HomeMy WebLinkAboutStaff Report 2432City of Palo Alto (ID # 2432)
City Council Staff Report
Report Type: Action ItemsMeeting Date: 1/30/2012
January 30, 2012 Page 1 of 2
(ID # 2432)
Summary Title: Retiree Medical Discussion
Title: Retiree Medical Actuarial Report Discussion
From:City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that Council:
·Review, discuss and provide feedback on the attached actuarial valuation results (see
Attachment A).
Council Review and Recommendations
On November 28, 2011, Council approved staff’s recommendation to review and accept the
updated retiree medical actuarial study with valuation dates as of January 1 and June 30, 2011.
The actuarial study results are required by the Government Accounting Standards Board (GASB)
Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment
Benefits other Than Pensions.
Included in their approval, Council directed staff to schedule a Council meeting, prior to the
midyear budget, with the actuarial consultant who prepared the retiree medical actuarial study,
Bartel and Associates. The meeting is scheduled for January 30, 2012. Council requested the
meeting in order to have an in-depth discussion on several of the assumptions included in the
actuarial study and its conclusions. Among the assumptions up for discussion are the “closed
amortization period” (versus “open”) and the assumed rate of return on investments going
forward and the medical trend assumptions. A listing of all assumptions appears in Attachment
A.
Council asked for the investment rate of return in the California Employers’ Retiree Benefit
Trust (CERBT) for the City’s trust investment since its inception in March 2008. The rate of
return (money-weighted) for the City’s trust investment for the period March 17, 2008 through
June 30, 2011 is 3.62 percent. The rate of return (time-weighted) for the CERBT, overall, for the
period of June 1, 2007 (trust inception) through June 30, 2011 is 1.24 percent.
Attached to this memo are the related staff reports from the Finance Committee discussion on
October 18, 2011 and the Council discussion on November 28, 2011.
January 30, 2012 Page 2 of 2
(ID # 2432)
Attachments:
·Attachment A: Retiree Medical Report (ID 2345)(PDF)
·Attachment B: Excerpt from Finance Committee meeting of November 28, 2011 (PDF)
Prepared By:David Ramberg, Assistant Director
Department Head:Lalo Perez, Director
City Manager Approval: ____________________________________
James Keene, City Manager
City of Palo Alto (ID # 2345)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 11/28/2011
November 28, 2011 Page 1 of 2
(ID # 2345)
Summary Title: City Council to Approve Retiree Medical
Title: Finance Committee Recommendation that the Council Approve and
Accept the Updated Retiree Medical Actuarial Study
From:City Manager
Lead Department: Administrative Services
Recommendation
The Finance Committee recommends that the Council approve and accept the updated retiree
medical actuarial study (Attachment A).
Committee Review and Recommendations
On October 18, 2011, the Finance Committee voted unanimously to accept staff’s
recommendation to review and accept the updated retiree medical actuarial study with
valuation dates as of January 1 and June 30, 2011. The actuarial study results are required by
the Government Accounting Standards Board (GASB) Statement No. 45, Accounting and
Financial Reporting by Employers for Post Employment Benefits Other Than Pensions.
The updated study results in an increase of $3.8 million (39%) in the City’s retiree medical
liability between 2009 and 2011. The result is that the City’s cost for retiree medical goes from
$9.8 million to $13.6 million annually. The reasons for the cost increase are based on changes
to actuarial assumptions and demographic changes and other changes as discussed in detail in
Attachment A.
Staff will provide funding recommendations as part of the FY2012 mid-year budget process and
as part of the FY2013 proposed budget. In addition, staff will include the revised costs in the
long range financial forecast, which will be presented to the Finance Committee in early 2012.
Attachments:
·Attachment A: Retiree Medical Study (PDF)
·Attachment B: Finance Committee minutes 10/18/2011 (PDF)
·Attachment C: Staff Presentation (PDF)
·Attachment D: At places memo (PDF)
November 28, 2011 Page 2 of 2
(ID # 2345)
Prepared By:David Ramberg, Assistant Director
Department Head:Lalo Perez, Director
City Manager Approval: James Keene, City Manager
City of Palo Alto (ID # 2180)
Finance Committee Staff Report
Report Type:Meeting Date: 10/18/2011
October 18, 2011 Page 1 of 5
(ID # 2180)
Council Priority: City Finances
Summary Title: Retiree Medical Study
Title: Review and Acceptance of Updated Retiree Medical Actuarial Study -
Valuation Date January 1, 2011 and Valuation Date June 30, 2011
From:City Manager
Lead Department: Administrative Services
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 2009 study show a fairly dramatic increase in Citywide costs. See
Attachment B, slide 31 for a summary of the study results.
RECOMMENDATION
Staff recommends that the Council review and approve the attached actuarial valuation results
(see Attachment A).
BACKGROUND
Per GASB Statement No. 45, beginning in Fiscal Year 2008, like other governmental entities, 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 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, the annual
required contribution (ARC).
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 City transferred $33.8
million to the trust. As of January 1, 2011, the trust was valued at $40.2 million, and as of June
30, 2011, it was valued at $44.8 million. Of course, recent market volatility may have a
downward effect on future figures, not included in this study.
DISCUSSION
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October 18, 2011 Page 2 of 5
(ID # 2180)
Bartel and Associates completed an actuarial valuation for the City on October 11, 2011 with
two valuation dates: January 1, 2011 and June 30, 2011. The reason for the two valuation
dates goes back to a new regulation pertaining to members of the CERBT (trust). All the City’s
past valuations have used a January 1 valuation date. However, beginning FY 2012, members of
the CERBT are required by GASB 57 to switch to a common valuation date of June 30.
Therefore for this study only, the City opted to utilize both the January 1 and June 30 valuation
dates. The January 1, 2011 valuation determines the Actuarially Required Contribution (ARC)
for FY 2012; the June 30, 2011 valuation determines the ARC for FY 2013 and FY 2014.
January 1, 2011 Valuation Date
The actuarial study using a valuation date of January 1, 2011 valued the City's unfunded retiree
medical liability at $134.7 million, compared to the unfunded liability of $105.0 million on
January 1, 2009 –a 28% increase.
The Annual Required Contribution (ARC) associated with the January 1, 2011 valuation is
$13.6 million for Fiscal Year 2012. This is an increase of $3.8 million (39%) over the ARC of
$9.8 million associated with the January 1, 2009 valuation. The dramatic increase in the City’s
retiree medical liability between the 2009 and 2011 studies is attributable to several
differences in assumptions used by the respective actuarial firms (Milliman and Associates
performed the 2009 study, and Bartel and Associates performed the current study). Those
differences are as follows (Attachment A, page 7 also summarizes the assumption changes and
their impact on the City’s liability):
1.New CalPERS “Decrements.” The most recent CalPERS experience study –which gathers
demographic information throughout the state –noted increasing lifespans of retirees,
decreasing average retirement age, and other factors, all of which increase the City’s
projected unfunded liability by approximately $8 million.
2.Recent Spike in Palo Alto Retirements –as cost-sharing and wage freezes have been
implemented, many people have accelerated their retirement plans. There were more
than the projected retirements between 2009 and 2011. All of the retirements since the
last study added $2.7 million to the City’s unfunded liability.
3.Medical Trend Assumptions –The table below shows the difference in medical premium
growth rates assumed in the respective studies. Milliman assumed a slow but steady
increase in rates ranging from 6.5% in the early years and settling at 5.85% from 2018
on. On the other hand, Bartel assumes that the rate of increase will be more front-
loaded, starting at 9% and settling to 5% per year starting in 2021. Cumulative increases
assumed in the more recent report are higher than those assumed in 2009. (See
Attachment B, slide 10 for a comparison of specific medical trend assumptions in the
two studies, and Attachment C for PERS Medical Plan rate changes 2002-2012.) This
added $4.8 million to the City’s unfunded liability.
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October 18, 2011 Page 3 of 5
(ID # 2180)
4.“Actuarial Load”–This is a 2% premium applied to assumed costs based on the premise
that PERS Preferred Provider (PPO) Medical Plan premiums have been increasing at a
slower rate than have claim costs. PERS has been funding the difference from reserves,
but Bartel believes that eventually rate increases will need to bounce upward to more
evenly match the increased costs. This anticipated “bounce” adds $3.4 million to the
City’s unfunded liability.
5.Cost Sharing by Miscellaneous Group –This change in benefits was implemented after
the 2009 study and caused the City’s unfunded liability to decrease by $14.2 million.
Note that the impact of any public safety group concessions is not included in this study.
6.Migration of Retirees to More Expensive Medical Plans –While 13% of actives are
enrolled in PERS PPO plans, that percentage rises to 32% for retirees under 65, and to
54% of retirees over 65. This seems to be due to the increased portability of the PPO
plans for retirees who move out of the area. The last study may not have recognized
this trend, which adds $7.7 million to the City’s unfunded liability. (See Attachment B,
slide 7 for enrollment statistics for active and retired employees.)
7.Asset Smoothing –Bartel recommends smoothing gains and losses in the trust balance
over 5 years, to avoid volatility in the City’s ARC. For example, the year-end 2010 Trust
balance was $40.2 million, an increase of 26% over the year-end 2009 balance of $32.0
million. With asset smoothing, the actuarial value of the trust assets for year-end 2010
would be $35.3 million, since that 26% gain is spread over the next five years. By saving
some of the market gain for subsequent years when there may be losses, the City
assumed an additional $4.6 million in unfunded liability.
8.Closed Amortization Period –Rather than continually “re-up” the 30-year amortization
period, which would never actually completely pay off the liability, Bartel recommends
amortizing over the remaining 28 years of the 30-year period beginning 2009. The
impact of this change on the City’s unfunded liability is included in that of the
Demographic and Other Factors discussed below.
9.Demographic and Other Factors –These are ways in which the City's actual experience
differs from what is assumed in the CalPERS experience study. For example, to the
extent that City employees retire earlier or later than average, or go out on disability
more or less than the statewide average, this affects the liability. In our case these
factors add $12.4 million to our unfunded liability. (See Attachment B, slide 5 for
statistics on active and retired employees included in the study.)
The General Fund’s share of the citywide ARC totals approximately $9.5 million annually for
FY 2012, an increase of $2.7 million from the amount budgeted for FY 2012 based on the
January 1, 2009 valuation. That amount can be funded from the CERBT trust, if needed. Staff
will provide more precise figures for the General Fund portion by the October 18 Finance
Committee meeting. (See Attachment D: Results by Fund.)
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October 18, 2011 Page 4 of 5
(ID # 2180)
June 30, 2011 Valuation Date
The actuarial study using a valuation date of June 30, 2011 valued the City's unfunded liability
at $139.7 million, which is an increase of $5.0 million over the January 1 valuation date. The
ARC associated with this valuation is $14.4 million for Fiscal Year 2013, and projected at $14.8
million for 2014. (Again, see Attachment B, slide 31.) The $0.8 million jump in the ARC
between FY 2012 and FY 2013 is primarily due to the decrease in assumed discount rate from
7.75% to 7.25%.
The reasons for the respective discount rate assumptions are:
The January 1, 2011 valuation assumed a discount rate of 7.75% as mandated by CERBT.
Beginning Fiscal Year 2013, CERBT requires that each member agency employ a discount rate
no higher than 7.61%, as applicable to its selected asset allocation. The trust offers three
possible asset allocations, of which Option 1 –the City’s chosen option -has the highest
projected yield. CERBT’s expected return over a 20-year period for Option 1 Asset
Classifications is 7.61%, with a 50% confidence limit. Bartel recommends dropping the assumed
rate to 7.25% to achieve a 60% confidence limit.
The General Fund portion of the FY 2013 and FY 2014 ARCs is $10.0 million and $10.3 million,
respectively. Again, staff will provide more precise figures for the General Fund portion of the
FY 2013 and 2014 ARCs by the October 18 Council meeting.
RESOURCE IMPACT
The FY 2012 budget allocated $9.8 million towards the ARC for all funds, but this amount was
an estimate before the actuarial study was completed. The ARC contained in the actuarial study
was $13.6 million, representing an increase of $3.8 million across all City funds. The General
Fund portion of the increase is $2.3 million for FY 2012, which may be drawn from the trust, if
needed. Future years’ ARC funding will need to be incorporated into those years’ budgets. Staff
will provide funding recommendations during the Mid-Year or FY 2013 proposed budget
process.
ENVIRONMENTAL REVIEW
The action recommended is not a project for the purposes of the California Environmental
Quality Act.
Attachments:
·-a:Attachment A: Executive Summary (PDF)
·-b:Attachment B: Revised Preliminary Results (PDF)
·-c:Attachment C: 2002-2012 PEMHCA Premiums (PDF)
·-d:Attachment D: Results by Fund (PDF)
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October 18, 2011 Page 5 of 5
(ID # 2180)
Prepared By:Nancy Nagel, Senior Financial Analyst
Department Head:Lalo Perez, Director
City Manager Approval: ____________________________________
James Keene, City Manager
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City of Palo Alto
Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations
Executive Summary
October 11, 2011
Bartel Associates, LLC
411 Borel Avenue, Suite 101
San Mateo, California 94402
Phone: 650-377-1600
Email: jbartel@bartel-associates.com
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O:\Clients\City of Palo Alto\OPEB\2011 val\Reports\BA PaloAltoCi 11-10-11 OPEB 6-30-11 Valuation Executive Summary.doc
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations
Executive Summary
October 11, 2011
Governmental Accounting Standards Board Statement No. 45 (GASB 45), “Accounting and Financial
Reporting by Employers for Postemployment Benefits Other Than Pensions” provides standards for the
financial reporting of the City’s Retiree Healthcare Plan. The City implemented GASB 45 for the
2007/08 fiscal year. The January 1, 2011 actuarial valuation provides the financial reporting information
for the City’s 2011/12 fiscal year and the June 30, 2011 actuarial valuation provides the financial
reporting information for the City’s 2012/13 and 2013/14 fiscal years.
VALUATION RESULTS
Participants: The same participant data was used to prepare both the January 1, 2011 and June 30, 2011
actuarial valuations. A summary of this data as of June 30, 2011 is:
Participants 6/30/11
Actives
Number 923
Average Age 44.7
Average City Service 10.8
Average PERS Service 13.7
Average Pay $86,007
Total Payroll (000’s) $79,384
Retirees
Number 860
Average Age 67.0
Average Retirement Age 55.5
Plan Assets: Assets must be set aside in a trust that cannot legally be used for any purpose other than to
pay retiree healthcare benefits in order to be considered plan assets for GASB 45 purposes. The City's
retiree healthcare plan is currently funded with the CalPERS Trust (CERBT).
