HomeMy WebLinkAbout4.14 Share of Liability DRFA Retiree Med InsG~~~ OF DU~~JG
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`~~~~~ REPORT L E R K
`~'~LI~ ~°~ DUBLIN CITY COUNCIL File #^ 5~^~} DO -~~
DATE: July 20, 2010
TO: Honorable Mayor and City Councilmembers
FROM: Joni Pattillo, City Manager
SUBJE nformational Report On Calculation Of City of Dublin Share of Liability For
Dougherty Regional Fire Authority (DRFA) Retiree Medical Insurance
Prepared By: Paul S. Rankin, Administrative Services Director.
EXECUTIVE SUMMARY:
The City of Dublin, in conjunction with the City of San Ramon, operated the Dougherty Regional
Fire Authority (a Joint Powers Authority) from 1988 -1997. The Authority has no active
employees, however the cities continue to fund remaining obligations for retiree medical,
retirement, and workers compensation claims which have continuing benefits. The City of
Dublin has updated the calculation of its projected share of the Retiree Medical Benefits, as
required to be disclosed in the Comprehensive Annual Financial Report (CAFR) in accordance
with Government Accounting Standards Board (GASB) requirements.
FINANCIAL IMPACT:
The City of Dublin currently funds these expenses on a pay-as-you-go basis. As part of the
CAFR, the City discloses a"Net Unfunded Liability" based on the calculation. The updated
calculation shows a decrease in the projected liability. The City currently has designated
reserves of $3,500,000 that the City Council has designated for Fire Retiree Medical
obligations. In addition to the DRFA component, the City also has obligations to Alameda
County Fire for accrued Retiree Medical liability. Those are not shown on the City Financial
Statements.
RECOMMENDATION:
Receive the report.
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Submitted By:
Administrative Services Director
Reviewed B .
Assistant City Manager
DESCRIPTION:
On April 20, 2010 the City Council provided direction on the designation of City Reserves.
During the discussion related to reserves for Fire Retiree Medical expenses, there were
questions related to how the former pougherty Regional Fire Joint Powers Authority integrates
Page 1 of 3 ITEM NO. t•~~"'~'
with the City obligations. The City last had an Actuarial Study of the DRFA liability perFormed in
2007. The accounting standards require the City to update that information at a minimum of
every three years. Staff worked with a consultant to update the calculation as of June 30, 2010.
Alternative Calculation Method
The City has the option to engage the services of a certified actuary to provide the calculation,
or an alternative calculation method. Given the cost of actuarial services and the closed status
of the DRFA Plan (i.e. it only covers existing retirees and their beneficiaries), Staff engaged the
accounting firm of Vavrinek Trine & Day to assist in preparing the calculation. The key
elements that need to be addressed include:
• Project future cash outflows for benefits.
• Project the discounted projected benefits to their present value by using the discounted
rate of the expected long term rate of return on the assets expected to be used to pay
the benefits.
• Allocate the present value of the projected benefits to periods using an actuarial cost
method by using one of the six actuarial cost methods identified by GASB.
Douqhertv Reqional Fire Authoritv - Backqround
In 1988, the cities of Dublin and San Ramon formed Dougherty Regional Fire Authority
(DRFA), a joint powers agency (JPA). In 1997, the two cities decided to change how Fire
Services would be provided in each City. As a result JPA personnel were absorbed by the two
new service providers (Alameda County Fire Department and San Ramon Valley Fire Protection
District) pursuant to a mutual agreement.
The JPA has remained intact to conclude the financial affairs of the entity. This includes
residual retiree obligations and workers' compensation liabilities. Dublin's share of all DRFA
close-out expenses, including retiree medical benefits, is 57.51 % of the actual costs, with the
City of San Ramon paying 42.49% of the costs. The two cities have entered into a binding
agreement to share these expenses on this basis.
