HomeMy WebLinkAbout0420.094City of Palo Alto
City Manager's Report
TO: HONORABLE CITY COUNCIL
ATIENTION:
FROM:
FINANCE COMMITTEE
CITY MANAGER DEPARThfENT: F'~
AGENDA DATE: Sepcembft' 13, 1994 CMR: 420;\14
SUBJECT: Actuarial Iofonnatloo Responding to Council Questions RegaroJng
Long-Term ProjeWons ror Use of AB 702 Rtsenes
REOUEST
This repoll responds to questions raised by Council regarding slaft's recommendation on the
use of AB '1C1l funds toward fulure cnsh outlays for retiree health benefits.
~TIQNS
This is an iMannafional report. No action is rcquirOO.
POLICY IMPLICATIONS
The information conwn.:d in this report has been prepared to aid in the analysis of the use
of AB 7C1l funds toward, future retiree health benefits.
EXECUTIVE SUMMARy
In April 1994, Jlaffsubmitttd to Council. recommendstion for the use of the Assembly Bill
(AB) 7(Q Public Employees Retirement System (PERS) credit of $6.1 million obtain.:d by
the Cil}' in fiscal years 1991-92 and 1992-93. Staff's recommondalion would provide for
the funding of retiree health benefits in the future, (0 Ihe extent that th..., benefits exceMM
a certain percentage (1.5 percent) of the City', gross payroll oosts. (CMR,207:94).
To determine the appro<imall: time frame oyer which the AB 7C1l credit (X'ild sustain such
• funding leyel, several scenarios were developed. Assumptions were rna"" regarding key
variables which will impact Ihe future costs of retiree O1ooic81 be..,fits and the relatM
funding of such benefits. Faclors such as continued growth in health care costs, increase>
dea ,.
~{~
"('
,\
in the City" retiree population and the effects of changes in the City's contribution fonnula
all contribute to the projection of these costs, In an attempt to develop actuariaIl)' sound
estimales, !he City contracted with William Mef(Cr Inc. 10 provide projections of the City'.
cub oullay for retiree health benefits for a future period of 30 yeus. The resu!1s are
ahown in the IIttacbed report from William M. Mercer Inc.
FISCAL IMPACT
When compared 10 projected incre .... in the City'. gross payroll costs (Attachment B),
projected retiree health benefits per the Mercer sludy will begin to e.=<I 15 pef(Cnt of
payroll in fiscal year 1995, and the drawdown on the AB 702 credit should continue until
approximately the year 2008. Changes in the fectors discuss<<l in the report ""II impact tJ-.e
cost of retiree health benefits, shomning or .xlending the period of the available funding
from AS 702. Howeyer, ur.der current actuarial as,umptions, Ih' most polifive overall
blldget impact from the use of the credit should fall within the five 10 ten-year time frame,
which was one of the criteria develope<l by Council for use of the funds.
ENVIRONMENTAL ASSESSMENT
None.
AITACHMENIS
A) Report by William M. Mercer, Inc. Re: Update of Actuarial Study, dated June
29;1994
B) SclIeduJe: Projected Retirees' PEMHCA Cosl Vs City'. Gross Payroll
PREPARED BY: Carol Ferrell, Accounting Manager
r5 ('
DEPARTMENT HEAD REVlEW:'---(fl Ob ! I & \l!.~_
EmTyHarrison
Director of Finance
CITY MANAGER APPROVAL:
CC: nla
Tune 29, 1994
Ms. Flora Tzeng
Senior A=uruant
City of Palo Alto
Departri>ont of ~
2SO Hamilton Avenue, Box 102.10
Polo A1IO, CA 94303
Re: Updoh> of Actuarial Stud,.
Dear Flora:
.,-~.
ATIACHIIElH A
Our acllWial study of the City's health benefits for "lilt .. , daled Novmlber, 1993,
incl"ded • snon (>-year) proj«tion of the City's cash outlay for the benefits, AI
the City's I<qUesl we have oxt<nded the projection 10 30 )'ears, and the results are
shown in tlte attached exhibi ts,
SUmmarY 9f Reoults
The pro~on !hows thai. under the assumptions we have made, the City's co<t for
health benefits for milees will in=ase throughout tlte projecti on period, with no
significant stabilization, The increase is attributable 10 three factors:
Growtb In lb. mi ... population, The retiree population increases
throughout the proj<ctWn period, appeoring 10 stabilize IOward the end of the
period. Dilling chat time. the retiree population more than doubles (almost
triples, if retirees' spo .... are included), This means tha~ while there are
presently 2,6 City wOlters for every retiree, in 30 years, there will be only
1.1.
