Loading...
HomeMy WebLinkAboutRES 08-328Finance Department City of Port Arthur, Texas 7~0; Steve Fitzgibbons, City Manager f=rom; Rebecca Underhill, CPA, ,Director of e~ [)ate; July 21, 2008 Re; PR 14850 -First Southwest Company - OPEB The Governmental Accounting Standards; Boaird has issued Statement 45, which requires Cities to report the liability that exists, and accrues each year, for "Other Post Employment Benefits" (OPEB). For the first time, public-sector employers are required to recognize the cost of the benefits that will be provided upon retirement for employees over their active service life, ratther than on the pay as you go basis that we currently operate under. This accounting treatment is similar to pensions. VVe recognize the cost of providing those benefits now, as they are being earned, rather than upon retirement. The City of Port Arthur's OPEB is our health insurance plan. We allow retirees to rE~main participants in our health insurance program. The retiree pays a portion of the cost of their coverage, and the City fuinds tlhe balance. We recognize our retiree health care cost, as we go, as a component of tlne total health care cost. W'e are required to comply with the new sl:anda~rd for the year ended September 30, 2c)09. In anticipation of that date, we cons:racte~d with Milliman, consulting actuaries, to perform an initial study of our plan. They dc~termined that the Unfunded Accrued Actuarial Liability (UAAL), that is the amount of benefit already earned by cr.rrrent erployees and retirees, is $51 to $93 rrrillion. (The difference is due to various discount rate assumptions.) The Annual Required Contribution (ARC), the current pE~riod cost plus the amortization of the UAAIL, would be between $6.3 and $10 million, again depending upon the discount rate. We need to fund the ARC in full each year. We are not yet comfortable wil:h thE~ numbers, nor do we have a funding vE~hicle in place. Also, at this point we have no funding provided for the ARC in the proposed budget. We need to address these large liabilities, the funding of the ARC and the best approach for this issue. This is obviously very complex, and will be very expensive to deaN with. In order to assist the City, I have obtained a professional services proposal from First Southwest Company (FSC). They will work with the actuaries to verify the accuracy of the valuation. Based upon our initial review, we feel that some of the assumptions may need to be adjusted (i.e. turnover rates, rf~tiree statistics, etc). Any adjustment in these assumptions can be very costly. FS~~ will then work with the City to minimize these costs, by providing options for plan design changes, and try to determine the most Economically Feasible options for the City. Lastly, FSC will work with us to develop funding mechanisms that can reduce the costs to the City. As stated earlier, the discount rate has a dramatic effect on the costs. There are funding vehicles available to us that can help us increase investment income, which will reduce the cost. FSC will perform these services under the existing financial advisory contract, at the rate of $Z00 per hour. The work is segmented in five (5) phases, and t;he maximum cost estimated is $21,000. PR 14850 RU RESOLUTION NO. ~O " 3~ A RESOLUTION AUTHORIZING (FIRST SOUTHWEST COMPANY TO PROVIDE PROFESSIONAL SERVICES RELATED TO THE CITY OF PORT ARTHUR'S OTHER POST EMPLOYMENT BENEFIT LIABILITY IN AN AMOUNT NOT TO EXCEED $21,000 WHEREAS, the City of Port Arthur (City) has potential liabilities related to 'Other Post Employment Benefits" (OPEB), as defined by the Governmental Accounting Standards Board, Statement of Accounting Standards Number 45, and WHEREAS, the City desires to engage a firm with the expertise necessary to evaluate the actuarial studies performed, and assist the City in managing this liability, and WHEREAS, the City Council has adopted resolution 07-34, which authorized a professional services contract with First Southwest Company (FSC), and WHEREAS, the City has a very longstanding relationship with this firm, and appreciates the knowledge and expertise that they have related to City affairs, and WHEREAS, FSC has submitted a proposal to assist the City in these matters. NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PORT ARTHUR: Section 1. That the facts and opinions in the preamble are true and correct. Section 2. That the City Council hereby authorizes First Southwest Company to perform the services outlined in the proposal, attached hereto as "Exhibit A", under the direction of the Director of Finance. Section 3. That the caption of this Resolution shall be spread upon the minutes of the City Council. READ, ADOPTED AND APPROVED, THIS 29T" DAY OF 7ULY 2008, A.D., AT A REGULAR MEEETING OF THE CITY COUNCIL OF THE CITY OF PORT ARTHUR, TEXAS BY THE FOLLOWING VOTE: f"1 ... AYIES: MAYOR NOIES: ,. Mayor A ~ST: ' ~~ ~-- , ~. - - err•i Hanks, ctin City cretary ~'`~ ~~~ APPROVED AS TO FORM: r~~ ~r~~ Mark T. Sokolow, City Attorney APPROVED FOR ADMINISTRATION: __ Ste~~e Fitzgibbons, City Hager Rebecca Underhiil, CPA, Director of Finance Acci;. No. 614-1701-583-54.00 Z:\Finance\OPEB\PR 14850 - FSW