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MIN 10-14-2009 Special Meeting Minutes - Exhibit "B"
Exhibit "B" ~- ,r 3~::.. .. ~s ~~., ~: ~~ n N ~. /lI L II 1/~~ ~ /\-J To: Steve Fitzgibbons, City Manager From: Rebecca Underhill, CPA, Assistant City Date: October 13, 2009 Re: GASB 45 -Other Postemployment Benefits -Retiree Health Insurance . ~~:: ; ~< ~~ `~ ~~, ;,` rr ~: ,;~ }` _,. --, ~~:, ,: ~,, The Government Accounting Standards Board issued Statement 45 requiring governmental entities to recognize the liability that exists for other post employment benefits', OPEB. (A summary of which is enclosed hereto, as Exhibit 1}. For the City of Port Arthur, the OPEB is retiree health insurance. The health insurance benefit has been funded 'pay as you go'; without recognizing the future cost that is accruing for active employees. Under the new accounting rule, this practice is no longer possible. It is inaccurate and financially unsound. GASB 45 was implemented because of the growing concern over the potential magnitude of government employer obligations for post-employment benefits. The total employee cost should be recognized at the time that the employee is rendering service to the City. For example, the cost of the police department today, includes the salaries that the officers are paid, and sufficient funding for the retirement and health insurance that the current employee will receive after their service to the City is complete. (This accounting treatment for OPEB has been in place for non-government entities since 1990.} GASB 45 1) recognizes the cost of OPEB benefits in the period when the City receives the services, 2) provides information about the actuarial liabilities for the promised benefits, and 3) provides information useful in assessing potential demands on future cash flows. The city's problem is not unique; people are living longer, health care cost increases at twice the rate of inflation, etc. Current Retiree Health Insurance Plan Our. City provides the following benefits for retirees under the health insurance program: • All retirees are eligible to participate. (Employees are eligible to retire at 60 years of age with 10 years of service, or at any age with 20 years of service) • The City pays %2 of the cost of Retirees under 65, without dependents. • For retirees under 65, with dependents, the City pays %: of the dependent cost (which is more than the retiree cost). • Theoretically, the City pays no cost for the Medicare eligible retiree.* • If the Medicare retiree has a dependent that is not medicare eligible, the City pays %2 of the dependent's cost. • In the event of the death of a retiree, the City pays %: of the cost for the surviving spouse. * The actuarial study, and subsequent review, both concluded that the medicare premium paid at the time, October 1, 2007, was not fully funding the cost. GASB 4S Basics Normal cost is the actuarial present value of the benefits allocated to the valuation year. (The cost of the benefit earned by current employees during the one year period of the study). Actuarial Accrued Liability (AALJ is the actuarial present value of all benefits accrued as of the valuation date. Valuation Assets are equal to the market value of assets as of the valuation date, if any. (Currently, the City has none.) Unfunded Actuarial Accrued Liability (UALLJ is the difference between the actuarial accrued liability and the valuation assets. The UAAI is amortized over a period not to exceed 30 years. Annual Required Contribution (ARCJ is the actuarially determined annual cost to fund the normal cost and the amortization of the UALL. Stea 1-the Actuarial Valuation In late 2007, the City Council authorized a contract with Milliman, consulting actuaries, to perform the initial valuation of the plan. That valuation was received in November 2007, enclosed herewith as Exhibit 2. The numbers were staggering. For this study, dated 10-01-07, the AAL, the liability incurred by the City for both retirees and active employees was determined to be $93 million, at an investment rate of 490. The ARC for that year was $10 million, again at 4%. This means that in order to fund the benefit that has been promised to both retirees and active employees, under the exact scenario currently in place, the City would have to add $10 million to our annual budget. While GASB 4S does not require the City to fund the ARC, the liability will be reported, and remaining unfunded, will continue to grow. Over time, this situation could pose a serious threat to the financial well being of the City, and result in negative audit opinions and credit ratings. There are a variety of ways to limit and/or reduce the OPEB liability, including: • Extending vesting periods. Currently, city employees vest for purposes of health insurance coverage after 20 years of service, regardless of age. As we go forward, the City might consider a lesser benefit for those retirees with a lesser tenure with the City. • Lowering benefits levels and/or increasing the employee/retiree share of costs is another method of cost control. The staff recommendation, adopted by the City Council on September 22, while increasing retiree and employee costs, did not lower benefit levels in any way. We have estimates from the actuary that these changes may impact our UALL as much as 270. o Should the City reduce health insurance benefits in any way, increase deductibles, increase copays, limit coverage, etc, the liability would be reduced. • Changing from a defined benefit to a defined contribution plan is another possible route to take. The City may consider this option going forward for new hires. By contributing a set amount for retiree insurance over the career of the employee, at retirement the employee has a set amount of funding to purchase his/her own health insurance option. This approach completely eliminates future obligation and liability for the City for that group of employees; eventually eliminating the entire liability. Step 2- Seek Assistance from Qualified Benefits Professionals Coming to terms with the enormity of our situation, and understanding that we at the staff level did not have the expertise to grapple with all of the issues, the City Council authorized a contract with First Southwest Company, our financial advisors, who assigned our contract to their benefits group. Ric Panzera worked with us to first have our initial study reviewed by a second actuary. The purpose of this exercise was to delve deeper into the specific items that were driving our costs, i.e. turnover assumptions, mortality assumptions, health insurance costs by group, etc. Stanton Group (now Gallagher Benefits) working as a subcontractor for First Southwest, reviewed the Milliman study, and reviewed additional employee census data, and claims data. They issued a report dated April 29, 2009 (Exhibit 3), which first confirmed the Milliman report. Using the same assumptions, Stanton actually calculated a higher liability, $96.7 million. However, based upon their study of our plans actual experience, and utilizing an alternative amortization method*, the liability was reduced to $89 million, with the ARC at $7.76 million; still a staggering number. *The assumptions for termination were increased, again to coincide with the City's actual experience. The election of health insurance coverage at retirement was decreased, based upon actual rates. The amortization was escalated over time to coincide with projected payroll increases, rather than flat over the 30 years. This assumption lowers the ARC now, and increases it over the amortization period. Step 3 - Chanees Need to Be Made At the staff level, it became obvious that the City could not add $8 - $10 million per year in costs in order to maintain the status quo; and knowing that that number would only increase over time, as more retirees came onto the plan. It did not seem prudent to do nothing, as the liability will continue to grow, deteriorating the City's financial position. The first action taken was to request City Council approval, and funding, for an 'Employee / Retiree Health Clinic'. By offering lower cost alternatives for primary care, and expanded wellness initiatives, we are very hopeful that we will be able to contain the future increases to overall health insurance costs. This model has been successful in other communities, and has been widely studied by our Health Director and her staff, to determine the best, most effective practices. The initial plan is for a three year pilot period. During this time we will do all that we canto evaluate the effectiveness to our health care cost. The Clinic is expected to open November 1, 2009. During the summer months, the health insurance renewal was in development. Prior to the renewal recently adopted, retirees under age 65 were 'blended', included, for insurance purposes, as regular employees, and medicare retirees paid `100%' of their cost. Also, over time, on occasion, the City Council had absorbed rate increases for retirees and employees, which threw the plan out of sync. We began exploring the plan cost by employee/retiree group. It had been the belief, for some time, that the medicare retirees were fully funding their premiums. The actuaries did not see it that way. They saw the medicare retirees underfunded by 66%. Blue Cross saw it at 22% underfunded. Each group was looking at different sets of data, for different time periods; however, either way, the medicare retirees were not funding 100% of the cost, and are therefore increasing the liability. Non medicare retirees are a larger problem, funding an estimated 709'0 of their higher, fully insured cost. As we looked at the renewal, the staff recommended to the Council, and the Council adopted a plan whereby we begin to move towards a funding model that 1) reflects the plan, whereby retirees (under 65) pay 509'0 of their cost, or their dependent costs, and 2) unblends the rates, (Exhibit 4). After discussion and input from the Council, the effects of these two changes were phased in over five years. The effect of the five year phase in for the November 1, 2009 renewal is: Current Est. Monthly ' 11/1/09 $ Count Cost Cost Increase Increase . Retiree <65 54 $ 183.55 $ .205.81. $ 22.26 _ ..12.13% Retiree <65+ 1 Dependent 13 646.14 723.55.. : 77.41 11.98% _: Retiree <65 + 2Dependents _ _. __ 10 724.33: 811.51 87.18 ~ 12.04% _ Medicare Retiree _ 80 149.50 162.94 13.44 ' 8.99'/°` _ Medicare Retiree + 1 Dependent 34 421.36 456.53 35..17 8.35% Medicare Retiree + 2 Dependents 2 499.54 ` 539.07 39.53 7.91°rb .Employee + 1 Dependent 55 280.86 286.63 : 5.77 2.05% Employee + 2Dependents 203 351.24 360.97 9.73 2.77% This phase in period will allow the staff to continue studying plan options as far as eligibility, new