January 13, 2015 Town of San Anselmo June 30, 2014 OPEB Valuation Review

Introduction and Disclaimer My role for the Town is as: As an actuary with substantial experience in preparing valuations of Other Post Employment Benefit programs for disclosures under GASB 45. To serve as one of the two Bickmore actuaries involved in preparing the 2014 OPEB valuation for the Town of San Anselmo for GASB 45 reporting purposes. I am not: An Attorney – no legal advice An Accountant or an Auditor A representative of CalPERS or GASB Bickmore June 2014

Presentation Overview What we are valuing and a high level summary of the process Results of the June 2014 OPEB Valuation Comparison to Prior Valuation Results Upcoming Considerations

Definition of OPEB By OPEB we are referring to Other Post Employment Benefit Programs Meaning, benefits provided after termination of employment, except for pension benefits or temporary coverage required by COBRA. For the Town of San Anselmo, this means retiree medical benefits. We need to consider potential liability both from access to coverage as well as subsidized premiums.

Eligibility Requirements for OPEB Medical coverage is provided through CalPERS. Satisfy the requirements for retirement under CalPERS Minimum age 50 (52 for PEPRA miscellaneous) & 5 years CalPERS service Approved disability retirement. Can enroll within 60 days of retirement or during any future open enrollment period. Coverage is available for lifetime The employee must begin his/her retirement (pension) benefit within 120 days of terminating employment with the Town to be eligible to continue this medical coverage and be entitled to the employer subsidy described on the next slide.

Overview of Benefits Provided if Eligible The Town subsidizes a portion of the monthly premium for the retiree. The maximum monthly subsidy is the greater of: The PEMHCA Minimum Employer Contribution (MEC). The MEC was $119 per month in 2014 and is $122 per month in $225 per month. If the retiree dies prior to his/her spouse and the spouse is entitled to survivor pension benefits, the spouse is also eligible for a survivor medical benefit.

Additional “Hidden” Retiree Medical Benefits Under the CalPERS medical program, premiums vary by region and medical plan selected. Aside from that: Monthly premiums for all retirees not eligible for Medicare and for all active employees are the same (“Basic” plans). Monthly premiums for retirees/dependents covered by Medicare are adjusted down to reflect the fact that Medicare pays first, then the CalPERS plan pays. 7

Additional “Hidden” Retiree Medical Benefits As a group, the claim costs for pre-Medicare retirees and disabled retirees are expected to be significantly higher than the premium rate charged. In other words, the retiree is getting a value greater than the actual premium. The implicit subsidy is the term used to describe this hidden benefit for the retiree, that is, the difference between the expected or average claim cost at each age compared to the actual premium charged. We will ignore this for now but come back to it later. 8

How We Evaluate & Allocate the Cost The Basic steps are to: 1.Clarify and confirm the plan benefits: who gets what, beginning when and for how long 2.Determine the population of active and retired employees to be covered 3.Project – for each individual – his or her benefits each year in retirement. 4.Adjust (multiply) each future benefit by the assumed probability it will be paid. 5.Recognizing the time value of money, discount each future benefit payment back to the valuation date using the discount rate.

How We Evaluate & Allocate the Cost Basic steps (continued): 6.Add these discounted future benefit payments up for everyone: Present Value of Projected Benefits (PVPB) 7.Allocate the cost of the PVPB for each person over his or her expected years working for the Town. 8.Past service cost = Actuarial Accrued Liability (AAL) Current service cost (actives only) = Normal Cost 9.Annual Required Contribution (ARC) = Normal Cost plus a payment to amortize any unfunded AAL (plus interest adjustment).

