PURPOSE

The purpose of this report is seek approval by City Council of a trust agreement, along with all  related documents,  to contract with CalPERS to provide retiree benefit trust management and investment services.  This agreement will allow the City to comply with the GASB statement #45 for the accounting of Other Post Employment Benefits (OPEB).

BACKGROUND

The Governmental Accounting Standards Board (GASB) issued GASB Statement 45 in order to provide more complete, reliable, and decision-useful financial reporting.  This includes reporting of the costs and financial obligations that governments incur when they provide post-employment benefits other than pensions as part of the compensation for services rendered by their employees.  Post-employment healthcare benefits, the most common form of Other Post-Employment Benefits, are a very significant financial commitment for many governments. GASB 45 mandates that, effective for fiscal years beginning after December 15, 2006, governments with over $100M in revenue will have to start valuing and reporting the liability for other post employment benefits (OPEB).  Smaller governments have to report in the 2 years following depending upon their size.

To address this issue, in Fiscal Year 2005-06, staff engaged actuary John Bartel of Bartel and Associates to provide a preliminary estimate of the City�s OPEB liability.  Additionally, staff sought additional information how to best facilitate the requirements of this accounting pronouncement in terms of prefunding OPEB.

Subsequent to questions raised by Council at the 1^st quarter financial report to Council in December 2006, staff prepared a memo in response to these questions, (Queue Memo # 769) and conveyed a copy of the preliminary actuarial valuation report that was prepared by Bartel and Associates. This report included a preliminary actuarially determined liability that projected a total citywide unfunded OPEB liability that could be as high as $31 million.  This equated to an estimated annual required contribution amount of $2.8 million.

In March 2007, as part of the mid year financial update, staff recommended, and Council

appropriated $5M of the remaining Pension Obligation Bond (POB) reserve in the General Fund to

prefund this obligation, and gave staff direction to seek an agreement with CalPERS to provide the trust mechanism in which to invest and manage these funds.

ANALYSIS

While the GASB pronouncement dictates the accounting treatment of OPEB, cities have a number of decisions that deal with the fiscal impact of implementing OPEB.  These decisions include:

�         Will the City fund the cost of OPEB at all, partially, or fully?

�         If it is not funded, or partially funded, what will the negative impact on the City�s credit rating be?

�         If partially or fully funded, what mechanism will be chosen to facilitate the investment and management of OPEB funds?

�         Should the City create its own trust and manage the funds internally, or use an external provider such as a financial institution or another public agency such as CalPERS?  Note:  If an external provider is used, a higher discount factor can be used in determining the unfunded actuarially accrued liability (UAAL), thereby reducing the UAAL to the City.

�         What amortization period should be used to pay down the UAAL?

While there are numerous other complicated and detailed issues, the general direction that Council gave staff, and the recommendations that staff is proposing are:

• Fully fund the annual required contribution (ARC) of the OPEB.  This is the most fiscally responsible option.  It eliminates any potential negative credit rating issue with the City, as well as putting money in an irrevocable trust to pay for the benefits for the employees. 

• Contract with CalPERS to provide benefit trust services that include investment management and administration for the following reasons:

• This allows the City to utilize the CalPERS investment expertise and leverage.  Expectations of investment return are similar to that of the pension investments, and those have exceeded 12% in recent years.  If investment returns exceed 7.75%, that should lessen the ARC in future years. 

• Because CalPERS is an external agency, the actuarially assumed discount rate that determines what the City can use to actuarially determine the liability can be higher, thereby reducing the UAAL.  Under this scenario, a 7.75% return is assumed versus an assumed discount rate of 4% to 5% if funds were managed in an internal trust.  The 7.75% rate is the same assumed rate of return that CalPERS uses in the pension valuations.

• Since CalPERS is a non profit entity, their fees are less expensive than a commercial bank or financial institution.

• CalPERS has established the retiree benefits trust in March of 2007, and is ready to accept contributions, and provide investment and administrative services.

• Lastly, since the City already deals with CalPERS, the familiarity of the administration process with CalPERS is already known, and is straightforward.  Indications are that it will be virtually the same as how the City handles the pension contributions and administration.

Based on the recommendations above, staff worked with Bartel and Associates to finalize the actuarial valuation, as well as taking the necessary steps to enter into a trust agreement with CalPERS.  These steps include approval and execution of the following documents by City Council, staff, and Bartel and Associates:

• Agreement and Election to Prefund OPEB through CalPERS

• Delegation of Authority to Request Disbursements

• Summary of Actuarial Information required for CalPERS Financial Statements

• Employer Contribution by Check Under Agreement and Election to Prefund OPEB

• Certification of OPEB Actuarial Information and Funding Policy

This final valuation report received from Bartel and Associates incorporated the $5 million from the remaining POB reserve fund that Council appropriated at the mid year financial update to prefund the OPEB liability. As a result, the new unfunded actuarial determined liability is $15.1 M and the annual required contribution as a percentage rate of payroll [that will be used to amortize this liability over a 30 year funding horizon] equates to 1.6% for the General Fund, and 2.1% for all other funds payroll.  The difference in the rates results from the $5M that Council appropriated being applied to the General Fund liability; hence, a lower rate. This lower rate would decrease the General Fund liability previously estimated at $1.99 million to roughly $987,000 per year.   Staff utilized these percentages in preparing the 2007-08 budget, in order to estimate the cost of funding this obligation. A new actuarial study is necessary every 2 years, and staff has added this to the 2007-08 budget, and will continue to budget this study in the future.  Because the CalPERS trust is new, they will not be offering actuarial services for at least 3 to 4 years, so staff will continue to engage Bartel and Associates to perform this service. It is important to note that Bartel and Associates is one of a few actuarial firms that CalPERS has approved to perform these valuations, and they actually helped CalPERS design the actuary guidelines for these valuations.

One last issue to mention is the Burbank Employees Retiree Medical Trust (BERMT), and how this relates to cost of OPEB. In the beginning of this process, staff spoke with the City�s auditor, as well as with Bartel and Associates concerning this issue, and it was assumed that the BERMT was not subject to the OPEB valuation since the contributions were set, and there was no benefit defined thus far.   GASB recently issued clarification language stating that if the trust does not have individual accounts, then it is a defined benefit plan for purposes of OPEB, and subject to the computation of the liability. To address this potential impact based on input from John Bartel and the City�s auditors, the assumption was made that the inherent cost of the BERMT is neutral in terms of the OPEB calculation.  Stated simply, the City already pays funds into the BERMT, and since benefits have yet to be paid out of that trust, the trust will not pay out more than it can afford based on the actuarial analysis.  It is important to note that Bartel and Associates has performed the actuarial services for the BERMT, so staff is confident that this is a valid direction to pursue.

FISCAL IMPACT

As indicated above, the final OPEB rates are 1.6% for the General Fund, and 2.1% for all other funds.  Staff has used these percentages in preparing the 2007-08 budget and will go into affect July 1, so there is no fiscal impact at this time.

RECOMMENDATION

Staff recommends that City Council adopt a resolution approving a trust agreement with CalPERS to provide retiree benefit trust services, and approval of all related documents to facilitate the funding, investment management and administration of Other Post Employment Benefits.

Attachments:

1. Final Actuarial Report

2. Agreement and Election to Prefund OPEB through CalPERS

3. Delegation of Authority to Request Disbursements

4. Summary of Actuarial Information required for CalPERS Financial Statements

5. Employer Contribution by Check Under Agreement and Election to Prefund OPEB

6. Certification of OPEB Actuarial Information and Funding Policy

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