hires, etc., in a continued effort to provide a sustainable, long term benefit for the current and future employees and retirees. Yes, under the current plan, the under 65 retiree will see substantial increases over the five years. It is our hope that these increases can be mitigated in the future; however the current course is prudent, and measured approach to secure the long term sustainability of the plan. The City Council has approved a contract with Gallagher Benefits to perform the 2009 actuarial study. These studies are required to be updated, no less than every two years. The 2009 study will reflect changes to the plan adopted at the 9/22/09 meeting. The City Council is being asked to hire a benefits attorney to provide us with legal advice as we look at changes to eligibility and other options. The attorney will also assist us in establishing the trust vehicle to begin funding the liability. A trust is the best option to reduce the liability by setting aside funding. As usual, the staff looks forward to the input from the Council as we proceed in this very difficult, but necessary task. EXHIBIT " 1 " Summary of Statement No. 45 "••• Guvecnmen~al Accounting Standards Board Employers for Postemployment Benefits Other Than Pensions (Issued 6/04) Summaries /Status Summary of Statement No. 45 Accounting and Financial Reporting by In addition to pensions, many state and local governmental. employers provide other postemployment benefits (OPEB) as part of the total compensation offered to attract and retain the services of qualified employees. OPEB includes postemployment healthcare, as well as other forms of postemployment benefits (for example, life insurance} when provided separately from a pension plan. This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. The approach followed in this Statement generally is consistent with the approach adopted in Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, with modifications to reflect _ differences between pension benefits and OPEB. Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, addresses financial statement and disclosure requirements for reporting by administrators or trustees of OPEB plan assets or by employers or sponsors that include OPEB Page 1 of 9 10/4/2009 http://www. gasb.org/stlsummary/gstsm45 .html Summary of Statement No. 45 plan assets as trust or agency funds in their financial reports. How This Statement Improves Financial Reporting Postemployment benefits (OPEB as well as pensions) are part of an exchange of salaries and benefits for employee services rendered. Of the total benefits offered by employers to attract and retain qualified employees, some benefits, including salaries and active-employee healthcare, are taken while the employees are in active service, whereas other benefits, including postemployment healthcare and other OPEB, are taken after the employees' services have ended. Nevertheless, both types of benefits constitute compensation for employee services. From an accrual accounting perspective, the cost of OPEB, like the cost of pension benefits, generally should be associated with the periods in which the exchange occurs, rather than with the periods (often many years later) when benefits are paid or provided. However, in current practice, most OPEB plans are financed on apay-as-you-go basis, and financial statements generally do not report the financial effects of OPEB until the promised benefits are paid. As a result, current financial reporting generally fails to: • Recognize the cost of benefits in periods when the related services are received by the employer • Provide information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded • Provide information useful in assessing http://www. gasb.org/st/summary/gstsm45 .html Page2of9 10/4/2009 Summary of Statement No. 45 potential demands on the employer's future cash flows. Page 3 of 9 10/4/2009 This Statement improves the relevance and usefulness of financial reporting by (a) requiring systematic, accrual-basis measurement and recognition of OPEB cost (expense) over a period that approximates employees' years of service and (b) providing information about actuarial accrued liabilities associated with OPEB and whether and to what extent progress is being made in funding the plan. Summary of Standards Measurement (the Parameters) Employers that participate in single-employer or agent multiple-employer defined benefit OPEB plans (sole and agent employers} are required to measure and disclose an amount for annual OPEB cost on the accrual basis of accounting. Annual OPEB cost is equal to the employer's annual required contribution to the plan (ARC), with certain adjustments if the employer has a net OPEB obligation for past under- or overcontributions. The ARC is defined as the employer's required contributions for the year, calculated in accordance with certain parameters, and includes (a) the normal cost for the year and (b) a component for amortization of the total unfunded actuarial accrued liabilities (or funding excess) of the plan over a period not to exceed thirty years. The parameters include requirements for the frequency and timing of actuarial valuations as well as for the actuarial methods and assumptions that are acceptable for financial reporting. If the methods and assumptions used in determining a plan's funding requirements meet the parameters, the same methods and assumptions are required for http://www.gasb.org/st/summary/gstsm45.html Summary of Statement No. 45 financial reporting by both a plan and its participating employer(s). However, if a plan's method of financing does not meet the parameters (for example, the plan is financed on apay-as-you-go basis), the parameters nevertheless apply for financial reporting purposes. For financial reporting purposes, an actuarial valuation is required at least biennially for OPEB plans with a total membership (including employees .in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retired employees and beneficiaries currently receiving benefits) of 200 or more, or at least triennially for plans with a total membership of fewer than 200. The projection of benefits should include all benefits covered by the current substantive plan (the plan as understood by the employer and plan members) at the time of each valuation and should take into consideration the pattern of sharing of benefit costs between the employer and plan members to that point, as well as certain legal or contractual caps on benefits to be provided. The parameters require that the selection of actuarial assumptions, including the healthcare cost trend rate for postemployment healthcare plans, be guided by applicable actuarial standards. Alternative Measurement Method A sole employer in a plan with fewer than one hundred total plan members (including employees in active service, terminated employees who have accumulated benefits but are not yet receiving them, and retirees and beneficiaries currently receiving benefits) has the option to apply a simplified alternative measurement method instead of obtaining actuarial valuations. The option also is available to an agent employer with fewer than one http://www.gash.org/st/summary/gstsm45.htm1 Page 4 of 9 10/4/2009 Summary of Statement No. 45 Page 5 of 9 10/4/2009 hundred plan members, in circumstances in which the employer's use of the alternative measurement method would not conflict with a requirement that the agent multiple-employer plan obtain an actuarial valuation for plan reporting purposes. Those circumstances are: • The plan issues a financial report prepared in conformity with the requirements of Statement 43 but is not required to obtain an actuarial valuation because (a) the plan has fewer than one hundred total plan members (all employers) and is eligible to use the alternative measurement method, or (b) the plan is not administered as a qualifying trust, or equivalent arrangement, for which Statement 43 requires the presentation of actuarial information. • The plan does not issue a financial report prepared in conformity with the requirements of Statement 43. This alternative method includes the same broad measurement steps as an actuarial valuation (projecting future cash outlays for benefits, discounting projected benefits to present value, and allocating the present value of benefits to periods using an actuarial cost method). However, it permits simplification of certain assumptions to make the method potentially usable by nonspecialists. Net OPEB Obligation-Measurement An employer's net OPEB obligation is defined as the cumulative difference between annual OPEB cost and the employer's contributions to a plan, including the OPEB liability or asset at transition, if any. (Because retroactive application of the measurement requirements of this Statement is not required, for most employers the OPEB liability at the beginning of the transition year will http:l/www. gasb. org/st/summary/gstsm45 .html Summary of Statement No. 45 be zero.) An employer with a net OPEB obligation is required to measure annual OPEB cost equal to (a}the ARC, (b) one year's interest on the net OPEB obligation, and (c) an adjustment to the ARC to offset the effect of actuarial amortization of past under- or overcontributions. Financial Statement Recognition and Disclosure Sole and agent employers should recognize OPEB expense in an amount equal to annual OPEB cost in government-wide financial statements and in the financial statements of proprietary funds and fiduciary funds from which OPEB contributions are made. OPEB expenditures should be recognized on a modified accrual basis in governmental fund financial statements. Net OPEB obligations, if any, including amounts associated with under- or overcontributionsfrnm governmental funds, should be displayed as liabilities (or assets) in government-wide financial statements. Similarly, net OPEB obligations associated with proprietary or fiduciary funds from which contributions are made should be displayed as liabilities (or assets) in the financial statements of those funds. Employers are required to disclose descriptive information about each defined benefit OPEB plan in which they participate, including the funding policy followed. In addition, sole and agent employers are required to disclose information about contributions made in comparison to annual OPEB cost, changes in the net OPEB obligation, the funded status of each plan as of the most recent actuarial valuation date, and the nature of the actuarial valuation process and significant methods and assumptions used. Sole and agent employers also are required to present as RS/ a schedule Page 6 of 9 http://www.gasb.org/stlsummary/gstsm45.html 10/4/2009 Summary of Statement No. 45 of funding progress for the most recent