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Home My WebLink About6. Other Post Employment Benefit (OPEB) Recognition 6. CITY OF SHAKOPEE Memorandum TO: Mayor and Council Mark McNeill, City Administrator FROM: Gregg Voxland, Finance Director SUBJ: Other Post Employment Benefit (OPEB) Recognition DATE: April 17, 2008 Introduction A new accounting rule requires the city to record a liability on its financial records for future post employment benefits. The biggest concern of implementation of this rule from finance professionals is the impact on credit ratings. In Shakopee's circumstance, our analyst at Moody's has said that at this time, "it is not a big deal" in terms of the size of the liability and funding it over 30 years. Background Government Accounting Standards Board Rule 45 requires the city to record a liability for current and future post employment benefits. The benefit the city provides is allowing employees and dependents to stay on the group medical and dental insurance policies. Until age 65, the premium must be averaged in with active employees. The former employees then pay that averaged premium. State law requires the city to permit former employees to stay on the plan and to average the premiums with active employees until age 65. The benefit is that the averaging gives the former employee a lower rate and this is called an "implicit rate subsidy". Last year, the city retained an actuary to calculate the amount of the subsidy for the current and former employees who are on the insurance policy. The results are that as of January 2007, there is an Actuarial Accrued Liability of $1,887,961 (12/31/2006) and an Annual Required Contribution (ARC) of $240,553 Annual amount needed to fund the liability over 30 years). Anew actuarial study need to be done every three years. The city needs to show the liability by the 2008 fiscal year and the amount needed to fund the liability is $240,553 per year. Of the $240,553, $126,319 is the normal annual cost and $114,234 is "catch up" cost for prior periods. The liability is a relatively small number and the $240,553 ARC amounts to 1.4% of the General Fund budget. In comparison, Duluth is at 30%. This is similar to funding pension obligations through the Public Employees Retirement Association except this is the city's obligation instead of PERA's obligation. The attached chart is from the Government Finance Review published by the Government Finance Officers Association, February 2008 issue. The left side relates to how the insurance benefit is structured. The right side is the accounting side. 1. Starting at the upper right side with the "Funding Strategy Decision" box, there are three ways to find the liability. First is to put $1,887,961 in a separate account, second is to put part of that amount in a separate account and third is the current funding strategy of paying as you go. The first is the most prudent from a financial management standpoint. The liability is recognized and funded as a cost of the current account period and doesn't impose a greater burden on future accounting periods. It is a positive message to investors, bond rating agencies and citizens that the city is well managed. The second strategy is a cross between the first and the third. The third strategy recognizes the liability but does not fund it - kind of a "head in the sand" approach. There is no current requirement to set aside money. Ques ti On #1 - Does council want to fund (set aside money) the liability? 2. If council selects the first or second funding strategy, the next decision is how to separate the funds. A. Irrevocable trust has the advantage of taking the liability off the balance sheet of the city if it is fully funded or reduce the liability for partial funding. The disadvantage is not being able to get the money out of the trust if the liability goes away due to health plan changes such as going to a state or federal health care system. A possibility is setting up the trust with a provision for withdrawal due to such a change. A key point here is that under the current arrangement, due to the liability being an implicit rate subsidy, the city will not ever pay out these funds. The payment is blended in the rates that former and current employees and the city pay each month for health care insurance. B. A revocable trust does not take the liability off the balance sheet but does provide a more formal legal separation of the money. The footnotes to the financial statements would explain the liability and funding status. C. Earmarking the money in an agency fund does not take the liability off the balance sheet but does separate the money and avoid the cost of setting up and managing a legal trust. The city already has an agency fund for employee compensated absences (vacation, sick and compensatory time leaves) and OPEB could be part that fund. The footnotes to the financial statements would explain the liability and funding status. Question #2 - Which method of segregating the money does council want - Irrevocable trust, revocable trust, or earmark the money? Funding source for monies to set aside could be: 1. Operating budgets of the respective funds. 2. Bonding. 3. Transfers using fund balances. 4. Market value homestead credit (MVHC). 5. Tax-levy if possible. 6. Interest earnings in the agency fund. Under current conditions, if the liability were fully funded, the interest earnings on that balance plus the interest earnings on the balance for the compensated absences fund would pay for the liability going forward. One scenario for funding could be: Employee Benefit Fund interest earnings (3yrs)$ 230,000 Sewer Fund share 29,203 Storm Fund share 29,203 Telecomm Fund share 972 Recreation Fund share 9,717 General Fund share MVHC 2008 520,000 MVHC 2007/fund balance 420,000 1,239,095 Balance to be funded by the General Fund 648,866 (2008 budget reductions?) Recommendation At this point, the accounting recommendation is to recognize the liability, ear mark funding as part of the agency fund for employee benefits, and to fund it by a combination of operating budgets and interest earnings and use fund balance for the prior periods but within the General Fund use combination of fund balance and MVHC. The minimalist recommendation would be to recognize the liability, ear mark funding as part of the agency fund for employee benefits, and to fund it by using the Employee Benefit Fund interest earnings and operating budgets over 30 years. Action Discuss and give staff direction. Gregg Voxland Finance Director H:\Finance\docs\ I Exhibit 1:OPEB Decision Points' , Establish Goyern~r,;_~ _ I'' I, ~ ~ ~I ,yctuanai vain i ,r, i i ~i Rod , r., i Health care~F Ir F~~~~ _~t~,~_~~, , -Y ~ And I t_,. j Decision ~ i _ Plan Design a~ ~ o Health-care Cost ~ Pr~_~f~~;nd F'a~1i rl Pr_iunJ F ~ Benefit Levels ~ ~ Containment cn , ~ ~ Implicit Rate ~ Fundin;_ Subsidy Mechani~_ rr 0 tJ Irrevocable Trust Revocable Trust G -r ~ 'v Cash ' Bond ~ r 401 (h) VEBA Section _I I5 Cash Boy ~d Cash Bond Cash Bond Notes I . GFOA extends its appreciation to the GFOA Committee on Retirement Benefits Administration and its advisor. Leslie Thompson of Gabriel, Roeder, Smith and Company, who developed the initial version. of this decision tree. 2. While OPEB decisions do not necessarily focus on health care, this decision tree focuses on this particular beneft as the majority of the OPEB emphasis and cost is related to health-care benefits. February 2008 I Government Finance Review I I