Benefits Under the DRFA Plan
Retirees of DRFA receive Retiree Medical benefits under the California Public Employees
Retirement System (CaIPERS) Health Benefits Program. Prior to the 1997 transfer of existing
employees, the DRFA Board of Directors adopted a provision for assuring that the Authority's
future medical insurance contributions keep pace with inflation. The Authority adjusts its
contribution to an amount equal to the average premium of alt medical plans available through
CaIPERS (Bay Area Sacramento Region) or to the actual premium rate of the plan selected by
the retiree, whichever ~is less. The coverage varies and includes the retiree and eligible
dependents.
Calculation Results
Attachment 1 is the DRFA Calculation Report for June 30, 2010. As shown on page 5 the total
projected liability is approximately $1.5 million. The City of Dublin share of this fiability is
estimated to be $867,658. Although the accounting rules would allow for the amortization of the
liability over 30 years, the City has used 20 years based on the closed nature of the plan.
Based on the updated calculations the annual contribution on a"pay-as you-go" basis is very
close to the annual cost. The Annual Cost estimated for Fiscal Year 2010/2011 is $56,566
(estimated City of Dublin Share of the Retiree Medical Insurance). The calculation suggests
that the City should be making annual contributions of $59,273 or $2,707 more than the
Page 2 of 3
estimated actual cost. The calculated annuaf contribution attempts to take into consideration
interest earnings, changes in the cost of benefits, and mortality rates. The current group
consists of 11 Retirees and 9 dependents, with an average age of 70.5 years. As with any
projection of this nature the actual results will vary. This is why the City is required to conduct
periodic updates.
Obliqations Bevond DRFA
As mentioned earlier the City of Dublin also has obligations associated with its contracting with
Alameda County Fire Department (ACFD). Because the Department operates as a dependent
special district with the Alameda County Board of Supervisors as its governing body, the
recording of the liability for retiree medical is entirely shown on the Alameda County financial
statements. The contract nature of the Department serving multiple agencies results in some
unique conditions in terms of formally allocating shares of the liability and deciding on a funding
mechanism that all agencies can fund. Although it is a separate agency the City of Dublin
contract for service, obligates the City for certain on-going staffing based upon the contingent of
employees that were originally transferred to Alameda County Fire Department from DRFA.
ACFD's current funding practice is pay-as-you-go, and no excess funds are being collected to
offset costs of benefits earned by employees going forward. The allocation is based on the
ACFD cost allocation methodology (# of companies per agency with an adjustment for agencies
with a 4-person company). A special provision has been made for the recent contracting
agencies. They will not be paying an allocation for retiree health medical costs for the first 5
years of their participation. This is due to the fact that the transitioned employees are not
eligible for retiree medical benefit until they are vested with ACFD for 5 years.
In 2008 the ACFD and the cities of San Leandro and Dublin obtained Actuarial Services in order
to begin to evaluate the potential exposure and cost sharing alternatives. The preliminary
indications were that ACFD, without long term funds invested in a trust, would have an
estimated accrued actuarial liability of $59.086 million. Based on the preliminary weighted
assignment of Dublin's share at 13.08%, the accrued liability for Dublin was projected at $7.73
miflion.
The discussion of the ACFD potential obligation is to provide additional context for the current
reservation of City funds for this future liability. The combined DRFA and ACFD liability is
nearly $8.6 million. It is anticipated that the City will be working with its ACFD partners to define
a recommended financing strategy. In the mean time the City of Dublin has begun to designate
reserves that can lessen the local budgetary impact of the final solution and demonstrate
prudent financial planning.
NOTICING REQUIREMENTS/PUBLIC OUTREACH: None
ATTACHMENTS: 1. Other Post Employment Benefits (OPEB) Calculation
using the Alternative Measurement Method Report
dated June 30, 2010
Page 3 of 3
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Vavrinek, Trine, Day & Co., LLP.