The City began prefunding the plan’s obligations during 2007/08. The City’s intention is to fund the full
ARC each year. Investment gains and losses relative to the assumed net rate of return are spread over a 5-
year period by using an Actuarial Value of Assets rather than the Market Value of Assets to determine the
plan’s costs and funded status. This helps smooth any volatility in the Market Value of Assets and provides
an element of stability for the plan expense and City contributions. The Actuarial Value of Assets is kept
within a corridor of 80% to 120% of the Market Value to make sure it does not diverge significantly from
the Market Value of Assets.
The Market Value of Assets was $40,213,000 and the Actuarial Value of assets was $35,294,000 on January
1, 2011. The Market Value of Assets was $44,774,000 and the Actuarial Value of assets was $40,222,000
on June 30, 2011. The following table shows how the Market Value of Assets changed through 6/30/11 and
is projected to change during 2011/12.
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 2
October 11, 2011
Plan Assets
(Amounts in 000’s) 2009 2010
1/1/11-
6/30/11
Projected
2011/12
Market Value at Beginning of Year $ 24,616 $ 32,042 $ 40,213 $ 44,774
Contributions 700 3,532 2,448 5,165
Benefit Payments - - - -
Administrative Expenses (23) (34) (41) -
Investment Earnings 6,749 4,674 2,155 3,246
Market Value at End of Year 32,042 40,213 44,774 53,185
Actuarial Value at End of Year 35,294 40,222 49,279
Annualized Investment Return
Market Value 26.9% 13.7% 5.3% 7.3%
Actuarial Value 11.6% 11.9% 7.0% 9.7%
Funded Status: A plan’s funded status is measured by comparing the Actuarial Accrued Liability (see
definitions and assumptions section below) with Plan Assets. A plan is considered funded when Plan
Assets equal the Actuarial Accrued Liability. As the City’s retiree healthcare plan had not been funded
prior to GASB 45 implementation in 2007/08, the City established a contribution policy that would fund
benefits as earned for each future year and would fund the Unfunded Actuarial Accrued Liability over a
30-year period.
GASB 45 requires the discount rate used to determine the present value of future benefit payments be based
on the source of funds used to pay the benefits. This is the expected long-term net earnings rate on plan
assets for funded plans and the expected long-term net earnings rate on an agency’s investment fund for
unfunded plans. A 7.75% and 7.25% discount rate was used for the City’s January 1, 2011 and
June 30, 2011 valuations, respectively, representing the long-term expected net return for the CERBT. See
page 5 in the Definitions and Assumptions Section for a discussion of the discount rates used in the
valuations.
The plan was approximately 21% funded as of January 1, 2011, and 22% funded as of June 30, 2011:
1/1/11 Valuation 6/30/11 Valuation
Funded Status
(Amounts in 000’s)
7.75%
Discount Rate
7.25%
Discount Rate
Actuarial Accrued Liability (AAL)
Actives $ 51,179 $ 57,479
Retirees 118,800 122,444
Total 169,979 179,923
Actuarial Value of Plan Assets (AVA) 35,294 40,222
Unfunded AAL (UAAL) 134,685 139,701
Funded Percentage (AVA/AAL) 21% 22%
Annual Required Contribution (ARC): The Annual Required Contribution is the Normal Cost plus an
amortization payment toward the Unfunded Actuarial Accrued Liability. The Normal Cost is the value of
benefits allocated to the current fiscal year for service worked during that year. The Unfunded Liability is
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 3
October 11, 2011
amortized as a level percent of payroll over a period of 28 years as of June 30, 2011 (27 years remaining
as of June 30, 2012).
The City’s Annual Required Contributions for 2011/12, 2012/13 and 2013/14 are as follows:
7.75% 7.25% Annual Required Contribution
(Amounts in 000’s) 2011/12 2012/13 2013/14
Normal Cost $ 4,937 $ 5,609 $ 5,791
Unfunded Liability Amortization 8,666 8,769 9,054
Annual Required Contribution 13,603 14,378 14,845
Estimated Payroll 80,664 83,285 85,992
ARC as a % of Payroll 16.9% 17.3% 17.3%
Amortization Period 28 Yrs 27 Yrs 26 Yrs
Net OPEB Obligation (NOO): The City’s Net OPEB Obligation is the historical difference since GASB
45 implementation between actual contributions made and Annual Required Contributions. Benefits paid
for current retirees directly from City assets are considered contributions. The Net OPEB Obligation
would be zero for an agency that always contributed the Annual Required Contributions. An agency that
contributed more than the ARC would have a Net OPEB Asset (NOA).
Annual OPEB Cost (AOC): The Annual OPEB Cost is the plan’s fiscal year expense. It is equal to the
Annual Required Contribution plus expected interest on the Net OPEB Obligation less an amortization of
the Net OPEB Obligation. It is different from the Annual Required Contribution because the Annual
Required Contribution may include a provision for amounts not yet funded that have been expensed in
prior Annual OPEB Costs. The Annual OPEB Cost equals the Annual Required Contribution when the
Net OPEB Obligation at the beginning of the year is zero.
7.75% 7.25% Annual OPEB Cost
(Amounts in 000’s) 2011/12 2012/13 2013/14
Annual Required Contribution $ 13,603 $ 14,378 $ 14,845
Interest on Net OPEB Obligation (1,781) (1,687) (1,705)
Amortization of Net OPEB Obligation 1,483 1,451 1,498
Annual OPEB Cost 13,305 14,141 14,638
Amortization Period 28 Yrs 27 Yrs 26 Yrs
The City’s expected Net OPEB Obligations for 2011/12, 2012/13 and 2013/14 are:
7.75% 7.25% Estimated Net OPEB Obligation
(Amounts in 000’s) 2011/12 2012/13 2013/14
Net OPEB Obligation (Asset) at Begin. of Yr $ (22,977) $ (23,275) $ (23,511)
Annual OPEB Cost 13,305 14,141 14,638
Estimated Contributions 13,603 14,378 14,845
Net OPEB Obligation (Asset) at End of Yr (23,275) (23,511) (23,718)
The City’s actual June 30, 2012, June 20, 2013 and June 30, 2014 Net OPEB Obligations will differ from
those shown above because actual contributions may differ from those estimated.
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 4
October 11, 2011
Projection: The following table shows the projected Net OPEB Obligation, Annual Required
Contribution, Annual OPEB Contribution, and City Contribution (including benefit payments paid
directly by the City) over the next 10 years.
Full ARC Pre-Funding Projection
7.25% Discount Rate1
(Amounts in 000’s)
Contribution Fiscal
Year
Ending
Begin
Year
NOO ARC
Annual
OPEB
Cost
(AOC)
Benefit
Pmts
Pre-
Funding
Total
Contrib Payroll
Contrib
% of
Payroll
2012 $(22,977) $13,603 $13,305 $8,438 $5,165 $13,603 $80,664 16.9%
2013 (23,275) 14,378 14,141 8,988 5,390 14,378 83,285 17.3%
2014 (23,511) 14,845 14,638 9,986 4,859 14,845 85,992 17.3%
2015 (23,718) 15,327 15,155 10,929 4,398 15,327 88,787 17.3%
2016 (23,891) 15,825 15,690 11,945 3,880 15,825 91,672 17.3%
2017 (24,026) 16,340 16,247 12,940 3,400 16,340 94,652 17.3%
2018 (24,119) 16,871 16,825 13,832 3,039 16,871 97,728 17.3%
2019 (24,165) 17,419 17,425 14,692 2,727 17,419 100,904 17.3%
2020 (24,159) 17,985 18,049 15,574 2,412 17,985 104,183 17.3%
2021 (24,095) 18,570 18,697 16,460 2,110 18,570 107,569 17.3%
DEFINITIONS AND ASSUMPTIONS
Present Value of Benefits: When an actuary prepares an actuarial valuation, he or she first gathers
participant data (active employees, retirees, and beneficiaries) as of the valuation date. Using this data
and appropriate actuarial assumptions, the actuary projects the future benefit payments. The actuarial
assumptions estimate when employees will retire, terminate, die or become disabled, as well as salary
increases, inflation, and net investment earnings. The expected future benefit payments are discounted
back to the valuation date using the expected net investment return or discount rate. This discounted
value is the Present Value of Benefits. It represents the funds the plan needs as of the valuation date to
pay all expected future benefits if all assumptions are realized and no additional contributions are made
by the City. The City’s January 1, 2011 and June 30, 2011 Present Value of Benefits were $204.3 million
and $219.2 million, respectively.
Actuarial Accrued Liability: The Actuarial Accrued Liability is the portion of the Present Value of
Benefits that has been allocated to prior service through the valuation date. The City’s January 1, 2011
and June 30, 2011 Actuarial Accrued Liabilities were $170.0 million and $179.9 million, respectively
Normal Cost: The Normal Cost is the portion of the Present Value of Benefits allocated to the current
fiscal year. The plan’s Normal Costs for the 2011/12 and 2012/13 fiscal years are $4.9 million and $5.6
million, respectively.
1 Fiscal year ending 2012 based on prior valuation with 7.75% discount rate.
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January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 5
October 11, 2011
Actuarial Cost Method: The actuarial cost method determines how benefits are allocated to each year of
service. It has no effect on the Present Value of Benefits but has significant effect on the Actuarial
Accrued Liability and Normal Cost. The City’s January 1, 2011 and June 30, 2011 retiree healthcare
valuations were prepared using the Entry Age Normal cost method. Under the Entry Age Normal cost
method, the Plan’s Normal Cost is developed as a level percent of payroll over the participants’ working
lifetimes.
Actuarial Assumptions: Under GASB 45, an actuary must follow current actuarial standards of practice.
These standards generally call for the use of explicit assumptions which means that each individual
assumption must represent the actuary's best estimate for that assumption.
For the January 1, 2011 valuation, a discount rate of 7.75% was used, as required by CalPERS for plans
funded in the CERBT. In March 2011, the CalPERS’ Board approved the following changes to the CERBT:
created 3 different asset allocation strategies, each with different expected returns and volatility,
revised the discount rate assumption from a mandated rate (7.75%) to provide agencies and their
actuaries with the flexibility to select the discount rate (up to a maximum rate based on the selected
asset allocation).
For each investment option, CalPERS’ maximum discount rate is the median return2, with lower rates also
being acceptable. The following table shows CERBT target asset allocation strategies and CalPERS
maximum discount rates:
Option 1 Option 2 Option 3
Asset Allocation
Global Equity 66.0% 50.1% 31.6%
Global Real Estate 8.0% 8.0% 8.0%
Commodities 3.0% 3.0% 3.0%
Inflation Linked Bonds 5.0% 15.0% 15.0%
U.S. Nominal Bonds 18.0% 23.9% 42.4%
Total 100.0% 100.0% 100.0%
Maximum Discount Rate 7.61% 7.06% 6.39%
Bartel Associates recommends a lower discount rate than the maximum to build in some level of
conservatism, so the assumption is expected to be realized (or exceeded) approximately 55% to 60% of
the time. This results in the following discount rates:
Option 1 Option 2 Option 3
≈60% Realization 7.00% 6.50% 6.00%
≈55% Realization 7.25% 6.75% 6.25%
For the June 30, 2011 actuarial valuation, the City chose the Option 1 asset allocation strategy, and agreed
that it would be prudent to build in a margin for conservatism when choosing a discount rate. The discount
rate for the June 30, 2011 valuation is 7.25%, which represents an estimated 55% confidence level that
actual future returns will be at least that high. The change in discount rate from 7.75% to 7.25% between
2 The median return represents the return at which ½ of the returns are expected to be higher and ½ lower.
2.a
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 6
October 11, 2011
these two valuations results in a $10.6 million actuarial loss.
The January 1, 2009 Milliman valuation used actual premiums for 2009, and then used a healthcare inflation
rate of 6.5% from 2010-2014, 6.0% from 2015-2017, and 5.85% for each year thereafter. In the January 1,
2011 valuation, actual premiums were used for 2011 and 2012. The healthcare inflation rate for non-
Medicare eligible participants starts at 9.0% (the increase in 2013 premiums over 2012 premiums) and
grades down to 5% after 8 years. The healthcare inflation rate for Medicare eligible participants starts 0.4%
higher and also grades down to 5% after 8 years. This change in medical trend leads to a $4.8 million
increase in the Actuarial Accrued Liability. This is partially offset by a $3.9 million gain, because of the
difference between actual 2011 and 2012 premiums and projected 2011 and 2012 premiums from the
January 1, 2009 valuation.
A 2% load was added in the January 1, 2011 valuation, to take into account that recent PEMHCA PPO
premium increases are believed to be below per capita claims increases. This load results in a $3.4 million
increase in the Actuarial Accrued Liability.
Retirement, disability, termination, and mortality assumptions were changed from the CalPERS 97-02
Experience Study in the January 1, 2009 valuation to the CalPERS 97-07 Experience Study in the January 1,
2011 and June 30, 2011 valuations. This change results in a $7.9 million increase in the Actuarial Accrued
Liability.
Another key January 1, 2011 valuation assumption change is the assumed medical plan at retirement. We
believe the 2009 valuation assumed each active participant remained in the same plan at retirement and
Medicare eligibility (at age 65). The January 1, 2011 valuation assumes percentages, as shown below, based
upon actual participation of current retirees, which differs substantially from the participation of current
actives. This change increased the Actuarial Accrued Liability by approximately $7.7 million.
Medical Plan at Retirement
Miscellaneous Safety
<65 65+ <65 65+
Blue Shield 35% 20% 35% 20%
Kaiser 25% 25% 25% 25%
PERS Choice 30% 20% 20% 20%
PERSCare 10% 35% 10% 35%
PORAC 0% 0% 10% 0%
A final key assumption change between the January 1, 2009 valuation and the January 1, 2011 valuation is
the Medicare eligibility rate. The 2011 valuation assumes 80% of Miscellaneous actives and 90% of Safety
actives hired prior to 4/1/86 will be eligible for Medicare, and all actives hired after 4/1/86 will be eligible
for Medicare. Similarly, 90% of current retirees under the age of 65 are assumed to be eligible for Medicare.
These assumptions produce an approximate increase in the Actuarial Accrued Liability of $2.6 million.
The City’s introduction of sharing of future premium cost increases for Management/Confidential, SEIU
and UMPAPA for those retiring after April 1, 2011 has led to a $14.1 million decrease in the Actuarial
Accrued Liability.
