISCUSSION: The actuarial study completed by Milliman, Inc. in April 2006 valued the City's unfunded retiree medical liability at $148.7 million, assuming a 4 percent rate of return on the funds, the then- current rate of return on the City'S investments. Once the City takes steps to establish a trust for these funds, the assumed rate of return rises to 7.75 percent, reducing the present-value of the liability to $82.6 million. Furthermore, if the City deposits the $26.5 million balance from its Retiree Health Benefrts Internal Service Fund into the trust, the unfunded liability is reduced to $56.1 million. Without establishing a tmst, the Annual Required Contribution (ARC ~ or amount the City must set aside to fully fund the liability) would be $13.1 million per year. Wjth the establishment of a trust, the ARC goes down to $6.9 million. The budget for fi.scal year 2007-08 and all subsequent years would then include this reduced ARC and the proposed funding plan for the entire liability. CMR: 19507 Page) of4 The following table shows the allocations of both the liability and the ARC across the City's funds a:ssuming 7.75 percent rate of return, based upon actual staff demographics within each fund. Fund Actuarial Ua bility ARC General Fund $61,613,148 $5,141,349 Capital Improvement Fund 542,174. 67,606 Electric Fund 8,990,109 660,327 - External Service Fund 101,350 24,741 Gas Fund 2,397,695 203,057 Printing -Internal Service Fund 166,772 15,822 Refuse Fund 1,474,589 138,046 Storm Drain Fund 344,492 25,163 Technology Fund -Internal 961,295 1J 0,135 Service Fund Vehicle -Internal Service Fund 746,362 70,939 Wastewater Collection Fund . 670,244 152,104 Wastewater Treatment Flmd 2,685,693 65,379 Water Fund 1,884,974 220,165 Citywide Total $82,578,897 $6,894,833 As per the above table, the General Fund staffs share of the citywide ARC \otals $5.1 million. Since the General Fund budgets $2.2 million per year for current retiree medical expenditures, an additional $2.9 million would be required to fund the increased expenditure. General Fund staff provide services to the other funds, with the associated salary, beneflt and other costs allocated to the other funds via thc Cost Plan. However, the Cost Plan allocations have only included current retiree medical expenses and have not included the appropriate share of General Fund staffs annualJy accrued retiree medical liability. Once that liability is added to the Cost Plan, the allocated expense to other funds increases by $0.4 million per year resulting in a net ARC of $2.5 million. Using the fmal actuarial information, the net ARC for the General Fund is $2.5 million; an increase of $0. I million from the Long Range Financial Plan estimated net ARC of $2.4 million. In addition, none of the historically accrued liability has.been allocated to other funds. Staffhas calculated that other funds' unpaid share of already-accrued retiree medical liability totals $3 million. That rather large unpaid "bill" will be charged over a period of three years to mitigate the impact to the other funds. Therefore, for three years, the General Fund's ARC will effectively be reduced by an additional $1.0 million, leaving $1.5 million in required set-aside funds. Starting in fIscal year 2010-11, when the other funds have caught up in their payments, the General Fund net ARC would bump back up to $2.5 million. A new actuarial study, which is required every two years, will change those numbers once again. CMR: 195:07 Page 2 of 4 The following table summarizes the calculation described above: Total Citywide ARC $6,894,833 Less all other funds ARC <1,753,484> .. ~ ... .. ~ .. Equal GF ARC 5,141,349 Less current amount budgeted for retiree medical benefits <2,200,000> GF increase due to GAS.B 45 implementation .. 2,941,349 Less current year cost-plan allocations , <400,000> . Equals net ARC!i1crease for GF 2,541,349 Less prior years' catch up of cost plan <1,012,072> Equals net ARC increase for GF less prior year catch-up $1,529,277 Alternatives to establishing a trust with CalPERS have been discussed with the Finance Committee (Attachment A). These include: continuing the pay-as-you-go approach and booking the unfunded ARC on the financial statements; issuing debt to fund the liability; participating in a pre-funding plan by CaIPERS; establishing a trlfst with a financial institution other than CaIPERS; and others. Staff recommended proceeding with the CalPERS trust option for many reasons, including the following: • Administrative costs are expected to be significantly lower with CalPERS than with a private financial institution. • CalPERS has an outstanding record of investment performance and a seasoned team of investment professionals. Over the past 20 years, CalPERS has averaged a 1 ° percent rate of return on their investments. • Using internal staff or a provider other than CalPERS would require significantly more work, would require a trust or financial planner; legal services, establishment of an investment policy and risk program, and the creation of a review team possibly including members of bargaining units. • Pre-funding would require the City to issue debt at a taxable rate and it would potentially impact other debt issuance plans. • If the City decided not to establish a trust fund and left the $26.5 million in the Retiree Health Benefits Internal Service Fund, the expected interest rate would be 4.35 percent, as reported for the City's portfolio as of December 31, 2006. In addition, the $26.5 million would not be considered applicable assets -so the ARC would go back to $13.1 million Should Council direct staff to proceed with establishing the trust with CalPERS, staff would initially receive annual reporting on the earned rate of return, eventually moving to quarterly reporting. These results would be included in the quarterly financial report to Council. ENVIRONMENTAL REVIEW The action recommended is not a project for the purposes of the California Environmental QUality Act. CMR: 195:07 Page 3 of 4 PREPARED BY: TRUDY EIKENBERRY Accounting Manager, Administr tive Services DEPARTMENT HEAD APPROVAL: LALOPEREZ CITY MANAGER APPROVAL: V" •• ,-,,4 LJ /"") ~\ \ ' ). uo r."",.,.",:~/-:-:--:-____ _ . t" EMILY HARRISON Assistant City Manager ATTACHMENTS Attachment A: CMR:438:06, June 12, 2006, Informational Update on Financial Reporting Activity and Funding Options for Retiree Medical -Governmental Accounting Standards Board Statcments Numbers 43 & 45 CMR: 195:07 Page 4 of 4