Certified Public Accountants
VALUE THE DIfFERENCE
City of Dublin
Share of
Dougherty Regional Fire Authority
(A Joint Powers Authority)
(With no Active/ Current Employees)
Other Post Employment Benefits (OPEB)
Calculation
using the
Alternative MeasurementMethod
June 30, 2010
Prepared: June 25, 2010
8270 Aspen Street Rancho Cucamonga, CA 91730 Tel: 909.466.4410 Fax: 909.466.4431 www.vtdcpa~m ~~ ~• ~~ ~~ ~~~~~
FRESNO • LAGUNA HILLS • PALO AL70 • pLEASANTON • RANGHO CUCA~~~-,yqCHMENT 1
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Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
VALUE THE DIFFERENCE
June 25, 2010
Attn: Mr. Paul Rankin
City of Dublin
10 Civic Plaza
Dublin, CA 94568
Re: OPEB Calculation usin~ the Alternative Measurement Method
Dear Mr. Rankin:
In response to your request, we were engaged to assist you in preparing the OPEB
calculation using the alternative measurement method as allowed by GASB for benefit
plans as directed by the City. A report is attached which details our conclusions.
If you have any questions regarding this report, please ca11 me at (909) 466-4410.
Sincerely yours,
Joe Aguilar
Of VAVRINEK, TRINE, DAY & CO., LLP
Attachments
8270 Aspen Street Rancho Cuc~monga, CA 91730 Tel: 909.466.4410 Fax: 909.466.4431 www.vttlcpa.com
FRESNO • LAGUNA HILLS • PALO ALTO • PIEASANTON ~ RANCHO CUCAMONGA
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OPEB Calculation using the Alternative Measurement Method
Scope of Sef-vices and Deliverables
The scope of our work is to assist you in preparing the OPEB calculations using the alternative
measurement method as allowed by GASB for benefit plans as directed by the City.
• Project future cash outflows for benefits by collecting and organizing in a spreadsheet the
essential information about the terms of the plan and the covered group as directed by the
City.
• Project the discounted projected benefits to their present value by using the discounted rate
of the expected long term rate of return on the assets expected to be used to pay the benefits.
• Allocate the present value of the projected benefits to periods using an actuarial cost method
by using one of the six actuarial cost methods identified by GASB.
• Summarize the results of our work for each calculation as directed by the City.
Background Information
In 1988, the cities of Dublin and San Ramon formed Dougherty Regional Fire Authority
(DRFA), a joint powers agency (JPA). The JPA provided fire services to all of Dublin and the
southern portion of San Ramon. In 1997, the two cities decided to change how Fire Services
would be provided in each City. As a result JPA personnel were absorbed by the two new
service providers pursuant to a mutual agreement. The JPA has remained intact to conclude the
financial affairs of the entity. This includes residual retiree obligations and workers'
compensation liabilities. Dublin's share of all DRFA close-out expenses, including retiree
medicat benefits, is 57.51 % of the actual costs, with the City of San Ramon paying 42.49% of the
costs. The two cities have entered into a binding agreement to share these expenses on this basis.
Plan Description
City of Dublin share of DRFA Retiree Health Plan is a single-employer defined benefit
healthcare plan administered by the California Public Employees Retirement System (Ca1PERS).
The Plan provides medical insurance benefits to eligible retirees and their eligible dependents. In
accordance with Public Employee Retirement Law (Article 2), the Public Employees Retirement
System Board of Administration has the responsibility to approve health benefit plans and may
contract with carriers offering health benefit plans. The Board of Administration is responsible
for adopting all rules and regulations, including the scope and content of basic health plans. The
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OPEB Calculation using the Alternative Measurement Method
California Government code also defines certain rules for contract agencies, such as DRFA, to
purchase health insurance benefits.
Funding Policy
There is no requirement imposed by Ca1PERS, to contribute any amount beyond the pay-as-you-
go contributions. The cost of monthly insurance premium~ may be shared between the retiree
and DRFA. The cost sharing varies depending on: the bargaining unit; dependent status; and
plan selected. A minimum employer monthly contribution requirement is established and may be
amended by the Ca1PERS Board of Administration and applicable laws. Within the parameters
of the law, individual contracting agencies such as the DRFA, are allowed to esta.blish and amend
the level of contributions made by the employer towards the monthly cost of the plans.