valuation and the two preceding valuations, accompanied by notes regarding factors that significantly affect the identification of trends in the amounts reported. Cost-Sharing Employers Employers participating in cost-sharing multiple- employerplans that are administered as trusts, or equivalent arrangements, in which (a) employer contributions to the plan are irrevocable, (b) plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the terms of the plan, and (c) plan assets are legally protected from creditors of the employers or plan administrator, should report as cost-sharing employers. Employers participating in multiple- employer plans that do not meet those criteria instead are required to apply the requirements of this Statement that are applicable to agent employers. Cost-sharing employers are required to recognize OPEB expense/expenditures for their contractually required contributions to the plan on the accrual or modified accrual basis, as applicable. Required disclosures include identification of the way that the contractually required contribution rate is determined (for example, by statute or contract or on an actuarially determined basis). Employers participating in acost-sharing plan are required to present as RSI schedules of funding progress and employer contributions for the plan as a whole if a plan financial report, prepared in accordance with Statement 43, is not issued and made publicly available and the plan is not included in the financial report of a public employee retirement system or another entity. other Guidance http://www.gasb.org/st/summary/gstsm45.html Page 7 of 9 10/4/2009 Summary of Statement No. 45 Page 8 of 9 10/4/2009 Employers that participate in defined contribution OPEB plans are required to recognize OPEB expense/expenditures for their required contributions to the plan and a liability for unpaid required contributions on the accrual or modified accrual basis, as applicable. This Statement also includes guidance for employers that finance OPEB as insured benefits (as defined by this Statement) and for special funding situations. Effective Dates and Transition This Statement generally provides for prospective implementation-that is, that employers set the. beginning net OPEB obligation at zero as of the beginning of the initial year. Implementation is required in three phases based on a government's total annual revenues in the first fiscal year ending after June 15, 1999. The definitions and cutoff points for that purpose are the same as those in Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments. This Statement is effective for periods beginning after December 15, 2006, for phase 7 governments (those with total annual revenues of $100 million or more); after December 15, 2007, for phase 2 governments (those with total annual revenues of $10 million or more but less than $100 million); and after December 15, 2008, for phase 3 governments (those with total annual revenues of less than $10 million). Earlier implementation is encouraged. Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee http://www.gasb.org/st/summary/gstsm45.html Summary of Statement No. 45 Page 9 of 9 10/4/2009 retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities. Paragraphs 4 and 6 discuss the applicability of this Statement. http://www.gasb.org/st/summary/gstsm45 .html EXHIBIT "2" City of Port Arthur, Texas Actuarial Valuation Of Postretirement Benefits Under GASB 45 As Of October 1, 2007 Prepared By Milliman, Inc. 333 Clay Street Suite 4330 Houston, TX 77002-7338 /1 ~1llMt`AAN Qt;A~~l PagM l~lltm~r~ Consultants en~f Actuaries November 9, 2007 Ms. Rebecca Underhill, CPA Director of Finance City of Port Arthur 444 4~' Street Port Arthur, TX 77641 Re: Actuarial Valuation of Postretirement Benefits under GASB 45 for the City of Port Arthur Dear Ms. Underhill: 333 Clay Street. Suite 4330 Houston, TX 77002-7338 Phone: (713) 658-8451 Fax: (713) 658-9656 www.milliman.clxn Pursuant to your request, we have completed an actuarial valuation of the benefit cost and funded status relating to the future retiree medical benefits provided by the City as of October 1, 2007 for the fiscal year beginning October 1, 2007. The results of our calculations are set forth in the following report, as are the actuarial assumptions, methods and brief summary of the retiree eligibility and benefits upon which our calculations have been made. Our determinations reflect the procedures and methods as prescribed in Statement 45 of the Governmental Accounting Standards Board, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions" ("Statement"). Actuarial computations under the Statement are for purposes of fulfilling certain employer accounting requirements. The calculations reported herein have been made on a basis consistent with our understanding of the Statement. Determinations for purposes other than meeting the employer financial accounting requirements of the Statement may differ significantly from the results reported herein. In preparing our calculations for this report, we have relied without audit, on the employee data, plan provisions, and other plan financial information as provided by the City. If any of this information, as summarized in this report, is inaccurate or incomplete, the results shown could be materially affected and this report may need to be revised. This report is intended for the sole use of the addressee and is intended only to supply sufficient information for the Plan Sponsor to comply with the stated purpose of the report and may not be appropriate for other business purposes. Reliance on information contained in this report by anyone for other than the intended purpose puts the relying entity at risk of being misled. Accordingly, no person or entity, including the addressee, should base any representations or warranties in any business agreement on any statements or conclusions contained in this report without the written consent of Milliman. OFFICES IN PRINCIPAL CITIES WORLDWIDE Ms. Rebecca Underhill ' ~ November 9, 2007 Page 2 On the basis of the foregoing, we hereby certify that, to the best of our knowledge and belief, this report is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the applicable Actuarial Standards of Practice. We further certify that, in our opinion, each actuarial assumption, method and technique used is individually reasonable taking into account the experience of the Plan and reasonable expectations. Nevertheless, the emerging liabilities and costs of the plan will vary from those presented in this report to the extent that actual experience differs from that projected by the actuarial assumptions. Please contact us if you have questions about our report or would like additional information. We, Rick White and Bryan Wilson, are consulting actuaries for Milliman, Inc. and are Members of the American Academy of Actuaries and meet the Quaycation Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Respectfully submitted, ~~ R Richard E. White, FSA, MAAA Consulting Actuary ~ti~ B Wilson, MAAA Consulting Actuary OFFICES IN PRINCIPAL CJTIES WORLDWIDE z 1 Contents Introduction and Purpose .........................................................................................3 Exhibits ........................................................................................................................ 5 Exhibit 1 -Summary of Participant Data ............................................................... 6 Exhibit 2 -Actuarial Present Value of Total Projected Benefits ............................ 7 Exhibit 3 -Actuarial Accrued Liability .................................................................. 7 Exhibit 4 -Annual Required Contribution - 4.0% ................................................. 8 Exhibit 5 .-Annual Required Contribution - 7.0% ................................................. 9 Exhibit 6 -Projected Benefit Payments ...........................................:................... 10 Exhibit 7 -Financial Statement Disclosures ........................................................ 11 Exhibit 8 -Schedule of Funding Progress ............................................................ 12 Appendices .^u.^.^^.....•uuuuu.........^.auu...••.^ru^.uuu^u•u..^or.•.^•^u.u.uu...u........^.u..u.• 13 Appendix A -Actuarial Cost Method .......................................................................14 Appendix B -Actuarial Assumptions ....... .................................................................15 Appendix C -Plan Provisions ...................................................................................18 Appendix D -Glossary ............................................................................................. 20 Actuarial Valuation of Postretirement Benefits Under GASB 45 2 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepazed solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. introduction and Purpose Historically, governmental entities offering postretirement medical plans -especially those that are self-funded -have accounted for such plans on essentially a cash basis. Consequently, the cost for such plans is attributed to the period of time that an employee is retired and not performing substantial work for the employer. In 2004, the Governmental Accounting Standards Board issued Statement No. 45 entitled "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions" ("GASB 45 ") to address the accounting of these plans. The major change under GASB 45 is to attribute the cost of postretirement benefits to the time during which the employee is working for the employer. Reasons provided by GASB for this change include: • Recognize the cost of benefits in periods when the related services are received by the employer. • Provide information about the actuarial liabilities for promised benefits associated with past services and to what extent those benefits are funded. • Provide information that is useful to assess potential demands on the employer's future cash flows. While GASB 45 allocates the costs of a postretirement benefit plan over the years of active employment (when the promise of future benefits is potentially motivating an employee), it does not require the funding of such benefits. There are two key points that need to be noted in this regard. First, the choice of the discount rate used in measuring the liabilities of the benefits is tied to the funding vehicle or lack thereof. GASB 45 requires the use of a discount rate that is related to the long-term investment yield on investments used to finance the payments of benefits. An unfunded plan must use a discount rate equal to what the sponsor earns on its general assets. Since a lower discount rate leads to higher liabilities, a funded plan will have lower