1. OPEBs Case Study at Gainesville Regional Utilities APPA Fall Business/Financial Conference Session 30 – Are You Ready for OPEBs? Kim Simpson, CPA, Retired CFO – GRU Kim Simpson Consulting Phone & Fax (352) 373-7508 Mobile(352) 665-5214 simpsonsea@cs.com

2. Why are OPEBs Important? GASB is Requiring Accrual of Certain Costs More Importantly, OPEBs are True Costs That Will Affect Our Rates, Competitiveness in the Future

3. GRU Looked at Retiree Health Insurance Contributions in 1993 Who is Gainesville Regional Utilities (GRU)? –Combined electric, natural gas, water, wastewater and telecommunication utility –Electric System – Generating, T&D with Approximately 85,000 customers –Part of the City of Gainesville, sharing pension plans, post-employment benefits, some other functions –Combined Revenues of about $250 million Health Insurance Contribution Was GRU’s Largest OPEB

4. Why We Had a Problem Like Most Utilities, Had Never Booked Post-employment Health Benefit Liability Costs of Such Benefits were Escalating at High Rate Large Number of New Retirees –Put a 20 year and any age retirement system in place in 1985 but left generous retiree health plan in place

5. Why We Had A Problem (Continued) City Was Paying 80% of Individual Health Insurance Premium and 75% of Family With 20 Year Retirement Had Many Young Retirees with Families

6. Magnitude of Problem Actuarial Valuation of Unfunded Liability $90 million Assets On Hand -0- Annual Contribution if Funding Based on Actuarial Funding$13.1 million Annual Actual Funding (Pay-as-you Go) $1.3 million

7. We Had to Do Something We Were Concerned That If We Did Nothing, There Would Be No Health Benefit Contributions for Future Retirees –This Got Many Active Employees Interested in Helping Solve Problem

8. How We Attacked the Problem Initiated Team to Deal with Issue Worked Closely with Actuary Discussed Issue with Unions Met with Elected Officials Communicated with Retirees, Active Employees

9. How We Attacked the Problem (Continued) Comparisons to Competitors Checked Other Items Identified Groups of Retirees and Active Employees Put Revised Plan In Place

10. Initiated Team to Deal with Issue Combined Team of General Government and GRU Employees High Level Management Employees Selected Employees With Credibility and Respect of Elected Officials and Unions Team Worked Hard for Approximately Nine Months

11. Worked Closely with Actuary Used Same Actuary Who Handled Pension Valuations Actuary Was an Excellent Source of Ideas and Had a Good Feel About Relative Value of Changes This Doesn’t Come Free but Must Be Put in Context of Potential Savings

12. Discussed Issue with Unions Critical Part of Process They Can Help or Hurt Communications

13. Met with Elected Officials We Had an Initial Meeting with Elected Officials to Gauge Interest (Fortitude?) to Deal with Problem Initial Meeting Gave Us Some Direction as to How to Proceed Interim Communications to Keep Them Informed (They Will Hear from Employees and Retirees) Final Meeting for Decisions

14. Communicated with Retirees, Active Employees Focus Groups Held to Determine Knowledge of Problem, Values, Etc. Mass Mailings to Retirees Direct Communication With Active Employees Meetings With Retirees Individual Calculation of Impact for Each Retiree

15. Comparisons to Competitors We Felt it Was Important to Survey Post- Employment Health Contributions Offered by Our Competitors: –Local Employers –Other Governmental Employers –Other Public Power Employees –Investor Owned Utiltiies Conclusion: We Made Higher Contributions Toward Retiree Health Premiums Than Our Competitors

16. Checked Other Items Local Law, Ordinances Union Contracts State Regulations –In Florida, Law Requires that Insurance Premium Charged to Retirees Can’t Be Different from That Charged to Actives (Implicit Subsidy) Federal Law, Regulations Any Memorandum, Letters to Retirees (You Want to Find, If Any, Before They are Brought to You)

17. Identified Different Groupings Current Retirees and Current Active Employees Eligible to Retiree –These Active Employees Eligible to Retire Were Treated the Same As Retirees Because We Could Not Afford to “Empty Out the Back Lot” Active Employees with 10-20 Years Service (10 year vesting with a 20 year pension plan) Active Employees with Less Than 10 Years Service

18. Revised Plan Put into Place Actually Two Different Plans –Base (or Ultimate Plan) for New Hires and Those Active Employees With Less than 10 Years Service –Transition Plan for Current Retirees and Those Active Employees With 10 Years of Service or More (Consistent with Pension Plan Which Had 10 Year Vesting)

19. Description of Base (or Ultimate) Plan The City Will Contribute a Calculated Percentage Toward Retiree Health Insurance Premium –Maximum is 50% of Individual Premium –Based on Years of Service and Age 2% for Each Year of Service Years 1 to 10 3% for Each Year of Service 10 to 20 2% for Each Year of Service Over 20

20. Description of Base or Ultimate Plan (Continued) 2% Reduction for Each Year for Which Contribution is First Made Prior to Age 65 2% Increase for Each Year Past Age 65 for Which Contribution is First Made This Encourages Retirees Who Work Elsewhere (or Spouse Works Elsewhere) to Access that Employer’s Health Insurance

21. Example of Base (Ultimate Plan) Given a Retiree at Age 55 with 25 Years of Service –10 times 2% (for 1 st 10 years of svc)20% –10 times 3% (for next 10 years of svc) 30% –5 times 2% (for remaining 5 years of svc) 10% –Reduction for Years Before Age 65 -20% –Total Contribution % of Indiv Coverage 40%

22. Description of Transition Plan Same as Base or Ultimate Plan Except Years of Service Are Increased by a Multiplier Determined Based on Years of Service at Plan Revision Date Maximum Percentage City Contribution is 155% of Individual Premium if Family Coverage or 80% of Individual Premium If Individual Coverage Is Selected

23. Unfunded Liability After Plan Changes $18 million (About 50% for Base and 50% for Transition Costs)

24. Other Changes Made In Order to Limit Impact on Current Retirees We Put a Tiered Rate Structure in Place –Individual –Individual and Spouse –Individual and One Child –Individual and Family Helped Older Retirees Without a Family

25. Impact on Retirees Our 465 Current Retirees: –294 Paid More –171 Paid Less

26. Lessons Learned There is a Large Financial Exposure That Must Be Dealt With Changes Must be Made Carefully, Thoughtfully and With Full Communication Our Resulting Program is Relatively Complicated – Maybe There Are Ways to Simplify Try to Think of All the Nuances Document Process and New Plan Thoroughly

27. Summary of Unfunded Liability/Required Funding Actuarial Liability –Prior to Changes$90 million –After Revised Plan$18 million Required Funding –Prior to Changes$13.1 million –After Revised Plan$ 2.2 million