Present Value of Projected Benefits

Active and Retired Plan Members Employee Counts by Valuation Date: Age and Service Information by Valuation Date (Active Miscellaneous Only):

Results of the 2014 Valuation On June 30, 2014 there were: - 29 active employees - 29 covered retirees/survivors - 10 waiving but eligible retirees under age 65 Present Value of Projected Benefits: $ 2,073,000 Actuarial Accrued liability (AAL): 1,629,000 Actuarial Value of Assets: 0 Unfunded AAL: 1,629,000 Normal Cost: 47,000 ARC for fiscal year ending June 30, 2014: 137,000 Estimated retiree payments: 75,000 Estimated Net OPEB Obligation: 435,000

Historical Data Snapshot

Historical Present Value of Benefits

Historical Actuarial Accrued Liability View Notes

Historical Normal Cost View Notes

Historical Annual Required Contribution

Historical Net OPEB Obligation Net OPEB Obligation

OPEB Financing While there is no current OPEB funding requirement, eventually those benefits will be required to be paid and each agency needs to consider how best to finance the cost. GASB 45 (and new OPEB standard) unfunded liability disclosures will continue to shine a spotlight and put some pressure on prefunding. Intergenerational equity: whenever possible, the value of compensation and benefits provided should be funded during the years when the services are being provided. Otherwise, taxpayers are paying for an expense each year but receiving no current services in return.

Risks in the current program that can increase the “Ultimate Real” OPEB liability: Increase in the number active employees eligible for future benefits (either hiring more people or from fewer employee terminations) Earlier-than-expected retirements Retirees living longer than expected Medical premiums or caps on Town paid portion increasing more than projected Lower return on assets used to pay for these benefits Changes to legal protection of OPEB Possible future requirement to “prefund” these benefits?

Upcoming Changes to Reportable OPEB Liability Actuarial Standards: recognize longer life expectancies and ongoing “mortality improvements” a.Included in 2014 valuation b.Recent new mortality improvement scale released in 2014 c.Expected impact: increase in reportable OPEB liability (4-8% range?) New CalPERS experience study (1997 – 2011 experience). a.Longer life expectancies b.Termination or non-work related disability –no material changes c.Earlier/later retirements: based on plan; may be later in general d.Earlier disability retirement rates for many safety employees Elimination of “community rated plan” exception. Must begin recognizing the “implicit subsidy” of retiree premiums. a.Probably effective FYE June 30, 2017 for the Town. b.Expected impact: material increase in reportable OPEB liability. c.Pros/cons of prefunding an implicit subsidy liability is complex

Additional “Hidden” Retiree Medical Benefits Earlier I mentioned the fact that when retirees have access to the same health coverage and benefits as active employees and at the same premium rates, they are getting a cost break, even if they paid the full premium. The difference between the expected or average claim cost at each age compared to the actual premium charged is referred to as the implicit subsidy. 23

Example: “Hidden” Retiree Medical Benefits Facts: Program with just one medical plan, an HMO. Premium for actives/pre-Medicare retirees: $500/mo. Premium for Medicare retirees; $300/mo. Active premium if no retirees covered:$400/mo. Employer pays 50% of the retiree premium. Without the retirees, the active premium would be $100 per month less. This additional $100 per month paid by (or for) active employees is going to cover the higher claims for retirees. Suppose the actual retiree claims are expected to vary by gender and age as shown in this chart: The “implicit subsidy” for a male age 60 would be $ (claims) - $500 (premium) times 12 = $2,876 this year. 24

Upcoming Changes to Reportable OPEB Liability New GASB OPEB Statement : Expected release by June Will be similar to changes between GASB 27 and GASB 68 for pensions, including: Changes to how the long-term obligation and the annual costs of OPEBs are measured, including amortization periods, assets and liability methods; new terminology; Recognizing the entire difference between the total OPEB liability and the value of OPEB trust assets on the balance sheet. Presenting more extensive note disclosures and related schedules Separation of accounting recognition and funding calculations (they need not be the same) Changes to process for developing the discount rate, with some historical experience of contributions required in order to be able to anticipate future contributions. Expected Impact: accelerated recognition of liability, but overall perhaps no new liability except as impacted by changes in the discount rate development Expected Effective date: Town reporting FYE 2017.

Changing the Ultimate Real OPEB liability 1.Changing the amount of benefits (i.e., the monthly amount paid to retirees) 2.Changing who receives the benefits Retiree, spouse, surviving spouse Current retirees, current employees, future employees 3.Changing the eligibility for benefits Longer service Later benefit start age 4.Changing the length of benefits, or lowering them at a specific age, such as age 65 5.Increasing the ROA used to pay for these benefits. More investment income means less direct Town contributions. To accomplish this will require beginning to prefund the OPEB liability through an irrevocable trust.

Questions