liabilities than an unfunded plan with identical provisions and membership. While the discount rate issue provides some encouragement for funding plans, there is a second key point. GASB 45 requires that assets can only be considered if they are: (1) held in an irrevocable trust, (2) dedicated solely to provide benefits under the plan to retirees and their benef ciaries, and (3) are protected from creditors. This restriction may limit what can be funded, depending upon legal restraints and tax issues. Actuarial Valuation of Postretirement Benefits Under GASB 45 3 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administrazion and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. In order to illustrate how the results are impacted if the Plan is funded, results are shown using two different discount rates. If the Plan were funded, the entity may be able to invest in higher risk securities. For purposes of this report, we have determined the liabilities using a 7°Io discount rate, to reflect the potential effect of funding these liabilities using a trust fund. Without funding, the discount rate is assumed to be 4%, which represents a conservative estimate of short-term pooled funds. If the plan sponsor chooses to fund these liabilities, the actual discount rate will reflect the actual investments selected by the plan sponsor. If the plan sponsor chooses to continue with apay-as-you-go arrangement, the discount rate should reflect what the sponsor actually expects to earn on short-term pooled funds. These .pages estimate the cost of the entity's current retiree health program and the potential impact of GASB 45. The intended purpose of this information is to provide actuarial cost information to the entity to help with financial and benefit planning. Milkman does not intend to benefit and assumes no duty or liability to other parties who receive this work. The summary should only be used ~in its entirety to assure complete understanding of the estimates and the methodology and assumptions underlying the estimates. In preparing this report, we relied on the overall employee census information provided by the entity. We reviewed the information for reasonableness, but we did not audit the information. To the extent that any of this data or information is incorrect, the results of this report may need to be revised. We have not collected actual claims information of the entity. Per capita claims were developed from our understanding of the plan and Milkman's Health Cost Guidelines. A number of assumptions have been made in projecting retiree health costs that should be reviewed prior to interpreting the results shown in this report. These assumptions, as well as the actuarial methodology, are described in this report. The projections in this report are estimates and, as such, the entity's actual liability will vary from these estimates. The actual liability will not be known until such time that all eligibility is exhausted and all benefits are paid. The projections and assumptions should be updated as actual costs under this program develop. The Medicare Modernization Act (MMA) provides for a federal subsidy to sponsors of a postretirement benefit plan that provides prescription drug coverage, provided the coverage is at least actuarially equivalent to the prescription drug benefits provided by Medicare Part D. GASB has released a Proposed Technical Bulletin that indicates this future subsidy should not be reflected. We have not reflected any effect of this future subsidy in the calculations shown in this report. Actuarial Valuation of Postretirement Benefits Under GASB 45 4 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely. to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milkman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Actuarial Valuation of Postretirement Benefits Under GASB 45 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 1 Summary of Participant Data A~ears v'f.~er~~~e ... A: ~ ,~~t_ ~ ~ ~~ ` _ F .~ l , .~.~. 0-24 7 1 0 0 0 0 0 0 8 25-29 22 11 0 0 0 0 0 0 33 30-34 25 34 7 0 0 0 0 0 66 35-39 18 24 23 10 0 0 0 0 75 40-44 11 23 15 31 12 1 0 0 93 45-49 18 18 7 28 20 34 0 0 125 50-54 14 .13 9 15 13 22 26 0 112 55-59 6 8 11 10 11 7 6 '4 63 60-64 4 7 2 2 2 2 2 3 24 65-69 0 1 0 0 0 1 0 1 3 70&U 0 1 0 1 0 0 0 0 2 Total 125 141 74 97 58 67 34 8 604 Actuarial Valuation of Postretirement Benefits Under GASB 45 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 2 Actuarial Present Value of Total Projected Benefits Medical Pre-65 Post-65 Total r ~. • City* ~. F~re* Folice* Ite'rees Total $20,517,432 $9,317,913 $9,416,316 $4,737,503 $43,989,164 48,552,855 15,918,503 15,583,624 20,963,811 101,018,793 $69,070,287 $25,236,416 $24,999,940 $25,701,314 $145,007,957 ~. Ci>~y* ~ Fire* ~° ~ 'Folice*. ~tetirees ~ 'Foul ':: Medical Pre-65 $13,279,916 $5,732,450 $5,369,893 $4,060,752 $28,443,011 Post-65 19,749,157 5,690,970 5,082,761 13,319,079. 43,841,967 Total $33,029,073 $11,423,420 $10,452,654 $17,379,831 $72,284,978 * Actives Only ~. - . ~it~* " Fire* ` Folice* - Retirees -Total `~ Medical Pre-65 $8,389,290 $3,935,920 $3,092,327 $4,060,752 $19,478,289 Post-65 11,962,246 3,805,095 2,803,986 13,319,079 31,890,406 Total $20,351,536 $7,741,015 $5,896,313 $17,379,831 $51,368,695 * Actives Only Actuarial Valuation of Postretirement Benefits Under GASB 45 7 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, . administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 3 Actuarial Accrued Liability Exhibit 4 Annual Required Contribution - 4.0% City dire Police Retirees Total. A. Normal Costs (1) Current Year Normal Cost as of October 1, 2007 $ 2,782,225 $ 786,556 $ 873,354 $ 0 $ 4,442,135 (2) Assumed Interest to the End of the Fiscal Year $ 111,289 $ 31,462 $ 34,934 $ 0 $ 177,685 (3) Current Year Normal Cast as of Sept. 30, 2008 $ 2,893,514 $ 818,018 $ 908,288 $ 0 $ 4,619,82 [(1) + (2)l B. Determination of Current Year Amortization Payment (1) Unfunded Actuarial Accrued Liability (see Exhibit $ 39;239,271 $ 15,799,322 $ 13,020,317 $25,701,314 $ 93,760,224 3) (2) Maximum Permissible Amortization Period 30 years 30 years 30 years 30 years 30 years (3) Level Dollaz Amortization Factor 17.9837 17.9837 17.9837 17.9837 17.9837 (4) Amortization Amount as of October 1, 2007 $ 2,181,935 $ 878,536 $ 724,007 $1,429,145 $ 5,213,622 [(1) ~ (3)l (5) Assumed Interest to the End of the Fiscal Year $ 87.277 $ 35,141 $ 28,960 57 166 208 545 (6) Amortization Amount as of September 30, 2008 $ 2,269,212 $ 913,677 $ 752,967 $1,486,311 $ 5,422,167 C. Determination of Annual Required Contribution (1) Normal Cost for Benefits Attributable to Service in $ 2,893,514 $ 818,018 $ 908,288 $ 0 $ 4,619,82 the Year (A.3. ) (2) Amortization of Unfunded Actuarial Accrued $ 2,269,212 $ 913,677 $ 752,967 $1,486,311 $ 5,422,167 Liability (B.6.) (3) Annual Required Contribution (ARC) [(1) + (2)] $ 5,162,726 $ 1,731,695 $ 1,661,255 $1,486,311 $ 10,041,987 The amortization of the Unfunded Actuarial Accrued Liability is calculated here assuming 30 level annual payments. GASB 45 allows for these payments to be calculated as a level percent of payroll. If this were done, the FYE 2008 ARC would be lower, but future years would be higher as payroll increases. Actuarial Valuation of Postretirement Benefits Under GASB 45 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. Tt may not be appropriate for other purposes. MiUiman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 5 Annual Required Contribution - ?.0% City `ire Police Retirees T©tal A. Normal Costs (1) Current Yeaz Normal Cost as of October I, 2007 $ 1,351,277 $ 352,140 $ 366,753 $ 0 $ 2,070,17 (2) Assumed Interest to the End of the Fiscal Year $ 94,589 $ 24,650 $ 25,673 $ 0 $ 144,912 (3) Current Year Normal Cost as of September 30, $ 1,445,866 $ 376,790 $ 392,426 $ 0 $ 2,215,082 2008 [(1) + (2)] B. Determination of Current Year Amortization Payment (1) Unfunded Actuarial Accrued Liability (see Exhibit $ 20,351,536 $ 7,741,015 $ 5,896,313 $17,379,831 $ 51,368,695 3) (2) Maximum Permissible Amortization Period 30 yeazs 30 years 30 years 30 yeazs 30 years (3) Level Dollar Amortization Factor 13.2777 13.2777 13.2777 13.2777 13.2777 (4) Amortization Amount as of October 1, 2007 $ 1,532,761 $ 583,009 $ 444,076 $1,308,949 $ 3,868,795 (5) Assumed Interest to the End of the Fiscal Year $ 107.293 $ 40.811 $ 31.085 91 626 270 816 (6) Amortization Amount as of September 30, 2008 $ 1,640,054 $ 623,820 $ 475,161 $1,400,575 $ 4,139,611 ((4) + (5)] C. Determination of Annual Required Contribution (1) Normal Cost for Benefits Attributable to Service in $ 1,445,866 $ 376,790 $ 392,426 $ 0 $ 2,215,08 the Year (A.3.) (2) Amortization of Unfunded Actuarial Accrued $ 1,640,054 $ 623,820 $ 475,161 $1,400,575 $ 4,139,611 Liability (B.6.) (3) Annual Required Contribution (ARC) [(1) + (2)] $ 3,085,920 $ 1,000,610 $ 867,587 $1,400,575 $ 6,354,693 The amortization of the Unfunded Actuarial Accrued Liability is calculated here assuming 30 level annual payments. GASB 45 allows for these payments to be calculated as a level percent of payroll. If this were done, the FYE 2008 ARC would be lower, but future years would be higher as payroll increases. Actuarial Valuation of Postretirement Benefits Under GASB 45 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 6 Projected Benefit Payments .va~at~on ~.~ _ _ . " .dear' . ~ - Gross Contributions - -.Net 1 1,511;125 (571,572} 939,553 2 1,832,547 (698,271) 1,134,276 - 2,221,112 ; ,. '" (840,873} 1,380,239 4 2,690,188 (1,015,488) 1,674,700 ~ _ 3,191,979 (1,201-,5;29) ~ ~ 1,984,450 6 3,779,388 (1,427,708) 2,351,680 . 4,367,668 ; - _ ;_ (1,649x?~2) 2,7.:17,876 8 4,966,036 (1,882,301) 3,083,735 9 5,577,121 ,(2,127,831} . ~ 3,449,29U 10 6,257,498 (2,381,781) 3,875,717 11 6,935,748 (2,645,122} ~; 4,290,626 12 7,559,104 (2,884,317) 4,674,787 :~"3 8,3Q8,1S6 = ..:. (3,],46,093) 5,162,063 14 8,834,549 (3,381,490) 5,453,059 15 9,49'7`,861. -. (3,632,243) ~ - S,$65,618 16 10,141,619 (3,876,641) 6,264,978 17 -: . 