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Home My WebLink AboutAgenda BOC 032708IV VI AGENDA CITY OF PALM BEACH GARDENS BUDGET OVERSIGHT COMMITTEE THURSDAY, March 27, 2008, 8:30 AM CITY COUNCIL CHAMBERS PLEDGE OF ALLEGIANCE ROLL CALL: Regular Members Harvey Goldberg L. Marc Cohn Mark Veil John Chaplick Bernard Pettingill Chair Vice Chair Regular Member Regular Member Regular Member ADDITIONS, DELETIONS, MODIFICATIONS NONE APPROVAL OF MINUTES: January 24, 2008 ITEMS BY STAFF LIAISON NONE VII. OLD BUSINESS GASB 45 Discussions Fiscal 08/09 Budget Process VIII. NEW BUSINESS NONE IX. COMMENTS BY PUBLIC NONE E_TDXGIII N 01►yi1_210 11 I I I I I Discussion of GASB 45 - Other Post Employment Benefits (OPEB) I I I I I � I ' I I I I I I I I Budget Oversight Committee March 27 2008 What Is OPEB? Other Post Employment Benefits Postemployment healthcare benefits (medical, dental, vision, hearing) Other forms of postemployment benefits when provided separately from a pension plan (for example, life insurance, long -term care, cash stipends if compensation for services) 3/27/2008 1 Background GASB Statements 43 and 45 require a fuller accounting and reporting of the costs and obligations related to OPEB Who is affected? • State and local governments that follow generally accepted accounting principles (GAAP) when preparing annual audited financial reports Background There is a basic disconnect between the financial realities of OPEB and what governments actually report to the public Financial statements contain only the cash paid out in any given year for health insurance premiums and other benefits for retirees 3/27/2008 2 Background Current cash outlays tell you nothing about what benefits actually cost —which makes it difficult to make informed decisions about what benefits are affordable They give little indication of future cash flow demands They tell you nothing about the long -term obligations that result from promises to provide benefits in the future The Substance of OPEB Moth pensions and OPEB are part of the compensation for services rendered by employees —in other words; they are a part of the cost of today's services Benefits are "earned" and obligations accrue or accumulate during employment, although payment is deferred until after employment 3/27/2008 3 Current OPEB Practice Plans generally are financed on a pay -as- you-go basis — unlike pension plans, very few OPEB plans set aside assets to finance future payments —very few plans have had an actuarial valuation done Funding Requirements Governments are not required to pre -fund their OPEB —they can continue to finance OPEOU on a pay -as- you -go basis In other words, from a cash flow or budgetary perspective, there does not have to be any change However, there are accounting ramifications related to the decision to fund or not fund 3/27/2008 4 How Will OPEB Impact the Financial Statements? Annual expenses and expenditures will be greater than before The total obligation for OPEB will not initially appear as a liability— governments can catch up with it over time However, if a government does not begin funding OPEB, the liability will make its way into the financial statements as a "net OPEB obligation" Note Disclosure — Highlights Same things you see for pensions: • Description of the benefits, types and numbers of employees covered • Funding policy, including contribution rates • /Methods and assumptions (e.g., healthcare cost rate, investment return, amortization period) Plus... 3/27/2008 5 Note Disclosure — Highlights Required disclosure of funded status as of the most recent actuarial valuation (same elements of information required as Required Supplementary Information in Schedule of Funding Progress) Expanded disclosures in attempt to make information understandable to a wider range of financial report users What is an OPEB Plan? Not to be confused with an entity, like a retirement system The OPEiB plan is the plan as understood by the employer and plan members Should be based on the types of benefits provided at the time of each valuation, including any changes made and announced to plan members 3/27/2008 .A What Happens if Retirees Pay 100% of the Bill? As long as retirees are insured separately from current employees, there is no OPEB issue However, if they are insured together as a group, an "implicit rate subsidy" exists, and it is a form of OPEB that is reported Implicit Rate Subsidy Florida Statute 112.0801 "Retirees and their eligible dependents shall be offered the same health and hospitalization insurance coverage as is offered to active employees at a premium cost of no more than the premium cost applicable to active employees" "To determine health and hospitalization plan costs, the employer shall commingle the claims experience of the retiree group with the claims experience of the active employees" 3/27/2008 7 Why Are Implicit Rate Subsidies So Important? Costs for retirees generally are significantly higher Therefore, retirees that pay for the cost of healthcare benefits through a blended (with current employees) premium may not be paying the actual costs of their benefits Calculation of "Common" or "Blended" Premium 3/27/2008 M Number Cost i Blended" j r I Total active I I I I I I II $120,000 I $240 per and retired 500 per month I I month employees i I i i I 3/27/2008 M I I I Calculation of Age- adjusted Premiums I I Number I I I Cost I I Age- I adjusted