City of Hartford Other Post-Employment Benefits (OPEB) Presentation March 16, 2015 Adam M. Cloud Treasurer City of Hartford

Table of Contents I.Hartford’s OPEB Trust a.What is OPEB b.GASB Statement No. 45 c.What are the benefits of an OPEB Trust? d.Who gets OPEB benefits, and at what cost? e.Summary of the proposed Hartford OPEB Ordinance f.What is the current liability to the City? g.What is the historical OPEB cost to the City? II.Key Next Steps to Implementing An OPEB Trust 2

What is OPEB? Other Post Employment Benefits Retirement benefits (medical, dental, vision, life/disability) paid on behalf of retirees and their eligible dependents, in addition to pensions Benefits are not uniform for all retirees, due to differences in negotiated OPEB benefits over time Unlike pensions, OPEB costs are based on benefits costs during the years that a retiree (and applicable dependents) are eligible to receive benefits – future medical costs are difficult to calculate very far into the future. OPEB issue is important because: Governmental Accounting Standards Board (GASB) requires reporting of OPEB liability Failure to comply with GASB will prevent having a clean audit opinion An OPEB Trust allows: Favorable financial reporting Favorable rating agency reviews Investment returns from an OPEB trust to offset OPEB costs 3

GASB 45 – The Rule Book for OPEB Accounting Issued June 2004 Focused primarily on liability side equation Inclusive of a wide variety of benefits unless the retiree is paying 100% of the true cost of the benefit Covers medical, dental and other benefits Accrual-based accounting for expense is now required as well as measurement and disclosure of funding status Governmental Accounting Standards Series GOVERNMENTAL ACCOUNTING STANDARDS BOARD Statement No. 45 of the Governmental Accounting Standards Board Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions 4

Benefits of an OPEB Trust Fund 5 GASB 45 allows use of a higher discount rate when computing OPEB liabilities, which reduces the actuarially accrued liability – with no OPEB Trust, a lower discount rate must be used resulting in a higher liability Making the annual ARC payment each year ultimately leads to a net OPEB obligation of zero Investment returns on Trust assets reduce the cost of OPEB benefits Investment returns can eventually pay for a significant percent of future benefits Produces intergenerational equity: current taxpayers pay the full costs of their public servants’ compensation instead of leaving the bill to future generations Allows for a clean audit opinion

OPEB covers both Board of Education and City Employees: Active employees Three separate retiree groups City budgets and pays costs for OPEB annually City pays: life insurance premiums medical/dental benefits (partially offset by employee contributions) administrative costs Coverage as of July 1, 2013: LifeMedical Active employees2,9464,923 Retirees and spouses2,8581,742 Total5,8046,665 OPEB benefit payments for the year ended June 30, 2014, net of retiree and other contributions, totaled: $11,650,000 6 Who Gets OPEB Benefits in City of Hartford at what cost?

Summary of Proposed City of Hartford OPEB Trust Ordinance 7 Section 115 Trust Fund within meaning of the Internal Revenue Code Single account established by an OPEB Committee under section of the City of Hartford Charter, for beneficiaries (including BoE) hired prior to July 1, 2009, their qualified dependents and to cover expenses Managed by the City Treasurer, pursuant to City Charter and Connecticut General Statutes 7-403a An OPEB Committee will be established, consisting of the members of the Pension Commission, including the employee representative, together with the Mayor, the City Treasurer and the Superintendent of the BoE. The City Treasurer shall serve as Secretary to the OPEB Committee. OPEB Committee with take all necessary steps to establish and manage the OPEB Trust Fund and will make internal rules and regulations to carry out its duties, including the retention of professional services Annual actuarial valuation by qualified actuaries will be conducted The City will fund not less than 50% of the actuarially determined ARC payment The City Treasurer will be responsible for the care, custody, management and investment of all the assets of the OPEB Trust Fund, with the approval of the OPEB Committee, as fiduciaries Connecticut Uniform Prudent Investor Act, CGS 45a-541 or other relevant law applies No part of the OPEB Trust Fund assets will be subject to creditors of the City in any manner Upon vote of 7 member of the City Council, the OPEB Trust Fund may be terminated

Based on GASB Statement No. 45, the City actuarially determines an annual OPEB liability that must be recognized each year by the City. As of June 30, 2013, the City’s unfunded OPEB unfunded liability was $273 million dollars (per Aon Hewitt report) $37.2 million has been set aside to fund the OPEB Trust as follows: $2.6 million from the City; $34.6 million from BoE 2% City funded ratio; 71% BoE funded ratio June 30, 2014 OPEB Obligations ($000) ARC $19,991 Contributions made (YE 6/30/14) 11,650 (the PAYGo amount) Increase in net OPEB obligation 8,494 Net OPEB obligation, beginning of year 64,398 Net OPEB obligation, end of year $72,892* *Net OPEB obligation is less than the unfunded liability due to GASB 45 definition as the cumulative difference between the ARC and actual funding. 8 What Is The Current Liability to the City?

City’s Annual OPEB Cost Historically ($000) Annual Actual Percentage of Net FYE OPEB Cost ContributionAOC ContributedOPEB Obligation 6/30/12$18,641 $10, % $55,996 6/30/13 $19,318 $10, % $64,398 6/30/14 $20,144 $11, % $72,892 Key Actuarial Assumptions – OPEB Valuation date: July 1, 2013 Remaining Amortz. 30 Years Discount rate:4.5% per annum Projected salary incr.3.0% Inflation:3.5% Drug/medical cost trend:7% Administrative fee trend:4.0% Dental trend rate:5.0% 9

Key Next Steps 10 I.Finalize and approve City’s OPEB Ordinance II.Convene OPEB Committee III.Create OPEB Trust IV.Fund new OPEB Trust and invest assets V.Develop RFPs and hire the following OPEB Trust Fund service providers: a)Custodian b)Investment Consultant Create investment policy statement Determine asset allocation model c)Actuary Perform annual analysis and evaluation VI.OPEB Committee a)Invest assets in accordance with asset allocation and annual actuarial evaluation results