HomeMy WebLinkAboutStaff Report 318-05Management and professional employees, International Association of Firefighters (IAFF) and
Fire Chiefs members hired after January 1, 2004, and Service Employee's International Union
(SEIU) members hired after January 1,2005, have the following benefits upon retirement:
• Employees with ten years of CalPERS service, at least five of which are at the
City of Palo Alto, receive 50% of the lifetime medical benefit.
• Employees receive an additional 5% of the benefit for each year of service after
the first ten, until 100% eligibility and 90% of their dependent coverage is
achieved.
Currently, the City uses a pay-as-you-go approach. It draws from a Retiree Health Benefits
Internal Service Fund, which is funded by the General Fund and Proprietary Funds (Utilities and
Internal Service Funds) for current year expenditures. In 2003-04, expenditures for retiree health
care for all funds totaled $2.8 million. As of June 30, 2004, the Retiree Health Benefits Internal
Service Fund had a balance of $18.1 million, the majority of which was funded from General
Fund.
DISCUSSION
GASB 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other
Than Pensions requires an actuarial valuation every two years to calculate the amount of annual
contributions (the expense recognized in the financial statements) that would be needed to
provide the promised benefits. The actuarial calculates the following:
• Actuarial Accrued Liability (AAL). The AAL is the present value of projected future
benefits for all current and future retirees.
• Actuarial Value of Assets (A V A). The AVA is the market-based value of plan assets
and is only taken into consideration if they are in an irrevocable trust.
• Unfunded (Actuarial) Accrued Liability (UAL). The UAL is the difference between
the AAL less the A V A, in other words how much more must the City recognize as an
expense to be able to fully fund its other postemployment benefit.
• Annual Required Contribution (ARC): The ARC is calculated by adding the normal
cost amount (value of benefits earned in the current fiscal year) to the amortized past
service amount (UAL). The maximum acceptable amortization period for an OPEB
plan's UAL is thirty years. To calculate the ARC, the actuary uses cost methods and
assumptions allowable under GASB 45, such as turnover, retirement age, mortality,
healthcare cost trend data and entry age.
If the City contributes the ARC to the plan every year, a liability will not be recorded. If the
ARC is not fully funded in a given year, a liability is reported for the unpaid portion of the ARC.
The City is in the first phase of implementation and the actuarially determined expenses· will be
included in the CAFR for 2007-08.
GASB 43, Financial Reporting for Postemployement Benefit Plans Other Than Pension Plans
addresses the financial statement requirements for OPEB held in a trust fund. The trust fund
could be on the financial report of the plan sponsor, employer, PERS;: or other third party.
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Currently, GASB Statement No. 43 does not apply to the City, since the City does not currently
have a trust fund for OPEB.
Preparation for Implementation:
The City has contracted for an actuarial study based on 2003-04 data. This actuarial study will
provide a baseline to establish the ARC. In addition to allowable GASB methods, the City has
required that the actuarial also report results using the following criteria: over and under age 65,
by fund, by department, by bargaining unit, current employees, retired employee and survivors,
and different amortization periods. The actuarial will also provide strategies for funding and
reducing costs. The resulting report will provide a useful analytical and management tool. The
report will be available by mid~year of 2005-06 with results reported to Council in early calendar
year 2006.
Once a base line is established, staff will look at options for reducing the liability, if needed,
before the implementation date. Such options might be to cut spending, change the benefit
package, and/or establish a trust.
Establishing a trust means that plan assets are dedicated to providing benefits to retirees in
accordance with the terms of the plan and are legally protected. If the City chooses to establish a
trust, the following must be considered:
• An irrevocable transfer of assets to a trust means the employer loses access to those
funds permanently or until the plan is terminated.
• Plan assets in a trust lower the ARC, thereby lowering the cash contribution from the
City.
• Using a trust allows different investment options such as investment in equities and
longer-term maturities, possibly lowering additionally the cash contribution from the
. City.
• GASB Statement No. 43 requires reporting on the trust fund in the 2006-07 CAFR.
• A separate audit may be required.
Additional information must also be included in the notes of the CAFR. Examples of the
information included in the notes are:
• Plan description
• Funding policy
• Information regarding the actuarial valuation
• Net OPEB obligation, if one exists
Staff will report in the early part of calendar year 2006 to discuss the results of the actuarial
study.
ENVIRONMENTAL REVIEW
The action recommended is not a project for the purposes of the California Environmental
Quality Act.
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