The following table shows changes, actual and expected, from the January 1, 2009 valuation to the
January 1, 2011 valuation and, subsequently to the June 30, 2011 valuation:
2.a
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 7
October 11, 2011
Changes From January 1, 2009 Valuation to January 1, 2011 Valuation
AAL (AVA) UAAL
Actual 1/1/09 $129,661 $(24,616) $105,045
Expected 6/30/11 150,971 (42,322) 108,649
Assumption Changes
Medical Trend 4,840 4,840
New CalPERS Decrements 7,916 7,916
Actuarial Load 3,421 3,421
Medical Plan at Retirement 7,740 7,740
Medicare Eligibility 2,625 2,625
Asset Smoothing 4,552 4,552
Contribution Loss (2,452) (2,452)
Plan Change – Cost Sharing (14,194) (14,194)
Experience (Gains)/Losses
Caps/Premiums < Expected (3,917) (3,917)
New Retirees 2,700 2,700
Demographic & Other 12,383 - 12,383
Total (Gain)/Loss 23,514 2,100 25,614
Projected 6/30/11 174,485 (40,222) 134,263
Changes From January 1, 2011 Valuation to June 30, 2011 Valuation
AAL (AVA) UAAL
Actual 1/1/11 $169,979 $(35,294) $134,685
Projected 6/30/11 174,485 (40,222) 134,263
Expected 6/30/12 182,840 (49,279) 133,561
Assumption Changes
Discount Rate 10,613 10,613
Experience (Gains)/Losses
Demographic & Other (3,510) (3,510)
Total (Gain)/Loss 7,103 - 7,103
Projected 6/30/12 189,943 (49,279) 140,663
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 8
October 11, 2011
RETIREE HEALTHCARE BENEFITS
Eligibility Retire directly from the City under CalPERS (age 50 and 5 years of
CalPERS service or disability)
Retiree Medical
(Hired<1/1/043) Retired < 1/1/074
Full employee premium and percentage of dependent premium (90% in
2011, 95% in 2012, 100% in 2013+)
Retired > 1/1/074
Same as above but premium limited to 2nd most expensive Basic
medical plan in the Bay Area Region
For non-Safety – Mgmt/Conf, SEIU and UMPAPA
Retired > 4/1/115, all premium increases starting 1/1/11 shared evenly
between City and employee, up to 10%
Retiree Medical
(Hired>1/1/046) Vesting schedule (based on all CalPERS Service)7:
Years of Service %
< 10 0%
10 50%
↓ ↓
> 20 100%
Vesting applies to 100/90 formula amounts:
2011 2012
Single $ 542 $ 566
2-Party 1,030 1,074
Family 1,326 1,382
Police and Fire with 20 years City service – do not need to retire directly
from City
For Mgmt/Conf, SEIU and UMPAPA Retired > 4/1/118, all premium
increases starting in 1/1/11 shared evenly between City and employee, up
to 10%
Dental, Vision &
Life
None
3 1/1/05 for SEIU and 1/1/06 for PAPOA
4 1/1/08 for PAPOA 5 2/1/10 for SEIU 6 1/1/05 for SEIU and 1/1/06 for PAPOA
7 Minimum 5 years City Service. 100% vested for disability retirement
8 2/1/10 for SEIU
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City of Palo Alto Retiree Healthcare Plan
January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Page 9
October 11, 2011
Surviving Spouse
Benefit
100% of retiree benefit continues to surviving spouse if retiree elects
CalPERS survivor allowance
Benefit Changes
from Prior
Valuation
New Benefit Provision: cost sharing of future premium increases for
Mgmt/Conf, SEIU and UMPAPA retiring after 4/1/2011
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CITY OF PALO ALTO
RETIREE HEALTHCARE PLAN
January 1, 2011 and June 30, 2011
GASB 45 Actuarial Valuations
Revised Preliminary Results
Presented by John E. Bartel, President
Prepared by Deanna Van Valer, Assistant Vice President & Actuary
Adam Zimmerer, Actuarial Analyst
Bartel Associates, LLC
October 11, 2011
Agenda
O:\Clients\City of Palo Alto\OPEB\2011 val\Reports\BA PaloAltoCi 11-10-11 OPEB 6-30-11 Revised Preliminary Val Results.doc
Topic Page
Benefit Summary 1
Participant Statistics 5
Actuarial Assumptions Highlights 9
Actuarial Methods 15
Assets 17
Results – January 1, 2011 Valuation 19
Results – June 30, 2011 Valuation 29
CERBT Investment Options 41
Bartel Associates GASB 45 Database 43
Other Issues 46
Exhibits 48
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October 11, 2011 1
BENEFIT SUMMARY
Eligibility Retire directly from the City under CalPERS (age 50 and 5 years of
CalPERS service or disability)
Medical
Provider
CalPERS health plans (PEMHCA)
Non-Safety PEMHCA resolution provides only for PEMHCA
minimum (additional benefits paid by City)
Retiree Medical
(Hired<1/1/041)
Retired < 1/1/072
Full employee premium and percentage of dependent premium
(90% in 2011, 95% in 2012, 100% in 2013+)
Retired > 1/1/072
Same as above but premium limited to 2nd most expensive Basic
medical plan in the Bay Area Region
For non-Safety – Mgmt/Conf, SEIU and UMPAPA
Retired > 4/1/113, all premium increases starting 1/1/11 shared
evenly between City and employee, up to 10%
1 1/1/05 for SEIU and 1/1/06 for PAPOA 2 1/1/08 for PAPOA 3 2/1/10 for SEIU
October 11, 2011 2
BENEFIT SUMMARY
Retiree Medical
(Hired>1/1/044)
Vesting schedule (based on all CalPERS Service)5:
Years of Service %
< 10 0%
10 50%
↓ ↓
> 20 100%
Vesting applies to 100/90 formula amounts:
2011 2012
Single $ 542 $ 566
2-Party 1,030 1,074
Family 1,326 1,382
Police and Fire with 20 years City service – do not need to retire
directly from City
For Mgmt/Conf, SEIU and UMPAPA Retired > 4/1/116, all
premium increases starting in 1/1/11 shared evenly between City
and employee, up to 10%
4 1/1/05 for SEIU and 1/1/06 for PAPOA 5 Minimum 5 years City Service. 100% vested for disability retirement 6 2/1/10 for SEIU
2.b
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October 11, 2011 3
BENEFIT SUMMARY
Dental, Vision
& Life
None
Surviving
Spouse Benefit
100% of retiree benefit continues to surviving spouse if retiree
elects CalPERS survivor allowance
Benefit
Changes from
Prior Valuation
New Benefit Provision: cost sharing of future premium increases
for Mgmt/Conf, SEIU and UMPAPA retiring after 4/1/2011
Pay-As-You-
Go ($000s)
FY 2011/12 (Est) $8,142
FY 2010/11 $6,216
FY 2009/10 $5,519
FY 2008/09 $5,204
FY 2007/08 $4,646
October 11, 2011 4
BENEFIT SUMMARY
Implied
Subsidy
Non-Medicare eligible retirees pay active rates instead of actual cost
Active employee premiums subsidize retiree cost
Single Retiree Medical Cost
0
200
400
600
800
1,000
30 35 40 45 50 55 60 65
Age
Mo
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C
o
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PremiumMale CostFemale Cost
GASB 45 includes active “implied subsidy” with retiree cost
Community rated plans not required to value implied subsidy
PEMHCA is a community rated plan for most employers
Valuation does not include an implied subsidy
2.b
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October 11, 2011 5
PARTICIPANT STATISTICS
Participant Statistics
June 30, 2011
7 1 retiree with missing birth date assumed to retire at average retirement age 8 Excludes 3 retirees with missing retirement date
Miscellaneous Police Fire Total
Actives
Count 737 82 104 923
Average Age 45.7 38.2 43.4 44.7
Average City Service 10.4 10.8 14.0 10.8
Average PERS Service 13.8 11.4 15.0 13.7
Average Salary $78,762 $117,924 $112,185 $86,007
Total Salary (000’s) $58,047 $9,670 $11,667 $79,384
Retirees:
Count 659 87 114 860
Average Age7 67.5 63.0 67.2 67.0
Average Retirement Age8 57.2 47.9 52.1 55.5
October 11, 2011 6
PARTICIPANT STATISTICS
Participant Statistics9
January 1, 2009
9 From 1/1/09 Milliman report
Miscellaneous Police Fire Total
Actives
Count n/a n/a n/a 955
Average Age n/a n/a n/a 45.3
Average City Service n/a n/a n/a 11.2
Average Salary n/a n/a n/a $103,602
Total Salary (000’s) n/a n/a n/a $98,940
Retirees:
Count n/a n/a n/a 710
Average Age n/a n/a n/a 67.2
Average Retirement Age n/a n/a n/a n/a
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October 11, 2011 7
PARTICIPANT STATISTICS
Medical Plan Participation
Non-Waived Participants
Retirees
Medical Plan Actives < 65 ≥ 65 Total
Blue Shield 44% 34% 21% 27%
Blue Shield NetValue 0% 0% 0% 0%
Kaiser 34% 25% 24% 25%
PERS Choice 13% 21% 18% 19%
PERSCare 0% 11% 36% 25%
PORAC 9% 10% 1% 5%
Total 100% 100% 100% 100%
October 11, 2011 8
PARTICIPANT STATISTICS
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ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Valuation Date January 1, 2009
Fiscal Years 2009/10 &
2010/11 ARCs (end of year)
January 1, 2011
Fiscal Year 2011/12 ARC (end
of year)
June 30, 2011
Fiscal Years 2012/13 &
2013/14 ARCs (end of year)
Funding Policy Full Pre-funding through
CalPERS trust (CERBT)
Same
Discount Rate 7.75% 1/1/11 – 7.75%
6/30/11 – 7.25%
Payroll
Increases
Aggregate Increases – 3.25%
Merit Increases – CalPERS
1997-2002 Experience Study
Aggregate Increases – 3.25%
Merit Increases – CalPERS
1997-2007 Experience Study
10 From 1/1/09 Milliman report
October 11, 2011 10
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Medical Trend
Year
Increase from
Prior Year
2009 Premiums
2010 6.50%
2011 6.50%
2012 6.50%
2013 6.50%
2014 6.50%
2015 6.00%
2016 6.00%
2017 6.00%
2018+ 5.85%
Increase from Prior Year
Year Non-Medicare Medicare
2009 n/a
2010 n/a
2011 Premiums
2012 Premiums
2013 9.0% 9.4%
2014 8.5% 8.9%
2015 8.0% 8.3%
2016 7.5% 7.8%
↓ ↓
2021+ 5.0% 5.0%
2.b
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October 11, 2011 11
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Actuarial Load n/a 2.0% load
PEMHCA PPO premium
increases below per capita
claims increases
Retirement,
Mortality,
Termination,
Disability
CalPERS 1997-2002
Experience Study
Misc Fire Police
Benefit 2.7%@55 3%@50 3%@50
CalPERS 1997-2007
Experience Study
Misc Fire Police
Benefit 2.7%@55 3%@50 3%@50
2%@6011
ERA 57.5 54.5 54.0
Participation at
Retirement
n/a DOH < 1/1/04: 100%
DOH > 1/1/04: 95%
Employees with cost sharing:
reduce above %’s by 5%
11 Applies to employees hired after July 17, 2010
October 11, 2011 12
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Medical Plan at
Retirement
n/a Miscellaneous:
<65 65+
Blue Shield 35% 20%
Kaiser 25% 25%
PERS Choice 30% 20%
PERSCare 10% 35%
Safety:
<65 65+
Blue Shield 35% 20%
Kaiser 25% 25%
PERS Choice 20% 20%
PERSCare 10% 35%
PORAC 10% 0%
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October 11, 2011 13
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Medicare
Eligible Rate
n/a Actives hired < 4/1/86:
Miscellaneous – 80%
Safety – 90%
Actives hired > 4/1/86: 100%
Retirees < 65: 90%
Everyone eligible for
Medicare will elect Part B
coverage
Missing PERS
Group
n/a Retirees missing PERS group
assumed to be Misc unless
fund designates Police or Fire
October 11, 2011 14
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
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ACTUARIAL METHODS
Method January 1, 2009 Valuation12 January 1, 2011 &
June 30, 2011 Valuations
Cost Method Entry Age Normal Level % of
Pay
Same
Unfunded
Liability
Amortization
30 years open period 28 years (closed period) Fresh
Start for total 6/30/2011 UAAL
(27 years remaining on 6/30/12)
15 years (closed period) for
future gains and losses
Maximum 30-year combined
period
12 From 1/1/09 report by Milliman.
October 11, 2011 16
ACTUARIAL METHODS
Method January 1, 2009 Valuation12 January 1, 2011 &
June 30, 2011 Valuations
Actuarial
Value of
Assets
Market Value of Assets Investment gains and losses
spread over a 5-year rolling
period
Not less than 80% nor more than
120% of market value
Same as CalPERS, but shorter
period
Implied
Subsidy
Employer cost for allowing retirees to participate at active rates
Community rated plans are not required to value an implied subsidy
if active rates are independent of number of retirees
PEMHCA is a community rated plan for most employers
Valuation does not include an implied subsidy
2.b
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ASSETS
Market Value of Plan Assets
(amounts in 000’s)
2009 2010
1/1/11-
6/30/11
Projected
2011/12
MVA (Beg. of Year) $ 24,616 $ 32,042 $ 40,213 $ 44,774
Contributions 700 3,532 2,448 5,165
Benefit Payments13 - - - -
Admin. Expenses (23) (34) (41) -
Investment Return 6,749 4,674 2,155 3,24614
MVA (End of Year) 32,042 40,213 44,774 53,185
Approx. Annual Return 26.9% 13.7% 5.3% 7.3%
13 Benefit Payments made outside of trust by City. Refer to Slide 3 for fiscal year amounts. 14 Investment return based on 7.25% net of expenses
October 11, 2011 18
ASSETS
Actuarial Value of Plan Assets
(amounts in 000’s)
