HomeMy WebLinkAboutStaff Report 3010 City of Palo Alto (ID # 3010)
City Council Informational Report
Report Type: Informational Report Meeting Date: 7/23/2012
July 23, 2012 Page 1 of 2
(ID # 3010)
Title: Final Retiree Medical Actuarial Report
Subject: Final Retiree Medical Actuarial Report
From: City Manager
Lead Department: Administrative Services
This report and the attachment are provided to Council as an informational
update on the retiree medical actuarial study. No further Council action is
required.
Executive Summary
On April 16 Council approved changes to the retiree medical actuarial study
(report 2655). Staff informed Council that the changes would be incorporated
into the retiree medical actuarial study and a new study would be issued by Bartel
and Associates.
The attached report includes the changes approved by Council and is considered
the final retiree medical actuarial study for the City for the period up to June 30,
2014.
The actuarial accrued liability for retiree medical stands at $168 million and the
City has assets valued at $45 million making for an unfunded actuarial accrued
liability of $123 million. The City’s annual required contribution is $12.5 million.
These amounts were expected based on the changes Council approved in April.
Staff is continuing efforts to have employees share in the costs of retiree medical
across all labor groups.
Attachments:
Attachment A: Final Retiree Medical Report Valuation 6/30/11 (PDF)
Attachment B: CMR #2655 (PDF)
July 23, 2012 Page 2 of 2
(ID # 3010)
Prepared By: David Ramberg, Assistant Director
Department Head: Lalo Perez, Chief Financial Officer
City Manager Approval: James Keene, City Manager
CITY OF PALO ALTO
RETIREE HEALTHCARE PLAN
January 1, 2011 and June 30, 2011
GASB 45 Actuarial Valuations
Final Results
Presented by John E. Bartel, President
Prepared by Deanna Van Valer, Assistant Vice President & Actuary
Adam Zimmerer, Actuarial Analyst
Bartel Associates, LLC
May 23, 2012
Contents
O:\Clients\City of Palo Alto\OPEB\2011 val\Reports\BA PaloAltoCi 12-05-23 OPEB 1-1-11 6-30-11 Final Results.docx
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 27
Actuarial Valuation Certification 36
Exhibits 37
May 23, 2012 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
IAFF retired > 12/1/11 receive 90% of calculated amount
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
May 23, 2012 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 amounts6:
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, UMPAPA Retired > 4/1/11, SEIU Retired >
2/1/10, 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 For IAFF, vesting applies to greater of 100/90 formula amounts or same benefit as those hired < 1/1/04
May 23, 2012 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
May 23, 2012 4
BENEFIT SUMMARY
Implied
Subsidy
Non-Medicare eligible retirees pay active rates instead of actual cost
Active employee premiums subsidize retiree 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
Single Retiree Medical Cost
0
200
400
600
800
1,000
30 35 40 45 50 55 60 65
Age
Mo
n
t
h
l
y
C
o
s
t
PremiumMale CostFemale Cost
May 23, 2012 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
May 23, 2012 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
May 23, 2012 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%
May 23, 2012 8
PARTICIPANT STATISTICS
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May 23, 2012 9
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 (beginning 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. Asset allocation #1
beginning 6/30/2011.
Discount Rate 7.75% 1/1/11 – 7.75%
6/30/11 – 7.61% (no Margin
for Adverse Deviation)
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
May 23, 2012 10
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
Medical Trend Increase from
Prior Year 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%
Actuarial Load
for Additional
Future PPO
Increases
n/a None11
11 Because CalPERS has increased PPO premiums less than claims costs have increased, the City should expect premiums will
likely increase more rapidly than other typical medical cost increases.
May 23, 2012 11
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
January 1, 2009 Valuation10 January 1, 2011 &
June 30, 2011 Valuations
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%@6012
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%
12 Applies to employees hired after July 17, 2010
May 23, 2012 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%
May 23, 2012 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
May 23, 2012 14
ACTUARIAL ASSUMPTIONS HIGHLIGHTS
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May 23, 2012 15
ACTUARIAL METHODS
Method January 1, 2009 Valuation13 January 1, 2011 &
June 30, 2011 Valuations
Cost Method Entry Age Normal Level % of
Pay
Same
Unfunded
Liability
Amortization
30 years open period Same14
Actuarial
Value of
Assets
Market Value of Assets Same15
13 From 1/1/09 report by Milliman. 14 30-year open amortization period meets GASB 45 accounting standards but results in negative amortization and does not
meet a funding policy consistent with paying off the City’s unfunded liability. 15 Using Market Value of Assets to determine the ARC will result in more volatile future ARCs than if a smoothed Market
Value were used.
May 23, 2012 16
ACTUARIAL METHODS
Method January 1, 2009 Valuation13 January 1, 2011 &
June 30, 2011 Valuations
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
May 23, 2012 17
ASSETS
Market Value of Plan Assets – CERBT
(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 4,150
Benefit Payments16 - - - -
Admin. Expenses (23) (34) (41) -
Investment Return 6,749 4,674 2,155 3,40717
MVA (End of Year) 32,042 40,213 44,774 52,331
Approx. Annual Return 26.9% 13.7% 5.3% 7.6%
16 Benefit Payments made outside of trust by City. Refer to Slide 3 for fiscal year amounts. 17 Investment return based on 7.61% net of expenses
May 23, 2012 18
ASSETS
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May 23, 2012 19
RESULTS – JANUARY 1, 2011 VALUATION
Funded Status – 7.75% Discount Rate
(Amounts in 000’s)
1/1/0918 1/1/11
Projected
6/30/11
Present Value of Benefits
Actives $ 78,831 $ 82,476
Retirees 78,384 116,471
Total 157,215 198,947
Actuarial Accrued Liability
Actives 51,277 49,189
Retirees 78,384 116,471
Total 129,661 165,660 $ 169,930
Actuarial Value of Assets (AVA) 24,616 40,213 44,774
Unfunded AAL 105,045 125,447 125,156
Funded Ratio 19% 24% 26%
Normal Cost 3,478 4,782
Pay-As-You-Go Cost 6,075 8,434
18 From 1/1/09 report by Milliman.
May 23, 2012 20
RESULTS – JANUARY 1, 2011 VALUATION
Actuarial Gain/Loss – 7.75% Discount Rate
(Amounts in 000’s)
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
Medical Plan at Retirement 7,740 7,740
Medicare Eligibility 2,625 2,625
Contribution Loss (2,452) (2,452)
Plan Change – Cost Sharing (14,194) (14,194)
Plan Change – IAFF (1,069) (1,069)
Experience (Gains)/Losses
Caps/Premiums < Expected (3,917) (3,917)
New Retirees 2,700 2,700
Demographic & Other 12,318 - 12,318
Total (Gain)/Loss 18,959 (2,452) 16,507
Projected 6/30/11 169,930 (44,774) 125,156
May 23, 2012 21
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 2009/1019 2010/1120 2011/1221
ARC - $
Normal Cost $ 3,478 $ 3,591 $ 4,782
UAAL Amortization 6,308 6,404 7,802
Total 9,786 9,995 12,584
Projected Payroll 98,940 102,156 80,664
ARC - % Pay
Normal Cost 3.5% 3.5% 5.9%
UAAL Amortization 6.4% 6.3% 9.7%
Total 9.9% 9.8% 15.6%
19 Beginning of year payment, as shown in Milliman report. 20 Beginning of year payment. 21 End of year payment.
May 23, 2012 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
CAFR
2010/11
Estimate
2011/12
NOO at Beginning of Year $(26,352) $(23,242) $(23,006)
Annual OPEB Cost
Annual Required Contribution 9,786 9,786 12,584
Interest on NOO (2,042) (1,801) (1,783)
NOO Adjustment 2,585 2,280 1,434
Annual OPEB Cost 10,329 10,265 12,235
Contributions
Benefit Payments Outside Trust22 5,519 8,197 8,433
Trust Funding 1,70023 1,83224 6,598
Total Contributions 7,219 10,029 15,032
NOO at End of Year (23,242) (23,006) (25,802)
22 Estimated cash payments shown for fiscal year 2011/12. Actual cash payments should be used for OPEB footnote. 23 Shortly after year end, the City contributed another $1.832 million to the Trust. 24 Shortly after year end, the City contributed an additional $2.448 million to the Trust.
May 23, 2012 23
RESULTS – JANUARY 1, 2011 VALUATION
Amortization Bases & Payments – 7.75% Discount Rate
(000’s Omitted)
1/1/2009 Valuation 1/1/2011 Valuation
6/30/2009 6/30/2010 6/30/2011
UAAL Balance25 $ 109,040 $ 110,693 125,156
30-Year Rolling
Amortization Payment26 - $ 6,308 6,404 7,802
25 January 1, 2009 UAAL from Milliman report adjusted with interest to June 30, 2009. 26 Milliman results are beginning of year payments. Beginning with the 2011/12 payment, all results shown are adjusted with
interest to the end of the year.
May 23, 2012 24
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 $ 43,859 $ 38,617 $ 82,476
Retirees 36,840 79,631 116,471
Total 80,699 118,248 198,947
Actuarial Accrued Liability
Actives 25,053 24,136 49,189
Retirees 36,840 79,631 116,471
Total 61,893 103,767 165,660
Normal Cost 2,626 2,156 4,782
May 23, 2012 25
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 $ 53,652 $ 12,581 $ 16,243 $ 82,476
Retirees 84,420 14,434 17,617 116,471
Total 138,072 27,015 33,860 198,947
Actuarial Accrued Liability
Actives 32,553 6,369 10,267 49,189
Retirees 84,420 14,434 17,617 116,471
Total 116,973 20,803 27,884 165,660
Actuarial Value of Assets27 28,394 5,050 6,769 40,213
Unfunded AAL 88,579 15,753 21,115 125,447
Normal Cost 2011/12 3,314 705 763 4,782
Pay-As-You-Go Cost 2011/12 6,285 935 1,214 8,434
27 Allocated in proportion to the Actuarial Accrued Liability.
May 23, 2012 26
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 $ 3,314 $ 705 $ 763 $ 4,782