10,604,982 (4,083,358) 6,521,624 18 11,205,809 (4,309,458) 6,896,351 `ig 11,748,625 ~" (4,520,614) 72228,011 20 I 12,164,068 ~ (4,712,326) ~ 7,451,742 This table illustrates projected benefit payments for current members only. Actuarial Valuation of Postretirement Benefits Under GASB 45 10 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. / ~ Exhibit 7 Financial Statement Disclosures The following table shows the calculation of the Annual Required Contribution and estimated Net OPEB Obligation at the end of the fiscal year. -~_ ~~ r r r~ - n Determination of Annual Required Contribution Normal Cost at fiscal year end $ 4,619,820 $ 2,215,082 Amortization of UAAL 5,422,167 4,139,611 Annual Required Contribution (ARC) $ 10,041,987 $ 6,354,693 Determination of Net OPEB Obligation Annual Required Contribution $ 10,041,987 $ 6,354,693 Interest on prior year Net OPEB Obligation 0 0 Adjustment to ARC 0 0 Annual OPEB Cost $ 10,041,987 $ 6,354,693 Estimated Contributions (939,SS3) (6,354,693) Increase in Net OPEB Obligation $ 9,102,434 $ 0 Net OPEB Obligation -beginning of year $ 0 $ 0 Net OPEB Obligation -end of year (estimated) $ 9,102,434 $ 0 The following table shows the annual OPEB cost and net OPEB obligation for the prior 3 years assuming the plan is not prefunded (4% discount): Percentage o~ -Fiscal Discount ~' Annual OPEB Cost Net OPEB Year Ended ?.ate 4PFB Gost Contributed Ubl' ation 09/30/2006. N/A N/A N/A N/A 09/30/2007 N/A N/A N/A N/A 09/30/2008 4.0% $10,041,987 9.36% $9,102,434 Actuarial Valuation of Postretirement Benefits Under GASB 45 11 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepazed solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. 1 ~ Exhibit 8 Schedule of Funding Progress Unfund"ecl ~~a~;~ ~~~ria~ Actuarial ~ Actuanat Discvont Accrued: ~ Accrued v'ataation ; '`_ Value. ~ ~ ' Liab~ities ' . . Liabilities - , :Funded , ;` ~. hate of Assets .: Rate .' ~. ~AAL}~l} _ (UAAL}f z~ .: Ratio October 1, 2005 N/A N/A N/A N/A N/A October 1, 2006 N/A N/A N/A N/A N/A October 1, 2007 0 4.0% 93,760,224 93,760,224 0.0% (1) Actuarial~Accrued Liability determined under the projected unit credit cost method. (2) Actuarial Accrued Liability less Actuarial Value of Assets. Actuarial Valuation of Postretirement Benefits Under GASB 45 _ 12 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Actuarial Valuation of Postretirement Benefits Under GASB 45 13 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Appendix A Actuarial Cost Method Unit Credit Actuarial Cost Method The actuarial cost method determines, in a systematic way, the incidence of plan sponsor contributions required to provide plan benefits. It also determines how actuarial gains and losses are recognized in pension costs. These gains and losses result from the difference between the actual experience under the plan and the experience by the actuarial assumptions. The cost of the Plan is derived by making certain specific assumptions as to rates of interest, mortality, turnover, etc. which are assumed to hold for many years into the future. Since actual experience may differ somewhat from the long term assumptions, the costs determined by the valuation must be regarded as estimates of the true costs of the Plan. Actuarial liabilities and comparative costs shown in this Report were computed using the Unit Credit Actuarial Cost Method, which consists of the following cost components: 1. The Normal Cost is the Actuarial Present Value of benefits allocated to the valuation year. 2. The Actuarial Accrued Liability is the Actuarial Present Value of benefits accrued as of the valuation date. 3. Valuation Assets are equal to the market value of assets as of the valuation date, if any. 4. Unfunded Actuarial Accrued Liability is the difference between the Actuarial Accrued Liability and the Valuation Assets. It is amortized over the maximum permissible period under GASB 45 of 30 years. It should be noted that GASB 45 allows a variety of cost methods to be used. We elected this method because it is generally easy to understand and is widely used for the valuation of postemployment benefits other than pensions. Other methods used do not change the ultimate liability, but do allocate it differently between what has been earned in the past and what will be earned in the future. If a different method was used, either the normal cost would decrease and the unfunded amortization would increase, or the normal cost would increase and the amortization decrease. Please note that the net effect of the change may result in an increase or decrease in the annual required contribution (ARC). If desired, we can provide more details. Actuarial Valuation of Postretirement Benefits Under GASB 45 14 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Appendix B -Actuarial Assumptions In addition to the actuarial method used, actuarial cost estimates depend to an important degree on the assumptions made relative to various occurrences, such as rate of expected investment earnings by the fund, rates of mortality among active and retired employees, rates of terminationd from employment, and retirement rates. In the current valuation, the actuarial assumptions use for the calculation of costs and liabilities are a.s follows: Measurement Date Benefit liabilities are valued as of October 1, 2007. Discount Rate for Valuing Liabilities (for illustrative purposes only*) Without prefunding: 4.00% per annum, compounded annually With prefunding: 7.00% per annum, compounded annually * please see discussion in the Introduction and Purpose section of this report MM=~- Healthy Lives: RP2000 Healthy Mortality Table (sex distinct) w/ Generational Projection Scale AA Disabled Lives: RP2000 Disabled Mortality Table (sex distinct) w/ Generational Projection Scale AA Withdrawal Rates (from TMRS Report for Mid withdrawal group) For the first 18 years, the rates vary by sex and length of service. Sample rates are shown below: Svc Males Females 0 .299 .308 3 .130 .166 6 .090 .104 9 .056 .058 12 .034 .038 15 .022 .023 18 .017 .013 After 18 years, the rates vary by age (from TMRS Report for municipalities with 500 or more members). Sample rates are shown below: Rate 40 .018 45 .013 50 •008 55 .003 60 •008 err~~ariat vAluation of Postretirement Benefits Under GASB 45 15 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. 65 .013 Disability Rates (from TMRS report) Age Male Female 30 0.000108 0.000054 35 0.000326 0.000164 40 0.000897 0.000449 45 0.001884 0.000943 50 0.003331 0.001666 55 0.005442 0.002723 Retirement Rates (from TMRS report Awe Male Female 45-49 0.06 0.045 50-54 0.08 0.075 55-59 0.12 0.10 60 0.20 0.35 61 0.24 0.25 62 0.50 0.40 63 0.28 0.20 64 0.35 0.25 65 0.75 0.50 66-69 0.55 0.45 70 1.00 1.00 Coverage Assumption 90% of employees eligible for retiree medical benefits are assumed to elect continued medical coverage in retirement. Spousal Coverage Assumption 50% of active members are assumed to elect coverage for a spouse upon retirement. Spouse Age Difference If spouse's date of birth is not provided, females are assumed to be three years younger than males. Administrative Expense Load 12.5% administrative load on gross per capita claims costs Per Capita Medical Benefit Costs The assumed annual per capita cost of medical and pharmacy benefits prior to reduction for retiree contributions is shown below for select ages. These amounts include a 12.5% administrate ' ve ex ense ioaa. A e Medical Male Female 55 $7,015 $7,419 58 8,355 8,345 61 9,951 9,387 64 11,852 10,559 65 3,372 3,494 Actuarial Valuation of Postretirement Benefits Under. GASB 45 16 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. 68 3,904 3,874 Medical Inflation (Trend Assumutionl The trend assumptions for medical and pharmacy costs and retiree premiums are summarized below: Year Pre Medicare Post Medicare 2007 11.0% 10.5% 2008 10.5% 10.0% 2009 10.0% 9.5% 2010 9.5% 9.0% 2011 9.0% 8.5% 2012 8.5% 8.0% 2013 8.0% 7.5% 2014 7.5% 7.5% 2015 7.0% 7.0% 201 fi ~ 6.5% 6.5% 2017 6.0% 6.5% 2018 5.5% 6.0% 2019 5.0% 5.5% 2020 5.0% 5.5% 2021 + 5.0% 5.0% 17 Actuarial Valuation of Postretirement Benefits Under GASB 45 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Appendix C Plan Provisions Medical Eligibility and Coverage City and Police Retirement -For employees who are eligible to receive a pension from the Texas Municipal Retirement System and are retiring (1}with 20 or more years of service with the City or (2) after age 60 with at least 10 years of service with the City. Disability -For employees who are eligible to receive a disability pension from the Texas Municipal Retirement System and became disabled after at least 10 years of service with the City. Fire Retirement -For employees who are eligible to receive a pension from the Port Arthur Firefighter's Relief and Retirement Fund and are retiring with 20 or more years of service. Disability -For employees who become disabled prior to attaining 20 years of service and are eligible to receive a disability pension from the Port Arthur Firefighter's Relief and Retirement Fund. Monthly Medical Contributions Required by Retirees Under Age 65 Over Age 65 Retiree Retiree Retiree Retiree Only & Souse On1y & Spouse $172.35 $606.70 $140.38 $395.64 Dental Eligibility and Coverage -Retirees are not eligible for the dental plan. Life Insurance Benefits -None Dental Benefits -The City makes no contribution to this benefit Vision Benefits -The City makes no contribution to this benefit Hearing Benefits -Not covered Medical Plan Benefits Summary - (see next page) Actuarial Valuation of Postretirement Benefits Under GASB 45 1$ This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Exhibit 11 City of Port Arthur Summary of Medical Benefits Effective 11h/2007 ~,~~^~-~ 'PPS./ ~~ ~_z??TS,F~;l r Dedudible Individual $~ $1 ~~ Family $1,500 $3,~ OOP Max Individual $2,500 $3~~ Family $5,000 $9,000 Lifetime Max $1 000 000 ..:. ,, _ ~... ~ y,_ _ r - _ __.,~ _. Member Coinsurance 80% 60% after per adm. ded. Per Admission Deductible None $2~ Penal for Failure to Precertif None $250 - r ;~~; ~... t. ,, Emergency FaciUty Charges 80% after $100 copay, waived if admitted Ph sician Char es 80% after cal. r. ded Non-Emergency Facility Charges 80% after $100 copay, waived if admtted 60% after $100 copay, waived if admitted Ph sician Char s 80% after cal. .ded 60% after cal. r. ded ~` ~,~_ ~~_ ,~~._ a~~~ - ~ - ant Physiaan Office (non-surgical), Lab/X-Ray 100% after $25 copay 70% after cal. yr. ded. Immunizations (birth to age 6) 100% 100% Physician Surgical Services 80% after cal. yr. ded 60% after cal. yr. ded. Lab & X-Ray in Other OP Facilities 100% 70% after cal. yr. ded. Certain Diagnostic Procedures: Bone Scan, 80% after cal. yr. ded 60% after cal. yr. ded. Cardiac Stress Test, CT Scan, Ultrasound, MR1, Myelogram, PET Scan Home Infusion Therapy (must be precert.) 80% after cal. yr. ded 60% after cal. yr. ded. In-Vitro Fertilization Decl ined Chiropractic Care ~ 80% after cal. yr. ded ~ 60% after cal. yr. ded. 1 500 ca l. r. max. All Other Ph sician Medicine Services Same basis as a n other sickness S ech and Hearin Services with Hearin Aids Covered as an other sickness• $1 000 max benefit r 36-month riod for Hearin Aids. All Other Out tient ServicesJSu lies 80% after cal. r. ded 60% after cal. r. ded. ,, ~_ -~~ •- f .