Title
Recommendation to Receive an Update to the July 23, 2013 Report on the City's Other Post-Employment Benefits (OPEB) Liabilities (City Manager 2110)
Body
To: Honorable Mayor and Members of the City Council
From: John A. Russo, City Manager
Re: Receive an Update from the July 23, 2013 Report on the City's Other Post-Employment Benefits (OPEB) Liabilities
BACKGROUND
OPEB was a rarely discussed and even more rarely understood matter until 2004, which is when the Governmental Accounting Standards Board (GASB) released Statement 45 (GASB 45) concerning health and other non-pension benefits. This regulation required cities to account for and disclose on their financial statements their liability for non-pension related benefits paid to retirees by Fiscal Year 2008/09. The goal was to create greater financial statement accuracy and transparency. These benefits and associated liabilities had existed for many years; they just had not been openly reported.
At the time the City was coming into compliance with GASB 45, the City Council received several reports from both staff and the Fiscal Sustainability Committee, which included the City Treasurer and Auditor and several members of the public, stressing the importance of addressing the growing OPEB liability. Several options were discussed including setting up an Irrevocable Trust Fund, issuing OPEB Bonds, and pre-funding the liability using recurring revenue streams such as interest owed the General Fund from loans given to Alameda Municipal Power (AMP) and the Alameda Reuse and Redevelopment Authority (ARRA) (neither of which is available today). The general consensus was that a mere "pay-as-you-go" approach was an unwise long-term approach and that some pre-funding was necessary.
DISCUSSION
OPEB benefits, which are considered part of the compensation negotiated between the employer and its employees, but not received until retirement, can include medical, dental, vision, hearing, life insurance or long term care insurance. Table 1 below outlines the benefits the City of Alameda offers to its retirees:
Table 1
Current Medical Benefits Offered to an Individual Retiree as of January 2015
|
Medical |
Dental |
Miscellaneous Employees |
$122/month |
N/A |
Public Safety* (Hired and Retired Prior to June 7, 2011) |
$1,858/month |
$60/month |
Public Safety* (Hired Prior to June 7, 2011 and Retired after this date) |
$1,858/month |
$60/month |
Public Safety (Hired and Retired after June 7, 2011) |
$712/month |
$60month |
* Includes two-party coverage
A miscellaneous employee (other than public safety employee) that retires at age 50 with 5 years of service with the City receives $122/month toward retiree medical insurance. The total cost for miscellaneous retiree health in FY 13-14 was $188,000 (Table 2). Public safety employees have different thresholds for eligibility determined by date of hire and retirement. However, if a public safety employee meets the appropriate thresholds during their years of service they can receive up to full lifetime medical and dental coverage for themselves and their spouse. In 2011, that threshold was changed through collective bargaining process; now public safety employees hired after June 7, 2011 can only receive single coverage (the spouse is no longer covered). The total cost for Public Safety retiree health in FY 13-14 was $2,463,000. The total cost for all OPEB benefits in FY 13-14 was $2,651,000.
Table 2
Estimated Annual Total (OPEB) Health Care Costs for Current Retirees Paid for by the City
(Pay-As-You-Go Amount)
|
FY 13-14 |
FY 14-15* |
FY 15-16* |
FY 16-17* |
Miscellaneous Retirees |
$188,000 |
$208,000 |
$231,000 |
$254,000 |
Public Safety Retirees |
$2,463,000 |
$2,555,000 |
$2,775,000 |
$3,029,000 |
TOTAL |
$2,651,000 |
$2,763,000 |
$3,006,000 |
$3,283,000 |
*Estimates
The benefits described above are paid for on a 'pay-as-you-go' approach, whereby the City budgets and pays for one-hundred percent of the actual yearly cost for these benefits. Some cities in the Bay Area borrow to make the pay-as-you-go payments; however; this is clearly not a recommended approach.
Under GASB 45, the City is required to report, and should plan for, not only the current cost of providing health care to retirees, but for the liability of future benefits for both current and retired employees. In order to estimate these costs, the City contracts with the actuarial firm, Bartel and Associates, which uses a variety of factors to calculate the liability, including mortality rates, rates of investment earnings, health care costs and inflation, etc. If the City has set aside enough money to pay all earned benefits, then the liability is fully funded. If not, then there is an "Unfunded Actuarial Accrued Liability" (UAAL). In Alameda's case, the UAAL is $91.2 million (as of the last actuarial valuation done January 1, 2013.)
Annually, the City identifies how much should be set aside to meet these already earned and future obligations. This is called the Annual Required Contribution or "ARC" (Table 3). The ARC has two components. The first is the normal cost for the benefits accruing to current active employees. The second is an additional dollar amount which makes up for less-than full contributions of the past. For Alameda the ARC for FY 13-14 was $8.5 million. The City was only able to contribute $2.7 million.