UAAL Amortization28 5,500 985 1,317 7,802
ARC 8,814 1,690 2,080 12,584
Projected Payroll 58,983 9,826 11,855 80,664
ARC - %
Normal Cost 5.6% 7.2% 6.4% 5.9%
UAAL Amortization 9.3% 10.0% 11.1% 9.7%
ARC 14.9% 17.2% 17.5% 15.6%
28 Allocated in proportion to the Actuarial Accrued Liability.
May 23, 2012 27
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% 7.61%
Present Value of Benefits
Actives $ 82,476 $ 87,186
Retirees 116,471 115,644
Total 198,947 202,830
Actuarial Accrued Liability
Actives 49,189 52,409
Retirees 116,471 115,644
Total 165,660 $ 169,930 168,053 $ 177,304
Actuarial Value of Assets 40,213 44,774 44,774 52,331
Unfunded AAL 125,447 125,156 123,279 124,973
Funded Ratio 24% 26% 27% 30%
Normal Cost 4,782 5,091
Pay-As-You-Go Cost 8,434 8,944
May 23, 2012 28
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Gain/Loss
(000’s Omitted)
AAL (AVA) UAAL
Actual 1/1/11 $165,660 $(40,213) $125,447
Projected 6/30/11 169,930 (44,774) 125,156
Expected 6/30/12 179,127 (52,331) 126,796
Assumption Changes
Discount Rate 2,816 2,816
Experience (Gains)/Losses
Demographic & Other (4,639) - (4,639)
Total (Gain)/Loss (1,823) - (1,823)
Projected 6/30/12 177,304 (52,331) 124,793
May 23, 2012 29
RESULTS – JUNE 30, 2011 VALUATION
Annual Required Contribution (ARC)
(Amounts in 000’s)
1/1/11 Valuation 6/30/11 Valuation
2011/12 2012/13 2013/14
Annual Required Contribution 7.75% 7.61%
ARC - $
Normal Cost $ 4,782 $ 5,091 $ 5,256
UAAL Amortization 7,802 7,665 7,779
Total 12,584 12,756 13,035
Projected Payroll 80,664 83,285 85,992
ARC - %Pay
Normal Cost 5.9% 6.1% 6.1%
UAAL Amortization 9.7% 9.2% 9.1%
Total 15.6% 15.3% 15.2%
May 23, 2012 30
RESULTS – JUNE 30, 2011 VALUATION
Amortization Bases & Payments
(000’s Omitted)
1/1/2011 Valuation 6/30/2011 Valuation
6/30/2011 6/30/2012 6/30/2013
7.75% 7.61%
UAAL Balance $ 125,156 $ 124,973 $ 126,819
30-Year Rolling Amortization
Payment - $ 7,802 7,665 7,778
May 23, 2012 31
RESULTS – JUNE 30, 2011 VALUATION
Estimated Net OPEB Obligation (NOO) Illustration
(Amounts in 000’s)
Estimated Net OPEB Obligation
(Asset)
1/1/11 Valuation 6/30/11 Valuation
Estimate
2011/12
Estimate
2012/13
Estimate
2013/14
NOO at Beginning of Year $ (23,006) $(25,802) $(26,184)
Annual OPEB Cost
Annual Required Contribution 12,584 12,756 13,035
Interest on NOO (1,783) (1,964) (1,993)
NOO Adjustment 1,434 1,583 1,606
Annual OPEB Cost 12,235 12,375 12,648
Contributions
Benefit Payments Outside Trust29 8,434 8,944 9,893
Trust Funding 6,598 3,812 3,142
Total Contributions 15,032 12,756 13,035
NOO at End of Year (25,802) (26,184) (26,570)
29 Estimated cash payments shown for all years. Actual cash payments should be used for OPEB footnote.
May 23, 2012 32
RESULTS – JUNE 30, 2011 VALUATION
Estimated Full ARC Funding Projection – 7.61% Discount Rate30
(Amounts in 000’s)
Fiscal
Year
End
Begin
Year
NOO ARC
Annual
OPEB
Cost
(AOC)
Contribution
Pay
Contrib
% of
Payroll
Benefit
Pmts
Pre-
Funding
Total
Contrib
2012 $(23,006) $12,584 $12,235 $8,434 $6,598 $15,032 $80,664 18.6%
2013 (25,803) 12,756 12,375 8,944 3,812 12,756 83,285 15.3%
2014 (26,184) 13,035 12,648 9,893 3,142 13,035 85,992 15.2%
2015 (26,570) 13,320 12,928 10,777 2,543 13,320 88,787 15.0%
2016 (26,962) 13,613 13,215 11,725 1,888 13,613 91,672 14.8%
2017 (27,361) 13,914 13,510 12,642 1,272 13,914 94,652 14.7%
2018 (27,765) 14,222 13,812 13,505 717 14,222 97,728 14.6%
2019 (28,175) 14,538 14,122 14,333 205 14,538 100,904 14.4%
2020 (28,591) 14,862 14,440 15,141 (279) 14,862 104,183 14.3%
2021 (29,013) 15,194 14,766 15,875 (681) 15,194 107,569 14.1%
30 Fiscal year ending 2012 based on prior valuation with 7.75% discount rate.
May 23, 2012 33
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Obligations – 7.61% Discount Rate
June 30, 2011
(Amounts in 000’s)
Benefits <
Age 65
Benefits >
Age 65 Total
Present Value of Benefits
Actives $ 45,615 $ 41,571 $ 87,186
Retirees 34,723 80,921 115,644
Total 80,338 122,492 202,830
Actuarial Accrued Liability
Actives 26,212 26,197 52,409
Retirees 34,723 80,921 115,644
Total 60,935 107,118 168,053
Normal Cost 2,761 2,330 5,091
May 23, 2012 34
RESULTS – JUNE 30, 2011 VALUATION
Actuarial Obligations – 7.61% Discount Rate
June 30, 2011
(Amounts in 000’s)
Misc Police Fire Total
Present Value of Benefits
Actives $ 56,775 $ 13,391 $ 17,020 $ 87,186
Retirees 83,714 14,346 17,584 115,644
Total 140,489 27,737 34,604 202,830
Actuarial Accrued Liability
Actives 34,733 6,869 10,807 52,409
Retirees 83,714 14,346 17,584 115,644
Total 118,447 21,215 28,391 168,053
Actuarial Value of Assets31 31,558 5,652 7,564 44,774
Unfunded AAL 86,889 15,563 20,827 123,279
Normal Cost 2012/13 3,528 750 813 5,091
Pay-As-You-Go Cost 2012/13 6,624 1,018 1,302 8,944
31 Allocated in proportion to the Actuarial Accrued Liability.
May 23, 2012 35
RESULTS – JUNE 30, 2011 VALUATION
Annual Required Contribution (ARC) – 7.61% Discount Rate
2012/13 Fiscal Year
(Amounts in 000’s)
Misc Police Fire Total
ARC - $
Normal Cost $ 3,528 $ 750 $ 813 $ 5,091
UAAL Amortization32 5,386 977 1,302 7,665
ARC 8,914 1,727 2,115 12,756
Projected Payroll 60,900 10,145 12,240 83,285
ARC - %
Normal Cost 5.8% 7.4% 6.7% 6.1%
UAAL Amortization 8.8% 9.6% 10.6% 9.2%
ARC 14.6% 17.0% 17.3% 15.3%
32 Allocated in proportion to the Actuarial Accrued Liability.
May 23, 2012 36
ACTUARIAL VALUATION CERTIFICATION
This report presents the City of Palo Alto Retiree Healthcare Plan (“Plan”) January 1, 2011 and June 30, 2011 actuarial valuations.
The purpose of these valuations is to:
Determine the Governmental Accounting Standards Board Statement Nos. 43 and 45 January 1, 2011 and June 30, 2011 Benefit Obligations,
Determine the Plan’s January 1, 2011 and June 30, 2011 Funded Status, and
Calculate the 2011/12, 2012/13 and 2013/14 Annual Required Contributions.
The report provides information intended for reporting under GASB 43 and 45, but may not be appropriate for other purposes.
Information provided in this report may be useful to the City for the Plan’s financial management. Future valuations may differ
significantly if the Plan’s experience differs from our assumptions or if there are changes in Plan design, actuarial methods or
actuarial assumptions. The project scope did not include an analysis of this potential variation.
The valuation is based on Plan provisions, participant data, and asset information provided by the City as summarized in this
report, which we relied on and did not audit. We reviewed the participant data for reasonableness.
To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted actuarial
principals and practices. Additionally, in our opinion, actuarial methods and assumptions comply with GASB 43 and 45. As
members of the American Academy of Actuaries meeting the Academy Qualification Standards, we certify the actuarial results
and opinions herein.
Respectfully submitted,
John E. Bartel, ASA, MAAA, FCA
President, Bartel Associates, LLC
May 23, 2012
Deanna Van Valer, ASA, EA, MAAA, FCA
Assistant Vice President, Bartel Associates, LLC
May 23, 2012
May 23, 2012 37
EXHIBITS
Topic Page
Premiums E- 1
Data Summary E- 3
Actuarial Assumptions E-29
Results by Fund E-37
Results by GF Department E-41
Definitions E-45
May 23, 2012 38
EXHIBITS
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May 23, 2012 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
May 23, 2012 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
May 23, 2012 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
May 23, 2012 E-4
DATA SUMMARY
Retiree Medical Coverage - Under Age 65
Plan Region Single 2-Party Family Total
Blue Shield Bay Area 48 42 25 115
Los Angeles 1 - - 1
Northern CA - 1 1 2
Sacramento 4 3 1 8
Southern CA - 1 - 1
Kaiser Bay Area 37 26 11 74
Northern CA 2 1 3 6
Out of State - 5 1 6
Sacramento 3 3 - 6
Southern CA 2 1 1 4
PERS Choice Bay Area 22 19 7 48
Northern CA 3 2 - 5
Out of State 7 13 2 22
Sacramento 1 - - 1
Southern CA 2 - - 2
PERSCare Bay Area 11 5 2 18
Northern CA 1 2 - 3
Out of State 13 2 - 15
Sacramento 2 - 1 3
Southern CA 1 - - 1
PORAC 10 14 12 36
Total 170 140 67 377
May 23, 2012 E-5
DATA SUMMARY
Retiree Medical Coverage - Over Age 65
Plan Region Single 2-Party Family Total
Blue Shield Bay Area 53 40 2 95
Northern CA - 2 - 2
Sacramento 1 - - 1
Southern CA 2 3 - 5
Blue Shield NetValue Southern CA 1 - - 1
Kaiser Bay Area 44 42 6 92
Northern CA 2 2 - 4
Out of State 4 3 - 7
Sacramento 6 6 1 13
Southern CA 1 - - 1
PERS Choice 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
Southern CA 4 1 - 5
PERSCare Bay Area 47 34 - 81
Northern CA 9 7 - 16
Out of State 41 19 2 62
Sacramento 3 4 - 7
Southern CA 5 3 - 8
PORAC 1 1 1 3
Total 255 213 15 483
May 23, 2012 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%
May 23, 2012 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
May 23, 2012 E-8
DATA SUMMARY
Retiree Age Distribution
Miscellaneous
0
20
40
60
80
100
120
140
160
<50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 ≥85
Age
Nu
m
b
e
r
May 23, 2012 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
May 23, 2012 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
Nu
m
b
e
r
May 23, 2012 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
May 23, 2012 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
m
b
e
r
May 23, 2012 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
May 23, 2012 E-14
DATA SUMMARY
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May 23, 2012 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
m
b
e
r
May 23, 2012 E-16
DATA SUMMARY
Active Service Distribution
Miscellaneous
0
50
100
150
200
250
0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
m
b
e
r
May 23, 2012 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
May 23, 2012 E-18
DATA SUMMARY
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May 23, 2012 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
m
b
e
r
May 23, 2012 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
m
b
e
r
May 23, 2012 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
May 23, 2012 E-22
DATA SUMMARY
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May 23, 2012 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
m
b
e
r
May 23, 2012 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
m
b
e
r
May 23, 2012 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
May 23, 2012 E-26
DATA SUMMARY
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May 23, 2012 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
May 23, 2012 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
m
b
e
r
May 23, 2012 E-29
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 January 1, 2011 &
June 30, 2011 Valuations
Valuation Date January 1, 2009
Fiscal Years 2009/10 &
2010/11 ARCs (beginning 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. Asset allocation #1
beginning 6/30/2011.
