HomeMy WebLinkAbout8.2 Fire Dept Retiree Health Benefit Liab
STAFF REPORT CITY CLERK
File #600-40
CITY COUNCIL
DATE:November 6, 2012
TO:
Honorable Mayor and City Councilmembers
FROM:
Joni Pattillo, City Manager
SUBJECT:
Authorization To Enter Into Agreement With Alameda County Fire District To
Fund Retiree Health Benefit Liabilities And Providing An Appropriation For The
Initial Contribution
Prepared by Paul S. Rankin, Administrative Services Director
EXECUTIVE SUMMARY:
On June 19, 2012 the City Council approved an agreement with Alameda County Fire District
(ACFD) to provide Fire Services to the City. ACFD provides services to multiple jurisdictions in
Alameda County. As part of its operating costs the Department has incurred a liability for
Retiree Medical benefits. The agencies served by ACFD have developed a methodology for
allocating this liability. The City of Dublin has, over the years, put aside funds to begin to reduce
the City share of the obligation. The City Council will be requested to authorize the City
Manager to negotiate and execute an agreement related to the funding of Retiree Medical
Benefits and to make an appropriation to reduce the amount of the City of Dublin’s share of the
total obligation.
FINANCIAL IMPACT:
The projected total funding required for the ACFD Retiree Medical side funds is $69.138 million
as of June 30, 2013. The City of Dublin share is estimated to be $7.61 million. Staff is
proposing to make an initial deposit of $6.487 million which represents the City share as of June
30, 2011. The source of this funding will be from General Fund net assets (reserves). This
action reduces by 10% the estimated City General Fund balance as of June 30, 2012.
Additional future contributions will be made as discussed further in this report.
RECOMMENDATION:
Staff recommends that the City Council: 1) Adopt the Resolution Authorizing the City Manager
to enter into an agreement with Alameda County Fire District regarding fair share funding of
Retiree Medical Benefit liabilities and approving the use of specified General Fund assets as an
initial contribution; and 2) Authorize the Budget Change.
Submitted By Reviewed By
Administrative Services Director Assistant City Manager
ITEM NO. 8.2
Page 1 of 5
DESCRIPTION:
The purpose of this report is to obtain City Council authorization to implement a supplemental
agreement with Alameda County Fire District regarding the funding of retiree medical benefit
liabilities as well as authorize an appropriation that will contribute funds to an irrevocable trust in
order to reduce the City of Dublin’s share of this liability. The discussion about paying down our
Fire OPEB liability has been an element of our discussions with the City Council during the most
recent budget preparation and deliberations. We were awaiting the actuarial study which was
just completed recently in order to present the fiscal impact.
Background
On June 19, 2012 the City Council adopted Resolution No. 119-12 which approved a 20-year
agreement with Alameda County Fire District for Fire Services. The City has contracted with
ACFD since 1997. The Agreement included the following provision as it related to unfunded
liability for retiree medical benefits:
Section 5 Cost of Services: Subsection b. Retiree Healthcare Plan Unfunded Liability
The City acknowledges that ACFD has incurred an obligation to fund a retiree healthcare
plan for certain of its employees assigned to provide services in the City since ACFD first
began providing services to the City on July 1, 1997. The parties hereby agree to
negotiate, in good faith, an agreement establishing a fair and equitable framework
whereby the City shall fund its proportionate share of ACFD's obligation to provide a
retiree healthcare plan for its employees, both retroactively and to the extent that said
obligation continues to accrue during the term of this Agreement.
The City shall be responsible for its proportionate share of retiree healthcare plan
unfunded liability remaining with the ACFD plan if the contract for fire services with ACFD
is terminated.
The arrangements for assigning the liability are somewhat complex as ACFD has multiple
contracting agencies, which have been receiving services for varying periods of time. Since the
retirees are former employees of ACFD, the District retains the responsibility for financial
disclosure of the full liability in its financial records. Therefore, ACFD Management, working in
consultation with a consulting actuary (Bartel & Associates), had to develop a system to allocate
the fair share of liability to each agency. The final resolution also has to accommodate different
strategies used by the participating agencies to fund their obligation.
