City of Lawrence

Finance Department

MEMORANDUM

DATE:	6/11/07
TO:	Dave Corliss, City Manager Debbie Van Saun, Assistant City Manager
FROM:	Heidi Nelson, Management Analyst GASB 45 Committee
RE:	OPEB Plan Design Options Study Results (GASB 45)

Background

Previously, EFI Actuaries conducted an actuarial valuation of the City of Lawrence’s annual Other Post Employment Benefits or OPEB liability as required under GASB 45.  The results of the study detailed the City’s OPEB liability using the three funding methods allowed for in GASB 45, which are as follows:

1. Full pre-funding of benefits – This implies that the City will consistently contribute an amount equal to the Annual Required Contribution (ARC) as defined by GASB 45.

2. Continuing pay-as-you-go funding – This entails no intended pre-funding, and that all future benefits will be paid from the City’s general assets.

3. Partial pre-funding of benefits – This involves contributing an amount which is higher than the pay-as-you-go cost, but lower than the ARC under full pre-funding.  In particular, it is assumed that the City will pre-fund the explicit liabilities of the Plan, but will continue to use pay-as-you-go financing for that portion of the liabilities which are dependent upon the implicit rate subsidy.

Although GASB 45 does not require that OPEB obligations be funded, the ARC is the level of employer contribution that would be required on a sustained, ongoing basis to systematically fund the normal cost and to amortize, or pay off, the unfunded liability attributed to past service over a period not to exceed thirty years.

City’s 2008 OPEB Liability

The charts below show the City’s 2008 OPEB Liability as determined by EFI Actuaries. 

Fully Projected Liability

Pay-as-You-Go	Fully Pre-Funded	Partially Pre-Funded (Pre-Fund Explicit Benefits)
9,284,261	4,912,275	7,336,893

Projected ARC (FY 2008)

Based on a 30-year Amortization Period

Pay-as-You-Go	Fully Pre-Funded	Partially Pre-Funded (Pre-Fund Explicit Benefits)
527,203	357,615	452,528

The previous memorandum that summarized GASB 45 and the results of the actuary’s valuation is attached.

Study of Plan Design Changes

In response to the initial OPEB/GASB 45 valuation results, the GASB 45 Committee asked EFI to conduct an actuarial study of the cost impact of modifying the post-retirement medical benefits available to current and future retirees.  The results of this study have been received.

There were 7 options evaluated.  These options were as follows:

1. Change the City’s portion of the premium to a flat dollar amount equal to 20% of the current premium equivalent.  This option assumes that the flat dollar amount would not increase over time.

2. Discontinue the City’s practice of providing subsidized dental insurance for retirees.

3. The City would no longer provide an explicit subsidy for medical, prescription drug, or dental care to retirees.

4. City would no longer provide retirees with an explicit subsidy and would charge participating retirees 125% of the designated premium equivalent for medical, prescription drug, and dental coverage.  This is the maximum amount that can be legally charged to these members for health plan coverage, under current Kansas state statute (KSA 12-5040).

5. Future retirees will be required to have earned at least 10 years of service with the City in order to participate in the City’s post-retirement health programs.  This represents the maximum service eligibility requirement allowed under Kansas state statute (KSA 12-5040).

6. The City would implement a vesting schedule for future retirees.  The amount of subsidy would be based on length of service.  The schedule would be based on 5 year increments, i.e. 10 years of service would equal 10%, 15 = 15%, 20+ = 20%.

7. Limit the explicit subsidy to a five-year period of time after retirement from the City.

Analysis

The following table shows the projected impact of implementing the above plan design changes.

Summary of Post-Retirement Benefit Changes ($ in Thousands)

As shown in the table above, only Options 1, 3, 4, and 7 would significantly reduce the cost of retiree health care.  Implementation of Option 3 or 4 would eliminate the 20% subsidy currently paid for retiree health care and represent a substantial change from our current policy.   

However, it may be desirable to implement Option 1 effective January 1, 2008.  Option 1 assumes that the City’s portion of the premium will be a flat dollar amount that is equal to 20% of the current premium equivalent and the amount will not increase over time.  Since this will not have an immediate negative impact on employees (the current percentage will just be converted into a flat dollar amount) the Committee feels that it is worth looking at for immediate implementation.  In the future, the City Commission could decide whether to change the amount of the subsidy.

Option 7 would level the retiree benefit between public safety and non-public safety employees.  The current 20% subsidy for retiree health care ends when the former employee reaches the age of 65.  Because participants in the Kansas Police and Fire retirement system typically retire at an earlier age than members of the Kansas Public Employees retirement system, the current health care subsidy represents a more significant benefit for public safety employees.  By limiting the benefit to five years the benefit would be more equal between the two employee groups.

Recommendation

Because Options 3, 4 or 7 would have a significant impact on employees’ health care benefits, it is recommended that these options be studied by the Health Care Committee if you consider them to have merit.  It is also recommended that the City Commission consider implementing Option 1 effective January 1, 2008.  The estimated impact of Option 1 would be to reduce the City’s annual cost by 0.352% of pay, or $147,300 for the 2008 Annual Required Contribution (ARC).  This would also reduce the OPEB liability that will be placed on our financial statements as a result of GASB 45.

The GASB Committee also feels that now would be an appropriate time to evaluate other potential changes to the retirant health care program.  For example, the Health Care Committee re-evaluated the Retirant Health Care Program policy in 2005.  At that time they discussed several changes that were possible to the program.  One proposed change was to not allow a retiree and his or her dependents to be eligible for coverage under the City’s plan if the retired employee is to be covered under a plan of another employer.  The Health Care Committee ultimately decided not to include the statement in the program policy even though the City has authority to do so under KSA 12-5040.  The GASB Committee recommends that this change be implemented or referred back to the Health Care Committee.

Next Steps

The GASB 45 Committee is seeking direction for the next steps in this project.  Ultimately a decision must be made about what funding method, if any, the City chooses to implement.  The City is not required under GASB 45 to fund the OPEB liability.  However, the liability will be shown on our financial statements.  While the calculated amounts are projections of future costs, the projection does represent real costs that the City has committed to pay if the current plan is continued.  As a result, it is similar to funding a pension.  If the cost of fully funding the benefit is deferred, it will put a greater burden on future budgets.

Given the current budget situation and the fact that the City is not required to fund OPEB obligations the Committee realizes that the feasibility of funding the Annual Required Contribution (ARC) for FY2008 would be difficult.  It is also likely that our bond rating would not be negatively impacted at this time if we do not fund the ARC in 2008.  However, it is not known when the rating agencies will expect public sector employers to address the liability. 

In addition, direction is requested as to how to present the valuation and options cost study.  Four presentations were included in our contract with EFI.  It was our intent to present the report to the GASB 45 Committee, the Health Care Committee, the Management Team, and the City Commission.  If you agree, we can schedule future meetings.  If you would like the presentations to be made differently, please let us know.