2009 2010
1/1/11-
6/30/11
Projected
2011/12
AVA (Beg. of Year) $ 24,616 $ 28,209 $ 35,294 $ 40,222
Contributions 700 3,532 2,448 5,165
Benefit Payments15 - - - -
Exp. Inv. Return 1,935 2,323 1,342 2,916
Exp. AVA (End of Year) 27,251 34,064 39,084 48,303
Preliminary AVA 28,209 35,294 40,222 49,279
Min AVA (80% MVA) 25,633 32,170 35,819 42,548
Max AVA (120% MVA) 38,450 48,255 53,729 63,822
AVA (End of Year) 28,209 35,294 40,222 49,279
Approx. Annual Return 11.6% 11.9% 7.0% 9.7%
15 Benefit Payments made outside of trust by City. Refer to Slide 3 for fiscal year amounts.
2.b
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RESULTS – JANUARY 1, 2011 VALUATION
Funded Status – 7.75% Discount Rate
(Amounts in 000’s)
1/1/0916 1/1/11
Projected
6/30/11
Present Value of Benefits
Actives $ 78,831 $ 85,476
Retirees 78,384 118,800
Total 157,215 204,276
Actuarial Accrued Liability
Actives 51,277 51,179
Retirees 78,384 118,800
Total 129,661 169,979 $ 174,485
Actuarial Value of Assets (AVA) 24,616 35,294 40,222
Unfunded AAL 105,045 134,685 134,263
Funded Ratio 19% 21%
Normal Cost 3,478 4,937
Pay-As-You-Go Cost 6,075 8,438
16 From 1/1/09 report by Milliman.
October 11, 2011 20
RESULTS – JANUARY 1, 2011 VALUATION
Actuarial Gain/Loss – 7.75% Discount Rate
(000’s Omitted)
AAL (AVA) UAAL
Actual 1/1/09 $129,661 $(24,616) $105,045
Expected 6/30/11 150,971 (42,322) 108,649
Assumption Changes
Medical Trend 4,840 4,840
New CalPERS Decrements 7,916 7,916
Actuarial Load 3,421 3,421
Medical Plan at Retirement 7,740 7,740
Medicare Eligibility 2,625 2,625
Asset Smoothing 4,552 4,552
Contribution Loss (2,452) (2,452)
Plan Change – Cost Sharing (14,194) (14,194)
Experience (Gains)/Losses
Caps/Premiums < Expected (3,917) (3,917)
New Retirees 2,700 2,700
Demographic & Other 12,383 - 12,383
Total (Gain)/Loss 23,514 2,100 25,614
Projected 6/30/11 174,485 (40,222) 134,263
2.b
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RESULTS – JANUARY 1, 2011 VALUATION
Annual Required Contribution (ARC) – 7.75% Discount Rate
(Amounts in 000’s)
1/1/09 Valuation 1/1/11 Valuation
Annual Required Contribution 2009/10 2010/11 2011/12
ARC - $
Normal Cost $ 3,478 $ 3,591 $ 4,937
UAAL Amortization 6,308 6,757 8,666
Total 9,786 10,348 13,603
Projected Payroll 98,940 102,156 80,664
ARC - % Pay
Normal Cost 3.5% 3.5% 6.1%
UAAL Amortization 6.4% 6.6% 10.7%
Total 9.9% 10.1% 16.9%
October 11, 2011 22
RESULTS – JANUARY 1, 2011 VALUATION
Estimated Net OPEB Obligation (NOO) Illustration – 7.75% Discount Rate
(Amounts in 000’s)
Estimated Net OPEB Obligation
(Asset)
CAFR
2009/10
Estimate
2010/11
Estimate
2011/12
NOO at Beginning of Year $(26,352) $(23,242) $(22,977)
Annual OPEB Cost
Annual Required Contribution 9,786 10,349 13,603
Interest on NOO (2,042) (1,801) (1,781)
NOO Adjustment 2,585 2,213 1,483
Annual OPEB Cost 10,329 10,760 13,306
Contributions
Benefit Payments Outside Trust17 5,519 6,216 8,438
Trust Funding 1,70018 4,280 5,165
Total Contributions 7,219 10,496 13,603
NOO at End of Year (23,242) (22,977) (23,275)
17 Estimated cash payments shown for years after 2010/11. Actual cash payments should be used for OPEB footnote. 18 Shortly after year end, the City contributed another $1.832 million to the trust
2.b
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RESULTS – JANUARY 1, 2011 VALUATION
Amortization Bases – 7.75% Discount Rate
(000’s Omitted)
1/1/2009 Valuation 1/1/2011 Valuation
6/30/2009 6/30/2010 6/30/2011
Outstanding Balance
2009 UAAL $ 105,045 $ 106,878 $ n/a
2010 Gains & Losses - 2,567 n/a
2011 Fresh Start UAAL - - 134,263
Total 105,045 109,445 134,263
October 11, 2011 24
RESULTS – JANUARY 1, 2011 VALUATION
Amortization Payments – 7.75% Discount Rate
(000’s Omitted)
1/1/2009 Valuation 1/1/2011 Valuation
2009/10 2010/11 2011/12
Amortization Payment - $
2009 UAAL19 $ 6,308 $ 6,513 $ n/a
2010 Gains & Losses - 244 n/a
2011 Fresh Start UAAL20 - - 8,666
Total 6,308 6,757 8,666
19 Amortized over 30 years beginning 2009/10 20 Amortized over 28 years beginning 2011/12
2.b
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RESULTS – JANUARY 1, 2011 VALUATION
Actuarial Obligations – 7.75% Discount Rate
January 1, 2011
(Amounts in 000’s)
Benefits <
Age 65
Benefits >
Age 65 Total
Present Value of Benefits
Actives $ 45,464 $ 40,013 $ 85,476
Retirees 37,577 81,223 118,800
Total 83,041 121,236 204,276
Actuarial Accrued Liability
Actives 26,106 25,074 51,179
Retirees 37,577 81,223 118,800
Total 63,683 106,297 169,979
Normal Cost 2,711 2,226 4,937
October 11, 2011 26
RESULTS – JANUARY 1, 2011 VALUATION
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2.b
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October 11, 2011 27
RESULTS – JANUARY 1, 2011 VALUATION
Actuarial Obligations – 7.75% Discount Rate
January 1, 2011
(Amounts in 000’s)
Misc Police Fire Total
Present Value of Benefits
Actives $ 54,725 $ 12,832 $ 17,919 $ 85,476
Retirees 86,109 14,722 17,969 118,800
Total 140,834 27,554 35,888 204,276
Actuarial Accrued Liability
Actives 33,204 6,496 11,479 51,179
Retirees 86,109 14,722 17,969 118,800
Total 119,313 21,218 29,448 169,979
Actuarial Value of Assets21 24,774 4,406 6,114 35,294
Unfunded AAL 94,539 16,812 23,334 134,685
Normal Cost 3,381 719 836 4,937
Pay-As-You-Go Cost 6,285 935 1,218 8,438
21 Allocated in proportion to the Actuarial Accrued Liability.
October 11, 2011 28
RESULTS – JANUARY 1, 2011 VALUATION
Annual Required Contribution (ARC) – 7.75% Discount Rate
2011/12 Fiscal Year
(Amounts in 000’s)
Misc Police Fire Total
ARC - $
Normal Cost $ 3,381 $ 719 $ 836 $ 4,937
UAAL Amortization22 6,072 1,087 1,507 8,666
ARC 9,453 1,807 2,344 13,603
Projected Payroll 58,983 9,826 11,855 80,664
ARC - %
Normal Cost 5.7% 7.3% 7.1% 6.1%
UAAL Amortization 10.3% 11.1% 12.7% 10.7%
ARC 16.0% 18.4% 19.8% 16.9%
22 Allocated in proportion to the Actuarial Accrued Liability.
2.b
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October 11, 2011 29
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Obligations
(Amounts in 000’s)
1/1/11 Valuation 6/30/11 Valuation
1/1/11
Projected
6/30/11 6/30/11
Projected
6/30/12
7.75% 7.25%
Present Value of Benefits
Actives $ 85,476 $ 96,769
Retirees 118,800 122,444
Total 204,276 219,213
Actuarial Accrued Liability
Actives 51,179 57,479
Retirees 118,800 122,444
Total 169,979 $ 174,485 179,923 $ 189,943
Actuarial Value of Assets 35,294 40,222 40,222 49,279
Unfunded AAL 134,685 134,263 139,701 140,663
Funded Ratio 21% 22%
Normal Cost 4,937 5,609
Pay-As-You-Go Cost 8,438 9,986
October 11, 2011 30
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Gain/Loss
(000’s Omitted)
AAL (AVA) UAAL
Actual 1/1/11 $169,979 $(35,294) $134,685
Projected 6/30/11 174,485 (40,222) 134,263
Expected 6/30/12 182,840 (49,279) 133,561
Assumption Changes
Discount Rate 10,613 10,613
Experience (Gains)/Losses
Demographic & Other (3,510) (3,510)
Total (Gain)/Loss 7,103 - 7,103
Projected 6/30/12 189,943 (49,279) 140,663
2.b
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RESULTS – JUNE 30, 2011 VALUATION
Annual Required Contribution (ARC)
(Amounts in 000’s)
1/1/11 Valuation 6/30/11 Valuation
Annual Required Contribution 2011/12 2012/13 2013/14
7.75% 7.25%
ARC - $
Normal Cost $ 4,937 $ 5,609 $ 5,791
UAAL Amortization 8,666 8,769 9,054
Total 13,603 14,378 14,845
Projected Payroll 80,664 83,285 85,992
ARC - %Pay
Normal Cost 6.1% 6.7% 6.7%
UAAL Amortization 10.7% 10.6%10.6%
Total 16.9% 17.3% 17.3%
October 11, 2011 32
RESULTS – JUNE 30, 2011 VALUATION
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2.b
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RESULTS – JUNE 30, 2011 VALUATION
Amortization Bases
(000’s Omitted)
1/1/2011 Valuation 6/30/2011 Valuation
6/30/2011 6/30/2012 6/30/2013
7.75% 7.25%
Outstanding Balance
2011 Fresh Start UAAL $ 134,263 $ 140,663 $ 142,093
Total 134,263 140,663 142,093
October 11, 2011 34
RESULTS – JUNE 30, 2011 VALUATION
Amortization Payments
(000’s Omitted)
1/1/2011 Valuation 6/30/2011 Valuation
2011/12 2012/13 2013/14
7.75% 7.25%
Amortization Payment - $
2011 Fresh Start UAAL23 $ 8,666 $ 8,769 $ 9,054
Total 8,666 8,769 9,054
23 Amortized over 28 years beginning 2011/12
2.b
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October 11, 2011 35
RESULTS – JUNE 30, 2011 VALUATION
Estimated Net OPEB Obligation (NOO) Illustration
(Amounts in 000’s)
1/1/11 Valuation 6/30/11 Valuation
Estimated Net OPEB Obligation
(Asset)
Estimate
2011/12
Estimate
2012/13
Estimate
2013/14
NOO at Beginning of Year $(22,977) $(23,275) $(23,511)
Annual OPEB Cost
Annual Required Contribution 13,603 14,378 14,845
Interest on NOO (1,781) (1,687) (1,705)
NOO Adjustment 1,483 1,451 1,498
Annual OPEB Cost 13,305 14,141 14,638
Contributions
Benefit Payments Outside Trust24 8,438 8,988 9,986
Trust Funding 5,165 5,390 4,859
Total Contributions 13,603 14,378 14,845
NOO at End of Year (23,275) (23,511) (23,718)
24 Estimated cash payments shown for all years. Actual cash payments should be used for OPEB footnote.
October 11, 2011 36
RESULTS – JUNE 30, 2011 VALUATION
Estimated Full ARC Funding Projection – 7.25% Discount Rate25
(Amounts in 000’s)
Contribution Fiscal
Year
End
Begin
Year
NOO ARC
Annual
OPEB
Cost
(AOC)
Benefit
Pmts
Pre-
Funding
Total
Contrib Pay
Contrib
% of
Payroll
2012 $(22,977) $13,603 $13,305 $8,438 $5,165 $13,603 $80,664 16.9%
2013 (23,275) 14,378 14,141 8,988 5,390 14,378 83,285 17.3%
2014 (23,511) 14,845 14,638 9,986 4,859 14,845 85,992 17.3%
2015 (23,718) 15,327 15,155 10,929 4,398 15,327 88,787 17.3%
2016 (23,891) 15,825 15,690 11,945 3,880 15,825 91,672 17.3%
2017 (24,026) 16,340 16,247 12,940 3,400 16,340 94,652 17.3%
2018 (24,119) 16,871 16,825 13,832 3,039 16,871 97,728 17.3%
2019 (24,165) 17,419 17,425 14,692 2,727 17,419 100,904 17.3%
2020 (24,159) 17,985 18,049 15,574 2,412 17,985 104,183 17.3%
2021 (24,095) 18,570 18,697 16,460 2,110 18,570 107,569 17.3%
25 Fiscal year ending 2012 based on prior valuation with 7.75% discount rate.
2.b
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RESULTS – JUNE 30, 2011 VALUATION
Actuarial Obligations – 7.25% Discount Rate
June 30, 2011
(Amounts in 000’s)
Benefits <
Age 65
Benefits >
Age 65 Total
Present Value of Benefits
Actives $ 49,568 $ 47,201 $ 96,769
Retirees 36,082 86,361 122,444
Total 85,650 133,562 219,213
Actuarial Accrued Liability
Actives 28,139 29,340 57,479
Retirees 36,082 86,361 122,444
Total 64,221 115,701 179,923
Normal Cost 2,978 2,631 5,609
October 11, 2011 38
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Obligations – 7.25% Discount Rate
June 30, 2011
(Amounts in 000’s)
Misc Police Fire Total
Present Value of Benefits
Actives $ 61,777 $ 14,823 $ 20,168 $ 96,769
Retirees 88,563 15,240 18,641 122,444
Total 150,340 30,063 38,809 219,213
Actuarial Accrued Liability
Actives 37,268 7,445 12,766 57,479
Retirees 88,563 15,240 18,641 122,444
Total 125,831 22,685 31,407 179,923
Actuarial Value of Assets26 28,129 5,071 7,021 40,222
Unfunded AAL 97,702 17,614 24,386 139,701
Normal Cost 3,823 825 960 5,609
Pay-As-You-Go Cost 7,385 1,132 1,469 9,986
26 Allocated in proportion to the Actuarial Accrued Liability.
2.b
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October 11, 2011 39
RESULTS – JUNE 30, 2011 VALUATION
Annual Required Contribution (ARC) – 7.25% Discount Rate
2012/13 Fiscal Year
(Amounts in 000’s)
Misc Police Fire Total
ARC - $
Normal Cost $ 3,823 $ 825 $ 960 $ 5,609
UAAL Amortization27 6,111 1,116 1,541 8,769
ARC 9,934 1,941 2,501 14,378
Projected Payroll 60,900 10,145 12,240 83,285
ARC - %
Normal Cost 6.3% 8.1% 7.8% 6.7%
UAAL Amortization 10.0% 11.0% 12.6% 10.5%
ARC 16.3% 19.1% 20.4% 17.3%
27 Allocated in proportion to the Actuarial Accrued Liability.
October 11, 2011 40
RESULTS – JUNE 30, 2011 VALUATION
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2.b
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October 11, 2011 41
CERBT INVESTMENT OPTIONS
Additional CERBT asset allocations and revised discount rate assumption
Agency selects one option effective July 1, 2011
Target asset allocations
Asset Classifications Option 1 Option 2 Option 3
Global Equity 66.0% 50.1% 31.6%
US Nominal Bonds 18.0% 23.9% 42.4%
REIT's 8.0% 8.0% 8.0%
U.S. Inflation Linked Bonds 5.0% 15.0% 15.0%
Commodities 3.0% 3.0% 3.0%
Total 100.0% 100.0% 100.0%
CalPERS reported expected returns (20 year period):
Option 1 Option 2 Option 3
75% Confidence Limit28 5.80% 5.60% 5.25%
50% Confidence Limit 7.61% 7.06% 6.39%
25% Confidence Limit 9.43% 8.52% 7.47%
Standard Deviation 11.73% 9.46% 7.27%
28 Confidence Limits – Actual Return will exceed the given rate with indicated probabilities, rates vary by year.
October 11, 2011 42
CERBT INVESTMENT OPTIONS
CalPERS discount rate development:
1st 10 year expected returns – based on asset advisors 10 year projections
Significantly higher returns assumed after 10 years
based on long term historical returns
implies actuarial losses in 1st 10 years
achievable?