General
Inflation
3.00% Same
Discount Rate 7.75% 1/1/11 – 7.75%
6/30/11 – 7.61% (no Margin
for Adverse Deviation)
33 From 1/1/09 Milliman report
May 23, 2012 E-30
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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
Increase from
Prior Year 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%
May 23, 2012 E-31
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 January 1, 2011 &
June 30, 2011 Valuations
Actuarial Load
for Additional
Future PPO
Increases
n/a None34
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%@6035
ERA 57.5 54.5 54.0
34 Because CalPERS has increased PPO premiums less than claims costs have increased, the City should expect
premiums will likely increase more rapidly than other typical medical cost increases. 35 Applies to employees hired after July 17, 2010
May 23, 2012 E-32
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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%
May 23, 2012 E-33
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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%
May 23, 2012 E-34
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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
May 23, 2012 E-35
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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%
May 23, 2012 E-36
ACTUARIAL ASSUMPTIONS
January 1, 2009 Valuation33 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
May 23, 2012 E-37
RESULTS BY FUND
Actuarial Accrued Liability (AAL)
(Amounts in 000’s)
January 1, 2009 January 1, 2011 June 30, 2011
7.75% 7.75% 7.61%
CIP $ 1,564 $ 2,362 $ 2,411
Elec36,37 13,214 16,004 16,216
Gas36 4,589 6,106 6,254
GF38 91,488 115,628 116,987
ISF - Technology 2,226 2,038 2,111
ISF - Vehicle 1,225 1,383 1,422
Refuse 3,063 4,835 4,939
Storm Drain 494 1,448 1,468
Water36 4,673 5,087 5,200
WWC36 2,013 2,062 2,165
WWT 5,112 8,707 8,879
Total 129,661 165,660 168,053
36 AAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Fund’s AAL 37 Assets for Fiber Optics Fund appropriated to Elec due to no Fiber Optics employees in data 38 Assets for Printing & Mailing Fund appropriated to GF due to no Printing & Mailing employees in data
May 23, 2012 E-38
RESULTS BY FUND
Annual Required Contribution (ARC)
(Amounts in 000’s)
1/1/09
Valuation
1/1/11
Valuation 6/30/11 Valuation
2009/10 2011/12 2012/13 2013/14
7.75% 7.75% 7.61%
CIP $ 142 $ 207 $ 214 $ 219
Elec36,Error! Bookmark not defined. 953 1,064 1,082 1,106
Gas36 344 443 450 460
GF38 6,825 8,798 8,896 9,084
ISF - Technology 214 214 218 224
ISF - Vehicle 95 117 116 119
Refuse 245 374 376 385
Storm Drain 36 104 106 108
Water36 386 396 409 419
WWC36 169 186 196 201
WWT 377 681 691 707
Total 9,786 12,584 12,754 13,033
May 23, 2012 E-39
RESULTS BY FUND
Unfunded Actuarial Accrued Liability (UAAL)
(Amounts in 000’s)
January 1, 2011 June 30, 2011
7.75% 7.61%
CIP $ 1,796 $ 1,808
Elec39,40 10,464 10,200
Gas39 3,950 3,878
GF41 91,718 90,149
ISF - Technology 1,106 1,059
ISF - Vehicle 749 726
Refuse 3,437 3,400
Storm Drain 1,161 1,145
Water39 3,466 3,399
WWC39 1,263 1,270
WWT 6,338 6,243
Total 125,448 123,277
39 UAAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Fund’s UAAL 40 Assets for Fiber Optics Fund appropriated to Elec due to no Fiber Optics employees in data 41 Assets for Printing & Mailing Fund appropriated to GF due to no Printing & Mailing employees in data
May 23, 2012 E-40
RESULTS BY FUND
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May 23, 2012 E-41
RESULTS BY GF DEPARTMENT
Actuarial Accrued Liability (AAL)
(Amounts in 000’s)
January 1, 2009 January 1, 2011 June 30, 2011
7.75% 7.75% 7.61%
ASD $ 5,932 $ 9,051 $ 9,003
ATT 1,303 1,879 1,899
AUD 116 137 143
CLK 1,036 841 849
COU 885 1,787 1,802
CSD 10,182 12,403 12,529
FIR 24,576 31,517 32,030
HRD 2,087 3,066 3,057
LIB 3,026 4,020 4,061
MGR 1,330 1,801 1,829
PLA 4,653 6,826 6,916
PLN - 241 242
POL 24,243 30,928 31,396
PWD 11,849 11,131 11,231
Total 91,218 115,628 116,987
May 23, 2012 E-42
RESULTS BY GF DEPARTMENT
Annual Required Contribution (ARC)
(Amounts in 000’s)
1/1/09 Val 1/1/11 Val 6/30/11 Valuation
2009/10 2011/12 2012/13 2013/14
7.75% 7.75% 7.61%
ASD $ 490 $ 585 $ 585 $ 597
ATT 104 141 148 151
AUD 15 13 13 13
CLK 70 77 78 80
COU 45 141 133 136
CSD 821 891 890 908
FIR 1,729 2,342 2,374 2,423
HRD 143 206 202 205
LIB 308 446 458 469
MGR 86 143 146 149
PLA 402 543 546 559
PLN - 11 11 11
POL 1,761 2,441 2,490 2,544
PWD 824 818 822 839
Total 6,798 8,798 8,896 9,084
May 23, 2012 E-43
RESULTS BY GF DEPARTMENT
Unfunded Actuarial Accrued Liability (UAAL)
(Amounts in 000’s)
January 1, 2011 June 30, 2011
7.75% 7.61%
ASD $ 7,180 $ 6,938
ATT 1,490 1,463
AUD 109 111
CLK 667 655
COU 1,417 1,389
CSD 9,838 9,654
FIR 25,000 24,682
HRD 2,433 2,356
LIB 3,189 3,129
MGR 1,428 1,410
PLA 5,414 5,329
PLN 191 186
POL 24,533 24,194
PWD 8,829 8,654
Total 91,717 90,150
May 23, 2012 E-44
RESULTS BY GF DEPARTMENT
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May 23, 2012 E-45
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
May 23, 2012 E-46
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
May 23, 2012 E-47
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
City of Palo Alto (ID # 2655)
City Council Staff Report
Report Type: Action ItemsMeeting Date: 4/16/2012
April 16, 2012 Page 1 of 2
(ID # 2655)
Summary Title: Approval Retiree Medical
Title: Approval of Retiree Medical Report and Assumption Changes
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the City Council approve the Finance Committee recommendation to
accept the retiree medical actuarial study with changes to amortization method, asset
smoothing, and actuarial load, but keep the 7.75 discount rate assumption in 2012. For fiscal
2013, staff recommends accepting all Finance-Committee recommended changes, including the
discount rate changing from 7.25 to 7.61 percent to match the highest CalPERS discount rate
option.
Council Review and Recommendation
On February 28 the Finance Committee discussed the retiree medical actuarial report and
options for changing certain assumptions impacting the liability valuation amount (Attachment
A). The discussion was the follow-up to Council direction on January 30 (Attachment A) to
consider options for reducing the ARC in FY2012 and to include reductions in the FY2012
midyear budget. Minutes of the February 28 discussion are provided in Attachment B.
John Bartel, of Bartel and Associates, presented eight options for reducing the ARC to the
Finance Committee on February 28. The entire list of options is included in Attachment A. The
Finance Committee voted to approve options 1-3 for reducing the ARC in FY2012. The impact
of these changes is shown in the table below.
Assumption Reduction in ARC
($ millions) in FY2012
1) Amortization Method $0.3
2) Asset Smoothing $0.3
3) Actuarial Load $0.3
Original ARC $13.5
Revised ARC $12.5
April 16, 2012 Page 2 of 2
(ID # 2655)
For FY2012 only options 1-3 have flexibility to be adjusted and reduce the citywide ARC by $.9
million or approximately $.6 million for the General Fund. Options 4-8 would have a major
caveat comment from Bartel and Associates that could result in a negative impact from the
external financial audit. In FY2013 the ARC is $14.2 million. It is estimated that it will be
reduced by $1.4 million citywide (or approximately by $1. million in the General Fund) with the
assumption changes for an estimated revised ARC of $12.8 million in FY2013. This assumes
roughly the same savings from the assumption changes in FY2012 carried over to FY2013 in
addition to the assumption change to the discount rate. With Council approval staff will ask
Bartel and Associates to revise the actuarial study for FY2013 since we only have an estimate
based on FY2012 changes. This will include any changes from newly negotiated labor
agreements.
For FY2012, the Finance Committee decided to consider if the City should fund the additional
$1.7 million in the ARC from the budget stabilization reserve during the FY2013 budget
discussions in May. Depending on where projected revenues materialize the draw on reserve
potentially could be less as some of the key revenues are showing slightly higher trends.
Staff will present a funding plan for FY2013 during the proposed budget Finance Committee
hearings in May.
Environmental Impact
This is not a project for the purposes of the California Environmental Quality Act.
Attachments:
Attachment A: ID# 2578 02-28-12 (PDF)
Attachment B: Excerpt Minutes from February 28, 2012 (PDF)
Prepared By: David Ramberg, Assistant Director
Department Head: Lalo Perez, Director
City Manager Approval: ____________________________________
James Keene, City Manager
City of Palo Alto (ID # 2578)
Finance Committee Staff Report
Report Type:Meeting Date: 2/28/2012
February 28, 2012 Page 1 of 2
(ID # 2578)
Summary Title: Retiree Medical Discussion
Title: Retiree Medical Discussion
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee:
Review, discuss and provide feedback on the attached additional retiree medical
actuarial valuation analysis (see Attachment C).
Council Review and Recommendation
On January 30 the City Council discussed the retiree medical actuarial report (Attachment A).
Minutes for the meeting are attached to this report (Attachment B).
The City Council did not act to change their decision from November 28, 2011 accepting the
updated retiree medical actuarial study.
The Council directed staff to return to the Finance Committee with additional analysis from the
City’s consultant, Bartel and Associates. The analysis is attached to this report (Attachment C).
As directed by the Council, the analysis focuses on different levels of the annual required
contribution (ARC) for the nine different assumption levels as outlined in the report.
Due to the time necessary to prepare the analysis, staff and John Bartel will be presenting the
information to the Finance Committee in discussion format at the Finance Committee meeting
on February 28.
Attachments:
Attachment A: CMR ID# 2432 (PDF)
Attachment B: Excerpt from the January 30, 2012 Council Minutes (PDF)
Attachement C: Additional Retiree Medical Analysis - Bartel and Associates (PDF)
February 28, 2012 Page 2 of 2
(ID # 2578)
Prepared By:David Ramberg, Assistant Director
Department Head:Lalo Perez, Director
City Manager Approval: ____________________________________
James Keene, City Manager
City 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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(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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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.
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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:
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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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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
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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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y
C
o
s
t
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
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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%
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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%
2.b
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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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2.b
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October 11, 2011 15
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
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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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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
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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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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.