In 1997, the DRFA Board of Directors adopted a provision for assuring that the Authority's
future medical insurance contributions keep pace with inflation. The provision provides that an
annual review of basic plan premiums be conducted. Following this review, the Authority will
adjust its contribution to an amount equal to the average premium of a11 medical plans available
through Ca1PERS (Bay Area Sacramento Region) or to the actual premium rate of the plan
selected by the retiree, whichever is less. Changes to the employer contribution rate towards
retiree benefits, based on the formula described, are recorded in a resolution adopted by the
DRFA Management Committee.
Alternative Measurement Method Procedures Performed
A s~le or agent employer that meets any of the eligibility criteria in paragraph 11 of GASB 45 is
permitted to apply the alternative measurement method set forth in paragraphs 33 through 35 of
GASB 45, which allows for certain simplifying modifications to the selection of assumptions for
purposes of ineasuring the ARC and the plan's actuarial accrued liabilities and funded status.
The alternative measurement method includes the same three broad measurement steps as an
actuarial valuation:
1. Project future cash ou~ows for benefits. This step requires collecting and organizing in
a spreadsheet format essential information about the terms of plan and the covered group.
It also involves making and applying assumptions about significant matters that will
affect future cash flows. These include assumptions about future employment and
retirement, life expectancy, and healthcare cost trends. The result of this step will be a
spreadsheet of projected future cash outflows for benefits, by plan member (or by groups
of plan members) and in total, for each of the future years in which benefit payments aze
expected.
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OPEB Calculation using the Alternative Measurement Method
2. Discount projected benefits to their present value. This step involves discounting the
projected future cash outflows to present value, using as the discount rate the expected
long-term rate of return on the assets expected to be used to pay the benefits. For
example, for a plan that is financed on a pay-as-you-go basis, for which no plan assets
have been set aside in a trust, or equivalent arrangement, the discount rate would be the
expected long-term rate of return on the employer government's general investments.
3. A[locate the present value of projected benefits to periods using an actuaria! cost
method This step involves the allocation of the present value of benefits to financial
reporting periods using one of the six actuarial cost methods identified in paragraph 13d
of GASB 45. Through the allocation process, the following elements are calculated:
a. The actuarial accrued [iability, representing the portions of the present value of
benefits attributed by the actuarial cost method to prior periods.
b. The annual required contribution of the employer (ARC), which is the basis for
calculating the employer's annual OPEB cost (or expense) for the year.
Methods~ and Assumptions
1. There are no active employees and in 2010 there are 11 retirees and their dependents (20
covered lives) receiving Retiree Medical Benefits.
2. The defined benefit postemployment healthcare plan is obtained through Public
Employees Medical and Hospital Care Act. (PEMCHA)
3. The City of Dublin's share of the cost is 57.51 % and the City of San Ramon's share is
42.49%.
4. The Authority will adjust its contribution to an amount equal to the average premium of
all medical plans available through PERS (Bay Area Region) or to the actual premium
rate of the plan selected by the retiree, whichever is less. Because the DRFA population
is aging most of its retirees are in the Ca1PERS Supplement/Managed Medicare Program
and thus, health premiums fa11 under the employer's ma~cimum premium provided.
5. Although GASB 45 allows an amortization period not to exceed 30 years, we used a 20
year level dollar amortization due to the closed status of the plan.
6. The Entry Age cost method was used.
7. The expected long-term rate of return on the assets expected to be used to pay the benefits
is 4.5%.