Requirement that discount rate cannot be greater than 50% confidence limit rate
Bartel Associates Recommendation: select rate at 55% or 60% confidence limit
Option 1 Option 2 Option 3
55% Confidence Limit
Discount Rate 7.25% 6.75% 6.25%
Maximum Discount Rate 7.61% 7.06% 6.39%
Margin for Adverse Deviation (0.36%) (0.31%) (0.14%)
60% Confidence Limit
Discount Rate 7.00% 6.50% 6.00%
Maximum Discount Rate 7.61% 7.06% 6.39%
Margin for Adverse Deviation (0.61%) (0.56%) (0.39%)
2.b
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October 11, 2011 43
BARTEL ASSOCIATES GASB 45 DATABASE
50% of 90% of 100% ofresults results results
are are arewithin within within
this this thisrange range range
0th Percentile
GASB 45
50th Percentile
100th Percentile
Sample Percentile Graph
Retiree Medical Benefits Comparison
95th Percentile
5th Percentile
75th Percentile
25th Percentile
0%
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October 11, 2011 44
BARTEL ASSOCIATES GASB 45 DATABASE
Miscellaneous
NC ARC NC ARC
95th Percentile 11.7% 31.4%11.9% 32.2%
75th Percentile 7.5% 19.4%7.0% 20.5%
50th Percentile 3.6% 8.9%2.9% 10.2%
25th Percentile 1.3% 3.3%1.4% 3.6%
5th Percentile 0.6% 1.3%0.7% 1.8%
Percent of Pay 6.3% 16.3%8.0% 19.9%
Percentile 67% 67%82% 73%
Safety
Discount Rate = 7.25%, Amortization Period = 27 Years
GASB 45
Retiree Medical Benefits Comparison
Normal Cost & Annual Required Contribution
-10%
0%
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October 11, 2011 45
BARTEL ASSOCIATES GASB 45 DATABASE
95th Percentile 251%275%
75th Percentile 151%166%
50th Percentile 74%87%
25th Percentile 23%28%
5th Percentile 8%12%
Percent of Pay 207%242%
Percentile 89%92%
Miscellaneous Safety
Discount Rate = 7.25%
GASB 45
Retiree Medical Benefits Comparison
Actuarial Accrued Liability
0%
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October 11, 2011 46
OTHER ISSUES
GASB Pension Accounting
Exposure Draft for pension accounting changes issued 7/8/2011:
Usually the last public document issued before issuing final statement
Similar views expected for OPEB
Comment deadline 9/30/11
Likely effective for 2013/14 fiscal year
Major issues:
Unfunded liability on balance sheet
Lower discount rate if funding less than ARC
Immediate recognition of:
Service & Interest Cost
Benefit changes
Inactive gains/losses & assumption changes
Deferred recognition of:
Active gains/losses & assumption changes, over (future working lifetime)
closed period
Asset gains/losses, over 5 years
Entry age normal cost method
National Health Care Reform – Too early to know impact
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October 11, 2011 47
OTHER ISSUES
Timing:
Present preliminary results September 26, 2011
Present revised preliminary results October 11, 2011
October 11, 2011 48
EXHIBITS
Topic Page
Premiums E- 1
Data Summary E- 3
Actuarial Assumptions E-29
Definitions E-36
2.b
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October 11, 2011 E-1
PREMIUMS
2011 PEMHCA Monthly Premiums
Bay Area
Non-Medicare Eligible Medicare Eligible
Medical Plan Single 2-Party Family Single 2-Party Family
Blue Shield $675.51 $1,351.02 $1,756.33 $337.88 $675.76 $1,013.64
Blue Shield NetValue 581.24 1,162.48 1,511.22 337.88 675.76 1,013.64
Kaiser 568.99 1,137.98 1,479.37 282.30 564.60 846.90
PERS Choice 563.40 1,126.80 1,464.84 375.88 751.76 1,127.64
PERS Select 492.68 985.36 1,280.97 375.88 751.76 1,127.64
PERSCare 893.95 1,787.90 2,324.27 433.66 867.32 1,300.98
PORAC 527.00 987.00 1,254.00 418.00 833.00 1,331.00
October 11, 2011 E-2
PREMIUMS
2012 PEMHCA Monthly Premiums
Bay Area
Non-Medicare Eligible Medicare Eligible
Medical Plan Single 2-Party Family Single 2-Party Family
Blue Shield Access+ $711.10 $1,422.20 $1,848.86 $337.99 $675.98 $1,013.97
Blue Shield NetValue 611.59 1,223.18 1,590.13 337.99 675.98 1,013.97
Kaiser 610.44 1,220.88 1,587.14 277.81 555.62 833.43
PERS Choice 574.15 1,148.30 1,492.79 383.44 766.88 1,150.32
PERS Select 487.39 974.78 1,267.21 383.44 766.88 1,150.32
PERSCare 1,029.23 2,058.46 2,676.00 432.43 864.86 1,297.29
PORAC 556.00 1,041.00 1,323.00 418.00 833.00 1,331.00
2.b
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October 11, 2011 E-3
DATA SUMMARY
Active Medical Coverage
Bay Area Plans
Medical Plan Single 2-Party Family Waived Total
Blue Shield 90 68 210 - 368
Blue Shield NetValue 2 1 1 - 4
Kaiser 74 65 151 - 290
PERS Choice 22 39 47 - 108
PERSCare - - 1 - 1
PORAC 12 7 54 - 73
Waived - - - 79 79
Total 200 180 464 79 923
October 11, 2011 E-4
DATA SUMMARY
Retiree Medical Coverage - Under Age 65
Plan Region Single 2-Party Family Total
Bay Area 48 42 25 115
Los Angeles 1 - - 1
Northern CA - 1 1 2
Sacramento 4 3 1 8
Blue Shield
Southern CA - 1 - 1
Bay Area 37 26 11 74
Northern CA 2 1 3 6
Out of State - 5 1 6
Sacramento 3 3 - 6
Kaiser
Southern CA 2 1 1 4
Bay Area 22 19 7 48
Northern CA 3 2 - 5
Out of State 7 13 2 22
Sacramento 1 - - 1
PERS Choice
Southern CA 2 - - 2
Bay Area 11 5 2 18
Northern CA 1 2 - 3
Out of State 13 2 - 15
Sacramento 2 - 1 3
PERSCare
Southern CA 1 - - 1
PORAC 10 14 12 36
Total 170 140 67 377
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October 11, 2011 E-5
DATA SUMMARY
Retiree Medical Coverage - Over Age 65
Plan Region Single 2-Party Family Total
Bay Area 53 40 2 95
Northern CA - 2 - 2
Sacramento 1 - - 1
Blue Shield
Southern CA 2 3 - 5
Blue Shield NetValue Southern CA 1 - - 1
Bay Area 44 42 6 92
Northern CA 2 2 - 4
Out of State 4 3 - 7
Sacramento 6 6 1 13
Kaiser
Southern CA 1 - - 1
Bay Area 14 21 - 35
Los Angeles 1 - - 1
Northern CA 3 5 1 9
Out of State 12 17 2 31
Sacramento 1 3 - 4
PERS Choice
Southern CA 4 1 - 5
Bay Area 47 34 - 81
Northern CA 9 7 - 16
Out of State 41 19 2 62
Sacramento 3 4 - 7
PERSCare
Southern CA 5 3 - 8
PORAC 1 1 1 3
Total 255 213 15 483
October 11, 2011 E-6
DATA SUMMARY
Medical Plan Participation
Non-Waived Participants
Retirees
Medical Plan Actives < 65 ≥ 65 Total
Blue Shield 44% 34% 21% 27%
Blue Shield NetValue 0% 0% 0% 0%
Kaiser 34% 25% 24% 25%
PERS Choice 13% 21% 18% 19%
PERSCare 0% 11% 36% 25%
PORAC 9% 10% 1% 5%
Total 100% 100% 100% 100%
2.b
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October 11, 2011 E-7
DATA SUMMARY
Retiree Medical Coverage by Age Group
Miscellaneous
Age Single 2-Party Family Total
Under 50 2 - 2 4
50-54 20 17 8 45
55-59 55 38 17 110
60-64 61 62 14 137
65-69 58 68 5 131
70-74 55 41 1 97
75-79 32 23 - 55
80-84 24 15 1 40
Over 85 28 12 - 40
Total 335 276 48 659
Average Age 68.7 67.4 59.5 67.5
October 11, 2011 E-8
DATA SUMMARY
Retiree Age Distribution
Miscellaneous
0
20
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60
80
100
120
140
160
<50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 ≥85
Age
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October 11, 2011 E-9
DATA SUMMARY
Retiree Medical Coverage by Age Group
Police
Age Single 2-Party Family Total
Under 50 5 3 1 9
50-54 6 3 4 13
55-59 8 5 4 17
60-64 8 6 2 16
65-69 6 3 1 10
70-74 5 1 - 6
75-79 4 2 - 6
80-84 4 4 - 8
Over 85 2 - - 2
Total 48 27 12 87
Average Age 64.8 62.7 56.5 63.0
October 11, 2011 E-10
DATA SUMMARY
Retiree Age Distribution
Police
0
2
4
6
8
10
12
14
16
18
<50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 ≥85
Age
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October 11, 2011 E-11
DATA SUMMARY
Retiree Medical Coverage by Age Group
Fire
Age Single 2-Party Family Total
Under 50 1 1 3 5
50-54 1 2 10 13
55-59 5 2 4 11
60-64 7 8 3 18
65-69 4 8 2 14
70-74 11 16 - 27
75-79 5 8 - 13
80-84 4 4 - 8
Over 85 4 1 - 5
Total 42 50 22 114
Average Age 70.6 69.8 55.0 67.2
October 11, 2011 E-12
DATA SUMMARY
Retiree Age Distribution
Fire
0
5
10
15
20
25
30
<50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 ≥85
Age
Nu
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October 11, 2011 E-13
DATA SUMMARY
Actives by Age and Service
Miscellaneous
City Service
Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total
< 25 1 2 1 - - - - 4
25-29 9 22 11 2 - - - 44
30-34 7 39 23 16 4 - - 89
35-39 6 25 25 23 3 - - 82
40-44 3 24 21 31 14 3 - 96
45-49 4 31 17 46 34 23 5 160
50-54 7 20 23 31 23 15 14 133
55-59 1 13 11 25 11 10 4 75
60-64 - 8 4 13 8 7 - 40
≥ 65 - - 2 3 4 1 4 14
Total 38 184 138 190 101 59 27 737
October 11, 2011 E-14
DATA SUMMARY
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October 11, 2011 E-15
DATA SUMMARY
Active Age Distribution
Miscellaneous
0
20
40
60
80
100
120
140
160
180
<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 ≥65
Age
Nu
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October 11, 2011 E-16
DATA SUMMARY
Active Service Distribution
Miscellaneous
0
50
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150
200
250
0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
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October 11, 2011 E-17
DATA SUMMARY
Actives by Age and Service
Police
City Service
Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total
< 25 - 2 - - - - - 2
25-29 1 6 2 - - - - 9
30-34 1 10 9 1 - - - 21
35-39 - 3 6 7 2 1 - 19
40-44 - - 3 1 4 1 - 9
45-49 - - 1 2 6 4 4 17
50-54 - 1 1 1 - 1 1 5
55-59 - - - - - - - -
60-64 - - - - - - - -
≥ 65 - - - - - - - -
Total 2 22 22 12 12 7 5 82
October 11, 2011 E-18
DATA SUMMARY
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October 11, 2011 E-19
DATA SUMMARY
Active Age Distribution
Police
0
5
10
15
20
25
<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 ≥65
Age
Nu
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October 11, 2011 E-20
DATA SUMMARY
Active Service Distribution
Police
0
5
10
15
20
25
30
0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
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October 11, 2011 E-21
DATA SUMMARY
Actives by Age and Service
Fire
City Service
Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total
< 25 1 2 - - - - - 3
25-29 - 3 2 - - - - 5
30-34 2 3 4 - - - - 9
35-39 - 4 4 10 1 - - 19
40-44 - - 4 9 3 1 - 17
45-49 - 1 4 7 6 13 2 33
50-54 - - - 2 - 5 7 14
55-59 - - - 1 - - 1 2
60-64 - - - - - 1 1 2
≥ 65 - - - - - - - -
Total 3 13 18 29 10 20 11 104
October 11, 2011 E-22
DATA SUMMARY
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October 11, 2011 E-23
DATA SUMMARY
Active Age Distribution
Fire
0
5
10
15
20
25
<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 ≥65
Age
Nu
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October 11, 2011 E-24
DATA SUMMARY
Active Service Distribution
Fire
0
5
10
15
20
25
30
0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
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October 11, 2011 E-25
DATA SUMMARY
Actives by Age and Service
Total
City Service
Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total
< 25 2 6 1 - - - - 9
25-29 10 31 15 2 - - - 58
30-34 10 52 36 17 4 - - 119
35-39 6 32 35 40 6 1 - 120
40-44 3 24 28 41 21 5 - 122
45-49 4 32 22 55 46 40 11 210
50-54 7 21 24 34 23 21 22 152
55-59 1 13 11 26 11 10 5 77
60-64 - 8 4 13 8 8 1 42
≥ 65 - - 2 3 4 1 4 14
Total 43 219 178 231 123 86 43 923
October 11, 2011 E-26
DATA SUMMARY
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October 11, 2011 E-27
DATA SUMMARY
Active Age Distribution
Total
0
50
100
150
200
250
<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 ≥65
Age
Nu
m
b
e
r
October 11, 2011 E-28
DATA SUMMARY
Active Service Distribution
Total
0
50
100
150
200
250
300
0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
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b
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r
2.b
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October 11, 2011 E-29
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Valuation Date January 1, 2009
Fiscal Years 2009/10 &
2010/11 ARCs (end of year)
January 1, 2011
Fiscal Year 2011/12 ARC (end
of year)
June 30, 2011
Fiscal Years 2012/13 &
2013/14 ARCs (end of year)
Funding Policy Full Pre-funding through
CalPERS trust (CERBT)
Same
General
Inflation
3.00% Same
Discount Rate 7.75% 1/1/11 – 7.75%
6/30/11 – 7.25%
29 From 1/1/09 Milliman report
October 11, 2011 E-30
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Payroll
Increases
Aggregate Increases – 3.25%
Merit Increases – CalPERS
1997-2002 Experience Study
Aggregate Increases – 3.25%
Merit Increases – CalPERS
1997-2007 Experience Study
Medical Trend
Year
Increase from
Prior Year
2009 Premiums