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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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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%)
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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
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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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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
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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
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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%
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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
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60
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100
120
140
160
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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
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<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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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
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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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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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b
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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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2.b
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October 11, 2011 E-27
DATA SUMMARY
Active Age Distribution
Total
0
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October 11, 2011 E-28
DATA SUMMARY
Active Service Distribution
Total
0
50
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150
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0-4 5-9 10-14 15-19 20-24 >25
Service
Nu
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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
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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
Pa
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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
01/30/2012
Excerpt Minutes from the January 30, 2012 Council
Minutes
8. Retirement Medical Actuarial Report Discussion.
Director of Administrative Services, Lalo Perez announced the item was
previously brought before Council on November 28, 2011 where they
determined it should be returned with the Actuarial Consultant available to
answer questions. Although the Council had accepted the Staff
recommendation during the previous meeting, Staff informed them they
were in a position to make changes to the assumptions as they felt
necessary during the presentation by the Consultant.
President, Bartel Associates, LLC, John Bartel gave a presentation to explain
the process of how the actuarial assumptions came to be. Initially there
were two valuations prepared, January 2009 and 2011 which determined the
end of Fiscal Year 2012 Annual Required Contribution (ARC) albeit the
contribution was not a requirement. The key number to pay attention to was
the Actuarial Accrued Liability (AAL); the value of benefits do to service that
had already been rendered. If the assumptions were met the amount
presented should be considered as the amount of assets that should be set
aside. The Actuarial Accrued Liability for active employees dropped
modestly from $51.3 million to $50.2 million while there was a large
increase for those who were no longer rendering service went from $78.4
million to $119 million; therefore, the total liability went from $130 million to
$169 million. The presentation was broken out into assumption changes,
plan changes, and gains and losses. He explained the Actuarial Load item
was the review of the increase to the CalPERS premiums; that had not been
keeping pace from one year to the next with their claims. CalPERS had been
pulling funds from their reserves to mitigate their premium increases. It was
discovered that people were opting into more expensive Medical Plans at
retirement, which increased the assumption numbers by $2.6 million. The
two items that decreased the liability were the cost sharing and the
International Association of Fire Fighters (IAFF). The Un-funded Actuarial
Accrued Liability (UAAL) of $134 million represented the distance the City
was from its AAL. The UAAL was rolled over on June 30, 2011 to be added to
the FY11/12 ARC in the amount of $8,597,000 to equal a 28-year
amortization of the original number which was for a 30-year amortization.
He noted if the City was pre-funding an obligation there should be a period
where that amount was being paid off over. He mentioned if the City was to
continue the pattern of an open or rolling amortization in the current FY the
ARC would be lower and there would be a cash flow but 30-years from now
the Un-funded Liability would not be paid off and in fact the Un-funded
Liability would be higher than today.
2 01/30/2012
Mr. Perez clarified if the City switched to a 30-year open amortization for
FY12 the reduction in the ARC would be $280,000 or $196,000 for the
General Fund. For FY13, the number would be $470,000 city wide or
$329,000 for the General Fund. The Rate of Return discussed in November
for FY12 was 7.75 percent and for FY13 and forward there were three
choices; the highest rate available was 7.61 percent, 7.06 percent, and 6.39
percent. Staff had recommended the City use 7.61 percent with an
adjustment for adverse deviation which lowered the percentage to 7.25
which was the return used for FY13. If the number used remained at 7.61
percent the ARC would be $570,000 city wide with the General Fund being
$399,000; 70 percent of the contribution was a General Fund obligation. If
there was a change to a 30-year rolling amortization with a higher rate of
return assumption of 7.61 percent it would lower the General Fund annual
required obligation by $728,000. The experience with the Trust since its
inception in March of 2008 through December of 2011 the Rate of Return
was 3.62 percent to the positive. Staff intended to return to Council at Mid-
Year for a discussion on options to fully fund the ARC and to locate solutions
to fund the ARC on an ongoing basis beginning with FY13 which meant
increasing the budget by $3.7 million city wide or $2.3 in the General Fund
in FY12 and an additional $800,000 city wide or $500,000 for the General
Fund.
Council Member Klein made note that the non-required ARC was absorbing
ten percent of the budget which appeared to be freezing out expenditures
that may be better for the health of the community long-term. He asked if
the goal of the Consultant was to choose the most conservative assumption.
Mr. Bartel said that was incorrect. The information his Firm provided was
their educated speculation, they did not feel the assumptions provided were
the most conservative but were not the most aggressive either. He noted
CalPERS selected the ranges and the Firm had a choice from their provided
percentages. CalPERS had a significant amount of equity invested in the
Global Equity market which was volatile.
Council Member Klein asked if there was a standard in the Actuarial Field as
to which amortization approach was approved or required.
Mr. Bartel said some Actuaries had used the Government Accounting
Standards Board (GASB) accounting standard as the out of bounds marker
for the minimum contribution that could be paid, if that was the approach
taken from an accrual stand point there should not be an amortization period
longer than 30-years. He believed if a client was pre-funding and they had a
goal of paying their un-funded liability off, using an open or rolling
amortization period did not meet that objective. If the objective was to pay
the minimum that the GASB accounting standard allowed without worry
3 01/30/2012
whether the unfunded liability was paid off, an open or rolling amortization
was sufficient.
Council Member Klein had concerns with the Bartel Associates not
recognizing there may be an un-bubble as it were with the number of
employees not retiring appose to the high number of retirees over the past
few years.
Mr. Bartel expressed his understanding of the un-bubble was when the City
ended up with far fewer people eligible to retire.
Council Member Klein said if the information was acknowledged in the report
that was sufficient.
Mr. Bartel requested the Council review the presentation where the active
liability was shown from January 1, 2009 to January 1, 2011 the rate of
retirement did not impact the people who had already retired, it only
impacted the active liability where the un-bubble was partially reflected by
the number of active liability being lower because there were a lot of people
who retired in the short-run. His Firms’ calculations reflected CalPERS
experience in terms of how people will retire.
Council Member Klein asked how the CalPERS experience was reflective of
the City of Palo Alto experience.
Mr. Bartel clarified Palo Alto’s non-safety employees had retired on average
at age 57, while the CalPERS rate of retirement being used for the current
active employees had future employees expected to retire slightly above age
58. Therefore his Firm consistently believed the Experience Analysis CalPERS
had completed, which was specifically related to CalPERS Public Agencies
with their pension formulas.
Council Member Klein asked how the factors related since the non-safety
employees were now at a two percent at age 60.
Mr. Bartel said the Palo Alto non-safety employees did not have two percent
at age 60.
Council Member Klein clarified the incoming employees were brought in at
two percent at age 60.
Mr. Bartel said the two percent at age 60 only applied to employees hired
after a certain date. They would need to use the rate of retirement
associated with the formula that people had so the formula of a retirement
age of 58 would be closer to 60 or 61 with two percent at 60. He noted until
4 01/30/2012
the employees were hired under the calculation they were not taken into
consideration in the valuation.
Council Member Klein said if the Actuarial Report was performed every two
years and the Firm reviewed long-term, in ten years most of the employees
would be at two percent at 60.
Mr. Bartel said how the City achieved the factors would be based on how the
employees were hired. His experience with second tiers was it would take
approximately ten years for the agency to make up half of the population.
For now the employees who had not been hired had no impact on the un-
funded liability.
Council Member Shepherd asked if Mr. Bartel felt the Milliman firm would
have stayed at the 7.75 percent rate on discount.
Mr. Bartel said they would have had to drop to 7.61 percent for the June 30,
2011 since it was the cap.
Council Member Shepherd asked when the five year averaging was compiled
with respect to asset smoothing. She had seen the measurement between
2009 and 2010 and clearly 2009 was a low point for savings and portfolios.
Mr. Bartel said the Firm settled on a five year asset smoothing period after
reviewing economic cycles and the CalPERS rate of return cycles which
ranged between a three to five year span. When the Firm reviewed the
CalPERS 15-year pension smoothing system there was a fear the length of
time would mask a large systematic adjustment. The reason the firm settled
on a five year asset smoothing cycle was because it was a long enough
period to see an economic flux without being so long there was a masking
occurring.
Council Member Shepherd asked if there was recognition of the 2009
financial crisis.
Mr. Bartel said what was occurring was the difference between what was
expected and actual and bringing those amounts in 20 percent each year.
Well over half of the 2009 downturn was in the June 30, 2011 valuation
especially since the investment return was offset by good investment
returns. The goal was to not inflate the contribution rate up if there was a
volatile market as well as it was not recommended to lower fears if the
investment market rose.
Council Member Shepherd asked what the risk would be if Council chose to
make a change to the five year asset averaging by either funding or not
funding the AAL.
5 01/30/2012
Mr. Bartel said Council needed to look at the difference between the market
value and the actuarial value which was the compromise between the
smoothing and not. On June 30, 2011 the City had a market value of $44.8
million and the actuarial value being used to set the rate was $40 million.
There were approximately ten percent of the assets not included so a $4
million change in the un-funded liability might increase the ARC by
$500,000. Using smoothing for actuarial value of assets understated the
contribution at the expense of smoothing, similarly if the investment return
was particularly good it might overstate in a good investment years.
Council Member Shepherd said there was an $8 million difference between
2008 and 2010.
Mr. Bartel acknowledged that was correct.
Council Member Shepherd asked why there was a $12 million change
between 2009 and 2011.
Mr. Bartel said the investment return for the City because of the timing of
when the contribution was placed was consistently good. The $4 million
difference was being used as an actuarial value below the market value so
they were overstating the contribution by the $250,000.
Council Member Burt said the newly hired non-public safety employees were
coming in on a two tier retirement program of two percent at 60. Mr. Bartel
mentioned those employees did not have an impact on the current actuarial
discussion. He asked if in ten years half of the City’s employees were at two
percent at 60, they would be in the equation to a fairly significant degree. So
if the actuarial was looking into the future at a 30-year horizon, he asked
how they would not impact the equation.
Mr. Bartel said there was more than a 30-year horizon. For example, if the
valuation was completed the day before the employee change was effective
that valuation would determine an un-funded liability using no one in the
new tier. However, if the valuation occurred the day after the benefit
changed, and there were employees hired under the tier benefit program,
the un-funded liability for those new employees and the actuarial liability
would be zero. The un-funded liability did not change because there were
new employees being hired, what would change was the normal cost
component of the ARC.
Council Member Burt asked for a scenario in ten years where half of the
newly hired employees were at two percent at 60 retired at age 58 while the
other half at age 63. He asked if it was correct to state those who retire at
6 01/30/2012
age 63, had attached to them less un-funded liability than those who retired
at age 58.
Mr. Bartel stated no. The scenario would be the employees retiring at age 63
had a lower actuarial liability. Although the retiree medical benefits may not
have changes, they would begin drawing those benefits later than the earlier
retirements.
Council Member Burt said the period in which the City was paying the full
amount for the employee before they were eligible for Medicare was
significantly shorter.
Mr. Bartel said that was correct so the employee’s liability would be lower on
a per capita basis and their normal cost rate would be lower on a per capita
basis.
Council Member Burt asked if that was reflected in the fixed closed
amortization rate.
