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HomeMy WebLinkAbout4 Post retirement health insurance Agenda Item # 4 Public Utility District Memorandum To: Board of Directors From: Kim Szczurek, Finance & Accounting Manager Through: Mary Chapman, Administrative Services Manager Peter Holzmeister, General Manager Date: December 28, 2006 Subject: ACCOUNTING FOR POST RETIREMENT HEALTH INSURANCE 1. WHY THIS MATTER IS BEFORE THE BOARD The Governmental Accounting Standards Board (GASB) has issued Statement No. 45 which addresses the accounting and reporting for certain `other" post retirement employee benefits (OPEB's). The TDPUD needs to comply with this rule no later than 2008. Staff is recommending that we comply with this rule in 2007. 2. HISTORY The District provides for certain payments towards retiree's health insurance. These payments are capped based upon the retiree's years of service and retirement age. The retiree pays the difference between the District's contribution and the actual cost of the insurance. Currently the District recognizes the expense for these costs each month when the health insurance bill is paid. As you will recall, we held a workshop on this item at the December 20, 2006 meeting. At that time the Board expressed interest in having a "review" of the current retirement medical benefits. I have attached an excerpt from the 2006 memorandum of understanding with the IBEW that contains the section pertaining to "Post Retirement Medical and Dental Benefits". I will also plan to orally review this with the Board during this agenda item if that is the Board's pleasure. Our outside auditors, Virchow Krause noted in their verbal report to the Board on the 2005 financial statements, and in footnote #1 of the financial statements that the District will need to comply with this pronouncement. GASB 45 changes how the expenses for this plan are to be accounted for. Essentially it requires that the District recognize, in its financial statements, the cost for the future health insurance premiums for current employees and/or an accrued liability for any unfunded costs. The GASB believes that this treatment more closely matches the expense of the retiree medical plan with the time an employee earns the benefit — while they are actually working - not after they are retired. The GASB also encourages governmental entities to set aside funding for these future payments in the form of an irrevocable trust fund. This allows the government to accumulate funds to pay for the benefit payments, rather than leave that burden to future Boards and rate payers. Memorandum December 28, 2006 GASB 45 Page 2of2 In order to calculate this liability the District must obtain an initial actuarial study of its past, current and future costs related to retiree medical. This study must be updated periodically (in the TDPUD's case at least every three years). Staff has worked with our health insurance provider NRECA to obtain this study so that we could have an initial idea of the magnitude of costs involved. This study has determined the District's liability for the employees who are currently eligible for this benefit as well as estimating future costs as employees continue to "earn" the benefit. Statement 45 allows an employer to amortize the cost of the liability over a period of up to 30 years in order to try to mitigate the financial burden on the employer. The actuarial study has determined that the additional annual cost to the District will be approximately $198,800 for 2007 (assuming a 30 year amortization). Staff included, and the Board approved, this amount in the adopted 2007 budget. As you may recall, I specifically discussed this item with you during the budget workshops, and let you know that I would be returning to provide additional information. Staff is also recommending that the Board establish an irrevocable trust fund to accumulate funds for future costs for this benefit and that these funds be invested in a longer-term instrument in order to maximize interest earnings. Higher interest earnings will offset costs to the District in the future. It is my understanding that CaIPERs is in the process of creating this type of trust for local government employers who use the CaIPERs health insurance plan. CalPERS is also working through the legislative process to open this option to local governments who are not using their health plan. They are hopeful this will happen by the summer of 2007. 