2010 6.50%
2011 6.50%
2012 6.50%
2013 6.50%
2014 6.50%
2015 6.00%
2016 6.00%
2017 6.00%
2018+ 5.85%
Increase from Prior Year
Year Non-Medicare Medicare
2009 n/a
2010 n/a
2011 Premiums
2012 Premiums
2013 9.0% 9.4%
2014 8.5% 8.9%
2015 8.0% 8.3%
2016 7.5% 7.8%
2017 7.0% 7.2%
2018 6.5% 6.7%
2019 6.0% 6.1%
2020 5.5% 5.6%
2021+ 5.0% 5.0%
2.b
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October 11, 2011 E-31
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Actuarial Load n/a 2.0% load
PEMHCA PPO premium
increases below per capita
claims increases
Mortality,
Termination,
Disability
CalPERS 1997-2002
Experience Study
CalPERS 1997-2007
Experience Study
Retirement CalPERS 1997-2002
Experience Study
Misc Fire Police
Benefit 2.7%@55 3%@50 3%@50
CalPERS 1997-2007
Experience Study
Misc Fire Police
Benefit 2.7%@55 3%@50 3%@50
2%@6030
ERA 57.5 54.5 54.0
30 Applies to employees hired after July 17, 2010
October 11, 2011 E-32
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Participation at
Retirement
n/a Hired < 1/1/04: 100%
Hired > 1/1/04: 95%
Employees with cost sharing:
reduce above %’s by 5%
Medical Plan at
Retirement
n/a Miscellaneous:
<65 65+
Blue Shield 35% 20%
Kaiser 25% 25%
PERS Choice 30% 20%
PERSCare 10% 35%
Safety:
<65 65+
Blue Shield 35% 20%
Kaiser 25% 25%
PERS Choice 20% 20%
PERSCare 10% 35%
PORAC 10% 0%
2.b
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October 11, 2011 E-33
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Medicare
Eligible Rate
n/a Actives hired < 4/1/86:
Miscellaneous – 80%
Safety – 90%
Actives hired > 4/1/86: 100%
Retirees < 65: 90%
Everyone eligible for
Medicare will elect Part B
coverage
Spousal
Coverage at
Retirement
Actives: 60%
Retirees: based on current
elections
Currently covered: based on
current elections
Currently waived: 80%
Family
Coverage at
Retirement
Actives: 18% until age 65
Retirees: based on current
elections until age 65
Actives
Misc : 10% until age 65
Safety : 20% until age 65
Retirees: based on current
elections until age 65
October 11, 2011 E-34
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Missing PERS
Group
n/a Retirees missing PERS group
assumed to be Misc unless
fund designates Police or Fire
Missing
Bargaining
Unit
n/a Retirees missing bargaining
unit assumed to be SEIU
unless fund designates Police
(PAPOA) or Fire (IAFF)
Missing
Department
n/a Retirees missing department
assumed to be 80% GF,
10% Elec, and 10% WWT
Missing Fund n/a People assumed to be 80% GF
from above assumption placed
in “Unknown” Fund
Surviving
Spouse
Participation
n/a 100%
2.b
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October 11, 2011 E-35
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation29 January 1, 2011 &
June 30, 2011 Valuations
Spouse Age Actives – Males 3 years older
than females
Retirees – Males 3 years
older than females if spouse
birth date not available
Same
Future New
Participants
None – Closed Group Same
October 11, 2011 E-36
DEFINITIONS
GASB 45
Accrual
Accounting
Project future employer-provided benefit cash flows for current active
employees and current retirees
Discount projected cash flow to valuation date using discount rate (assumed
return on assets used to pay benefits) and other actuarial assumptions to
determine present value of projected future benefits (PVB)
Allocate PVB to past, current, and future periods using the actuarial cost
method
Actuarial cost method used for this valuation is the Entry Age Normal Cost
method which determines Normal Cost as a level percentage of payroll (same
method used by CalPERS)
Normal Cost is amount allocated to current fiscal year
Actuarial Accrued Liability (AAL) is amount allocated to prior service with
employer
Unfunded AAL (UAAL) is AAL less plan assets pre-funded in a segregated
and restricted trust
PayGo Cost Cash subsidy is the pay-as-you-go employer benefit payments for retirees
Implied subsidy is the difference between the actual cost of retiree benefits
and retiree premiums subsidized by active employee premiums
2.b
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October 11, 2011 E-37
DEFINITIONS
Present Value of Benefits
Present Value of Benefits
(With Plan Assets)
Unfunded
Actuarial Accrued
Future
Normal
Costs
Normal Cost
Assets
Present Value of Benefits
(Without Plan Assets)
Unfunded Actuarial
Accrued Liability
Future
Normal
Costs
Normal Cost
October 11, 2011 E-38
DEFINITIONS
Annual
Required
Contribution
(ARC)
“Required contribution” for the current period including:
Normal Cost
Amortization of:
- Initial UAAL
- AAL for plan, assumption, and method changes
- Experience gains/losses (difference between expected and actual)
- Contribution gains/losses (difference between ARC and contributions)
ARC in excess of pay-as-you-go costs not required to be funded
Net OPEB
Obligation
(NOO)
Net OPEB Obligation is the accumulated amounts expensed but not funded
Net OPEB Asset if amounts funded exceed those expensed
Annual OPEB
Cost (AOC)
Expense for the current period including:
ARC
Interest on NOO
Adjustment of NOO
NOO adjustment prevents double counting of expense since ARCs include an
amortization of prior contribution gains/losses previously expensed
2.b
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Blue Shield 23.35% 17.95% 23.71% 9.11%13.80%10.06% 5.19% 2.99% 17.01% 5.27% 12.62%
Blue Shield NetValue 3.61% 0.98% 16.17% 5.22% 6.34%
Kaiser 23.33% 17.83% 16.13% 9.78%10.73%9.16% 7.99% 4.77% 6.84% 7.28% 11.25%
PERS Choice 18.88% 18.04% 5.82% 9.43%12.50%6.00% 0.00% 5.44% 10.74% 1.91% 8.71%
PERS Select -3.00% 4.80% 3.74% -1.07% 1.06%
PERSCare 22.05% -0.59% 13.80% 9.76%13.09%-2.56% 0.00% 15.78% 2.97% 15.13% 8.65%
WHA 15.00% 34.23% 15.00% 9.80%11.80%16.86%
PORAC 21.25% 9.91% 1.65% 0.00%9.97%2.99% 6.99% 0.00% 8.88% 5.50% 6.55%
Blue Shield 4.00% 17.95% -10.06% -0.45% 11.33% 7.05% 0.00% -12.27% 12.80% 0.03% 2.62%
Blue Shield NetValue 0.00% -1.68% 12.80% 0.03% 2.63%
Kaiser 55.60% 31.90% -11.19% -10.13% 32.52% -5.63% 2.49% 6.50% -5.38% -1.59% 7.61%
Kaiser/OOS 13.21% 36.39% 8.96% -19.53% 29.43% 9.89% 6.75% 0.16% 11.11% 3.40% 8.99%
PERS Choice 5.08% -1.40% -8.53% 15.18% 6.12% 2.15% 0.00% 2.00% 5.56% 2.01% 2.66%
PERS Select 0.00% 2.00% 5.56% 2.01% 2.37%
PERSCare 5.92% -1.16% -13.91% 20.01% 7.05% 8.86% 0.00% 1.48% 5.62% -0.28% 3.02%
PORAC 21.30% 5.42% 0.00% 0.00% 0.00% -9.33% 7.03% 10.00% 15.15% 0.00% 4.63%
WHA 12.08% 55.09% 0.00% -1.00% 7.00%12.99%
Medicare - All Regions
Percent
Change
Percent
Change
Percent
Change
Percent
Change
Percent
Change
Percent
Change
Percent
Change
Percent
Change
Percent
Change
2011-12
Percent
Change
Bay Area
CalPERS 2002-2012 Health Premiums - Regional
2003-04
Percent
Change
2004-05
Percent
Change
Average per
year
increase
Medicare Percent
Change
2009-10
Percent
Change
2010-11
Percent
Change
2007-08
Percent
Change
2008-09
Percent
Change
2005-06
Percent
Change
2006-07
Percent
Change
Basic 2002-03
Percent
Change
2.c
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-: Attachment C: 2002-2012 PEMHCA Premiums (2180 : Retiree Medical Study)
October 12, 2011 1
RESULTS BY FUND
Actuarial Accrued Liability (AAL)
(Amounts in 000’s)
January 1, 2009 January 1, 2011 June 30, 2011
7.75% 7.75% 7.25%
CIP $ 1,564 $ 2,409 $ 2,572
Elec1,2 13,214 16,325 17,225
Gas1 4,589 6,227 6,668
GF3 91,488 118,946 125,564
ISF - Technology 2,226 2,079 2,257
ISF - Vehicle 1,225 1,411 1,510
Refuse 3,063 4,931 5,256
Storm Drain 494 1,478 1,565
Water1 4,673 5,189 5,539
WWC1 2,013 2,103 2,313
WWT 5,112 8,881 9,454
Total 129,661 169,979 179,923
1 Assets for Fiber Optics Fund appropriated to Elec due to no Fiber Optics employees in data 2 AAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Fund’s AAL 3 Assets for Printing & Mailing Fund appropriated to GF due to no Printing & Mailing employees in data
October 12, 2011 2
RESULTS BY FUND
Annual Required Contribution (ARC)
(Amounts in 000’s)
1/1/09
Valuation
1/1/11
Valuation 6/30/11 Valuation
Annual Required Contribution 2009/10 2011/12 2012/13 2013/14
7.75% 7.75% 7.25%
CIP $ 142 $ 220 $ 237 $ 245
Elec1,2 953 1,164 1,235 1,275
Gas1 344 390 515 532
GF3 6825 9,510 10,018 10,344
ISF - Technology 214 229 245 253
ISF - Vehicle 95 126 132 136
Refuse 245 402 420 434
Storm Drain 36 112 118 121
Water1 386 428 464 479
WWC1 169 200 223 230
WWT 377 730 771 796
Total 9,786 13,603 14,378 14,845
2.d
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Excerpt from Finance Committee minutes of October 18, 2011.
2. Review and Acceptance of Updated Retiree Medical Actuarial Study
– Valuation Date January 1, 2011 and Valuation Date June 30, 2011
Director of Administrative Services, Lalo Perez stated in 2008
Government Accounting Standards Board (GASB) required
governmental entities to value the benefits of medical plans to
determine the liability; the City complied in January of 2009. It was
required every two-years to complete a refresh of the value. The
presentation showed the differences between the 2009 value of the
benefit to the 2011 refresh. The major difference was in the retirees
where it went from $78,384,000 to $118,800,000. The positive piece
of the information was the assets being set aside had increased and
the City’s earning had risen. The assets went from $24.6 million in
2009 to $35.3 million in 2011 bringing the unfunded liability for retiree
medical for the full organization to $135 million. Public Employee
Retiree Service (PERS) had added the flexibility for the City to select a
regular return. After discussions internally and with Bartel Associates,
Inc. it was determined a 7.25 discount rate was the rate for the City to
use going forward for the Fiscal Years (FY) 2013 and 2014. By
following that recommendation it changed the future Annual Required
Contribution (ARC) from $13.6 to $14.4 million, approximately
$775,000 more for FY13 and if the same rate of assumption was
maintained there would be an additional $467,000 for FY14.
John Bartel, Bartel Associates, LLC addressed the Actuarial Accrual
Liability (AAL) number which was $130 million and the expectation
should be for the AAL to grow from one valuation to the next because
there were services being rendered and as they were rendered it
changed the numbers. He explained if there had been no changes in
the assumption and there had been no gains and losses the expected
AAL would have been $151 million. Assumptions were thought of
future changes for what may occur and no matter how good of an
actuarial firm the City hired they did not determine the cost of the
plan. The cost of the plan was determined based on the benefits paid,
offset by investment earnings received in the Trust and increased by
expenses. He reviewed the actuarial gains and losses comparing the
2009 results to the 2011 results and explained the increase.
Mr. Perez stated in selecting Bartel and Associates, LLC. as the
actuarial firm for the City, Staff had send out a list serve inquiry and
the majority of the responses from other agencies for who they had
completed their reports were Bartel and Associates, LLC. He spoke to
the changes made by the present and prior Council with respect to the
longer term benefits; 1) there was a longer vesting period with retiree
medical so an employee hired post January 2004 needed 20 years to
achieve the 90 percent and 2) for the Public Employee Retirement
Service (PERS) Care Family Health Plan the City was not paying 100
percent which was significant since the annual cost was $24,000 for
someone with family coverage. In order to mitigate the future costs
the City could negotiate with the bargaining units or the other option
was to utilize the funds set aside in the Trust to assist paying the
difference. Staff hoped to return in early calendar year 2012 to provide
recommendations.
City Manager, James Keene announced the main action Staff was
recommending to the Finance Committee was to set the methodology
on the liability and the ARC. The next item on the agenda was a
discussion of the 2012 budget and the implications on finances; he felt
the two issues were directly linked. In the last actuarial valuation there
was a $105 million unfunded liability and currently it was at $134
million even though there was a strong financial performance activity
on the assets. He asked if there was a net increase of assets over the
last two years.