Mr. Bartel clarified the fixed closed amortization had no impact on the
second tier employees. The fixed closed amortization had to do with the un-
funded liability for employees in the first tier and that number would not
change because of the second tier employees.
Council Member Burt asked if the City moved forward with an open
amortization rate, presumably that dollar amount would decline as far as the
contribution based upon the change in the employee retirement age.
Mr. Bartel stated no. If there was an un-funded liability and the funding
policy was to pay the normal cost plus some amortization of the un-funded
liability, the amortization on the un-funded liability was not being driven by
the accrual for the new employees. It was not being driven by the normal
cost because the policy was paying the normal cost. The topic of discussion
was how the un-funded liability was being paid, none of which was due to
the employees in the new tier. As time went on, the only way the new
employees would impact the liability was one of two ways 1) if the City did
not contribute to the normal cost for the new employees then they would
contribute to a higher un-funded liability or 2) if the City thought the new
employees were going to retire at age 61 but in actuality they retired at age
58 then the normal cost for the new employees would be too high or too
low.
Council Member Burt asked what the assumptions of the Firm were when
they informed the City, if they did not move forward with the fixed close
rate, at the outset they would be paying less than interest. He asked for
confirmation that in ten years there was an expectation the annual payment
7 01/30/2012
would be reduced as a result of a rolling amortization that reflected a later
retirement date.
Mr. Bartel said in actuality the normal cost would be lower although that was
not the amortization component. To clarify, whether the City accepted an
open or closed amortization rate the new tier employees had little to no
impact on the current amortization number; the impact would be on the
Rate of Accrual not the payment on the un-funded liability.
Council Member Burt said there were two alternatives presented the fixed
closed amortization and the open rolling amortization. He asked why there
was not an alternative based upon the interest.
Mr. Bartel said the Firm had the information for a third alternative although
since the majority of their clients amortized the un-funded liability as a level
percentage of pay they did not include it. An amortization that was a level
percentage of pay with a 7.50 percent investment return assumption on a
30-year amortization, the first year would be approximately six percent on
the balance. Interest would accrue at 7.50 and the payment was six percent
of the balance leaving a negative amortization until the City was below 20
years on the 30-year amortization period.
Council Member Burt said with the fixed closed amortization the probability
to be paid-off the liability was high within the 30-year period and an open
rolling amortization was basically a reverse mortgage with the City paying
less than the interest. Assuming there would always be an interest payment,
Palo Alto did not want to go further into debt they wanted to pay more
interest amount without necessarily taking on the principal. He asked why
that was not an option.
Mr. Bartel said the numbers would roughly be 7.75 percent of the un-funded
liability of approximately $134 million. With that option the payment grew
from $8.4 million to $10 million and there would be a contribution decrease
as a percentage of pay.
Council Member Burt said he would be interested in reviewing that option in
more detail as an alternative.
Vice Mayor Scharff asked for clarification on the process where the money
was placed in a Trust account, then the money was taken to pay the Retiree
Medical on a cash flow basis as it became due.
Mr. Bartel confirmed yes, that was the current process.
Vice Mayor Scharff asked how much would be owed for the current year, on
a cash flow basis.
8 01/30/2012
Mr. Bartel said for FY11/12 the amount would be approximately $8.4 million
if the City was only paying the benefits due to retirees.
Vice Mayor Scharff said prior to the Actuarial Study the City was looking at
paying $9.4 million and now it was $13.3 million but on a pure cash flow
basis it would be at $8.4 million.
Mr. Bartel said that was correct.
Vice Mayor Scharff said on a cash basis there would have been an additional
$1 million paid off.
Mr. Bartel stated yes.
Vice Mayor Scharff said the current recommendation was to pay off an
additional $4 million.
Mr. Bartel said yes.
Vice Mayor Scharff said the Actuarial Study was a snapshot with changed
assumptions which was compiled ever two-years. He asked if the suggestion
was in two-years things would remain as is with the City paying the $13.3
million with no changes.
Mr. Bartel noted reality interfered with what the Actuary expected to occur.
Vice Mayor Scharff asked if the City did not pay the amount would they still
be fine on a cash flow basis.
Mr. Bartel agreed.
Vice Mayor Scharff asked if the City would still be paying down on the
amount if they continued to pay the $9 million as previously recommended.
Mr. Bartel said yes.
Vice Mayor Scharff said there was no obligation to pay more than $9 million.
Mr. Bartel clarified there was no legal requirement to pay a higher amount.
With that being said, the un-funded liability was due in large part because
there were employees who were no longer working for the City.
Vice Mayor Scharff noted soon the City would be paying more people to not
work in the City than to work.
9 01/30/2012
Mr. Bartel said that was true.
Vice Mayor Scharff said for example if the $3.8 million was not paid towards
the un-funded liability it could be paid towards infrastructure.
Mr. Bartel said yes.
Vice Mayor Scharff said there were a number of un-funded liabilities
throughout the City that drew a limited amount of money. The goal to pay
off a funded amount was because of a future lack of income, a City did not
retire, posing the argument of paying interest only. He understood not
adding amounts for the future employees to pay although it was the past
employees who did not pay off their portion that the present employees
being dealt with.
Mr. Bartel said that was an appropriate policy question. To the extent if it
were possible to return to when Palo Alto initiated the Retiree Medical
Benefit and set aside the cost of service each year, that would be
generationally equitable. Unfortunately, going back was not an option;
therefore, as an Actuary the recommendation was to set aside more than
the cost of service for two reasons 1) there was a large number of retirees
and the City was obligated to make those payments and 2) there was a
large un-funded liability so setting money aside provided the advantage of
future benefits being paid by interest rather than cash.
Vice Mayor Scharff said the $14 million reduction came about because of the
90/10 cost sharing change in the medical plan.
Mr. Bartel said that was correct.
Vice Mayor Scharff said if the plan change went to 80/20 there would be an
additional $14 million reduction.
Mr. Bartel said he could not say the answer was yes. Hypothetically speaking
he said the answer was yes.
Vice Mayor Scharff said the City Council received different requests for cash,
he asked why the Retire Medical Benefits trumped the other requests. The
increase from $9 million to $14 million was not easily absorbed and the
additional funds could be spent elsewhere.
Mr. Bartel stated he was not qualified to respond on why one item was of a
higher importance than another.
Mr. Perez said an area of concern discussed in the Municipal Finance Groups
was the eventual review by the Credit Rating Agencies in terms of the
10 01/30/2012
outstanding liability and how they were addressed. Yes, it was possible to
not fund the liability fully and only pay the retiree obligation although there
will come a time where the rating agencies will consider the liability.
Vice Mayor Scharff said as long as the appropriate assumptions were chosen
the ARC will show fully funded. He asked the amount of money that could be
saved staying within the boundaries of the assumptions.
Mr. Perez said if there were changes made to a 30-year amortization and the
7.61 percent rate of assumption there could be a savings of $860,000.
Vice Mayor Scharff asked if the funds were being taken from the Reserves
since the concessions were not received.
Mr. Perez agreed that was a possibility.
Vice Mayor Scharff noted taking funds from one Reserve to add to another
Reserve provided less flexibility.
Mr. Perez confirmed that would be the scenario for 2012 but Staff was not
suggesting the same approach for 2013.
Council Member Schmid said the question for the Actuary was what was the
clear and true picture of costs and obligations. There was a recommended
option outlined in the Actuarial Report that the City accept a discount rate of
7.25 percent although staying under Option 1 raised the confidence level of
achievement and yet it maintained the same set of asset distributions.
Mr. Bartel said that was correct.
Council Member Schmid asked how long it took for an Actuarial Assessment
to catch up with structural changes. As an Actuary the position was to have
the City assume a greater risk although as a City, it was required to assume
all final risk. His concern was staying with Option 1 was pushing more of the
investments into a Hedge Fund scenario where risks had been exaggerated
over the past few years.
Mr. Bartel stated the Firm was not recommending Investment Option 1, 2, or
3.
Council Member Schmid said there was a recommendation for Option 1.
Mr. Bartel clarified if there was an incident where Option 1 was identified it
was in error, he clearly noted the Firm was not investment advisors.
11 01/30/2012
Council Member Schmid read from the Council packet where Bartel and
Associates had recommended select rate 55 percent confidence limit under
Option 1.
Mr. Bartel clarified the confidence level was noted for each Option but no
single Option was recommended.
Council Member Schmid asked how an Actuary could assist the City to
understand when there was a structural change rather than a general cycle.
Mr. Bartel said based on what the Investment Advisors were saying which
was currently; if you were to invest more aggressively the volatility of the
contribution and assets would be greater. He explained the volatility
mattered when there was a large amount of assets relative to the payroll. It
mattered less in the short run, particularly when the assets were smaller
relative to the payroll.
Council Member Schmid said the discussion at hand was on past obligations
the City needed to pay off.
Mr. Bartel answered yes.
Council Member Schmid questioned the information saying the City was
paying two times the amount for previous employees and the number was
growing.
Mr. Bartel acknowledged the growth and noted the expectation was the
growth pattern would not be to the scope of the recent past.
Council Member Schmid said it was important to be open with the
community to provide them with what the City’s obligations were so there
was an understanding of when items needed to be given up.
Mr. Bartel agreed and said for that reason the percentage of the confidence
level was recommended for the discount rate.
Council Member Schmid asked for confirmation the Firm was recommending
the 55 or 60 percent confidence level but were not recommending Option 1,
2, or 3.
Mr. Bartel said that was correct.
Council Member Schmid said the report indicated many people switched
medical plans to PERSCare at the age of 65. He asked if that was where the
$7.7 million came from.
12 01/30/2012
Mr. Bartel said according to the study performed Palo Alto had no active
employees under the PERSCare medical plan. There were 11 percent of the
retirees in PERSCare that were not yet Medicare eligible.
Council Member Schmid said there was a contract that said the City would
pay the second most expensive medical plan; therefore if retirees moved
into PERSCare the City would not pay.
Mr. Perez confirmed that contract was effective January 2007 and forward so
any employee who retired prior to that date was eligible to shift into
PERSCare at the City’s expense.
Mayor Yeh said a question had been raised as cities began to see the liability
eat into a higher percentage of their total budget his thought was what
GASB would do beyond requiring cities to disclose what their liability was. He
knew if there was a draft of GASB requiring cities to disclose their liability he
asked what the timeframe would be for that information and how serious
that development might be coming from them. From a legal perspective
what type of authority did GASB have to draft that type of requirement.
Mr. Bartel said if Mayor Yeh was referring to the Pension Disclosure Exposure
Draft which did not require the City to fund it but it did require them to place
on their city wide financial statement the pension un-funded liability. He had
been told by GASB staff they would be following-up on the requirements and
the Draft would be final by June 30, 2012. He said it would be effective for
Palo Alto on their FY12/13 budget so when the June 30, 2013 financial
statement was completed he believed the un-funded liability would appear
on the pension side. GASB was following-up the Draft project with an Other
Post Employee Benefit (OPEB) standard.
Mayor Yeh asked when the Firm looked at the majority of cities’ financial
situations what were the projections for what the implications the liability
might cause besides the rating agencies downgrading cities. Would GASB
acknowledge and accept cities filing for bankruptcy or would they request
them to issue OPEB or Pension Obligation Bonds to meet their liability.