OPEB.doc ~ First Southwest Company 32Ei Nor1:h St. F'aul Street Suite 800 Dallas, Texas 75201-3852 214-953-8740 Direct 800-678-3792 Toll Free 214-505-0884 Cell 214-840-5003 Fax Jtlrle 18, 2008 Ms. Becky Underhill Direcitor of Finance City oaf Port Arthur 444 Fourth Street Port Arthur, Texas 77640 Dear Ms. Underhill: A. R. (Ric) Panzera, CIMC Senior vce President Benefit Plan Services rpanzera@firstsw.com This proposal letter is intended to provide the City of Port Arthur ("City") a methodology and the requisite profession~~l services to validate and potentially reduce its Other Postemployment Benefit ("OPEB") liability as computed under GASES No. 43 & No. 45. W e have attempted to design a study plan which will be flexible enough to allow the city to only utilize those services needed, but be robust enough t.o fa.ci.lit:ate a thorough study of the components of the City's issues and furnish solutions. First Southwest, acting as lead consultant, will retain Stanton Group of Minneapolis to provide actuarial and consultiiZg services for this study and is solely relying on Stanton's actuarial expertise. Our proposal involves four broad steps. They .are: I. Perform an actuarial audit to verify the accuracy of the City's initial valuation [I. Consult with the City and explain the audit findings and financial ramifications of the audited valuation and any recommend changes that will impact the amount of the liability associated with the current plan design III. Provide additional services from an experienced health care consultant to introduce potential plan design options that may further reduce the: liability. The actuary and the health cage consultant would collaborate to determine plan options that may be economically feasible for the City. IV. Unce any changes have been deterrnine~d, First Southwest will work with the City to explain potential funding mechanisms to further reduce the financial costs to the City. Typical Primary Actuarial Audit Steps The typical primary steps of an actuarial ;audit are: 1. Match the Retained Actuary's Results This step will address whether or not th.e retained actuary correctly programmed the benefits of the plan based on the census data, plan provisions, and actuarial assumptions and methods shown in the retained actuary's valuation report. Th~° audit report would include result differences along with an explanation of such differences. This step can be accomplished by performing a complete replication valuation of the retained actuary's valuation or an estimation of the retained actuary's valuation results by applying various modeling techniques. A replication valuation consists of obtaining the actual participant data used by the retained a<:tuary and modeling Stanton's software system in an attempt to duplicate actuarial valuation results within a few percentage points difference. Estimation of the valuation results using modeling techniques requires less effort but provides slightly less assurance of a valid result. 2. Review the Actuarial Assumptions This step will address the validity of the: assumptions used in the retained actuary's valuation. The audit report would indicate if we believe any assumption is not reasonable and would include an explanation of why we believe the assumption is not reasonable. The report would also include an estimate oaf the effect our suggested reasonable assumption change would nave on the results. Reca~mmended Approach for the City of Part Arthur, Texas First Southwest proposes to have the Stanton Group actuary: 1. Perform basic check of valuation results and provide cursory assumptions review 2 Stanton Group will perform a basic cheek of the retained actuary's valuation results by applying modeling techniques to the information presented in the retained actuary's valuation report and provide a cursory review of the assumptions presented in the valuation report. If the basic check results are not within a reasonable range of the valuation results, we recommend th.e following to resolve the difference: (a) Request liability and annual cost: results by specific groups and/or benefits from the retained actuary. This will help in isolating which participants or what benefits are causing the difference. (b) Investigate reasons for the difference by discussing plan provisions and assumptions and how they are applied with the retained actuary and/or plan sponsor. These dis<:ussiions usually increase the audit actuary's knowledge of plan participants, benefits and assumptions that are not detailed in the valuation report and consequently, resolve the difference. Additionally, these di;scussions can result in the detection of plan provisions that are not valued correctly or omitted in the retained actuary's valuation. At this point, the results are very likely Ito be within a reasonable range (e.g. 10%) of the valuation results o:r the audit actuary can explain the difference. However, if we are not within a reasonable range or can not explain the difference it may be necessary to complete a full replication valuation. A full replication valuation will entail programming all census data, benefits, and actuarial assumptions and methods into the audit