Liability Background
In general the liability for retiree benefits are incurred based on service by employees and paid
out over many years. These liabilities are also sometimes referred to in the accounting
pronouncements as “Other Post-Employment Benefits” (OPEB). Actuaries assist in projecting
the amount of the liability based on assumptions such as: the number of employees covered;
the cost of the benefits they will receive in the future; the life span of the retiree and any covered
dependents; and other factors. Current Government Accounting Standards require agencies to
calculate and disclose the liability. In this case the liability for fire department retirees is
recorded on the ACFD financial statements.
Page 2 of 5
The liability is a projection of the estimated cost to provide the benefit to both current employees
as well as accrued liabilities for those who may have already retired. Although there is not a
requirement to pre-fund the liability, the City of Dublin has a history of proactively working
towards pre-funding retiree liabilities. Likewise, the partners contracting with Alameda County
Fire District and the County have looked at options to pre-fund. Some of the benefits of pre-
funding include:
Prefunding enables the agencies to calculate actuarially determined periodic
contributions to partially or completely fund future obligations.
Earnings on assets reduce employer contributions.
Reduces the net OPEB obligation liability on the balance sheet of the agency granting the
benefit (ACFD).
Enhances financial security for retirees.
The City of Dublin has a long standing practice of proactively pre-funding retiree health
liabilities. Since 1999, the City has worked with actuaries to assess the City liability and begin to
incrementally set aside funds for these future obligations. The City was among the first
participating agencies in June of 2007 to contribute to the CalPERS Trust Fund established for
this purpose. The City will extend this practice by working with ACFD to finance the City fair
share of ACFD liabilities.
Methodology
The District and its actuary developed a proposed system intended to meet the needs of the
District and contracting agencies. The methodology used determined the total liability for ACFD
and then calculated a “side fund” for each participating agency. The side fund represents the
amount of unfunded liability for each agency due to past service, based on ACFD retiree
medical benefits. As of the actuary’s June 30, 2013 estimate, ACFD has the largest share at
32.24%; the City of Dublin share is 11.02%. The purpose of calculating side funds is to allow
each agency the choice on pre-funding Retiree Medical benefits.
Assumptions related to the discount rate will impact the amount of the liability. They relate to
the assumed earnings on the deposited funds. To the extent that funds can be invested before
the benefits are paid, interest that is earned from investments will reduce contributions required
in the future. However an aggressive discount rate may result in continued funding shortfalls if
the investments perform at less than the assumed rate. The actuary has prepared the liability
calculations using a rate of 7.25%. This rate is a more conservative assumption than the
maximum discount rate allowed by the CalPERS Benefits Trust.
The methodology assumes that there will be an annual projected calculation of the side fund.
The following breakdown shows the components that go into the projected Fiscal Year
2012/2013 City of Dublin side fund balance:
Page 3 of 5
Component Projected
Dollar Amt.
Beginning of year “side fund” balance $7,058,000
Normal Cost Annual allocation of cost for current year employee service. 368,000
(Dispatch allocated by call volume – remainder first by FTE then by allocation %)
Benefit Payments – Premiums paid for retirees in the current year. (Allocated (327,000)
based on ACFD data.)
Interest assumed to end of year. 501,000
Sub-Total Side Fund End of Year $7,600,000
Additional pooled allocation for the year. 10,000
TOTAL $7,610,000
The City of Dublin calculated liability will fluctuate each year based on changes in each of the
components outlined above. In addition there can be changes to the side fund amount based
on changes in actuarial assumptions (ex. Life expectancy; future increases in health costs;
discount rates; number of employees allocated; etc.) ACFD is planning to utilize the CalPERS
“California Employers Retiree Benefits Trust” (CERBT which was established for the purpose of
receiving employer contributions that will prefund health and other post-employment benefit
costs for retirees and their beneficiaries. It is a method of generating significant revenues from
long term investment to apply toward OPEB obligations.
Authorization to Develop and Execute An Agreement
Since ACFD is the employer responsible for reporting the OPEB liability, it will be important to
have an agreement which specifies the City obligations and how the funds will be managed.