Mr. Bartel said all of the rating agencies were aware of cities un-funded
liabilities because they read the financial statements so he did not believe
there would be a dramatic effect unless there was an agency not adequately
setting money aside.
Mayor Yeh said he was aware the rating agencies had gone under scrutiny
for making their criteria more transparent as far as how they reach the
rating for the different entities. He asked if there was knowledge as to what
municipalities could anticipate once their transparency was affected.
13 01/30/2012
Mr. Perez acknowledged there had been concern amongst the financial
groups and they had met with the rating agencies themselves without
clarity. Part of the issue for the rating agencies to create a fixed pattern was
the different cities were inconsistent with their liabilities and offered benefits
where Palo Alto was on the upper end.
Mayor Yeh said the process appeared as through there was a grading curve
created and those who were closest to the 50 percent received an A.
Mr. Perez noted many of the municipalities were on different reporting cycles
and it was mentioned having a majority on the same reporting cycle created
a smoother comparison for the rating agencies.
Mayor Yeh suggested adding a separate line item to the budget process
reflective of the health of the ARC showing where the City was in paying
down the un-funded liability. Having the information readily available to
Council would provide flexibility in decision making with the competing
priorities requesting funds.
Mr. Bartel noted the recommendation and understood there should be a
range and a projection of how the un-funded liability would react as time
passed.
Mayor Yeh agreed on the understanding and noted as the valuation was
completed every two years it could be a continuous update reflective of
market performance.
Council Member Klein asked why the interest rate remained the same on the
liabilities as it did with the investments. As time went on and a person
wished to reduce their payments they would refinance the loan and reduce
the interest rate.
Mr. Bartel rephrased the question for accuracy; as there was an un-funded
liability of $133 million, if that amount could be borrowed at five percent,
would the City not be better of borrowing the money at five percent giving it
to CalPERS and have them earn their higher rate of return so the City was
only paying five percent on the debt.
Council Member Klein said that was one way of looking at the situation but
not what he was referring to. His thought was moving forward using a
number other than what was suggested by the Firm of 7.6 percent for the
annual payment at what rate of interest would the debt increase.
Mr. Bartel said the 7.6 percent was based on a lost opportunity.
14 01/30/2012
Council Member Klein asked why they could not consider the 7.6 percent as
an unrealistically high number on the liability in the same manner as a bank
earned money on the arbitrage.
Mr. Bartel clarified when a discount rate was being used whether it was at
7.25 percent or 7.61 percent and the decision was to contribute $1 million
less it was looked upon as a lost opportunity to earn that percentage of
interest. If there was a thousand dollars owed annually it was discounted
and if money was contributed the question was how much was needed to
reach the thousand dollars so the investment return needed to be used in
both directions.
Council Member Klein disagreed with the mathematics because people
frequently borrowed at one rate and received an investment return at a
different rate.
Mr. Bartel said if money was borrowed at a lower rate of return, contributed
the money to CalPERS and expected to receive a higher rate of return was
considered an interest arbitrage. He understood there was a chance the City
may come out ahead in that situation; however, there was no certainty.
Council Member Klein stated he was not suggesting the City borrow their full
debt amount but rather borrow on a year to year basis.
Mr. Bartel asked who the lender would be.
Council Member Klein was not certain who the lender would be.
Mr. Bartel said the lender mattered because if the City was not making their
contribution to the plan but borrowing from the plan it did not make financial
sense.
Council Member Klein corrected he believed he would be borrowing the
money from the recipients or the beneficiaries of the plan not the plan itself.
Mr. Bartel stated by borrowing from the plan what was happening was the
amount being borrowed was not earning the highest interest rate.
Council Member Klein disagreed, he felt borrowing the money and using the
arbitrage method would benefit the plan.
Mr. Bartel said any money not contributed to the plan or borrowed from the
plan was not earning interest under the plan.
Council Member Klein said he would be earning interest because the money
would be invested.
15 01/30/2012
Mr. Bartel gave an example of the City owing $1 million each year from
today. The valuation valued the $1 million discounted at 7.25 percent
making its actual value $930,000. There were two choices 1) put $930,000
into CalPERS today or 2) put $1 million into CalPERS one year from today.
Either of those options would earn the City the 7.25 percent interest. His
understanding of the recommendation by Council Member Klein was the City
was not going to contribute the $930,000 and was going to pay 4 percent
interest on $130,000 and somehow that transaction would accumulate to $1
million.
Council Member Klein presented the situation as the City owed $1 million;
the question was how much would that $1 million grow to in a year at 7
percent and why was it not calculated in the same manner as when an
individual borrowed money from a bank.
Mr. Bartel said the misunderstanding was the money was not being
borrowed from anyone, so the analogy did not work. The reality was the City
was borrowing money from the plan and the plan was saying if you want to
use an expected return of four percent than the un-funded liability would be
substantially higher because there was going to be less interest earned.
Council Member Klein said there the bank was a potential lender.
Mr. Bartel said that was correct, or there was someone who would loan the
City the money at a reasonable interest rate.
Council Member Klein was aware with the City’s current credit rating an
amount of money could be borrowed at a four to four and a half percent.
The benchmark was if it was necessary to borrow money, it was possible to
do so at an amount substantially less than the discount rate being used.
Mr. Bartel noted four percent was a tax advantaged interest rate so if there
was money borrowed against the debt he did not believe it could be at a tax
advantaged rate and the City could not receive the arbitrage unless they
actually borrowed money from a lender. The caveat was if the money was
borrowed and contributed to CalPERS there would be a significantly greater
than zero risk that CalPERS investments would earn less than what was
being paid on the debt service.
Council Member Klein agreed there would always be a risk with arbitrage.
Mr. Bartel said the issue became whether the risk was an appropriate one for
the City and the taxpayers to take.
16 01/30/2012
Council Member Holman said as the City looked forward at increased medical
costs and rates of returns that were less than they use to be she asked how
municipalities would not be forced to look at addressing retiree benefits.
Mr. Perez acknowledged Staff needed to continue to review ways in which to
reduce the expense. In reviewing the trend data it took from 2002 to 2008
for the City to double the medical payment for current city wide health care
without the additional cost to pension. He agreed that route was not
sustainable and he noted the national average according to the Kaiser Study
http://ehbs.kff.org/, in terms of employer/employee cost sharing was 70/30
whereas Palo Alto was achieving a 95/5 for miscellaneous and 90/10 for fire
fighters. He added there was a significant reduction in cost when PERSCare
was eliminated for the equation.
Council Member Holman felt it was important for the pubic to be informed
that any changes in the cost of healthcare was not without difficulty and
there were limitations the City had to abide by.
Council Member Shepherd noted healthcare was an untained field as to how
municipalities were explaining and handling their un-funded liabilities. She
was interested in a better understanding of how to roll out the liability a little
longer in order for the City to be more frugal with its cash flow. She was
aware there was $34,000 placed in the CalPERS Irrevocable Trust and asked
if those funds would always belong to Palo Alto.
Mr. Perez said the City would carry the risk of investment but the funds
would remain the property of Palo Alto. The funds could be pulled out by the
City at any time as well as added to in the future.
Council Member Shepherd asked how much medical plan flexibility was
available at retirement or was it scripted when employees were hired.
Mr. Perez said his understanding was there could not be changes made to
current retirees, for those hired after 2004 where there had been changes
made those such as the vesting period and PERSCare was not an option
unless the employee chose to pay the difference out of pocket.
Mr. Bartel corrected the Firm was not saying the City could not change it for
current employees they were saying they were not expecting Palo Alto to
make that change to the benefits.
City Attorney, Molly Stump noted the retiree medical issue was an area still
in its infancy although the California Supreme Court issued a decision late
2011 clarifying benefits to retirees could be vested dependant upon the
language in the various agreements, facts, and circumstances in which the
employees received their benefits. The courts left open for discussion to
17 01/30/2012
some degree the question of medical benefits to be paid upon retirement to
current employees.
Robert Moss expressed his initial reaction to the amount of money the City
was committed to spend for healthcare which was only a portion to the total
cost of retirement. The un-funded liabilities depended in large part on
assumptions, which tended to be adjustable and the manner in which
CalPERS invested the funds. He predicted there would be a rise in healthcare
costs of approximately 6.5 percent annually except with programs such as
Kaiser so he suggested capping cost the City was willing to pay thereby
reducing the overhead cost and swaying employees to accept the lower cost
medical plan.
Council Member Espinosa said Me. Bartel had mentioned if his Firm was to
have a conference with the Milliman Actuarial Firm there would be
similarities in the manner in which the assumptions were reached. He asked
for clarification on the areas where Milliman would disagree with the Bartel
Firm.
Mr. Bartel believed Milliman would agree with his Firms’ assessment of the
Confidence Level although he supposed in their report they would have used
a 7.61 percent for the discount. He suspected they would disagree with the
medical trend numbers but he expected they would have matched the new
CalPERS demographics numbers, and they would have agreed with what as
being said with respect to the $3.4 million actuarial load but it was unlikely
they would have implemented the assumption. There was no doubt if they
looked closely at the demographics of the medical plan at retirement they
would agree with the change similarly to the Medical eligibility. They clearly
had a different view on the amortization where they would have accepted a
rolling 30-year.
Council Member Espinosa asked how the presented information was being
teed up back to Staff across the City and to retirees assisting them in
understanding the broader context of the challenges the City was facing.
Mr. Perez said Staff had presented the City Manger with draft presentation
slides regarding a similar discussion. There had been questions on how the
un-funded liability grew to the extent it had and as he had mentioned earlier
it doubled in a matter of four years. It was important to have the discussion
regarding the pension and healthcare, how those rising costs affected the
budget and the consequences to the services offered throughout the City.
City Manager, James Keene said over the past couple of year Staff had been
shown charts reflective of the trajectory of the increases.
18 01/30/2012
Mayor Yeh asked for confirmation that absent any Council action Staff would
be returning at Mid-Year with a Budget Amendment Ordinance to increase
funding the ARC by $2.3 million for the General Fund and potentially $1.5
million for the Enterprise Fund. However, if Council wished to take action the
options were 1) accepting the minimum resulting in growth in the un-funded
liability, 2) to hold the un-funded liability steady, or 3) 30-year closed
amortization.
Mr. Keene mentioned there was a schedule action at the Mid-Year although
technically the adjustments did not need to be reconciled until before the
end of the Fiscal Year. He explained no matter the Motion provided during
the meeting or at the Mid-year Council had some flexibility after the fact.
Mr. Bartel wanted to ensure the Council had clarity whether a 28 or a 27-
year amortization would be paying in the initial period less than interest
meaning on an interest only option the City ended up paying more.
Mayor Yeh said in preparation for the Mid-Year and the budget decisions it
would be helpful if the Council received the data numbers indicated from the
Milliman low to the Bartel high with the spread in between.
Mr. Bartel asked for clarification if the question was how much work would
be required to supply those numbers.
Mayor Yeh clarified his interest was to receive a definite number and its
meaning if the Council chose the interest only option.