Table 3
Gap in Funding OPEB Liability
|
FY 13-14 |
FY 14-15* |
FY 15-16* |
FY 16-17* |
ARC |
$8,472,000 |
$9,086,000 |
$9,760,000 |
$10,486,000 |
Amount Funded |
$2,651,000 |
$2,763,000 |
$3,006,000 |
$3,283,000 |
GAP |
(5,821,000) |
($6,323,000) |
($6,754,000) |
(7,203,000) |
*Estimates
As the table above illustrates, the City has been significantly underfunding its OPEB liability; consequently, the liability grows and threatens the City's financial health.
OPEB TASK FORCE
In 2012, in order to address this problem, the City Manager appointed a Task Force to review the City's pension obligations as well as Other Post-Employment Benefits (OPEB). The Task Force included individuals with a wide range of publicly held positions including the City Treasurer and Auditor, several community members, both the Police and Fire Chiefs, the Presidents of the Police and Fire Unions, the Human Resources Director and the Assistant City Manager. After many Task Force meetings, the following recommendations were submitted to the Council for consideration. Some of these strategies had wide backing from the Task Force; however, not one had unanimous support. Updates on those recommendations are provided where applicable.
1. Modify vesting and eligibility rules for new hires beyond those changes made in mid-2011 (eligibility for spouses eliminated and number of years to vest standardized to ten years for all new public safety employees);
2. Establish a plan such as the 401(a)(h) in which employees make contributions now for their future health care (Employees hired after 2011 are mandatorily contributing to a 401 (a) (h) Trust);
3. "Buy out" the benefit by establishing a program like that in Beverly Hills in which employees are given an option of receiving money (either cash or tax advantaged account) in exchange for their defined benefit (This program was analyzed and determined not to be cost effective, though could be reconsidered in the future); and
4. Work with employee bargaining groups to negotiate down the liability; (Negotiations with Public Safety employee groups is on-going).
The Task Force acknowledged that the City and its Safety employees have already taken steps to address OPEB costs including increasing the vesting requirement for benefits, and significantly reducing the benefits for new hires after June 2011.
OTHER POTENTIAL SOLUTIONS
As with any complex issue, there is no one solution. Instead, staff believes that it will take a combination of solutions to address the issue, and even then may not solve the problem entirely. In addition to the recommendations below, it cannot be stressed enough that any solution must be developed in partnership with the City's labor groups, particularly sworn Public Safety employees.
1. Create a Trust Fund - Pre-funding benefits is a strategy widely held as being the most cost effective way of eliminating an OPEB liability. This is often done through a Trust Fund which allows an agency to accumulate funds for payment of the City's future OPEB liability. These types of Trust Funds are protected and can only be used for OPEB payments. Additionally, as money is accumulated, the investment returns help fund the benefits. Both the City and the employee could contribute to the Fund. (In 2014, the City established a Trust and contributed approximately $300,000).
2. Budget More with Existing Funds - The City could increase the amount budgeted for its annual contribution toward its OPEB in the City's budget. Any amount in excess of what is needed for payments for the current year could be contributed to the Trust Fund.
3. Employee Contribution to OPEB - In exchange for the City making contributions toward pre-funding OPEB, the City could negotiate for the employees to contribute toward the cost of OPEB. In addition, in the last round of negotiations, current safety employees agreed to pay a portion of the increases in medical coverage up to 50% over the next several years. However, this cost sharing arrangement does not carry over once an employee retires. The City could negotiate this cost sharing into retirement
4. Create a tiered-benefit program - As discussed above, the vesting and eligibility rules for new hires was modified in mid-2011 which, among other things, standardized the number of years to vest the benefit to ten years for all new public safety employees. In addition to these steps, the City could make contributions to retiree health care proportionate to the number of years of employment, as well as lengthen the period before they become fully eligible for this benefit. This would mean that the longer an employee works the more benefits they would earn.
5. "Cap" the City's medical contribution rate. - Many cities have moved to the model of offering health care for retirees, however, making a flat contribution toward the cost of the premium, irrespective of the cost of the medical plan. This could be for future hires.
6. Further the Limits on Spousal Benefits - The spouses of employees that were hired prior June 2011 currently receive city-paid lifetime medical benefit. The City could modify this benefit and provide a flat contribution to those spouses.
As discussed above, any approach to solving the OPEB program will be multi-faceted and would have to be closely coordinated with the City's bargaining units.
FINANCIAL IMPACT
There is no financial impact from receiving this report. The financial impacts of the various OPEB solutions cannot be quantified without more analysis. However, each of the options should have some positive impact on reducing the City's $91 million and growing liability.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
There is no impact to the Alameda Municipal Code.
ENVIRONMENTAL REVIEW
Receipt of this report will not result in a significant effect on the environment and is exempt from CEQA under Guidelines section 15061(b)(3).
RECOMMENDATION
There is no recommendation at this time. This report is for information only.
Respectfully submitted,
Elizabeth D. Warmerdam
Assistant City Manger
Financial Impact section reviewed,
Elena Adair, Finance Director
CC: Kevin Kennedy, City Treasurer
Kevin Kearney, City Auditor