1 am hopeful that it will, in that it would reduce the time and cost involved in doing this on our own. If the Board desires to begin funding this liability in 2007, 1 would recommend that we initially establish a Board-designated cash account and invest in the LAIF until such time as we know whether or not CalPERS is an option. The Board may wait until 2008 to comply with this pronouncement. However, the longer the District waits to start recognizing and/or funding this liability, the larger the liability grows. 3. OTHER INFORMATION I have again included as an attachment an extract of the GASB Statement 45 and other supporting information. I have also attached excerpted portions of the NRECA actuarial study for the District. This information was discussed at the December 20, 2006 workshop and of course I will be available for further discussion at this meeting. 4. RECOMMENDATION That the Board adopt the requirements of Governmental Accounting Standards Board pronouncement #45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions". Additionally, that the Board authorize staff to create and make monthly deposits to a Board-designated account for the accumulation of funds towards the future payments of these benefits and that those funds be invested in the California Local Agency Investment Fund (LAIF) until such time that the Board determines the method of creating an irrevocable trust fund for these monies. Excerpt from 2006 Memorandum of Understanding (k) Post Retirement Medical and Dental Benefits: (1) The plan is the same as the current employees' medical plan except for a $500 deductible per person compared to a $200 deductible per person for employees. It is based on the ElectREcomp medical plan with $500 deductible per person. Percent of Premium Paid Years of Service by District 10 50% 11 55% 12 60% 13 65% 14 70% 15 75% 16 80% 17 85% 18 90% 19 95% 20 100% District will pay the same percentages listed above of the retiree and dependent medical and dental premiums beginning at the retiree's age 60 for future retired employees based on years and months of service at Truckee Donner. If a person retires earlier than age 60 the benefit will be reduced to its actuarial equivalent. (This is estimated to be about 2% per year reduction in the benefit paid by the employer. For example, a person retiring at age 58 with 19 years of service would have 91% of the retiree and dependent premiums paid by the District if the actuarial equivalent was calculated to be exactly 2 %. (2)The benefit paid by the District is capped as listed below: Monthly Caps Individual only $475 Spouse only $475 Child(ren) only $475 Spouse & child(ren) only $725 Medicare Rate $375 If the premiums increase above the monthly cap, the retiree will pay the difference between the new premium and their percent of benefit established upon retirement multiplied by the cap. Example:A person retiring at age 58 with 19 years of service would have 91% of the retiree and dependent premiums paid by the District if the actuarial equivalent was calculated to be 2%. If initially the premium for individual only was $340, the retiree would pay 340 — (91% x $340) = $30.60. If the premium increases to $400 while the cap is$350, the retiree would pay 400— (91%x$350) =$81.50. (3) Retiree cannot leave the plan and then come back. Once time is broken on the plan, the employee or retiree cannot come back on the medical plan. (4) If the retiree is paying for part of the medical coverage it will be done through an electronic fund transfer from the retiree's account on a monthly basis. (5) When the retiree is eligible for Medicare, it is mandatory that the retiree enroll for that coverage. (6) If the District changes the plan or coverages through the collective bargaining process, those will apply to retirees also. (7) The vision benefit will remain the same without any monthly caps. 2006 MOU EXCERPT Excerpt from NRECA Actuary Report (3 pages) a� Exhibit I Truckee-Donner Public Utility District Health Insurance Plan GASB 45 Obligations as of January 1,2006 (Based on 4.00% Discount Rate) A. Accrued Liability (AL) as of January 1, 2006: 1. Actives Not Yet Eligible ($1,269,700) 2. Actives Fully Eligible (330,100) 3. Retirees and Dependents (728,700) 4. Total AL (2,328,500) B. Future accruals of current actives (1,183,300) C. Actuarial Present Value of Total Projected (3,511,800) Benefits=(A4)+(B) -2- Exhibit H Truckee-Donner Public Utility District Health Insurance Plan GASB 45 Expense for FY 2006 (Based on 4.00% Discount Rate and 10 Year Amortization) A. Normal Cost Component 