<., g, ,.. ~, l Bab Routine Ph sicals, Wel Y Y ay ° 70% after cal. yr. ded. g Immunizations (after a e 6) ay after $25 cop 100 70% after cal. yr. ded. Vision ~ Hearin Exam 100% after 25 co a 70% after cal. r. ded. ~~- ~, Coinsurance 100% 70% after cal. yr. ded. Maximum Benefits Home Health Care $10,000 per cal. yr. $7,000 per cal. yr. Skilled Nursing Faality $10,000 per cal. yr. $7,000 per cat. yr. Hospice Care $20,000 lifetime max $14,000 lifetime max Benefits used in or out-of-network a 1 towards both maximums. ... ~ , . _. g~ f3q Inpatient Services Hospital Services (Facility) 80% 60% after per adm. ded. Physician Services 80% after cal. yr. ded 60% after cal. yr. ded. Calendar Year Limitations 30 days/visits 15 days/visits Da sand visits used in or out-of-network a towards both maximums. Outpatient Services Services in Physician Office 100% after $25 copay 70% after cal. yr. ded. Professional Provider 80% after cal. yr. ded 60% after cal. yr. ded. Visits Allowed 30 visits 15 visits Chem. De nden Max for each Covered Individua l $10000 lifetime maximum Serious Mental Illness ed as an of er si Cover ne ~.., ~. ~ _ -~ - .. .. : Retail $10/$30/$50 80% of Allowable minus copay Mail Orcler 30-da su I 10/$30/ 50 'Members choosing to buy brand drugs when a generic equivalent is available will pay the brand copay plus the difference between the cost of the brand and generic drug, even if prescription says DAW. Rx oopays do not apply to stoploss maximum. Actuarial Valuation of Postretirement Benefits Under GASB 45 19 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepazed solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. Appendix D Glossary The following is an explanation of many of the terms referenced by the Proposed Statement of the Governmental Accounting Standards Board, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions". 1. Actuarial Cost Method. This is a procedure for determining the Actuarial Present Value of Benefits and allocating it to time periods to produce the Actuarial Accrued Liability and the Normal Cost. The Statement assumes a closed group of employees and other participants unless otherwise stated; that is, no new entrants are assumed. Six methods are permitted -Unit Credit, Entry Age Normal, Attained Age, Aggregate, Frozen Entry Age, and Frozen Attained Age. 2. Actuarial Accrued Liability. This is the portion of the Actuarial Present Value of Benefits attributable to periods prior to the valuation date by the Actuarial Cost Method (i.e., that portion not provided by future Normal Costs). 3. Actuarial Present Value of Benefits. This is the value, as of the applicable date, of future payments for benefits and expenses under. the Plan, where each payment is: (a} Multiplied by the probability of the event occurring on which the payment is conditioned, such as the probability of survival, death, disability, termination of employment, etc.; and (b) Discounted at the assumed discount rate. 4. Actuarial Value of Assets. This is the value of cash, investments and other property belonging to the Plan, as used by the actuary for the purpose of an Actuarial Valuation. 5. Amortization Payment. This is the amount of the contribution required to pay interest on and to amortize over a given period the Unfunded Actuarial Accrued Liability or the Unfunded Frozen Actuarial Accrued Liability. A closed amortization period is a specific number of years counted from one date and reducing to zero with the passage of time; an open amortization period is one that begins again or is recalculated at each actuarial valuation date. 6. Annual Required Contributions ("ARC"). This is the employer's periodic required contribution to a defined benefit OPEB plan, calculated in accordance with the set of requirements for calculating actuarially determined OPEB information included in financial reports. 7. Attribution Period. The period of an employee's service to which the expected postretirement benefit obligation for that employee is assigned. The beginning of the attribution period is the employee's date of hire. The end of the attribution period is the normal retirement date. For disability retirement, the end of the attribution period is the date of disability. 8. Benefit Payments. The monetary or in-kind benefits or benefit coverage to which participants may be entitled under a post employment benefit plan, including health care benefits and life insurance not provided through a pension plan. Actuarial Valuation of Postretirement Benefits Under GASB 45 20 This material assumes that the reader is familiar with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. 9. Funding Excess. This is the excess of the Actuarial Value of Assets over the actuarial accrued liability. 10. Normal Cost. This is the portion of the Actuarial Present Value of Benefits allocated to a valuation year by the Actuarial Cost Method. 11. Net OPEB obligation. This is the cumulative difference since the effective date of this statement between annual OPEB cost and the employer's contributions to the plan, including the OPEB liability (asset) at transition, if any, and excluding (a) short-term differences and (b) unpaid contributions that have been converted to OPEB-related debt. 12. Other Postemployment Benefits ("OPEB"). This refers to postemployment benefits other than pension benefits, including healthcare benefits regardless of the type of plan that provides them, and all other postemployment benefits provided separately from a pension plan, excluding benefits defined as termination benefits or offers. 13. Return on Plan Assets. This is the actual investment return on plan assets during the fiscal year. 14. Substantive Plan. The terms of the postretirement benefit plan as understood by an employer that provides postretirement benefits and the employees who render services in exchange for those benefits. The substantive plan is the basis for the accounting for the plan. 15. Unfunded Actuarial Accrued Liability. This is the excess of the actuarial accrued liability over the Actuarial Value of Assets. Actuarial Valuation of Postretirement Benefits Under GASB 45 21 This material assumes that the reader is familiaz with the City of Port Arthur's post-employment benefit programs, their benefits, eligibility, administration and other factors. The material was prepared solely to provide assistance to the City in reviewing the impact of the proposed GASB Statement 45 on the City's financial statements. It may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. This material should only be reviewed in its entirety. . EXHIBIT "3" April 29, 2009 Ms. Rebecca Underhill, CPA Director of Finance City of Port Arthur, Texas P.O. Box 1089 Port Arthur, Texas 77641-1089 Re: Actuarial Audit of the City of Port Arthur Retiree Health Care Plan Actuarial Valuation Dear Ms. Underhill: Gallagher Benefit Services, Inc. (GBS) is pleased to provide our Actuarial Audit of the City of Port Arthur Actuarial Valuation Report of Postretirement Benefits under GASB 45 as of October 1, 2007 provided by Richard E. White and Bryan Wilson, consulting actuaries of Milkman, Inc., on November 9, 2007. This Actuarial Audit consists of two steps: Step One -Match Results of Milkman based on information provided by Milkman (i.e. report and subsequent documents) to verify the accuracy of the City's Other Postemployment Benefits (OPEB) actuarial calculations, and Step Two -Review of the Actuarial Assumptions Used by Milkman to value the OPEB liabilities and annual costs. The following summarizes the purpose, approach, findings, and conclusion for both steps of the Actuarial Audit: Step One -Match Results of Milkman Purpose This step addresses whether or not Milkman correctly programmed the benefits of the plan based on the census data, plan provisions, and actuarial assumptions and methods shown in their report. Approach GBS programmed the participant data, plan provisions, and assumptions provided by Milkman. GBS valued postemployment medical and prescription drug coverage for retirees, beneficiaries, disabled participants, and active employees. 3600 American Blvd. West, Suite 500 Bloomington, MN 55431 952 356 3840 1 800 754 9867 vvww.gallagherbenefits.com www.stanton-group.com Ms. Rebecca Underhill April 29, 2009 Page Z Certain plan provisions regarding spouse contributions and disability eligibility requirements were not clear in Milkman's Valuation. GBS contacted the City to get clarification of these provisions and included them in the liability calculations. Milkman results were provided by individual components. GBS results were also separated into these individual components for comparison purposes and to assist in matching Milkman. Findings and Conclusions During the matching process, GBS determined that the census data was as of January 1, 2007 rather than the October 1, 2007 valuation date. This is acceptable so long as the January 1, 2007 data was expected to reasonably represent participants as of the October 1, 2007 valuation date. Milkman did not indicate this expectation within the valuation. Overall, GBS is within 5% of the Present Value of Benefits (PVB) calculated by Milkman based on their assumptions. However, GBS did not fall within 5% for all the individual components. GBS's PVB for spouses of employees and pre-Medicare spouses of retirees are 25% and 22% higher than Milkman's, respectively. GBS's PVB for Fire employees (excluding spouse coverage) is 8% less than Milkman's. These two individual components comprise a small portion of the total PVB. The City may want to understand how Milkman is interpreting and valuing the provisions related to these individual components. Despite these discrepancies, GBS is within 5% of Milkman's PVB and concludes that overall liabilities are reasonable based on the provisions of the plan and the assumptions used by Milkman. Step Two - Review of the Actuarial Assumptions Used by Millimon Purpose The Review of Actuarial Assumptions is an analysis of the economic, demographic, and utilization assumptions and actuarial cost method used to determine the results presented by Milkman. The assumptions are evaluated for reasonableness on an individual basis. Approach To evaluate the retirement, termination, disability, and election rate assumptions, GBS conducted an experience study, comparing Milkman's assumptions to historical occurrences provided by the City. Findings and Conclusion The Review of Actuarial Assumptions produced some questions regarding assumptions used to calculate the OPEB liabilities and annual costs. GBS does not necessarily believe that any specific assumption is incorrect; rather GBS believes that further analysis and discussions with the City should be completed to determine if a revised assumption is more suitable. Ms. Rebecca Underhill April 29, 2009 Page 3 The following summarizes key findings and recommendations for assumptions related to the Per Capita Claims Costs (PCCC), termination rates, and election rates: Milkman developed the PCCC from their understanding of the plan