premium I Active Employees 400 I $80,000 per I month I I $200 per I month I I I I I I I Retired Employees I 100 I j $40,000 per I month I I $400 per I month I I I j 1 I I I I I I Total 500 $120,0 0 per month month av . i Calculation of Implicit Rate Subsidy Age I Blended I adjusted I Difference premium ! p remium Active $200 1 $240 $240 -$200 = Employees per I per 1 $40 extra per . month I month month 0 1 $240 I $400 - $240 = 3/27/2008 67 Illustration of "Hidden Subsidy" $6.000 $5.000 $4,000 $3;000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 'Y2,000 $1,000 $0 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 - - Avo. Cost — Actual Cost Summary of GASB 45 Actuarial Valuation Results 3/27/2008 10 Background • GASB Statement 45 is effective for period starting after 12/15/07 for Phase 2 governments (annual revenues at least $10 M but less than $100 M) • Must implement for year beginning 10/1/08 Report prepared by Bolton Partners calculated initial expense for year beginning 10/1/07; City designated $307,000 as of 9/30/07 Update must be done every two years 3/27/2008 11 Results of GASB 45 Actuarial Valuation I I I I I I Funded I FYE 9/30/08 I I Not Funded FYE 9/30/08 I I I I I I I Unfunded Accrued Liability I I $2,131,uuu I I $3,240,uuu I I I I Annual Required Contribution: I I I I I I l 1 Normal Cost I Amortization of Unfunded Liability ( 189,000 i 118,000 I 305,000 , 112,000 I 1 ! Total Annual Required Contribution i Y307, 000 I i $417.00 I I ! I Net OPEB Obligation: I I I i Beginning of Year Obligation i I $01 I $0 i 1 i Current Annual Required Contribution $307,000 i $417,000 3/27/2008 11 Example of Annual Cost - GASB vs. Pay -as- you -go (Paygo) $700.000 $600.000 $500.000 $400.000 $300000 - - - - - - - - - $ono non $100 ,000 �n 2008 2015 2020 2025 2030 - - GASB —Paygo 23 What are our Options? Advance fund the ARC with an irrevocable trust (like a pension fund) Continue Pay -as- you -go; book liability to balance sheet each year Set aside "earmarked" funding 3/27/2008 12 Options for Funding OPEB Liability Option Advance fund Advantages -No net OPEB Liability -Unfunded liability and ARC reduced due to interest rate assumptions -Could help protect bond ratings -Provides incentive to explore options to better manage costs -Will provide a funding source for general fund many years later Options Liability Option Pay- as- you-go Disadvantages -Have to identify a funding source -Opportunity costs - money cannot be used for other programs -Cost pressure increases as number and life expectancy of retirees increase -Potential national healthcare initiatives may reduce need for all or part of advance funded resources for Funding OPEB Advantages •Lirnits current year annual expenditures -Maintains city's financial flexibility in current and future tight budget and economic times -Should have no effect on bond ratings in early years -Allows time to explore ways to reduce liability -No impact on current budget, operating balances, or tax rate Disadvantages -OPEB liabilitywill continue to grow until "pay -as- you -go" cost exceeds ARC -Could adversely affect bond ratings sometime in future -Limits incentive to manage cost -Budgets will continue to incur costs of retiree health benefits related to services provided by current employees 3/27/2008 13 Options for Funding OPEB Liability Option Earmark funding Advantages -Sets aside funding for future benefits eamed by current employees -Funding plan should help protect bond ratings -Provides incentive to explore options to better manage costs -Maintains city's financial flexibility in current and future tight budget and economic times What Qualifies as a Contribution? Disadvantages •OPEB liability will continue to grow until "pay-as-you-go" cost exceeds ARC -Cost pressure increases as number and life expectancy of retirees increase -Unfunded liability and ARC; increased due to interest rate assumptions -Plan net assets must be reported as both employer and plan assets Made direct payments of benefits Paid insurance premiums Irrevocably transferred assets to a dedicated trust, or other third party acting in that capacity, to fund benefits as they come due in the future 3/27/2008 To Fund or Not to Fund? . Implicit Rate only which makes our liability manageable Compared to total City budget of over $108 million and unrestricted net assets of $97 million, liability to be booked in first year is .3% To Fund or Not to Fund? Could reduce health insurance benefits in the future to contain costs Liability could change dramatically based upon plan provided As Health insurance premiums increase — likely to see fewer retirees keep health insurance 3/27/2008 15 To Fund or Not to Fund? The assumptions used make a huge difference in the amount of the liability Funding a trust make the funds unavailable for any other purpose To Fund or Not to Fund? Current tax reform, economic, and government spending climate indicate scarce source of available resources in foreseeable future Potential national health care initiatives in future could reduce need for all or part of advance funded resources 3/27/2008 W. Staff Recommendation Continue "Pay -as- you -go" method of accounting for retiree Implement GASB 45 FYE 9/30/08 as per Bolton valuation dated 3/27/07 Review results of actuarial valuations every two years with Budget Oversight Committee, and re- evaluate funding options every two years Questions? 3/27/2008 17