Mr. Perez stated yes there was a net increase in assets. He clarified
the firm made a recommendation and the City accepted to smooth out
the assumptions of the values of the assets going forward.
Mr. Keene asked if the methodology had not been changed would the
valuation of the unfunded liability been less in 2009.
Mr. Bartel stated if no assumption changes were made then the
unfunded liability would have been $109 million.
Mr. Perez said Staff was aware from the Council feedback that Bartel
felt the assumption of 6 and 6.5 percent for medical cost increases
was not sufficient.
Mr. Keene asked for confirmation that the unfunded liability would
continue to rise even if there were solid investment performances.
Mr. Bartel agreed.
Council Member Shepherd asked if a large group of employees retired
in a short timeframe caused a “bubble” which exacerbated the
position, when would there be an “un-bubble” as it were.
Mr. Keene clarified if there were no new hires there could be an “un-
bubble” but the City needed to replace employees so that was not a
probable scenario. He said people were living longer which created a
greater long-term cost.
Council Member Shepherd saw the mass retirement as a cause and
effect of the City’s position to increase the cost of employee
contribution to healthcare and what she was asking was would there
be a softening effect.
Mr. Bartel clarified the firm reviewed the City’s employment population
and calculated their age with years vested. He said in considering the
data the remaining population who did not retire with the early
retirement package were not far from regular retirement. If the City
were to split the active liability in half, that would reduce the actuarial
liability by $25 million. The liability for retirees themselves was $119
million.
Chair Scharff asked when the unfunded liability payment was due.
Mr. Bartel said that liability was being paid off over a period of 28
years. The goal was to ensure there were sufficient funds to make the
benefits payment but there was no requirement that the payment be
made early; it would be prudent to do so if there were the ability but it
was not required.
Council Member Yeh asked why the firm created a closed amortization
period of 30 years.
Mr. Bartel clarified the 30 year timeframe was in the prior firm’s
valuation, although the accounting standard recommended not using a
period longer than 30 years. It appeared the previous firm was using a
rolling 30 year formula but in doing that the City would never pay off
the debt. The City’s policy was to payoff the unfunded liability which
was a good fiscal policy and in that model there needed to be an end
date so the lower the ARC the less of the unfunded liability was paid
off.
Mr. Keene asked if nothing changed over the next 28 years and the
City made the ARC payments as identified, at the end of the 28 years
there would be no unfunded liability.
Mr. Bartel said that it did not mean there would not be a required
contribution but yes, there would not be an unfunded liability.
Council Member Schmid confirmed the formula of applying the health
retiree benefits to current employees had three parts; 1) prepaying for
the liability he or she would have in the future, 2) past retirement
payments, and 3) a portion of the payment would be put off because
in the future his or her payment may be higher. Two parts were
positive and one negative so he asked how the firm would recommend
allocation of shares for each part.
Mr. Bartel stated none of the numbers included any payment for
current active medical costs today; the formula was for their
retirement. The belief was the City was taking into account that the
portion of the premiums being paid for the current employee after
retirement would be substantially higher than what was being paid
today.
Council Member Schmid stated within the demographics the actuary
firm had built-in an assumption people would compete in the labor
market for 28 years prior to retiring.
Mr. Bartel disagreed and stated what was being said was when the
City reviewed their population they made an assumption of how long
they would be working for the City. The formula was to take the
pension plan in conjunction with a generous retiree medical plan which
took you to an expected retirement age based on Palo Alto’s
demographic. He explained to a large degree the employees at 2.7
had an expected retirement age of 57 based on the demographic.
Council Member Schmid asked when a payment was made during the
current year was the payment based on an assumption of the number
of years of service the employee would have when they retired.
Mr. Bartel clarified for the active employees the City may be making
payments on their unfunded liability after they had retired.
Council Member Schmid asked if the City was adequately providing for
those who were currently working.
Mr. Bartel said the sooner the unfunded liability was paid off, the
better off the City would be.
Council Member Schmid asked what the City should be paying for
current employees.
Mr. Bartel said for example, if Palo Alto had the funds and if they were
able to accommodate it he suggested paying off the unfunded liability
closer to a twelve year amortization.
Council Member Schmid asked if the firm was assuming the employees
were going to be working for 25 years why was the City making
payments on the basis of 28 years.
Mr. Bartel stated if the City had been pre-funding the retirement
medical obligation since it began there would not be a term of 28
years. He felt the City would not run out of funds by following the 28
year plan.
Council Member Schmid was concerned that over the past two years
the unfunded liability had taken a large jump because assumptions
were made of the demographics. He said the asset market value
between 2008 and 2011 the total increased by 10 percent but the
actuarial value did not increase at all over the same four year period.
The projected 2012 value had a substantial growth in asset except it
was already the first quarter and the value was at minus 20 percent.
Mr. Bartel stated that was correct.
Council Member Schmid said if the assumption was a growth of 7.25
rate of return; he asked where the 7.25 came from. He mentioned the
Federal Government announced they were going to be driving the
bond market as close to 1 to 2 percent as possible for the next two
years and global equities were going up and down with no trend of a
solid upward momentum.
Council Member Shepherd said Palo Alto had a 50 percent confident
rating and she asked how a 90 percent confident rating would affect
the numbers.
Mr. Bartel confirmed if the confident rating rose to 90 percent the
number would rise to approximately 4 percent. He stated the firm
received their numbers through looking to outside investment advisors
and asset classifications then perform statistic projections. He agreed
a rate return of 7.25 in the short term was not achievable which was
why he explained asset smoothing was so important.
Council Member Schmid was concerned about the smoothing process
being represented.
Mr. Bartel believed the 50 percent confidence level was close to the
7.61 rate of return but he preferred to air on the conservative side and
brought it down to 7.25.
Council Member Schmid felt Council should be able to speak to the
employees he needed to provide realistic numbers.
Mr. Bartel asked what discount rates Council Member Schmid felt
should be used.
Council Member Schmid stated 7.25; given the current asset allocation
was much too high for the amount of risk.
Mr. Bartel said the goal should be to asses the type of risk the City
was willing to take and setting the discount rate at that level.
Council Member Yeh asked the status of legislation to fund the
unfunded liability.
Mr. Bartel clarified the City would issue their financial statements in
compliance with GASB who had a pension exposure draft and although
it was not required to place the pension unfunded liability on the
financial statement it was clearly the most efficient way to accomplish
an accurate accounting. The exposure draft should be issued by the
end of 2012.
Council Member Yeh asked what the impact of monitoring would be
and if Palo Alto changed their methodology would their funded
percentage be reduced.
Mr. Bartel agreed, the more conservative the assumptions for discount
rates the lower the funded percentage would be.
Council Member Yeh asked where the rating agencies would go with
that type of system.
Mr. Bartel said in speaking with the rating agencies if there was a
modest liability and the City was doing nothing it would not affect the
agencies rating but if there was a valuable promise and the City was
not acting on it the rating agency would react.
Council Member Yeh said if GASB did not come out with a prescribed
methodology and each city was using different assumptions that would
become confusing.
Mr. Bartel was told by GASB that the actuaries had a standard of
practice and the outside auditors would review their work for
reasonableness. His concern was the outside auditors may not be
knowledgeable enough in those standards to perform an adequate
review.
Council Member Yeh noted a higher level of comfort with a higher level
of conservativeness but his concern was being more conservative may
position Palo Alto in a manner that could hurt the City externally.
Mr. Bartel stated his recommendation was to set t he discount rate for
the ARC which would also be the discount rate for the financial
statements. That left room to use a different rate for internal
purposes. He felt the concern over the discount rate was not limited to
Other Post Employee Benefit (OPEB), it was part in parcel to the
CalPERS pension.
Council Member Yeh said when there was only a closed amortization
period and new retirees entered the system it created an understated
unfunded liability because the new retires had not been included.
Mr. Bartel clarified his valuation had anticipated that and noted the
level percentage of pay making a negative amortization which meant
there was a negative amortization period until the level of amortization
was below 20 years.
Council Member Yeh said there had been contributions to the Trust
since 2008 and asked to what extend had it been spent down.
Mr. Perez stated the Trust had risen to $44.8 million and the majority
of the increases were from earnings.
Council Member Yeh noted he had seen the contributions listing in the
Staff Report but his question was whether the City had made the
contributions or were they from the structural reforms.
Mr. Bartel said they were City contributions.
Vice Mayor Yeh asked whether or not to use the Trust Fund to pay a
portion of the increased costs.
Mr. Perez noted that was one option to be considered, another option
would be budget reductions or increased revenues.
Vice Mayor Yeh reiterated the actuary had mentioned with a 30 year
amortization the City would not run out of funds. He asked if the funds
being refereed to were Trust Funds.
Mr. Bartel clarified the City was making their benefit payments for
retirees and putting funds aside with the intent of making the benefits
payments from the Trust at a future time. The expectation was the
City would reach a point in approximately 15 years where there were
sufficient funds to be able to expend fewer monies by making the
benefits payments out of the Trust.
Vice Mayor Yeh asked how much City contribution needed to be added
to the Trust in order to achieve the 5.65. If the goal was to continue
with the closed amortization and achieve the goal of using the Trust in
15 years, he did not want to run out of funds.
Mr. Perez stated the key was to be able to make the payments so
there were no funds drawn from the Trust.
Mr. Keene asked for clarification that the employee contributions for
healthcare were dedicated to the unfunded liability.
Mr. Perez stated that was correct.
Vice Mayor Yeh asked if that area would be a separate line item in the
future.
Mr. Perez noted it would be listed in the report under contributions.
Council Member Shepherd commented on how the City was placing
good faith in the Irrevocable Coffers Trust that sound investment
choices were being made with the contributions being placed through
them. She noted she was not comfortable with the investment choices.
Her preference would be having the City put aside the funds utilizing
the mechanisms currently in place for earning interest. She noted the
assumptions did not reflect the adjustments from safety units or what
might be coming forward with the other bargaining units.
Mr. Bartel assured the Committee the rate of return would absolutely
not be 7.25.
Council Member Shepherd said it would be less.
Mr. Bartel clarified he was uncertain what the percentage rate would
be in the short run however not many of their clients were comfortable
with how CalPERS had been investing.
Council Member Shepherd said they had not changed their manner of
thinking on investment strategy during the changing financial crisis.
Mr. Bartel disagreed and clarified there were elements that CalPERS
had changed but some they had not. In the California Employers
Retirees Benefit Trust (CERBT) there were two elements that were in
the Pension Trust and they did not invest in specific real estate.
Council Member Shepherd understood those points but argued their
strategy of investment in the global market place, where they placed
the bulk of their funds, had not changed.
Mr. Bartel suggested they review what the CalPERS investment staff
was doing today, if anything, that was different from their prior
practices. CalPERS had a long run of Chief Investment Officer (CIO)
turn over until they hired Joe Dear a few years ago who focused on
long-term investments and shifted the method of their investment
strategy.
Council Member Shepherd was familiar with Mr. Dear but did not feel
there had been a significant shift in strategy since his arrival. She
recommended using the information as a tool during labor
negotiations.
Chair Scharff agreed and noted it affected how retirees were viewed
and whether or not they could switch to a more expensive plan.
Council Member Yeh asked if Staff was reviewing the determined
funding recommendations for the current year, for example whether
the additions to the net increase in the ARC should be funded through
the Trust or not.
Mr. Perez said the Staff was returning during the Mid-Year to show the
Committee where the City was and recommend a decision at that
time.
Mr. Keene said the increased payment needing to be made was for FY
2012, the next item on the agenda was on the budget update where
there was a recommendation relating to drawing down the Budget
Stabilization Reserve because of the over collection of revenues but
that did not factor in any additional savings from public safety.
Council Member Yeh expressed the information was helpful and asked
about the increase of employee contributions and whether there Staff
had a process in mind.
Mr. Keene agreed with the general statement of Mr. Perez regarding
trends that the City had been consistently making with the bargaining
units and that he was discussing the equity/parity across the
bargaining units but that the contributions would be escalating as time
moved forward. The goal was to have all of the units making the same
contribution on healthcare.
MOTION: Council Member Schmid moved, seconded by Council
Member XXX that the Finance Committee accept the Retiree
Healthcare Plan January 1, 2011 and June 30, 2011 GASB 45 Actuarial
Valuations Revised Preliminary Results and that Staff provide
information on an Option to include a 7 percent Discount Rate and
move the allocation period to 25 years.
MOTION FAILED FOR LACK OF SECOND
MOTION: Council Member Shepherd moved, seconded by Vice Mayor
Yeh that the Finance Committee accept the Retiree Healthcare Plan
January 1, 2011 and June 30, 2011 GASB 45 Actuarial Valuations
Revised Preliminary Results.
Council Member Shepherd requested the structural changes from the
Police and Fire units be included in the report.
Council Member Yeh noted the retiree medical benefits were not a two
year issue and changes needed to be incorporated into the report
being distributed as new information arose. He felt if there were
feedback throughout the process it would be more helpful to show
different methodologies.
Mr. Bartel clarified the modification of the amortization period did not
require a new process, his firm would take the unfunded liability and
re-run the information with a different number of years to reflect the
new amortization date.
Chair Scharff asked if Mr. Bartel was saying it would not cost the City
any further expense to re-run the information.
Mr. Bartel clarified the alteration of the discount rate to 7 percent
would require the firm to complete additional work. He noted in order
of magnitude if they ran a 7 percent discount rate and reviewed a
different amortization period those fees would be between $1,500 to
$2,000 on the outset. Where the amortization change itself would take
approximately 2 hours and cost up to $500.
Council Member Yeh said the current amortization period was an
industry standard of 30 years so he would not want the City’s formal
actuarial study to reflect something different.