and Milkman's Health Cost Guidelines. GBS recommends using actual health care experience of City participants instead of Milkman's Health Cost Guidelines. The City is large enough that actual participant experience over multiple years would be very credible and would increase the credibility of the valuation results. The PCCC assumed for disabled participants is the same as that assumed for healthy participants, but employer medical costs for disabled participants could be significantly different than healthy participants. GBS recommends that a separate PCCC table applicable for current and future disabled participants be incorporated in the valuation. Milkman's 12.5% administrative load in the PCCC is slightly higher than GBS's client experience. Based on GBS's experience study, Milkman's termination assumption significantly overestimates termination prior to retirement eligibility. This is a critical assumption and has significant impact on plan costs. If the City overestimates termination, it will be anticipating lower costs than wilt actually occur. GBS recommends considering a more conservative termination assumption. Also based on GBS's experience study, Milkman's election rates at retirement slightly overstate the number of eligible employees assumed to elect coverage (including dependent coverage) at retirement. This is a critical assumption that can significantly impact plan costs. GBS recommends lowering the percentage of eligible employees that elect health care at retirement to 83% from 90% and those electing to cover a spouse to 38% from 50%. GSB's key finding and recommendation related to the actuarial cost method is how the amortization of the Unfunded Actuarial Accrued Liability (UAAL) is amortized. Milkman developed that Annual Required Contribution by amortizing the UAAL over 30 years as a level dollar amount. If the City is trying to keep the Annual Required Contribution and Net OPEB Obligation to a minimum now, the amortization of the UAAL could be amortized over 30 years as an amount that increases at the assumed payroll growth rate of the City. Changing to this method of amortization would decrease the amortization amount of the UAAL approximately 40% or $2,000,000 in the early years, but increase the amortization amount approximately 95% or $7,000,000 in the later years of the 30-year period. GBS's experience is that most clients are amortizing the UAAL over 30 years as an amount that increases at the assumed payroll growth rate. GBS recommends changing the amortization method if the City is trying to keep the Annual Required Contribution as low as possible and follow the methodology of many other public sector employers. Ms. Rebecca Underhill April 29, 2009 Page 4 In addition to matching Milliman, GBS determined results with revised termination rates and election rates. Exhibits at the end of the audit report summarize the Present Value of Benefits, Actuarial Accrued Liability, and Annual Required Contribution under the following scenarios: GBS Match -This is GBS's match of the Milliman results based on Milliman assumptions and plan provisions. Revised Termination Rates -These are GBS's results based on revised termination rates as described on page 11 of the audit report. Revised Election Rates -These are GBS's results based on revised termination rates and election rates as described on page 11 of the audit report. Revised UAAL Amortization Method -These are GBS's results based on revised termination rates, election rates, and amortization method as described on page 11 of the audit report. GBS appreciates the opportunity to provide this service to the City of Port Arthur. If you have any questions regarding our report, or if you would like additional information, please contact me. Sincerely, Christopher L. Grabrian, EA, ASA, MAAA Actuarial Consultant Gallagher Benefit Services, Inc. (952) 356-0706 Sarah G. Johnson, ASA, MAAA Actuarial Analyst Gallagher Benefit Services, Inc. (952) 356-0732 s rN. s ~ ~°a, s °' 3 ... N V ° ~ C E ~~ ~ ~s ~ +~ ~ as ,~'+ ' ~ +~ N N .^ r- N C ~ O 0J Z O ~ j N _d ~ d v ~ u d'd L _ ~ CC G • +J G O d O b ~ Cr1 ~ ,~ O • ~ ~. 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O ~ C ~ ~ b i 30 ~ O ~ ~ •C . ~ ~ 'r O m RS ~ > C ~ '> ~ M ~ ~ ~ tL/f (~ C ~ ~ N~ N i a J ~ L ~ ± H c°~ O N O S ~ L C ~ ~ ~ ~ u ~ ~ . 4; L . ~ Q N N w ~ a~ L p i + L ~ O~ t- u ~ ~ O cC v ~ L. ~ V1 ~ m .:' O~ N ~ ~.+ L .r.. + .- 1] E ~ v~ +.~ -p ~ O v l7 V ..r - ~ v H H F I~ t,7 ~ n. ~ . fQ .r. o 0 0 0 0 0 ~ ~ ~ ~ M ~ M > '~d ~ >. C ~ H ~ p ~ ~ C~ ~O I~ O O O r N V • ~ O ~ y aT+ L O O li O O O O ~ O • ~ y.. O O ~ ~ C i c O O 3 O ~ L~ ~ N ~ ~a,~a~a~N ~ ~'' L ~ v 0 ~ a: O N~~ ~"~ ° °M • 3 r ~n ~ooo . ~ +~' ~~~ 0 0 0 0 0 0 a C U • C N ~ ~ O N .~ ~ .. ° ~ ~ o~ O >_ o~ v~ J ,n ~ ~" v . ~1 V ~ O ~ ~ +~ ~ 0~ Dn ~ M d' '~t' ~ t1'1 t O u ~' O r' u q O ~ O . ~ a a '+d p N G1 ' N ~~ a..i = aC F- a- t/f CO r '~ cn 4J c v CSC v s A l~ V C .O a E a ~~ •~ ~.. V a 0 .^ 1 3 H to .~ N ~. c N V ^ ~ j ~ N • M . N N p~ o. 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'~ N E c o v ~~ ~ n c a o p •^ 4- L E ~ ~ L "- ~ ~ ~ L ~ ~ ~ L.. ~ ~ ~ ~ ~ L' ~ to ~ ~-+ N ~ c O C `~ ~ L L~~_ ~ sn ~ in ~ N ~ ~ O +, .~ U C~ c nn~ H p ~ ~~ ~ ~ L •r- i p ~ ~ «S O -p ~. +~ L. ~ , u X ~ ~ ~ ~ N ~ T ~ U ~' O V N ~ ~ ~ O~ N N }+ U p 41 0 t C L c 0 U O +-' O O ~ V ~ ~ L N O ~ O ~' _, in ~+ N Q1 ~- .~ rn ~-+ a,~ ~ a 3 o.r r- ° ' ~~,c ~ ~' ~ o ~a~>a~ - ~ c ~ O~ 'D ~ ~ = N 3 z° u ~~ C G ~ H ,- ,~ O L O G p~ C ._ ~ao N .D ~, . v ~ O a..+ > ~ .,..~•L c~ ~. ~~~~ bo y ~aa~~~ .~ °;~v.~ ~° ~.. uT.^oN~ L ~ ~ L ~ ~ ~,.~ V' ~.,.. a,,.r ~ r d f~ I"' y C. 4J ~ ~ (~ 00 O~ f+r1 r' CO M 11'1 O~ O u 0 N ~D I.c'1 N r- ~ n a0 ~ ~ 00 Ill ~ Lf1 1~ 1~ ~O M L1'1 ~aoooooo.-oo a x N C v ~ d' r 00 t~ N I~ N ~O o0 v ~ Lf1 p• d' N M O~ O ~O r- W ,C M A O ~C GO ~O M N M a~Nr•~~ w N C ~ }"' ~ M ~ 0` .p tt1 Lf'1 r NO ~ cC ~ ~, c Q ~ n~ v H GJ O~ 1~ O M r- 1~ d' M ~D O M I~ C~ ~O M 00 If1 '~ OGL >_ d' M N N N ~ ~- ~' X J ~ W V r M ~O C~ ~ ~ ~ ~ ~ '~ ~ ~- ~ ^ o r1 .o ~ o ~ v ~ ~ ~ N ~ ~ ~ ~ ~ 00 ~ ~' CO 00 M M 00 M 00 M 00 M O ~O O ll1 M N r' ~ ~ 0 0 0 ~ N M ~ ~ W H O O ~O ~ N f~ 00 M 00 M 00 M N r p~ 11'i M N r r- X 0 0 0 r' b `'"' V O M ~D C~ N tr1 00 p+p ~ 0+0 0+0 0+0 ~ ~ Q ~ r ~- ~ r.. r- r- ~•- r r Oi } t!i i.~ ~ N Oa a ~ ~ O I.n O ~r1 O ~c1 ~ v ~r1 tl1 .o •c E ,n a Q v en o~ r c v v z v c v 4 v L R V C I O_ a E N a .^. L f~ V Q y- O 3 a~ .~ a~ cG 0 3 H a a~ C No = ~ r..i ~ ~ ~ ~ y ~ ~~° `~ c }; ~ o ~, a o c ati °' ~ E ~ ~ ~.*~' ~ ~ +~ c ~ ~~ p ~ +L~+ C 11 a° E~ >,ooa r ~+ •^ W1 = v; U e, o ~ ~ u ,~ ~ o o b3~L~ '~~~~°; L°~~o °,,' a 3 o v, ~ ~ ~ O H ~ y ~ C i+' N U-C a.+ J X N ~ ~L ~ map N~ L a0~°13 v r- -r ~ ~ ~ .~ cca ~ cv0 0 0 0 > ~ a N ~~~3a~ N L C N ~ ~ V~-~ ~~~~~ ~~oo~ ~~.~~o o ~ y~ ~ s ~ u cv F- c ~ .~ c~ ti.. N ~ > ~ o ~ L ~ F.. co -v ~ ~ u r c. *' x 3 W N b ~ ~ ~ Q ~ d ~ u a~ u X Q W I o~ ~- .o M N_ o u .~. n ~ .a M r 0 sa~e~ ~pMpJpy~~~lA .0 N L O a x v m c7 V 0 L ;.+ O a~ u c v ~L v a a, 3 ~ 3 L ~ o ~ L v ~3 3 ~ +~ ~ O L C ~ ;v ~ -v s v b N v E m •~- ~ ~C_ G ~ v ~, ~~ ~~ u ~ in o O ~ M N ~ O 0 0 0 0 0 u 4J u ,~ (JS ~... c L y s V C O fl. a .'. L V a O .; 1 H cC +~.+ p N r ~ ~ N ~ L .~ ~ ~ > O ,~,, r- s 30 ~'' ~ Q! ~ 1' Q1 ~' s 3 E ~ o 0 ~ o ~ N ~ C ~ ~ ~ d L ~-- ~' ~ Olt ~ -~ ~ L ~ +~.+ C ~ ~ ~ ~ aL o~ ~ ~. On a ~ ~ .c `~ a > 3 ~ ~ p o •~-- s ~ °A u c O '- ~ + W ~ w.- w ~ ~ W ~ V ~ G1 s ° v a ~ s •~ H '~'- 3°'~0 a~ ~ a~ ~; w ~ i n. a ~ o N ~ ~' c ~ °i ~ ~ ~~ ~ ~ ~ ~ 3 0 J t/1 L N ~ r 3 ~~ E~ °3 ~_ ~ ~ V ~ ~ dN' N ~ ~ ~ ~ O ~~ M CO GO r M N M C~ O Q x r O O e- r ~- N O r' c ~ ~ ~ d' ~ N N r N I.t'1 ~' +~+ ~ t11 f~ tl'1 O ~ O ~ C ~ Gui .C d' N GO ~- .a. N ~ O X ~ r ~ N r- W ~ c a ~ ~ a. c..o ~n ~n r- c cv ~ r- M r- r„ ~ ~ ~' .~ a~ v I- N to O~ O r- d' ~C M O~ M ~f1 N ~ ~ M ^ M O I~ .p Gd ~ p> ~' M N N N E ~' O X J ~ W U v M ~O C~ ~ ~~~ b ~~~ r r C u .~ v c v s ~o Rs V C I O a Q r .^ 7 u Q ~- 0 3 a~ .~. a~ ~c 0 3 H a a~ d a Q W I I L ~ ~ ~ ~ ~ m ~ ~ N r ~ ~ ~~ ~ ``- -v N °' N c ~ ~ u ~ - v 3 i ~ ~ ~ p v + v ~ ~ ~ C .~ -~ a ~ :~ ~ L 4- ~30~0 oa ia~ E ~ ~ ~ ~ o ~ J E ~g--' ~ ~ ~ ~ N C a~ C ~' ~ t N ~ '~ ~ ~ Q. L 41 ~ L ~ ~" on L t/1 V1 O C O a.~+ C )( , Ebc a~a~~ ,_. O ~ i ~~ O CO en ~ C N ~ u N ~ b ~ ~ ~ ~ ~v ~aa S ~ C L~ v u~~ ~~ Q7 ~ "0 i1 "7 N ~ 0 ~ Q~ ~ ~, ~ o ~, E H ~ o a~ ~ °' ~ o ~~ °+~ a, ~ .7•~ ~.~ vnl av~~ L '~ara~Na ~o~a~ -o~~~~ ~ V C ~ ~ 'i j ~ tl N ~ ~ N ~ -r ~ L C 'L ~ ~ y~ " O ~ ~ +~ ~•- u ~1 ,~-Ea ~ ~ ~~v~a~ L ~ ~ O ~ ~ ~ ~ u y + -' ~ v ~ v . ~s-v E'~a~~ c o ~ ~ ~~.+ i ~ E N QVj ~ y j E ~, ~, L ~ o ~ onv~~ o m~11~~ ~ ~ y c ~ J L it ~ V N + ~ 1 c vi v cn v c v m v t R V C 0 a. 7 H a .~ V Q v- O 3 .^ CC O 3 H- a ~ N_ . O T7 ~ N ~+ W +~' 4J C C > N m L7 ~` ~ O v- ~ ~ ~ °E saw c ~ a~~ C L tC GJ r.v E o-° ~u,~ Hi v O L ~ ~ a c~ u Z 'p ~^ C O O ca ~« N3 C .L~ ~ v- •.'"v c~*~ - iv ~ ago ° ~ ~ u 3 ~~° ~~-7v °' N N_ ~ O C D ~ N ~~ ~~ N L~ ' 1 ~ U C ~ +~ C O 'O . y C >~ C ~ ~ u p +' O O ~ O ~D O~ a i ~ ~ ~J ~ ~D O • ~, y r E a~ v•~ a u o- L +~ c v~ a ~a °~'-~ u~ ~ E~ c~ . .- ~ N C ~ cCC i O ~s O v O ~ O O ~ ~+ O 1~ 111 ~ M b~ v .~+ W1 ~> ~+ c ~ ~ E a c °NNoo~ o +~ b ~ °' ~ ~ ^ n.~ a~ - }+ N~ .C O C N W v N O am Z7 N p ~ p l1 L .. '~ i' ~ ~ Q! ~ C ~ _ O O w- ~ N ~ O C t O C 7 ~_.+ 'p ~ q~'j O ~ O M N N ~°D > v°- v O aL-+ ~~' a~ ~~~ ~ aL a~ ~ E ~ .~~ ~ a~ ~ ~. _ o a u o c ~~ H g L ~' n a~ c-v ~ v ~"' ° ° ~ o i ~~+ COj a~ o >+ L c~ ° O ~~ ~ +.~ ~ u O u O +; o-vo ~3~ Lai°v -v ~~ ~E C ~ C N j O C ~ N O ~ u 7 ~^ ~ C i i v J r- N 1~ ~ ~ 00 N ~f1 r f~ O > ~ H N O ~ >. N N -p ~ ~ ° ~ _ ?a~ J ~ ~ ~O ~ L ~ C ~ i~~ ~~ b +0.+ ~ N ~ v . W ~ ~C i ~ O s E ~ a O u :~, c , ° a L O L - u L C ~ How ~"' " a~ ~.^>' G) '^ 'O '' S O L O ~ ~° ° Q Lf1 LA ~,- Lam N O cL N O N ~ ~ ~ N L ~ . ~ N ~-+ u N +.+ r. i'1 3 C ~ C! C v ~ ~ O '~ O ~ O ~ 'G ~ -p L j, ~ i `~ vs O GU1 v W .0 ~ C ~ ~ co a~ s ° roses ~ o~ a b N N ~ ~ N L V ~^ V +0.+ ' ~ °' L ~ 3c ~ 0 0 M r ~ ' 1 N "D ~ ~ ~ C +~+ C ,L ~ ~ ~ ~,+ V1 ~ ~ p O ~ ao cn ~ g o ~ro ~ ~~ S J ~~ ~ Ea ~i ~ > ~ ~ ~~ ~ ~, c ~ o~ a ~~ M 'Z ~~ O b~ ~ V i O co c~ r.''.~ cd ~ v ~ C Cn ~. p ? E 0 v ((S C E O M v ~ O EO O ~' ~ v O a,~ ~*,o~ E ~ ~ c o''" ~ `~ uu~« avi °% SJ a~ v v ~ N ~ ~ ~ °;~ 7 N L ~ ~ C a,~ - t G1 ~+ '-~ N ~ N t W ~.+ . L 41 O 'O ~ c0 7 ~ ~ ~ H s ~ O ~ ~ ~ N O C 0.~ p = ~ 0 i + L ~n C b =a +~+~ L~ 00 ~ E ~l7 . L W ~ O yL++~ oNa'~ a v~ Lvo Evv~ ~ Evan ~. 3 v v> G +.~ i 4~ C ~ ~ ~~ N +.+ N O oc ~a V1 +.+ +~ v--c ~- ~ RS ~° ~~ co ~ ~ >• o ~. ~~ a ~ E s E '~ - i v a o c Nom';' o ~ E o c i -o o `~ ~, -v E a, ~ ``- ,°v~~ ° noa N'^ 3~ ""~ ~ .~ o~-v a, boa v~3E i . . \~ ~;03~~ ~~ ~L cv~ a ~vNu _E ~a~,~,v ?,o ~a oN~ •cu,~H~~' ~~oa ~~ Es ~c a~vN ~~b°Xa ~ v Q1 ~ ~ ~ X a, N H ~ +-' '~'' `~ O O L ~ nl1 o on v o v a ~ L G1 C1 ~. D!1 ~ ~ ~ +~ ~ ~ ~ ~ j C QOj C O O 4! Wf ~ ~ N L. O O N W1 N ~ L E O V 41 ~' N O ~ c r `~ + L .oc v c ~ s ~ N ~ v > ~' ~ c a ~ +- v on ~ ~ •~ ~ C N ~ V Et v~•- , ~ NC N cc +~ ~ L a ~a~c o ~ 1 °~ o ~ °' ~ ~ co~ E ~ a+~Eu v N ~ '` L QI a +•~ ~ v ~- ~ -- C ;, ~ ~ ~ O C O ~ ~ N ~ ~ X c0 c ~ ~ v c ~ ~~ ~ r..