1. Normal Cost $113,700 2. Interest=(Al) * 0.04 4,500 3. Total Normal Cost=(Al)+ (A2) 118,200 B. Amortization of Actuarial Accrued Liability 1. Actuarial Accrued Liability(AAL) $2,328,500 2. Assets 0 3. Unfunded Actuarial Accrued Liability(UAAL) 2,328,500 4. Present Value Factor(based on 10 years) 8.4353 5. Amortization Payment=(B3) _(B4) 276,000 6. Interest=(B5) * 0.04 11,000 7. Total Amortization of Payment=(B5)+(B6) 287,000 C. GASB 45 Expense Components l. Total Normal Cost(A3) $118,200 2. Total Amortization Payment(B7) 287,000 3. Annual Required Contribution(ARC)_(Cl)+(C2) 405,200 4. Contributions Made 54,100 5. Increase in Net OPEB Obligation=(C3)—(C4) 351,100 6. Net OPEB Obligation—Beginning of Year 0 7. Net OPEB Obligation—End of Year=(C5)+ (C6) 351,100 -3 - Exhibit H (cont'd) Truckee-Donner Public Utility District Health Insurance Plan GASB 45 Expense for FY 2006 (Based on 4.00% Discount Rate and 30 Year Amortization) D. Normal Cost Component 1. Normal Cost $113,700 2. Interest=(Al) * 0.04 4,500 3. Total Normal Cost=(A 1)+(A2) 118,200 E. Amortization of Actuarial Accrued Liability 1. Actuarial Accrued Liability(AAL) $2,328,500 2. Assets 0 3. Unfunded Actuarial Accrued Liability(UAAL) 2,328,500 4. Present Value Factor(based on 30 years) 17.9837 5. Amortization of Payment=(E3)_(E4) 129,500 6. Interest=(E5) * 0.04 5,200 7. Total Amortization payment=(E5)+ (E6) 134,700 F. GAS 45 Expense Components 1- Normal Cost(D 1) $118,200 2. Total Amortization payment(E7) 134,700 3. Annual Required Contribution(ARC) _(F 1)+ (F2) 252,900 4. Contributions Made 54,100 5. Increase in Net OPEB Obligation=(F3)—(F4) 198,800 6. Net OPEB Obligation—Beginning of Year 0 7. Net OPEB Obligation—End of Year=(F5)+(F6) 198,800 -4- Excerpt from CalPERS prepared discussion of GASB 45 (4 pages) ctqt vo C�, How It Works: Specifics of the GASB Statement#45 Statement#45 of the Governmental Accounting Standards Board (GASB 45) addresses the accounting and financial reporting by employers for their Other Post-Employment Benefits (OPEB). It applies to all employers that provide OPEB (i.e. the employer pays all or part of the cost of the benefit, including implicit rate subsidies). Statement#45 requires accrual-basis accounting for expenses and measurement and disclosure of funded status.(UAAL), if applicable. Statement#45 is generally consistent with Statement 27 currently being used for pension benefits. What Does OPEB Require OPEB consists of post-employment healthcare benefits including medical, dental, vision, hearing and other health related benefits whether provided separately or through a defined benefit pension plan. OPEB also include post-employment benefits such as life insurance, disability and long-term care if provided separately from a defined benefit pension plan. GASB 45 requires OPEB costs be based on the substantive plan as understood by employers and employees. In the rapidly changing health care world this can sometimes be different than any written plan document that exists. In addition, the substantive plan should reflect any anticipated changes in cost-sharing features when there has been established a past practice of making such changes. For example, if the employer has been adjusting the retiree's share.of health care costs each year to equal 25% of the total cost, then this 25% share should be reflected when valuing.the benefits to be paid in the future. Implementation Dates The commencement date for required disclosures for employers under GASB 45 will depend on the size of the employer. Larger employers must start recognizing their liability for financial reporting periods beginning after December 15, 2006. For the State and most public agencies, this will be the fiscal year July 1, 2007 through June 30, 2008. Smaller employers will be able to delay recognition until 2008-09 or even 2009-10. The fiscal year.when employers must start recognizing their OPEB costs is determined based on the employer's total annual revenue in the first fiscal year ending after June 15, 1999. Implementation of GASB 45 for employers is as follows: • If revenues exceed $100 million, must start reporting in the 1st fiscal year beginning after December 15, 2006 i.e. 2007-08. 