Health care c:cst illCftllSt'S. In the projection, we assumed that health care
cost increases wouJd be high for the ne", several' y ..... and would then level
off at S~% per year, Even at this rate, costs escaiate rapidly, particulJlrly
when applied 10 • growing population (health care cost ttends are discussed
further below),
TIle CIty's amtribution fol'Dlula. Under its curtent anangmenl witlt
Pl!RS, the City pays the full cost of coverage for retirees and a small
portion of the cost for spour.es, with the agreement that the contribution for
spouses will increa.<e each year until the City pays the full cost for spouses
as well. Under the asswnptions made'for the proj«tion, the City's
3 Emba"~ro U:lllel S~-,.e 12~
Sol< 1014() / sn20
Sa" Fril<X'y.oCA '34111 ~'Il'>
4153335;00
F.a( 415.$9:1 5S~
I
M .. Fkn Tzeng
June 29, 1994
Page 2
--~-~~---
contribution (or spouses increa.scs throughout the projection period.
CONIitutInS an increasing share of their cost bul still well below the full cost
(abo di~ furtbu below),
The projection is based on the assumption that the 2lr"1lve workforce rernains at ilS
=1 sUe. Terminations, deaths and retirements ("IV'C<: and disability) are
e.: .. :pc.cted 10 tollow recent pattt.rns, and the age/sex mix uf the replacement
employees is also C){pected to be consistent with IC'cent experience.
The tabte below shows the size of the retiree population (ex:t:luding spouses), now
Md in 30 years.
THE EFFECJ' OF POPULATION GROWfH
.!.9.lM 2023 w~ workm
pel
1Il!i! w""", &!itm ~ wort", !!.£Ikm Bl!!a
FiR t()l 11 1'< 102 106 1.0
~ 203 70 2.9 203 lW 0.9
Polio: tIS SO 1.7 as 90 0.9
SEIU ill ill J.l ill ill .!J Tobl 941 3S1! 2.6 941 831 1.1
HeW. Care Q'!! InCi
The projection results are extremely sensitive to the rates at wh.ich health care costs
are expected to increase. In the exhibits, we have used the same assumptions as
~ used in !be actuarial valuation, in which cost increases are high (9~ eo 12%)
in 1995 and grade down oyer 4-7 years to an ultimate rate of 5~%.
()Yer the past Iwo or three years, PERS has be~n ..... mely effective in holding
down the rate of increase in the c..ast of the health plans offered to its members. It
is Ilot unreasonable 10 expecl that they could continue 10 achieve such results for al
I
'.',.
~ ~~-~-------------------------,---------------------~---
Ms. FJon Then8
J,."., 29, 1994
Page 3
!oasl sev<raI more yom, U IIW were to occur, il would rtduco the rate at which
the City's COS!> are projoco:d !.O ~ al least the costS al1ribulable to t<tirees
(COSI$ lOr spooscs 'Would =tinue !.O ~, ~ "'*" PE RS' formula, the
City's sha1e of the _'s <OS! would increa.e more rapidly).
B .... use of the I<1\$ltivity of the proj«;tion rtSUlts to assurn«l increases in health
care costs. the City may want to $tIC n:-.suJts using more optimistic (or more
pessimistic) "-<sUmptioos. The proj«tion m<xI<l th.a! we used ,hould allow this 10
be dOrle al rea.s.ona~le (:ost
The City's Contribution Formul~
The Ciry's COlllr,icl ,*,th PERS .«tuius thai contributions. fot retirec-s~ health
benefits foUow whal PcRS Calls the "Unequal Contribution Rule". Under this lwe,
the City is petmirsed to c""tribu~ less for [eUroes' health t>cnefilS th.an for
<mployees', but the City musl increase the retiree conUibution each year UIltil it
cat<bes up (in the City's case, unlll the City's contribution covers the full eo,t for
ntUees and '1'<'",,).