8. The expected rate of increase in healthcare insurance premiums is based on projections of
the Office of the Actuary at the Centers for Medicare & Medicaid Services, as published
in National Health Expenditure Projections: 2009-2019, Table 3. The increases are as
follows:
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Economic Assumptions FYE 6/30 Rate
Premium Increases 2011 4.Q0%
2012 3.70%
2013 5.40%
2014 6.70%
2015 7.10%
2016 6.80%
2017 & later 6.20%
9. The Unfunded Actuarial Accrued Liability (UAAL) is amortized over 20 years as a level
dollar amount.
10. Mortality is based on tables from National Center for Health Statistics website
www.cdc.~ov.
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OPEB Calculation using the Alternative Measurement Method
Summary of Information
The City of Dublin share of the Annual Required Contribution (ARC) for fiscal yea~ 2010-2011
is reported as follows. The City of San Ramon's share of the ARC is also shown as information
only.
57.51 % 42.49%
San
Dublin Ramon Total
Present Value of Projected Benefits (PVPB) 8 641,050 1,5
Actuarial Accrued Liability (AAL) 867,658 641,050 1,508,708
Less: Plan Assets - - -
Unfunded Actuar~al Accrued Liability (UAAL) 867,658 641,050 1,508,708
Annual Required Contribu6on (ARC) 64,727 47,822 112,549
The Annual OPEB Cost is reported as follows. The 2009-10 Annual OPEB Cost (as provided by
Bartel Associates) is provided for comparative purposes. The annual OPEB Cost has been
reduced from the previous report based on a more modest projection of health care rate.increases
and fewer participants in the plan.
Annual OPEB Cost Information
Annual Required Contrbution (ARC)
Interest on Net OPEB Obligation
Adjustment to Annual Required Contribution
Annual OPEB Cost (Expense)
Expected Contributions Made
Increase in NetOPEB Obligation
Net OPEB Obfigation-Beginning of Year
Net OPEB Obligation-End of Year
Dublin
2009-10 2010-11
111,000 64,727
2,000 9,300
(3,000) (14,754)
110, 000 59, 273
(54,390) (56,566)
55,610 2,707
151,065 206,675
206,675 209,382
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OPEB Calculation using the Alternative Measurement Method
The DRFA Retiree Health (City of Dublin Share) annual OPEB cost, the percentage of a.nnual
OPEB cost contributed to the plan, and the net OPEB obligation for 2011 and the previous years
(previous years were provided by the City of Dublin) were as follows:
Annuai OPEB Cost Information
Fi~cal Yr
Ended Annual % of Mnual
OPEB Cost OPEB Cost Cont Net OPEB
Obligation
06/30/06 76,206 60.72% 29,936
06/30/07 76,206 81.53% 44,013
06/30/08 110,000 60.24% 87,746
06/30/09 110,000 42.44% 151,065
06/30/10 110,000 49.45% 206,675
06/30/11 59,273 95.43% 209,382
The participant statistics are as follows:
Participant Statistics
Retirees
Retirees Dependants
Total Covered Lives
Average Age
Average Retirement Age
14
10
24
68.7
51.5
The Ca1PERS monthly insurance premiums are as follows:
CaIPERS 2010 Health Insurance Premiums
Blue Shield Access +
Blue Shield NetValue
Kaiser CA
KaisedOut of State
PERS Chace
PERS Select
PERS Care
Non Medicare Eligible
One Party 2-Party Family
577.33 1,154.66 1,501. 06
500.35 1,000.70 1,300.91
532.56 1,065.12 1,384.66
508.74 1,017.48 1,322.72
474.93 949.86 1,234.82
868.17 1,736.34 2,257.24
2007 Study Resuits
(Forinfo Only) 2010 Ca~ulation
11
9
20
70. 5
51.6
Medicare Eligible
One Party 2-Party Fairruly
299.53 599.06 89~8. 95
299.53 599.06 898.59
298.36 596.72 895.08
319.34 638.68 958.02
356.09 712.18 1,068.27
356.09 712.18 1,068.27
410.60 821.20 1,231.80
Vavrinek, Trine, Day & Co., LLP (