10 • If revenues are between $10 to $100 million, must start reporting in the 1 st fiscal year beginning after December 15, 2007 i.e. fiscal year 2008- 09. • If revenues are less than $10 million, must start reporting in the 1 st fiscal year beginning after December 15, 2008 i.e. fiscal year 2009-10. Employers can decide to start reporting GASB 45 earlier if they wish. GASB encourages earlier implementation. As mentioned earlier, GASB Statement#43 applies to plans. The implementation dates for GASB 43 for plans will be based upon the total annual revenue of the largest participating employer revenue in the first fiscal year ending after June 15, 1999. Implementation of GASB 43 for plans is as follows: • If revenues of the largest participating employer exceed $100 million, the plan must start reporting in the 1 st fiscal year beginning after December 15, 2005 i.e. 2006-07. • If revenues of the largest participating employer are between $10 to $100 million, the plan must start reporting in the 1 st fiscal year beginning after December 15, 2006 i.e. fiscal year 2007-08. • If revenues of the largest participating employer are less than $10 million, the plan must start reporting in the 1 st fiscal year beginning after December 15, 2007 i.e. fiscal year 2008-09. As can be seen, plans will be required to comply with GASB 43 one year earlier than employers will have to comply with GASB 45. Accounting for GASB 45 — How It Must Be Disclosed On Financial Statements With the implementation of Statement#45, GASB is striving to improve financial reporting and ensure that benefits promised to employees are. expensed in the years when the employees render their service. GASB Statement#45 will require the recognition of OPEB costs on an accrual basis. Accounting on an accrual basis assigns the cost of benefits to the period where the service is rendered. On the other hand, accounting for costs on a pay-as-you-go basis does not recognize the cost until the service is over. Under GASB 45, the State and Public Agency employers will also be required to include in their notes to their financial statements the following information: • Annual-OPEB cost and contribution for current and 2 preceding years as well as the net OPEB obligation. • Funded status information including assets and accrued liability. 11 • Plan description, funding policy, actuarial methods and assumptions. • Funding progress for current and 2 preceding years. To Obtain the Correct Long Term Costs, Actuarial Valuations Will Be Needed To obtain the necessary financial information to meet GASB 45 requirements many employers will require actuarial retiree medical valuations. Employers with less than 200 members will be required to have a valuation done at a minimum once every 3 years while larger employers with more than 200 members will be required to have a valuation done at a minimum every 2 years. The valuation date for purposes of reporting GASB 45 financial information is permitted to be up to 24 months before the beginning of the reporting period if valuations are performed annually or 24 months before the beginning of the first reporting period in a biennial or triennial cycle. The smaller employers (less than 100 members)will use an alternate measurement method to estimate their actuarial liabilities instead of having to have an actuarial valuation done. GASB 45 defines the number of members as being the plan's total membership which includes employees in active service, terminated employees who have accumulated benefits but are not yet receiving them and retired and beneficiaries currently receiving benefits. The purpose of the GASB 45 actuarial valuation will be to determine the annual OPEB cost, the net OPEB obligation and to evaluate the funding progress. The GASB 45 actuarial valuation will be similar to a pension valuation but different at the same time. Different assumptions will be required such as an assumption on healthcare cost trend rate. The discount rate assumption will vary depending on the extent to which the OPEB are pre-funded. For plans that are fully pre-funded, the actuary performing the GASB 45 valuation will be able to use a discount rate assumption equal to the expected return on the investments. For plans that are not being pre-funded, the actuary performing the valuation will be required to use a discount rate based on short term duration government bonds or other high quality fixed income instruments. The difference in discount rates between pre-funded plans and those not being pre-funded might be in the 2%-6% neighborhood. An employer that pre-funds its OPEB will be able to use a higher discount rate assumption and will be able to report a lower expense and a lower unfunded liability for OPEB. As mentioned above, GASB 45 requires the calculation of the annual OPEB cost. The annual OPEB