The.ttitl\n)elic of the contribotion "cat.:h up" is prescrib«! by PERS, and it is
~y supposed 10 take 20 years. Unfortunately, the tltoo!)' requires tltat
heaJth care COSI$ remaiA ,level (or til"". 20 yom •• ptactiC41 impossibility. The
ICUIal length of the "calctl up. period depct1d.I Oll the rale of increase in health care = the faster oosts incr<ase, tlte .loWCZ' the catch up. and vice versa.
AI preoeat, the City pays ~ 5% and l~ of the cost of spousal eoYmge.
Under tile ossumptions uood in the proj«;tiOll, ahcr 30 yean, the City would pay
~ 65$ and 7~ of !be COS! of spousal coverage.
The twO !abies OItaCh,'; show, '"P'J8tely for each employee group, tlte projected
roIirco and spouse popw.tion and tlte projoco:d cash outlay for re~ and spouses.
The resallS are also shown graphicall)', again , .. pamted by employee group. Totals
across aU employee groups at, shown two ways· split by group and betWO<Jl
--.,. r L
~ ==0 ________ , ______________ _
Ms. Flora TZCIl8
1_ 29.1994
Pase 4
•••
We "'auld be pleased to discuss the projection '=lIS funber with )'00 or will>. otbc:o
interested indMd.w., at the City,
Your, very Iruly.
~'u~JJ2--
Michaol L. Kramer, FSA
Principal
ene,
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CITY OF PALO ALTO
Cub Flo ... Projection -AU Gro" ...
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CITY OF PALO ALTO
Cash Flow Projection -Manageme>lt
2004 2009
Year
2014
I-Retirees I:ll spo~1
.._--------
2019
()6fZ9194
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I CITY OF PALO ALTO
Population Projection -All Grwps
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o
1994
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CITY OF PALO ALTO
Population ProjectioD -SEW
2004 2009
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ATTACHMENT B
ProJecfed RetI .... ' PEMHCA Cost v. City'. Gro... Payroll
~:
1, Groo3 p;rymIt -.. •• f 3.~ .nnu~.
2, Ro/8oflOlvm ",,_"'Is 5.4" for 1993.0114, 5" forl99419~ 5.5" for 199~, "" ,,,,,,.en.,
3. FY1992.93 f'fItir9u' PEMHCA J:s ennueH2td basfrJ on Je.,..JuOOOS3 tJCflJ8I e~ndfture, Fy,99ltP4 ~ actual e~ .
., Rttit'geS' PEMHCA incre88e3 is based Ofl WWi8m M61C6r, 'nco '$ f9port dattd ~4.
Fiscal Retirees' RoUP,yrall 1.5% of Excess Orawon
YBar Gross payrrill P.EMHCA % (lm~sPa)'[lill liailllh.CO$! AJ.lI02
1992193 $50,036,972 $629,084 1.26% 750,555 $6,100,000
1993194 51,788,266 733,843 1,42% 776,824 6,429,400
1994195 53,600,855 737,007 1.38% 804,013 6,75O,B70
1995i96 55,476,885 850,015 1.53% 832,153 17,862 7,103,324
1996197 57,418,576 970,374 1.69% 861,279 109,095 7,413,662
1997199 59.428,226 1,105,208 1.86% 691,423 213,785 7,632,103
199B199 61,508,214 1,251,918 2.04% 922,623 329,295 7,740,977
1999100 63,661,002 1,406,966 2.21% 964,915 452,051 7,726,262
2000101 65,889,137 1,575,901 2.39% 988,337 587,564 7,(;67,020
2001102 68,195,257 1,759,993 2.58% 1,022,929 737,064 7,239,753
2002103 70,582,091 1,953,173 2.77% 1,058,731 894,442 6,726,030
2003104 73,052,464 2,171,863 2.97% 1,095,787 1,076,076 5,966,951
2004105 75,509,300 2,413,348 3.19% 1,134,140 1,279,208 4,992,327
2005106 78,255,626 2,682,064 3.43% 1,173,834 1,508,230 3,693,143
2006107 80,994,572 3.66% 1,214,919 1,749,371 2,000,398
164
4,888,539