actuary's software system and "rec~clcul;ate" the liability. The auditing actuary will resolve any differences with the retained actuary and report results to the City. 2. Advanced Analysis of the Assumptions The audit actuary will analyze the appropriateness of the valuation economic and demographic assumptions based on information provided by the City and/or other sources. In most cases, City data will be very helpful %n our analysis, however, sameti.mes City data can be imperfect or scarce which can limit its credibility. Therefore, we may apply information from other sources for this analysis. We will address all assumptions, but may focus more of our effort on high-impact assumptions such as, but not limited to, the following: Discount rate /Long-term rate of return of assets used to pay benefits Healthcare cost trend rates 3 Withdrawal rates Retirement rates Participant coverage election percentage at retirement Participant spouse coverage election percentage at retirement The review or analysis of the assum:ptioris can range from 12 to 24 hours depending on the depth of the data provided by the City and the City's desired level of analysis. In some instances, the validity or reasonableness of an assumption can be; determined based on dialogue with the retained actuary regarding their process in selecting an assumption. If their process is base:d on a comprehensive credible analysis and the assumption seems reasonable then we may conclude that. the assumption is warranted. 3. GASB 45 Liabilities Management Once there is agreement with the plan sponsor that the plan's appropriate level of liability has been determined, if there is interest, we can also provide the plan sponsor with recommendations on the actions that can be taken to reduce the liability. The Stanton actuarial team will work with a senior consultant from their Employee Benefits division to analyze your current OPEB commitments and medical plan designs to identify options to reduce the GASB 45 liabilities. 4. GASB 45 Funding Options At the conclusion of the above steps and any plan design changes that may be initiated by the City, First Southwest will explore with the City potential funding options to reduce the costs associated with the plan. These options will include the use of aGASB-compliant trust mechanism, the related investment vehicles, custody/ safekeeping and the attendant reporting/monitoring requirements. A. Estimate of Time Commitment and Fec;s Fc°es are based on hourly billing rates that vary by engagement team member and ~°xpected number of hours required on the engagement. The average hourly fee for this engagement is $200 per 17-our which will be utilized t:o pay consultants from both First Southwest and Stanton Group. We expect the hourly fee and hours of effort for the services defined in this proposal to be as shown below: 4 • Basic check of valuation results by applying Recommended 10 $2,000 n•~ode~ling techniques to valuation report inforration and cursory review of assumptions Resolve basic check differences by acquiring Recommended if 6 $1,200 additional information and/or through discussions basic check fails with plan sponsor and/or retained actuary to be within reason Advanced analysis of assumptions based on data Recommended 12 to 24 $2,400 to provided by City or other sources plus rough $4,8C10 estimate of results using reasonable assurnptions in place of unreasonable assurnptions used by the retained actuary Match retained actuary's valuation results by Not expected to 20 to 40 $4,000 to replicating the valuation plus precise results Ibe necessary $8,000 using reasonable assumptions in place of unreasonable assumptions used by the retained actuary Analysis of current OPEB commitments and Recommended 15 to 25 $3,000 to medical plan designs to identify options to $5,000 reduce the GASB 45 liabilities. An exploration of potential funding mechanisms to further reduce costs. The services above implement a "stop and go" approach which requires a discussion with the City after each service to determine the next service and, if applicable, the desired level of that service. We believe this proposed approach will prove valuable to the City in providing comfort that the reported liabilities are ac:cura~te and also offer methodologies to reduce the fiscal impact of GASB 45 implementation. Both First Southwest and Stanton Group have substantial experience in working with public entities on GASB 45 and pension issues. We would be pleased to furnish references upon request. Neither First Southwest nor Stanton expects t:o incur travel expenses in the preparation of the audit and consultation can be performed via telephone conference. If the City prefers a personal briefing by First Southwest and Stanton; however, such expenses will be :incu:rred. In addition, the services for this project would be performed under the terms of the existing financial 5 advisory contract between First Southwest and the City and billed on an "as complleted" basis. Thank you for consideration and the opportunity to be of further service to the City. Sincerely, A. R. (Ric) Panzera, CIMC Senior Vice President Benefit Plan Services C~':: Joe Morrow 6