cost should be equal to the annual required j 12 y contribution (ARC) unless the employer has a net OPEB obligation at the beginning of the year. The ARC will consist of the normal cost for OPEB plus the amortization of any unfunded liability over a period of no more than 30 years on either a level dollar or level percent of payroll basis. Both the normal cost and the unfunded liability will be affected by the discount rate assumption. GASB 45 also requires the disclosure of the net OPEB obligation. The net OPEB obligation will be set at 0 at the time of the implementation of GASB 45. In subsequent years, the net OPEB obligation will be equal to the cumulative difference between the annual OPEB cost and the contributions made by the employers. To the extent the employer always contribute the ARC, the net OPEB obligation will always remain 0. If the employer does not pre-fund OPEB, then the.net OPEB obligation will become an increasing liability on the employer's balance sheet. Pre-Funding OPEB Is Not A Requirement But May Be Wise There are no requirements that employers pre-fund retiree health benefits. Pre-funding retiree health benefits is the making of actuarially determined periodic payments to partially or completely fund the unfunded actuarial obligation of the employer. Currently, health benefits.are'usuaily funded through employer, employee, and retiree contributions on a "pay-as-you-go" basis. Benefits of.Pre-Funding Even if not required, employers may wish to pre-fund the benefits and accumulate assets to offset the OPEB liabilities. Some of the advantages of doing so are: • Earnings on assets reduce employer contributions significantly. • Investment return assumption (discount rate assumption)will be higher, making annual expense and the unfunded liability lower. • Prevents net OPEB obligation from becoming a significant liability on balance sheet. Enhanced security for members. • Enhance inter-generational equity. By not pre-funding, the employer's credit rating might be affected, making it difficult or more expensive to issue bonds. Truckee Donner Public Utility District GASB 45 Other Post Retirement Benefits TDPUD - GASB 45 . What is it? • Governmental Accounting Standards Board makes rules for accounting and reporting for local governments like the PUD . GASB 45 addresses accounting and reporting for the District's retiree medical plan . Must implement not later than 2008 . Earlier implementation reduces future costs & liability . Board has previous)y included estimated 2007 funding amount in the 2007 budget TDPUD - GASB 45 . Why does GASB want governments to do this? . Recognizes that employees are earning this benefit while they work . Matches the expenses and funding to those worked years . Keeps the government from having a big unfunded liability down the road with no way to pay for it (e.g. : encourages savings for the future costs) TDPUD - GASB 45 . What are the District's retiree medical benefits? . Minimum 10 years employment . Must be age 60 & 20 years employment to receive full benefit . Covers qualified dependents . Mirrors active employee plan except higher deductable & no LTD . Benefit amounts have monthly caps . Retiree pays difference between benefit and actual cost of insurance TDPUD - GASB 45 . What is the financial impact on the TDPUD? . Actuarial study estimates total liability of $2.3M for past service and $ 118,,200 for each year of current service for a total liability of $3.5M . If the Board chooses to accumulate the funds for this over 30 years the annual cost, over and above what we currently pay, is about $198,,800 per year . This amount is included in the 2007 budget . Actual funding of this amount to a trust fund is highly encouraged by the GASB as the interest earnings can offset the amount the District has to fund out of rates TDPUD - GASB 45 . Are there GASB requirements for this funding? . Must set up an irrevocable trust fund for the purpose of paying future retiree medical bills . Encourages longer-term investing to maximize earnings . This also reduces future funding requirements from rates by the amount of interest earnings . CaIPERS is looking to establish this fund for local governments TDPUD - GASB 45 • Staff recommendations : . Implement the accounting and reporting guidelines for GASB 45 in 2007 . Begin funding for this liability in 2007,, setting aside the money in a Board- designated fund until such time as we know if CalPERS will allow us to invest in their fund . Board direction, comments, questions?