Mr. Bartel said his Firm could provide any of those calculations but he was
still uncertain as to what was being requested. He noted the numbers
provided to the Council and City Staff in the presentation were the Firm’s
best estimations for the liability and contribution and they did not think in
terms of minimum or maximum. He mentioned if the City paid interest on
the un-funded liability the ARC would be higher than what was being
presented. In the range of order it could be considered the Milliman
minimum or the Bartel best guess and the no-negative amortization as being
an upper limit on the short term contribution.
Council Member Klein was troubled by Council considering Motions
considering neither the agenda nor the Staff memo requested one.
Ms. Stump stated Council had a fare amount of flexibility in the term
providing feedback.
Mayor Yeh clarified there was leeway for a Motion as long as it stayed within
confine of the discussion.
19 01/30/2012
Ms. Stump agreed the parameters having been laid out were appropriate to
be included in a Motion.
Council Member Klein felt there was not fair notice given to the public or
Council itself to make a decision on the numbers involved.
Mayor Yeh noted his position was for Staff to return with more analysis and
not to take a firm position.
Ms. Stump said her advise was predicated the Motion being a request for
additional information and not for Council to be making a decision or
adjustment to the ARC itself.
MOTION: Mayor Yeh moved, seconded by Council Member Shepherd to
direct Staff to return additional analysis conducted with the consultant for
the different levels of the ARC contributions for the nine different assumption
areas for the February 28, 2012 Finance Committee.
Council Member Shepherd understood there was no boiler plate to the
assumptions and liabilities although it was being worked on and she hoped
in time there would be a smoother manner in which to go about making
these decisions. She felt it was important to have the ranges brought back
prior to the Mid-Year.
Council Member Schmid asked for clarification on the Motion; it was for Staff
to return to Council with variations.
Mayor Yeh stated the Motion was for Staff to work with the Consultant to
achieve the costs for the additional analysis.
Council Member Schmid said the value of the report before them and the
discussion during the meeting was having an independent Actuary inform
the Council on what his considered opinion was on what Palo A lot may face
in the future. He wanted to ensure the Motion was not requesting any
modification of the independent report.
Mr. Perez agreed the report had been previously approved by the Council
and the work being brought back to the Council was in addition to and not
an alteration to the report from the independent Consultant.
Council Member Schmid said if Council did not agree with the numbers, it
was something that should be stated publicly and work with the employees
and public about the consequences.
Vice Mayor Scharff asked for clarification on the Motion language “working
with the Consultant for costs for additional analysis.” His interpretation of
20 01/30/2012
the Motion was returning to Council with additional analysis not costs for
additional analysis.
Mayor Yeh clarified there would be a cost associated with the additional
analysis so the Motion should be corrected to read: to have Staff return with
costs for additional analysis conducted with the Consultant.
Mr. Bartel said the Mayor had suggested for future valuations to include a
range of contributions, he agreed and recommended that should be done in
conjunction with the impact that range would have on future un-funded
liability. He asked if that information was the intended information being
requested or were the ranges being sought strictly for the range of ARC.
Mayor Yeh said his desire was what type and amount of information could be
compiled by February 28, 2012.
Mr. Bartel explained both models with the ranges could be turned around by
February 28th.
Vice Mayor Scharff felt the Motion should read as followed: to have Staff
return with a band of costs setting forth the different assumptions to fund
the ARC.
Mayor Yeh concurred that was the intent of the Motion.
Vice Mayor Scharff understood Council was receiving the additional
information because they wanted to make a determination on how much to
fund the ARC; if there was a determination there should be a report to
reflect the decision. Council’s decision to fund should be based on the best
information provided on the assumptions. If the Motion was for additional
analysis without a final report to reflect the decision that came from the
additional information he did not see the necessity of the additional
information.
Mr. Bartel said if Council requested his Firm to prepare a report using the
7.61 percent discount rate, he would inform then that would not be his
recommendation although 7.61 percent was not out of the range of
reasonableness in assumptions. His interpretation of the Motion was not a
change in acceptance of the report but a request for more information so the
Council could make a future decision as to whether or not to rescind the
acceptance and request the report be redone.
Vice Mayor Scharff said if a decision was made to rescind the acceptance of
the report based on the additional information that would lead to redoing the
report. He noted his understanding of the Bond Rating was the report was
reviewed to verify it matched up with the contribution.
21 01/30/2012
Ms. Stump clarified rescinding the report was not on the agenda and would
not be an appropriate action during this meeting.
Council Member Burt asked for clarification if the City chose the option of the
full payment of the interest then initial annual payment would exceed the
initial alternative payment if the City was paying down the principal.
Mr. Bartel clarified the 28-year amortization had no payment on the principal
amount; the payment effecting the principal began once there was less than
20-years remaining on the amortization.
Council Member Burt said the dollar amount the City would pay in the initial
years would actually be higher if they switched to the interest only
alternative rather than if the City was paying down the principal on a 28-
year amortization.
Mr. Bartel stated yes but there was no payment going towards the principal
for a minimum of eight years on a 28-year amortization.
Council Member Klein said there were more than three options since there
was no required payment amount. The Actuary recommended three options
for the Council but those were not the only options available. He thought the
information requested in the Motion was included in the report and Staff
merely needed to extract it and enter it into a separate sheet.
Mr. Bartel noted the impact on the ARC was not included in the report. The
report covered the impact on the un-funded liability.
Council Member Klein believed he heard several numbers discussed
throughout the meeting regarding what would lower the ARC.
Mr. Perez said that was correct. Staff had derived numbers outside of the
report they had received from Mr. Bartel such as the 30-year open
amortization.
Council Member Klein argued the numbers were readily available if they had
been discussed in the meeting so his confusion was why the report needed
to be re-written. He requested a small report showing the five or so
differences in the dollar amounts with the ARC.
Mr. Bartel said the clarification he needed was whether Council wanted to
know in addition to the difference in the ARC what the impact in the un-
funded liability would be as time went by.
22 01/30/2012
Mayor Yeh clarified the value of having the additional information was the
Council would have a greater certainty of the impact on the un-funded
liability within the two-year timeframe before the next Actuary Report
produced. There was practical decision to be made at a mid year point and a
budget being prepared for the upcoming Fiscal Year. Ultimately he was
confident in the decision made met GASB requirements. The reason the
interest only options was provided was because it was a policy goal of
keeping the un-funded liability at a constant. The question was did the
interest only payments achieve that goal or were there other payment
streams that would not surpass it.
Mr. Bartel agreed the interest only payment method did achieve that goal.
If under the current amortization method, the un-funded liability will be
growing over the next 28 years or the next eight years and only then would
it begin to decline. If the policy goal was to not heave un-funded liability
grow, the answer would be over the next eight years using the 28-year
amortization method would be contrary to the policy.
Mayor Yeh agreed, with the explanation it did not make sense to include the
interest only method. The two numbers in question were 1) the low at $9.8
million which was what had been formerly budgeted for the contribution for
the FY12 as recommended by the Milliman Group versus 2) the $9.8 million
plus the $2.3 million under the new actuarial analysis, that was the band
and both were GASB compliant. As Council Member Klein noted as long as
there was a range of numbers the Council could make their decision.
Mr. Perez was aware the $9.8 million needed to be higher to fund the ARC
but the question was to what degree.
Mayor Yeh said if Staff knew the $9.8 million was not sufficiently high was
Council comfortable as a body to choose a number that Staff was now
currently planning to bring back. He recommended changing the language of
the Motion to: for Staff to bring back to the Mid-Year budget meeting the
Staff recommendation and allow Council to pick out the assumptions they
did not wish to include at that point.
Mr. Perez noted Mr. Bartel had said he had presented his level of
recommendation and did not recommend a change.
Vice Mayor Scharff felt the current Motion provided the framework for an
intellectual decision. He agreed with a brief report with the additional
numbers would be sufficient unless Staff believed there would be more
needed to meet with the Bond Council to explain how they arrived at the
numbers.
23 01/30/2012
Mr. Perez said the steps being outlined did not reflect concern with respect
to the rating agencies. If the Council were to make substantive changes then
there may be cause to revisit.
Council Member Shepherd it appeared to her that each one of the
differentials from the Milliman Report had a value for the ARC that could be
easily distributed to review the out of pocket expense.
Council Member Schmid asked Staff to provide the truest, most
straightforward response to what was the City’s liability on future medical
benefits.
Mr. Perez said in order to reach the truest number he would take the
actuarial load, which could be lowered a couple of percentages, Mr. Bartel
may not be comfortable lowering it more than two percent. Mr. Bartel may
say on actuarial load there was no movement, on some other number he
may say I could conceive a slight change and supply the range and what it
would do to both the ARC and the long-term liability. That was the type of
scenario Staff believed they could return to Council by the 28th of February
in a short report.
MOTION PASSED: 8-0 Price absent
Retiree Healthcare Plan
January 1, 2011 and June 30, 2011
GASB 45 Actuarial Valuations
Follow-up Analysis
Presented by John E. Bartel
Prepared by Deanna Van Valer
Adam Zimmerer
Bartel Associates, LLC
February 28, 2012
22/28/12
Background
Review Items:
Without Major Caveat
May include minor caveat, for example:
“Rolling amortization period meets GASB 45 accounting standards but
does not meet a funding policy requiring unfunded liability be paid off.”
With Major Caveat
“Assumption selected by City. Bartel Associates believes assumption is not
appropriate.”
Contribution Rate Impact:
Results are all relative to:
2011/12 ARC of $13.478 million
2012/13 ARC of $14.242 million
Results are not additive and may be different if multiple
selections are made
32/28/12
Methods & Assumptions
Without Major Caveat
7.25%7.61% 2012/134. Discount Rate
2% Load for
PEMHCA
no Load 2011/123. Actuarial
Load
5 Year
recognition
Market Value 2011/122. Asset
Smoothing
Fixed
(28 Years)
YearDescriptionItem
Rolling
(30 Years)
2011/121. Amortization
Method
42/28/12
Methods & Assumptions
With Major Caveat
YearDescriptionItem
80-90%
Eligible
100% Eligible 2011/128. Medicare
Eligibility
Experience
Based
No Change at
Retirement
2011/127. Medical Plan
at Retirement
IncorporateDo not
Incorporate
2011/126. CalPERS’
Experience
Study
9%/9.4% for 2013
Grading to
5% in 2021
& Beyond
6.5% for 2009
Grading to
5.85% in 2018
& Beyond
2011/125. Medical
Trend
52/28/12
Methods & Assumptions
Without Caveat
0.5 2012/134. Discount Rate
0.3 2011/123. Actuarial
Load
0.3 2011/122. Asset
Smoothing
Year
Reduction in ARC if
Assumption/Method Not
ChangedItem
$ 0.3 million 2011/121. Amortization
Method
62/28/12
Methods & Assumptions
With Caveat
0.2 2011/128. Medicare
Eligibility
0.8 2011/127. Medical Plan
at Retirement
0.9 2011/126. CalPERS’
Experience
Study
Year
Reduction in ARC if
Assumption/Method Not
ChangedItem
$ 0.3 million 2011/125. Medical
Trend
FINANCE COMMITTEE
DRAFT EXCERPT
Special Meeting
February 28, 2012
1. Retiree Medical Discussion
Lalo Perez, Administrative Services Director said per the Finance
Committee direction Staff returned with Bartel Associates to have a
discussion around eight of the amortization methods and assumptions.