Items which will be considered in developing the agreement include: A) Definition of how the fair
share is calculated; B) Provisions under which the agencies will resolve any dispute of the
calculation; C) A requirement for the funds to be contributed to an irrevocable trust; D) Reporting
requirements; E) Status of funds in the event that the trust were dissolved or there was a
change in the contract relationship between City and ACFD; and F) Other administrative matters
related to the joint funding of the liability.
Due to the complexity of the issues to be addressed, the parties have not developed the final
agreement. Staff is seeking City Council authorization to enter into a final agreement, which will
be reviewed by the City Attorney and will be consistent with the conceptual framework
presented in this Staff Report. Attachment 1 is a proposed resolution which will document this
authorization.
City of Dublin Contribution Fiscal Year 2012-2013
As noted earlier in this report, the City of Dublin Agreement with ACFD provides that the City will
develop a supplemental agreement to address this funding. The City Council has previously
taken action to designate (set aside) certain General Fund assets to proactively address funding
of this liability. As of June 30, 2012, the balance set aside in the Fire Services (OPEB) Benefits
reserve was $5,148,019.57. The Actuarial report prepared by ACFD shows that the City of
Dublin Side Fund balance as of June 30, 2011 was $6,487,000.
Page 4 of 5
Staff believes that it is prudent to initially fund at least this amount. In order to accommodate the
increased funding, Staff recommends reducing the City General Fund reserve for PERS and
OPEB liabilities by $1,338,980.43 to make the full $6.487 million in Fiscal Year 2012-2013. The
City OPEB and PERS liability designation has a balance as of June 30, 2012 of $7,073,815.40
and would be reduced to $5,734,834.97. A Budget Change (Attachment 2) has been prepared,
which will appropriate $6,487,000 from the General Fund reserves for this purpose.
The current City Council policy on year end reserves provides that each year the amount of
certain internal charges were added annually to the Fire OPEB reserve designation. This is one
way in which the City incrementally built-up the $5.148 million balance. In the past this has
amounted to an annual increase of approximately $300,000 in this reserve. It is proposed that,
as part of the Fiscal Year 2013/2014 Budget, this process be modified. The funds added at the
end of Fiscal Year 2012/2013 will be appropriated as additional contributions to the ACFD Fire
side fund in Fiscal Year 2013/2014. This will continue the pro-active effort by the City to reduce
this liability.
NOTICING REQUIREMENTS/PUBLIC OUTREACH:
Copy of Report to Demetrious Shaffer, Acting Fire Chief ACFD.
ATTACHMENTS:
1. Resolution Authorizing the City Manager to Enter into an Agreement
with Alameda County Fire District Regarding Fair Share Funding of
Retiree Medical Benefits Liabilities and Approving The Use Of
Specified General Fund Assets As An Initial Contribution.
2. Budget Change
Page 5 of 5
RESOLUTION NO. ___ - 12
A RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF DUBLIN
* * * * * * * * * * *
AUTHORIZING THE CITY MANAGER TO ENTER INTO AN AGREEMENT WITH
ALAMEDA COUNTY FIRE DISTRICT REGARDING FAIR SHARE FUNDING OF RETIREE
MEDICAL BENEFITS LIABILITIES AND APPROVING THE USE OF SPECIFIED
GENERAL FUND ASSETS AS AN INITIAL CONTRIBUTION
WHEREAS,
the City Council adopted Resolution 119-12 on June 19, 2012 approving an
agreement for services with Alameda County Fire District (ACFD); and
WHEREAS,
the Agreement with ACFD included provisions for a subsequent agreement to
address the method of funding liabilities associated with retiree health benefits; and
WHEREAS,
the method of financing must take into account an allocation of the “fair share”
attributed to each agency contracting for service with ACFD. and
WHEREAS,
ACFD has obtained an actuarial valuation which includes a proposed side
fund allocation to each participating agency including ACFD; and
WHEREAS,
ACFD intends to proceed with establishing an irrevocable trust to accept
contributions that will be used to finance side fund obligations of each agency; and
WHEREAS
, each agency can independently determine the timing of contributions to the
trust to reduce the agency side fund liability; and
WHEREAS
, a specific agreement detailing ACFD responsibilities and City of Dublin
responsibilities in funding and managing the side fund will be developed; and
WHEREAS,
City Council policies strive to reduce long term obligations for retiree benefits
by setting aside funding designated for this purpose; and
WHEREAS,
the City as of June 30, 2012 has a balance of $5,148,019.57 specifically
designated to offset liabilities for retiree benefits associated with ACFD employees; and
WHEREAS,
the City Council desires to make an initial contribution of $6,487,000 to an
ACFD trust, which will reduce the City of Dublin fair share of the liability; and
WHEREAS,
in order to make the desired contribution the City Council proposes to use
$1,338,980.43 from the Assigned Fund Balance for Pension and Other Post Employment
Benefits; and
WHEREAS,
the use of the $1,338,980.43 is intended to modify the current policy providing
principal components of fund balance as established in Resolution No. 108-12.