MOTION PASSED: 4-0
October 18, 2011
Finance Committee Meeting
#2180
Retiree Medical Valuation Study
2
Actuarial Liability 2009 - 11
FUNDED STATUS – 7.75% DISCOUNT RATE
(Amounts in 000’s)
1/1/09
1/1/11
Projected
6/30/11
Present Value of Benefits
• Actives
• Retirees
• Total
$ 78,831
78,384
157,215
$ 85,476
118,800
204,276
Actuarial Accrued Liability
• Actives
• Retirees
• Total
Actuarial Value of Assets (AVA) Unfunded AAL
51,277 78,384
129,661
24,616
105,045
51,179 118,800
169,979
35,294
134,685
174,485
40,222
134,263
Annual Required Contribution (ARC) 9,786 13,603
Net Increase in ARC 3,817
3
Annual Required Contribution
FY 2012, 2013 and 2014
4
Assumption Changes 2009-11
5
Cost Mitigation Efforts
1.Longer vesting period for retiree medical
for post-1/2004 hires
2.Highest-cost medical plan no longer paid
100% by City, since 2007
3.Miscellaneous group employees ramping
up to 10% medical premium cost-sharing,
effective 4/1/11
4.Firefighters will contribute 10% of medical
premiums, effective 10/31/11 –
-- NOT INCLUDED IN THIS ACTUARIAL STUDY --
6
Next Steps
1.Continue negotiating with Safety
bargaining units
2.Determine funding recommendations for
current year
may include drawing from CERBT trust
3.Determine funding recommendations for
FY 2013 and 2014
may include increasing employee
contributions
November 28, 2011 Item 3a Excerpt
3a. (Former No. 2) Finance Committee Recommendation that the
Council Approve and Accept the Updated Retiree Medical
Actuarial Study.
Council Member Klein stated his opinion that the dollar value of the
item should have excluded it from the Consent Calendar. He asked
Staff to discuss for the benefit of the public why there was a need for a
new actuary firm. He said there were recommendations from the
actuary which were accepted by the Finance Committee that he did
not agree with. Not all of the choices should be conservative. An over
funded City could lead to an under funded community which could
have a negative financial impact by making the community less
desirable. He appreciated the caution being taken over the past few
years and warned balance was necessary for a thriving community.
Lalo Perez, Director of Administrative Services expressed Staff had
intended to continue the use of Milliman, Inc. (Milliman) to conduct the
updated actuarial study. When it became evident the City needed to
have a firm act as an expert witness in the Binding Arbitration hearing
Milliman informed Staff it would not be in their best interest to
participate because of work they performed work for the International
Association of Fire Fighters (IAFF). The new firm chosen, Bartel
Associates, LLC (Bartel) was recommended by CalPERS and they were
willing to participate in the Binding Arbitration.
James Keene, City Manager added the firm was well recognized across
the state and for a period of time were the leading actuarial experts.
Council Member Klein asked if the previous firm had completed any
work on the project prior to transferring out.
Mr. Perez recognized they had completed some partial work.
Council Member Klein noted John Bartel had completed the actuarial
study differently than Milliman had in the past. He asked whether
Milliman would have made the same changes during this update. For
example with the medical trend assumptions; Bartel’s assumptions
were the rates would start high and end low which added $4.8 million
to the City’s unfunded liability where Millimans’ started at 6.5 percent
and ended at 5.85 percent.
Mr. Perez stated Staff would worked with Milliman’s staff to adjust
their low rate. Comments from Council indicated Long Term Projects
rates should be aligned to recent.
Council Member Klein asked if there were other incidents that could be
questioned.
Mr. Perez confirmed there were and explained that CalPERS made
changes to the demographics every couple of years and so Milliman
did not have the information prior to their departure. An additional
factor noticed by Bartel was the employees hired prior to 1986 were
not required to contribute to Medicare. If it were determined those
Staff members were not covered by Medicare, the City was responsible
for the full cost not just the Medicare cost. Milliman had a rolling 30
year amortization but with Bartel it was a 28 year closed end
amortization and the last difference was the rate of return
assumptions because CalPERS had made changes.
Council Member Klein asked the cost difference between the closed
amortization period versus the open.
Council Member Scharff noted the Staff discussion regarding the
differences between open and closed amortization was on packet page
175.
Mr. Perez stated he did not recall the number but would review the
report and let Council know when the information was ready.
Council Member Klein said it was a basic actuarial decision and he was
certain Milliman maintained the open 30 year deliberately. His concern
was if the rolling period was working for the City what was the benefit
to locking in a close date.
Mr. Perez said that by moving to the 28 year closed end
recommendation by the end of the time the cost would only be for the
current employees. The rolling was as if each year the loan was being
extended with no reduction.
Council Member Klein said Staff told Council two years ago the model
being used was accurate and now the new model was the accurate
one.
Mr. Perez clarified two years ago was the first time Staff had
experienced the program and after review and alterations they felt the
proposed program was a better fit for the City.
Mr. Keene said the program was meant to be a mix of the goals
Council wished to achieve. With any actuarial there was discretion for
the City to focus on the mix of assumptions they expected Staff to
include.
Vice Mayor Yeh said the Finance Committee had discussed the new
rules Government Accounting Standards Board (GASB) had
implemented and the need to report what the liability was versus the
need to fund the liability. He asked what steps had been taken with
the different bodies that require the entity fund the liability. The closed
end methodology would have a large impact on the steps towards
repayment but there was a higher burden within a limited timeframe
versus re-upping with the rolling methodology. He said it would be
helpful to know if that was a direction GASB or legislation was going
in.
Mr. Perez acknowledged there was a draft in process but nothing had
been released for review. His understanding was most agencies with
significant amounts were experiencing difficulty in addressing the
liability. His concern for Palo Alto would be because of the changes
made he was not clear how the rating agencies would view the City
not funding irregardless of GASB’s ruling. His secondary concern was
the liability amount was beginning to match the General Fund.
Vice Mayor Yeh asked if it would be possible to have an actuary
calculate through both methodologies.
Mr. Perez stated it was possible. It would add to the cost, but Staff
would comply with Council’s direction.
Mr. Keene shared his thoughts about having an unfunded liability.
Good financial management would be to reduce or eliminate unfunded
liabilities. He clarified either methodology would allow for modifications
to accommodate different goals. There were time constrains as far as
what assumptions Palo Alto was using to report to CalPERS prior to the
end of the 2011 calendar year.
Council Member Klein said the language used by Staff throughout the
report indicated the City was going to fund the Annual Required
Contribution (ARC) and it was his understanding that was included in
the make-up of the budget.
Mr. Perez agreed that was how Staff had approached the funding plan
for Mid-Year. There was a $4.3 million place holder for safety group
concessions; he noted not all of them would be met in the given
timeframe.
Council Member Klein clarified his concern was with the ARC and the
policy had been to fund the full ARC.
Mr. Perez confirmed that had been Staff’s recommendation.
Council Member Klein noted it had been addressed that fully funding
the ARC was not a requirement by GASB at this time.
Mr. Perez stated that was correct, the report read that it was an
annual requirement but in fact it was not.
Council Member Klein was concerned that with the change in direction
it was not City Staff but an outside entity that had placed a burden on
the budget.
Mr. Keene informed the Council the City was in the position to not
accept the actuarial assumptions. He said there was sound advice in
Mr. Bartel’s recommendations. He agreed the elimination of unfunded
liabilities over time was the best way to approach the debt situation.
He acknowledged if the proposed assumptions were approved by
Council, Staff would return later in the year with recommendations to
fund the additional costs in the current budget year for the ARC.
Council Member Klein asked if the FY12-13 budget would be prepared
in a similar manner.
Mr. Perez stated yes.
Council Member Klein asked for clarity on the interest rate assumption,
he was not quite clear from the wording in the report. On page 114
there was notification of an $800,000 jump in the ARC between FY12
and FY13 because of the decrease in the discount rate from 7.75
percent to 7.25 percent but the next paragraph indicated the PERS
Trust offered three possible asset allocations. Number one was the
City’s chosen option as the highest yield of 7.61 percent. Mr. Bartel
recommended dropping this to 7.25 percent. He asked if Staff had
accepted Mr. Bartel’s interest rate assumption recommendation.
Mr. Perez replied yes. In FY12 Staff was using 7.75 percent. For FY13
was where the PERS Trust options became relevant. Staff was
accepting the 7.61 percent with a margin for adverse deviation which
dropped the rate to 7.25 percent.
Council Member Klein asked if Staff was aware of what Milliman would
have recommended in the same situation.
Mr. Perez stated no.
Council Member Klein mentioned the conservative approach was
costing an excess of $800,000 when Staff could have used the 7.61
percent without incident.
Mr. Perez noted if the 7.75 percent had been used there would have
been a $580,000 difference in the annual payment.
Council Member Klein accepted the report but noted there were
implications he was not accept because Staff was being overly
cautious.
MOTION: Vice Mayor Yeh moved, seconded by Council Member
Schmid to approve and accept the Updated Retiree Medical Actuarial
Study.
Vice Mayor Yeh was aware when there was significant change in
methodology there would be a robust discussion but having a Mid-Year
check-in provided the opportunity to understand the true fiscal
impacts.
Mr. Keene recommended the Council meet with Mr. Bartel prior to the
budget process.
Council Member Schmid felt Mr. Bartel’s assumptions were realistic
and noted healthcare costs were rising annually. He acknowledged
past Council decisions had passed liability obligations on to the
present. He said it was unfortunate the increased revenue generated
was being obligated to fund the ARC payment rather than salaries or
other obligations. He believed the 30 year timeframe was based on the
assumption most workers in the system would work for 30 years. He
supported the acceptance of the Bartel recommendation.
Council Member Scharff understood the difference between a retiree
paying off a debt when they would no longer be generating income
while the City would continue to do so. He agreed it was a positive
public policy to payoff the assumptions with a closed end. He asked
what the impact was if the present assumptions were not accurate.
Mr. Perez said the liability would continue to grow.
Council Member Scharff asked what impact the continued growth of
the liability would have on the City.
Mr. Perez said there would be an increase in the calculation of the
payments, if the amount was significant enough to impact the City the
concern was with the rating agencies.
Council Member Scharff asked why the public safety concessions were
not included in the assumptions while the miscellaneous category was
and with that there was $14.2 million saved. He asked if during Mid-
Year the public safety would be included. He believed if the City was
not going to fully fund the ARC they were better off using the
assumptions that would lower the amount.
Mr. Perez agreed in concept it made sense to use the assumptions with
a lower amount if the full ARC was not being funded.
Council Member Scharff stated he supported the Motion.
Council Member Shepherd had concerns with the CalPERS 50 percent
confidence rate of return. She believed Palo Alto was within the norms
of other municipalities so when the reporting occurred to the public, it
appeared conservative although she felt for the 28 year period it
needed to be reviewed. She was aware without the concessions from
fire or police each time Council reviewed the assumptions it would
change with the added concessions. She asked if the City would be
able to cash flow the payoff with the period of the financial picture.
With continued employee retiring there was a need to continue the
funding. She noted her support for the Motion.
Council Member Burt asked why the item was on the Consent
Calendar.
Mr. Keene had thought with the Finance Committee approving the item
unanimously it would suffice being on the Consent Calendar. He
understood if an item passed unanimously but might be contentious it
should not be placed under Consent.
Council Member Burt said the subjective criteria was either
contentiousness or high consequence. He said $1 million was a high
enough consequence and this item was $29 million. He asked for
clarity of future criteria for potential policy changes. He noted the
concern of the new actuary being too conservative but mentioned the
previous actuary understated the liability. He said the difference in the
actuarial studies was the public safety groups from $29 million to $43
million. He asked if his interpretation was accurate.
Mr. Perez believed that was correct. If there was not a positive of $14
million because of the miscellaneous group the liability would have
been $44 million.
Council Member Burt shared his concern with the City relying too
heavily on an actuary study when they could be varied. His attention
was drawn when Milliman refused to be an expert witness because of
their association with the Fire Union.
Mr. Perez noted it was not the City’s Fire Union but rather the National
Fire Fighters Union.
Council Member Burt was disturbed that they would disengage their
relationship with the City because of the relationship with the Union.
He noted one factor to be aware of was the decreased age of
retirement and the second was the spike in Palo Alto retirements which
altered different elements of liabilities. He noticed the PERS PPO
premiums had been increasing at 2 percent annually less than what
appeared to be the actual underline costs.
Mr. Perez explained the premiums had increased 7 percent while the
claims had increased 10 percent. It was recommended by Bartel to
adjust the 2 percent differential because the conjecture was the
amounts would catch up. PERS was using reserves from the PPO plans
to cover the differences, the recommendation was to prepare the City
for the true bill.
Council Member Burt said that was an indication that PERS was
understating the cost. This raised the concern of whether Palo Alto
could trust the information coming from PERS. He acknowledged Palo
Alto was one of the few City’s confronting the situation head on but
there maintained a large unfunded liability.
INCORPORATED INTO THE MOTION WITH THE CONSENT OF
THE MAKER AND SECONDER that Staff is to schedule a meeting with
Mr. Bartel and full Council prior to the Finance Committee Mid-Year
Review.
Council Member Holman said this level of impact to the budget
deserved enlightened discussions.
Council Member Klein said Staff’s intention was to fund the full ARC
each year which had been City policy. The recent spike to Palo Alto
retirements was referred to as a short term occurrence although the
actuary did not believe that to be true.
Mr. Perez said the actuary requested trending data. The current data
was available in the report but was not sufficient for their purposes.
Council Member Klein could not see how the level of retirement trends
could continue.
Mr. Perez clarified the changes made in 2004 to the retirement
packages altered to implosion of retirement costs from those who were
hired prior and could retire earlier.
Council Member Klein said because of the economic trends in the
country the national reports indicate a later in life retirement rather
than the information presented in the report.
Council Member Shepherd asked with the current Motion if the ARC
would be funded next year.
Mr. Keene said Staff was intending to bring forth during Mid-Year a
budget recommendation to fund the ARC in FY12 and unless directed
otherwise, the FY2013 budget would begin in spring also funding the
ARC.
Council Member Shepherd asked if the decision was to not fund the
ARC if there would be a discussion.
Mr. Perez stated the FY2012 had approximately $10 million to fund the
ARC which was adopted by Council previously. The discussion was to
return with a recommendation to increase the amount to match the
actuarial study recommendation. The payment was not made until the
end of the year so Council could direct Staff not to make a payment.
Council Member Shepherd asked if the payment was due at the end of
the calendar year or fiscal year.
Mr. Keene confirmed the fiscal year, June 30, 2012.
Council Member Price asked what the average rate of return had been
from CalPERS assumptions over the past 5 years.
Mr. Perez said the CalPERS Trust had been up and down, he did not
have current numbers in percentages. He noted in January of 2011 it
was 18 percent and as of September 30, 2011 there was a significant
decrease in the portfolio which was at $44 million and dropped by $5
million. He declared Staff would have the historic percentages when
they returned.
Council Member Price felt the information would be helpful for the past
few years and the assumptions moving forward.
Council Member Schmid noted the report showed half of the current
active employees were in the age range of 45 to 54 which indicated a
steady stream of retirements.
MOTION AS AMENDED PASSED: 9-0