John Bartel, President, Bartel Associates, LLC, explained his firm had
separated out the eight items into categories they would be willing to
change without a major caveat. The Fiscal Year (FY) 2011/12 Annual
Required Contribution (ARC) was currently at $13.5 million which was
a large increase from the prior year of $3.7 million. The FY12/13 ARC
was anticipated to be $14.2 million representative of a $700,000
increase over FY11/12. The first four items of the amortization method
were 1) changing from a 28 year fixed to a 30 year rolling
amortization period which would impact FY11/12, 2) elimination of
asset smoothing and going to a market value of assets which would
impact the FY11/12, 3) a 2 percent load because of CalPERS increasing
premiums at a lower rate than claims were growing, and 4) the
discount rate which impacted the FY12/13 which was currently
recommended at 7.25 percent and the maximum discount rate
accepted by California Employees’ Retirement Trust (CEBRT) was 7.61
percent. The remaining four items were healthcare trends; 1) if Bartel
used the same trend as Milliman, Bartel would caveat that as being
selected by the City which would impact FY11/12, 2) if the CalPERS
experience Study which reflected the demographic changes and
improvements on mortality was not incorporated it would impact
FY11/12, 3) retirees were selecting the higher cost medical plan but
there was no recognition of that information in the prior study, and 4)
there was no Medicare eligibility recognition in the prior study that
some of the employees were not paying into Medicare and may not be
eligible. To summarize the points in order of magnitude; 1) extending
the amortization period and going to a rolling amortization period
would reduce the FY11/12 ARC by $300,000, 2) asset smoothing
would reduce the ARC $300,000, 3) elimination of the actuarial load
reduced the ARC an additional $300,000, 4) changing the discount
rate would reduce the ARC $500,000 but not until FY12/13, 5) the
healthcare trend change would reduce the ARC by $300,000, 6) the
CalPERS Experience Study would reduce it by $900,000, 7) the
medical plan at retirement $800,000, and 8) the Medicare eligibility by
$200,000.
Council Member Price asked, of the items listed the amortization, asset
smoothing, actuarial load, and discount rate, if they could be used in
combination.
Mr. Bartel clarified the recommendation was for the City to use what
had been presented in the report. He recognized that the City may not
agree with all of their recommendations. If the City chose to not
accept their recommendations as they were, the first four items could
be used in combination. If the City chose to select a change among the
first four items the changes would be within the range of
reasonableness of actuarial methods and assumptions. The remaining
four items could be thought of as being outside the range of
reasonableness for what Bartel would choose for actuarial
assumptions.
Chair Shepherd asked if the previous actuarial, Milliman, had
presented their recommendations in the same manner or was Bartel
more aggressive.
Mr. Perez mentioned items 6 through 8 were probably not feasible.
With respect to the contrast, the discount rate was not a good
comparison since at the time of Milliman’s representation the rate was
given without choice; the smoothing was not an option at that time
either, but the rolling 30 year amortization was the method Milliman
was using.
Vice Mayor Scharff said Bartel was suggesting a discount rate of 7.25
percent.
Mr. Bartel answered yes.
Vice Mayor Scharff asked if the City chose the 7.61 percent discount
rate would that affect the FY12/13 but not the FY11/12.
Mr. Bartel stated that was correct.
Vice Mayor Scharff asked if the decision needed to be made now or
was there time to wait a year to gather more information.
Mr. Perez felt obtaining additional information prior to finalizing a
discount rate decision was a good option. When the Mid-Year was
brought before the Council for the FY12 ARC the discount rate could be
incorporated in the discussion. When the proposed FY13 budget was
brought before Council in May of 2012 the dialogue for the discount
rate for that year should be discussed.
Vice Mayor Scharff asked what the thought process was between the
7.61 percent versus the 7.25 percent.
Mr. Bartel encouraged the Finance Committee to think of the 7.61
percent as a 50 percent confidence level for an extended period of
time. Given the known information there should be an expectation that
over the next 20 years CalPERS might earn 7.61 percent. He noted his
firm was recommending a confidence level that was higher than 50
percent for two reasons 1) the current investment market expectations
in the short run were below 7.61 percent and 2) they preferred a
higher confidence level of 55 or 60 percent because bad news had a
heavier weight than good news. His firm believed setting the rate
below what was expected might mitigate the negative.
Vice Mayor Scharff asked to confirm the difference with the discount
rate for FY13.
Mr. Bartel said the difference was $500,000.
Vice Mayor Scharff asked why the report mentioned a difference of $.7
million additional. He wanted to know if that was all four items
combined for FY13.
Mr. Bartel said there was a component of the $700,000 that was the
normal dollar increase because the contribution and the amortization
were designed to be an increasing dollar amount, a level percentage of
pay using CalPERS 3.25 aggregate payroll. The normal expected dollar
increase was calculated to be $400,000.
Council Member Burt said on slide 6 the title seemed convoluted
“Reduction in ARC if Assumption/Method was not Changed”.
Mr. Bartel said the attempt was to signify if the Milliman assumption
was maintained and the City did not accept Bartel’s recommendations
for a change.
Council Member Burt said his confusion was Bartel used the word
change under two opposing Council questions.
Mr. Bartel clarified the Milliman report used methods and assumptions
that were under the left hand column of the slide presentation
numbers 4 and 5. The only exception to that information was item 4.
Council Member Burt suggested the Finance Committee members re-
label slide 6 to reflect a better description which would be Impact of
Bartel Changes.
Mr. Bartel agreed the changed title would be accurate.
Chair Shepherd asked for a better understanding of the expectation of
a form of standardization in the upcoming years for assumptions
analysis where all cities would be looking at the same type of
assumption.
Mr. Bartel did not believe that would be the case. There would
continue to be different actuarial firms with different ideas of what
would happen in the future.
Mr. Perez said one standard was that all agencies would be required to
report in the same time period which was June 30 of each year.
Chair Shepherd said the purpose of the exercise was to achieve a good
estimate as to the real amount of money the City should have for the
retirees.
Mr. Bartel explained the nature of an Actuarial was to have a highly
educated process to estimate the best case scenario for their client in
their future. In reviewing items 1 through 4, number 1 had no impact
on the liability it had to do with how the City was paying off the un-
funded liability.
Chair Shepherd said she was unaware that not all employees paid into
Medicare.
Mr. Perez said paying into Medicare was not mandated for employees
hired prior to April of 1986.
Mr. Bartel noted prior to that date people were not required to pay into
Medicare and those who were not continued to not pay into the fund.
Chair Shepherd said those who did not pay into Medicare had no
government safety net.
Mr. Bartel explained an individual who did not pay Medicare through
the City may have paid into Medicare through another job or had a
Medicare eligible spouse. In looking at the retirees over the age of 65
he felt the assumption of 80 to 90 percent of the employees being
eligible was fairly accurate.
Vice Mayor Scharff asked if Mr. Bartel surveyed the City of Palo Alto
employees to achieve the assumption of 80 to 90 percent.
Mr. Bartel said one of the challenges he faced was for the City’s
retirees who were currently Medicare eligible, he could not be certain
what their hire dates were. Based on the eligibility for retirement there
were assumptions made by his firm on who was hired prior to April
1986.
Vice Mayor Scharff clarified the firm reviewed the current retirees over
the age of 65.
Mr. Bartel replied yes, over the age of 65 who were not receiving
Medicare.
Vice Mayor Scharff asked if the assumption made was they were not
receiving Medicare because they were not eligible.
Mr. Bartel answered yes because their expectation was if someone was
eligible for Medicare under the CalPERS system they participated
mandatorily.
Vice Mayor Scharff asked what was used to determine the 80 to 90
percent assumption.
Mr. Bartel said they used 80 to 90 depending on whether the
employee was safety or miscellaneous. They used 80 percent for
safety and 90 percent for miscellaneous.
Vice Mayor Scharff said if the firm used the numbers from the actual
retirees there should be a real number to work with.
Mr. Bartel agreed they had data for the current retirees over the age
of 65 who were currently receiving Medicare benefits or not.
Vice Mayor Scharff asked if the firm had the exact number of retirees
who were and were not on Medicare why the assumption was 80 to 90
and not an exact figure.
Mr. Bartel said because the actual number was slightly higher than the
80 to 90 percent but of the retirees over the age of 65 they believed
not all of them were hired before April 1986. He chose to be
conservative relative to the actual calculation to account for those
retirees hired after April 1986.
Vice Mayor Scharff thought the ARC dealt with future retirees and not
those who were already receiving benefits.
Mr. Bartel said it was important to understand that ARC did two things,
the sum of the normal cost for current employees and the amortization
of the un-funded liabilities. The un-funded liabilities included the
liability for current retirees. It was also important to understand the
assumption had no impact on the current retirees who were over the
age of 65 because the firm knew whether they were eligible for
Medicare or not. The assumption was only necessary for the retirees or
active employees who had not yet made the Medicare eligibility age.
Vice Mayor Scharff clarified the goal was to review employees who no
longer worked for the City but were not 65 years of age.
Mr. Bartel corrected the assumption applied to both the current
employees that were hired before April 1986 and those employees and
retirees who were not yet 65 years of age.
Council Member Burt asked if the assumptions being made for current
employees were different from the known existing retirees.
Mr. Bartel said he was breaking existing retirees into two groups. One
group was already Medicare eligible. There was no assumption for
them because the firm already knew their eligibility status. However,
active employees whose hire date was known were different. The firm
assumed everyone hired after April 1986 would be Medicare eligible
and only a percentage of those hired after that date would be Medicare
eligible.
MOTION: Vice Mayor Scharff moved, seconded by Council Member
Burt to recommend to Council to change (items 1-4) amortization
method, asset smoothing, actuarial load, and put off the issue of the
discount rate to 2013.
Vice Mayor Scharff said initially he supported the fixed 28 year
amortization method but the more he thought about it there was no
logical reason to pay off the un-funded liability. The current un-funded
liability was built up by previous generations and he did not see the
equity in the current generation bearing the burden on the budget
which in fact affected employee salaries, infrastructure needs, and
services. He felt the City was fine with the asset smoothing and
actuarial load as it was before and the change was too large too quick.
Council Member Burt summarized out a $3.6 million recommendation
it was being suggested that $2.7 million be adopted. He said the
consensus on the discount rate with the ten year horizon was the City
would not hit the 7.25 percent. The following decade it would rise
back up so much that it would cover the net from the prior decade.
This recommendation was based on optimism.
Council Member Price supported the Motion and appreciated further
discussion of the discount rate be deferred because there needed to be
a better understanding.
Chair Shepherd felt item 8; the Medicare eligibility at $200,000, should
have been included in the first four items. With the amortization
method there was room for change without huge impact.
MOTION PASSED: 4-0
Chair Shepherd asked if the Finance Committee decision would be in
the Council Consent Calendar.
Mr. Perez said Staff may want to incorporate it into the Mid-Year
discussion which would be an Action Item.
Chair Shepherd asked for the General Fund percentage.
Mr. Perez said $1.96 million or 70 percent.