ATTACHMENT 1
NOW, THEREFORE, BE IT RESOLVED
that the City Council directs the City Manager
to work with Alameda County Fire District to establish an agreement stating how the City of
Dublin “fair share” of Fire Retiree Health liabilities shall be calculated and funded, in
accordance with the framework as presented in the Staff Report on November 6, 2012; and
BE IT FURTHER RESOLVED
that upon completion of the written agreement with
oversight and review by the City Attorney, the City Manager shall be authorized to execute
the agreement on the behalf of the City of Dublin; and
BE IT FURTHER RESOLVED
that the City Council authorizes a change in the fund
balance policy adopted by Resolution No. 108-12 and herby directs that the Assigned Fund
Balance for Pension and Other Post Employment Benefits shall be reduced by $1,338,980.43
and the Committed Designation for Fire OPEB Liabilities shall be increased by the same
amount; and
BE IT FURTHER RESOLVED
that the City Council authorizes the City Manager to
expend the $6,487,000 from the Committed Designation for Fire OPEB Liabilities, by paying
these funds to an irrevocable trust established by ACFD to reduce the City fair share of
retiree medical insurance liabilities.
th
PASSED, APPROVED AND ADOPTED
this 6 day of November, 2012, by the
following vote:
AYES
:
NOES
:
ABSENT
:
ABSTAIN
:
______________________________
Mayor
ATTEST
:
_________________________________
City Clerk
ATTACHMENT 1
CITY OF DUBLIN
BUDGET CHANGE FORM FISCAL YEAR 2012/2013
_________________
CHANGE FORM #
New Appropriations:Budget Transfers:
(City Council Approval Required)
___X*___ From Unappropriated Reserves ________ From Budgeted Con
*City Council authorized use of reserves
(1001.1901-81101)
See Resolution 11/6/2012 ________ Within Same Department Activit
_____From New Revenues ____XX _ Between Departments
____
(City Council Approval Reqd)
________ Other
_____________________________________
DECREASE BUDGET ACCOUNT AMOUNT INCREASE BUDGET ACCOUNT AMOUNT
Name: General Fund
: EXPENDITURE
Fire Services Contributions to Other
$6,487,000
Agency
Account #: 1001.2401.81998
:
REASON FOR BUDGET CHANGE ENTRY
The City Council approved a 20 year agreement with ACFD June 19,
12). The agreement identified that the parties would develop the
share of retiree liabilities. The City Council received a report on November 6, 2012 related to the
calculation by an actuary, of the City of Dublin fair share of A
retiree benefit liability.
The City was awaiting the actuarial study in order to accurately
Although pre-funding the liability was a part of budget and financial planning discussions, the
adopted City of Dublin Fiscal Year 2012-2013 Budget did not incl
fund the City share of the ACFD retiree benefit liability.
The City of Dublin will fund the initial contribution from gener
describes the composition of the reserves being used to pre-fund
Budget Change appropriates the expenditure of a contribution to
ACFD. The trust will be used to fund retiree health benefits. The City as a contracting agency is
assigned a share of the liability, however, ACFD is responsible for reporting the OPEB liability,
since ACFD is the employer where the retirement occurred.
As Presented at the City Council Meeting on: Date: 11/6/2012
#################(Finance Use Only)###################
Posted By: Date:
_____ City Council Minutes Excerpt Attached ____________
G:\Budget Changes\5_2012-13\6_11_6_12_Fire OPEB.docx
ATTACHMENT 2