~ G1 ~, .c ,^ .~ o ~ ~N•~ C L. ~ ~ u E~ Q m V ~ ~ L ~ , ~ C ~ ~ v ~ a+ ~ V C ~ m E ~+ O ~ t7 ~. O a~ .+ ~ r + •.- Q1 F" . ~ l7 . l7 a v F- • ~ . L. ~p o ~ +~ ~' ~ ~ v ~ E c a • a ° ~ a y,.. O o O ' `''" f vim' v ~ ~ o ~ ' ~~+~ ~ on ~ c is v ; a i ~, E ~ c~ ~ .cz E C~ ~ N N L b N ~ ~ o ~ ~ E ~ O a ~ ~ ~ a, c En ~ bo°' ~ v o ro b ~ "'- ~ E o ~ L- w a i ~' L ~ o ~ V ~ ~ N i .• ~~ 1 c U v (/1 v c :~ L v L 00 ra ro V .O a E N a .,.. L V Q 3 W .` '~ 1 3 a 4~ t!f .. ~ a..+ ~ 'p m L a..+ O c C W1 ~ ~ 'D Ec~uco~~ O°b~; c~c•~ Z Q L ~~ •~ N ~ L L U GJ ~ QJ ~ cC d1 ~ O > ~_ E .C '~ ~ N ..~ QL.+ U Vl E -p u ~ ~ ~ L O C ~.+ ~ c~ Q~ N v N c~ •~ •-- on E •E o c ,.,.^v-oo3L N-,sa Eo a c •~ ~ ~ ~ O N ~ .O 1- ~ O H c WE bcco tea, ~ uQo° N N~ V v u r Q! ~_ Q p v m ~'' i~ V O d ~' X 0 0 J~ bL'n ;' ~ O~~ b O ~ O ~ > a~ ~ ~ i ~ ~ C v ~ ~•. >,• >. O ~ O ~~V OZ b~ Qa a"C i ~ v~ ~+ N L Q .^ ~ -p r- on ~ a u L •~Q=vO- R3 v p •~ O+-~L ~ ~0+ LO a c a~i ~ E `~ E ~ c `L° +' on L ~ o ~ O~' ~ os+~ Q~~•c c 3p C U cm ~ ,,.. a ~ w c~ v u a v~ .o a c ~ °~~ o ~ c~ o~ o ~ ~m LO •~~ c ;., xo ~ ~ W Q i O •v+ d ~ ~ Rf N ~ ~ ~ +' d O u C .~ '~f Z~~ G1 N~~ ~ H L ~~.+ ~ O v~oH E ~ L Luc ,. • ~ o ~ a~ a•H~, c ~ ~ ~ ~.c v T~ ~ LL. c •c ~ ,n ao u ~ u ~, a o ~ v ~ .~ • .. Q c ° l7 ~ a~ u a~ Q ~ ~ ~ ~ +-+ C ~ ~ N o X .N ~ i O L ~ Z ' vs ~ L ~ ~ E •^ L.1 ~ 3 Q ~ ~ u ~ L ~ ~ a~i cca ~ ~' o ~ ~ a ° ~ c~'n-p.~~-. V ~O ash ~ ~ ~'s•~~ ~ ~ L s ~ O ~ d. •~ N cL0 ~ ~ ~ N O ~ ,aL.+ ~QQ Eii ~Z~ ~ o aE H =~ onav U a_ ,~-+ N L V ..... C O u a, .Q L a ,~ L c~ ~ N V ~Lf Q T -~ o '~ ~ M ~ GJ C p ~ ~ v- +~ O •" C ~ O ~ J N ~ L ~ O L- E u as ~ y N •r- ~ • r- rti ~ G~ ~ c0 t u ~ a "~ O N U ~ . ~ _ ~~.+ u 1] '0 ~O U r N ~ O C r +' N O L ~..+ N 0 0 ~ u~ 'v N " ~+ N N v ~ ~ N c0 C!L -~ Lam. v1 m ~, .'r'.~ ~~° E ~ ~ ~ ~ " c, ~ ~ v :p ~ ~ ~ ~ ~ on N Q 4 ,- O ,.: ti L b ~ O C ~ +.+ .~' L ~ ~ .+ ~ ~ ~ ~ N ~ O N .V ? L C ~~ ~ O O C ~o N o~' ,... ' ~ O L Q7 ~.d (~ E ~ L ~ s L ~; u b ~ d O O on ~ a~ v L~ ~ ~ ••- U ~ i N • ~U Q' y L .~- Q1 3 itS C7 ro C N ~ ~ v ~ i~ C ca ~ '^ ~ ~ L C~ O ~ O M y- a; ~ = V a ~N v on ° ~ ~ E o `~ o ma c ~ o ~ . '" . o c 3 N~ n o O u ~ . c (~ ~ - ~ L o N •^ 'L O ~ N L ~ on DA N ~ ~ *' v c n. L ~ L a '~+ o C ~ "'' c 41 O tb L N _ ^ O `L `~ L N O O 'O L F- O .C ~ + + ~ ~ u y' . ~ _ ~ ~ v-- ~ •c ~ c a E- ~ v ~~~ ccac ~c~ u ENL ~'c , ~ °~ c ~ ~ ~ c o ~ L w ~ acs y ~ ~ .- ~ L 'r v L N ~ ~ ~ L N a~ c +~ GJ ~'aa `~ s'y~v ~~~ ''~ .- .~N~ oa ~ LJ ~ ~ a-+ ftf L ~ ~ ~ C ~^ ~ ~ N 'p 't7 • N N C •~- w C L .~+ N C N > O - ~ ftf ~ '~ ~ ~ ~ C ~ +r 'G O ~ N ~ a 'p c~ ~ C C 4Q- c~ v L ~ ~ ~ ~ ~~ O Q V N ~ • ~ n' ~ i N t N O ~ ~ Cam,,, C ~ O ~ N ~ b ~ ~ ~ V v- +~ O .i '"'n V ~- O cL0 'D ' o~ c t O ~ av N~ o • c . ~ ~ c v ~ 4J N . ~ N U ~ ~ W1 y •C ~ ~ N~ Q C O LJ U C H 111 ~+ b 0 ~_ ..- ~ +~ c o- v.- v v ~ •~ a ~ ~ c ca ~ v ~ d ~ N c~ ~ v ~ ~ ~; u ro N O ~ v ~ ~ L L~ W1 u ~ c N N V° O s ~~ U ~ >za N v c~ +-~ N u c o ~ a u v c c a ~ V a a ~ u v L Rs >' o ~ _° 3 c c a ~ E° u ~ E v ~ , L o `~ u o ~ a~ ~ ~ + ~ ~ ~ .~ .r. ~ a, ~ c ~ ~ ~~ Y = ' + N LJ O a a o '~ v0i ~ b N u ~ v ~ N ~ . -o •-- ~ c u ~ _ •~ • O O d v u 41 ~ ~ C ~ L ~ N L t N ~ 'a'~ CC G ~ ~ N ~ ~ ~ ~ V N y x'~ ~ ~ a ~ ~~~ u v v o ~ t ~ a 1 /1 Cut v,c Q O N N ~' N E o n V ~_ O V p u~ V C ~ N X ~ ~ ~ ~ V ~ ~ ^ C ~ ~ ~ N • G1 N • O +^ o a U v ~' o v cd v ~~ u ~~ ~ N N E s *' O ~ o ~ C C ~ v H o N C Q. v .. ~~ ~ ~ N •Q ~-+ ~ Q1 O V ~U (~ ~ a N Q ~ Q~ N u ~ o-vo v ~a~, O 0~3 V ~ v~~ ;~ o m~~ t/1 v m~ ' yj ~ ~ ~^ ~. W .L. ~ iJ ~ ~ ~ w ~ C ~ u V 0 O V ~ b °i c v ~ v~ °J o ro o c E a E ~' u~ ~ N' L , a 1- m c~ u on to m s F-- ~' X v 4 c~ a, ns a 0~ u ~ Q , O O O • • • i C ~ Rf +~ r ~ ~ ~ C b v ~ a = v o v L V C ~ .i..- +~+ C , '^ Ci i O ~' ~ a~ t O ' ~ + ~` . ~' 3 ~ N GJ O .- t ~_ ~ ..~ '~ Q L ~ ~ ~ . ~ 3 V b ~ -o ' u ~ ? M ti W H N D. O U L ~ ~ C ~ ~/- C .^ a cC c V W ~ s u .•.- ~ t ;~ ~ ~ c on a~ E c 'c o ~ 0 E v v L ~ ~ • ~ '~ {~/1 • ~ C .~ • .~ V ~ Q~ ~ ^ L ~ • ~+ V ~ L ~ ~ L ~ `~ w C ,~ ~ O f0 O a vn ~; s •.- ~ ~ c .~ ~.+ a .^ a ~ ~ ~3 E ~ ~~ ~ u ~ ~ u V1 u Q .N O L Q o ' o °' b ~' ~ ~ ,~ j ~ ~ a ~ o • L. ~ 3 s ~ ~; o ~ Q ° 3 ~ o. ~ ~ ~ ~ ~ o v~ ~ 3 Q ~ o ~ N ~ ~ C ~ L ~ ~ l ~ N O ~ ~a V a;a ° ~ "- c ~ ~ ~ c .~ ~ o ~ ~ a °: ~ H ~ o c a ~ v ~ - a~ ~ ~ ~ c ~ ~ ... ~.a ~ p •~ L ~ ~ N i ~ ~ ~+ i C ~ ~ ~ O ~ 3 O w } ~ ~ ~ AA ,, ~ W a ~ d ~ • L ~ V ~ L ~~ r `~ i EXHIBIT "4" K'~0~1~I t~ ., ., ~~~i~na~~i~m T0: Stephen B. ~ Fitzgibbons, City Manager FROM: RE: ~~~ + ~ ~~ ~~ DATE: 09 j04 jog Dr. Albert T. Thigpen, IPMA-CP, CAS Director of Human. Resources and Civil Service Ma'or Medical Insurance Renewal Ref. Renewal Rate Analysis ~4~'Z~ As you are aware, Blue Cross Blue Shield [BCjBS] of Texas has resented a major medical insurance renewal in which the p roposed rates for the City have been held constant [q.v. Exhibit p "A"]. Although, this is good news for the City, the shift which has occurred over time with regard to payment of "true" insurance costs leaves the City holding (paying) the larger end of the financial burden. A closer examination of renewal as ,shown in Exhibit "A" reveals rou s: BC/BS basically rated the City's covered lives in two (2) g p Medicare and "Under 65", the latter including retirees and "active" currently working) employees. In order to see the impact of ( retirees on renewal rates, Mr. Moshier, City Health Insurance Consultant, .had BC/BS provide renewal rates for "Active" employees. The result indicated a reduction of the previously resented renewal rate from $ 413.79 to $ 393.10 - a reduction of p approximately five (5%) percent [q.v. Exhibit "B"]. A key concern discussed by you, Ms. Underhill, ACM/Admin., and myself is the impact of the shift of the finanaal burden to the City. BC/BS has been requested to provide renewal rates for three (3) roups: "Actives", "Under 65 Retirees", and "Over 65 [Medicare] 9 Retirees" based on actual utilization costs. These rates are reflected in Exhibit "C". ~' ~ t Y As we have discussed, this year it will be prudent to return to a true 50/50 arrangement on premiums in which the employee and/or retiree are participating jointly. I have requested Mr. Moshier to ask BC/BS to provide renewals rates keeping the "Actives" at the original renewal rate of $ 413.79, the "Over 65 Retirees" at the proposed $ 216.70, and using the difference between the "Actives only" renewal rate of $ 393.10 and the original renewal rate to mitigate the renewal rate of the "Under 65 Retirees" which is shown in Exhibit "C" as $ 589.65. The revised rates would be used to calculate premium costs for plan participants. Retirees in the "Over 65 Retirees" (Medicare) category would pay $ 216.70 which is their funding rate based on utilization and a true one-half (50%) of their dependent care costs [Note: The City would see a reduction in individual and "Medicare 2+ Dependent categories; however, .there would be an increase in "Medicare Retiree/Medicare Dependent" category as the City currently does not .pay one-half (50%) of that cost.], "Actives" would pay one-half the appropriate ~ dependent premium (single+l, family}, and "Under. 65 Retirees" would pay one-half of the new adjusted premium. However, as in the past, City Council can choose to absorb all or a portion of the increase. Undoubtedly, additional modifications, as we have discussed, to the City's Major Medical Insurance Plan will be necessary to control costs and to maintain a viable plan for employees, retirees, and dependents. The changes will impact other benefit areas such as retirement, etc. Changes to control costs .should always be considered in the view of the greater concern of providing maximum healthcare benefit to all concerned. In considering a prospective view, it would appear prudent to examine our "covered .lives" base in .three principal components: retirees, employees with fifteen (15+) plus years of service, and those with 0 to fourteen (14+} years of service. Examining how we offer insurance benefits to .each of these groups will afford opportunities to modify insurance offerings regarding retirement; yet, maintain the goal of fairness and reasonableness. An additional requirement regarding persons qualifying for retirement -_ ~ t ~- eligibility using "prior service credit" [i.e. eligible time at another public .employer] would be to add a fifteen (15} year "direct service with the City of Port Arthur" to qualify for retiree medical benefits at the full level. This would be in keeping with the proposed grouping of "covered lives" and recognize those whose retiree status is the direct result of tenured service to the citizens. A plan to tie years of service to retiree insurance benefit level in a tiered manner will need to developed and considered. An example of such a .plan would be: 20+ years of direct service - 100% benefit level, 19 - 15 years of direct service - 75%, and 10 - 14 years of direct service - 50%. The renewal date for the City's Major Medical Health Insurance Plan is .November 01, 2009; therefore, we will have a. renewal resolution on the September 22, 2009 Council Meeting Agenda in order to have the month of October for "Open Enrollment" purposes (i.e. sign-up, benefit and dependent changes, etc.). Other changes to the City's Major Medical Health Insurance Plan will require significant due diligence and research; further, such changes are most effective, and receive City Council endorsement, when there is employee inp.ut.. Therefore, I would recommend further changes which would have greater impact on covered individuals be considered, and prepared, for implementation ~at the November 01, 2010 renewal. Please advise should you need additional information. c: John Comeaux, PE Rebecca Underhill, CPA Deborah Echols, CPA Patricia Davis R ~ , N ~- C3 DL N U Q L H .~ f- C N L Q L 0 0 ~- ._ U n L O ~-- C3 L ~-- .~ .~ Q -H L ~ N GL ~ ti S •: ~ q~ ~ ~ ~ C3 X ~ O Z y- 0 o~ ._ o~ ,_~_ 0 L V 03 .~ V .~ W ~ ~ N W W V Z OC Z N Z J Z OC Z Q 0~C O a O V OTC HQ 0G w Z D 4 a 0 ~c M T F- H O O J W w S N W .J m V W J m v ..~ C ~ c `°• a' M -- M p N ~ ~. ~ ~ a~ N M M Q ~ ~ ~ c~nN` '"'~ C N ~~~~~ rl N dS dS a 0 W 0 Z w E• r w 0 L !- O R~ N ~.; d ~ C L ~ Q ~' °G °~a ..,t a ~ O µ~::o o a~ ~p O ~ ~ N ~ Q ~ T O ~.. 0 +-+ E N ~ ~' .~ d o V o~ z f"' Z W J W W 0 Z J Q a W J Z O F= Z `W 0 U f0 V :f ,~ '~ A ~ ~ r ~ ~ ~ 3 ti N cp to n ch ~ M (O Q O e7 r r ~ r- ' ~ .~ S'O N GO~ ~ .- .-' 69 ~ t~ F. .~ ' C O) cD r c0 ~ O •~ n N CO ~ ~ M O ~ ~ ~ V ~ N ~-- e- 0 0 ~ 69 69 6E} b9 ~ ~ ~ a~ O ~ co 00 0 ~ r N ' T ~ .;~ '! i i ~: .V .;.: :; :~; .. r ~ r ~ r E a~n~?, • a ~,~,a a E cc d o~rn~E ~ . ~, ' ~ ~ ~ ~ ` =~ cs ~n v~ ~ u v~ in LL. 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