HomeMy WebLinkAbout01/29/10 COVER MEMORANDUM: ASSISTANT CITY MANAGER REBECCA UNDERHILLCITY OF PORT ARTHIUR, TEXAS
TO: STF,VF: FIT7.UIBBONS, CI'T'Y MANAC~P,R
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PROM: RI?BLCCt1 UNDERIIILI,, CYA, ASSIS"I'AN'I' CITY b11~~~R/ DMIN][STRATION
SUBJI.CT; RETIREE, fIEALTH INSURANCI~
DATE: 1 /29/2010
The City has been working on the issue of Retiree Health Insurance for the last number of years.
'.Che. City has always had an OPEB (Other Post Employment Benefit) Liability. Over the years, the
City has provided health insurance to retirees and their dependents at a subsidized rate. This benefit,
similar to employee pension benefits, was funded by this city, and most others, on a `pay as you go'
basis. Effectively, the annual cost for the retirees and their dependents, was included with the cost of
the active employees and paid from annual operating funds.
't'his `pay as you go' method does not recognize the cost which is incurred by the City every day,
for active employees, as the services are rendered. Every day that an active employee is at work, the
City incurs the cost of the current salary, the required social security and Medicare contributions, the
current cost of health insurance, and a contribution for the future retirement benefit and health
insurance benefit upon retirement. "I'he City funds all of those costs ever year; except for the final
piece -the contributions for the employee's future retiree health insurance.
For this city, and most others, historically, tlhe contribution to retiree health insurance was
viewed as a minor additional cost. However, over the years, the retiree population has increased and
the cc Est of healthcare has skyrocketed. This combiination has dramatically vnpacted the liability. In
response, and as a part of an ongoing effort to make governmental accounting more similar to the
private sector, reflecting more accurately the entire financial picture of the entity, the Government
'lccounting Standards Board issued Statement 45. This new accounting standard requires
government to report this liability. This is not an option, it is a requirement. This requirement has
been in place for non-government entities since 1990.
In order to comply with the new requirement, in 2005, we engaged an actuary to perform our
first study. After receiving the staggering report, with enormous liability and contribution
requirements, we engaged another actuary to `audit' the first study. The second study confirmed the
first. At October 1, 2007, the OPEB liability (debt) of the City of Port Atthur was measured at
X93.,760,224. The annual required contribution was $10,041,987. This means that in order to
fund, over a 30 year period, the liability that has already been incurred, and to fund the ongoing
benetlts, at the current level, for the current employees, the City would need to fund $10,041,987
from annual operations. (To put these numbers int~n perspective, the total bonded debt of the City is
$77.75 million at year end 2009, with annual debt service cost of $8.5 million.;)
1'he Gi1SB cannot require the City to fund the .Liability. However, if the City Council chooses to
continue to provide the same level of benefit, with no funding, the liability will only increase over
time. Thais increasing liability will erode the City's overall financial strength, and ultimately lead to
negative opinions from auditors and bond rating aj;encies. By ignoring a significant portion of the
City's ongoing operating costs, the City would be exhibitiing incredible financial irresponsibility. The
negative financial impact could very well lead to higher bond interest costs and loss of federal and
state funding.
'I his retiree health insurance liability is most closely comparable to the City's liabilities for
retvxment (pension) benefits. These benefits are funded through third party trusts that hold the
City's contributions, and the employees' contributions in trust to pay out their future benefits. The
employees contribute, while working, and the City matches those contributions at a level which is
a.ctu.arially determined by each plan in order to fund a determined level of benefit.
(:hir pension and retiree health insurance benefit liabilities are as follows, as of 2007 (the most
recent date available):
unfunded
Liabili Funded
Ti~IRS $ 36,167,297 61.04%
Firemen's Retirement $ 8,935,361 77.70%
Retiree Health Insurance $ 93,760,224 0.00%
The required presentation in the financial statements of the City, alerts the readers -investors
(current and prospective bond holders,i and federal agencies that we have ;a tremendous unfunded
liability. The prudent approach would be to establish an vrrevocable trust to fund this liability as well.
During this process, the staff has learned the factors driving the enormous liability, and has
l~~egun reviewing options.
• The staff has reviewed various plans throughout the state. The City's plan seems
generous by all measures. l~ew others offer full benefits for retirees with as little service
as we require.
o Retirees receive full insurance benefiits with minimal service to the City of Port
Arthur, as long as they meet service eligibility criteria of 20 years. Even if the
vast majority of the service is with another qualifying agency, if they retire from
the City, they are eligible for health insurance.
o Employees can retire with 20 year:; of service at any age. Theoretically, an
employee could retire in their 40s and receive health uisurance for the rest of
their life.
o Few offer subsidies for dependents, many offer no subsidy for under 65
retirees, some offer no subsidies for Medicare retirees, and some cap the
contribution at a flat dollar per year level. All of these options need to be
evaluated for the City.
• Prior to our November 1, 2009 health. insurance renewal, our insurance plan had two
classifications of participants -Medicare participants and non-Medicare participants.
This meant that non-Medicare retirees were included with active employees for rating
purposes. In the fall of 2009, the Human Resources Director submitted a report on
health insurance rates, whereby the `under 65' retirees rates are `unblended' from the
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active employee group. This is not an unusual action, and according to Blue Cross, is an
approach that has been utilized by other municipalities. This approach was
recommended by the ICMA (International City Manager's Association) Retirement
Corporation. We have engaged a prominent pension and employee benefits attorney to
assist us in this process. He does not see a legal problem with the action that the City
has taken thus far.
o The recommendation also moves all retirees, and active employees with
dependent coverage, back into a 50,50 cost share. This has been altered over
time, as the Council, on occasion, absorbed increases for retirees and
employees.
o The Medicare retirees had reportedly been fully funding their costs. Upon
further review with the 2009 renewal, this was not the case. The renewal
recommendation was to increase their contributions to reach the goal of 100%
funding.
o These actions are estimated to reduce our liability up to :25%, $23 million.
o Yes, these actions would dra~maticailly increase retiree health insurance costs
across the board. In recognition of this fact, the City Council adopted a five
year phase in of the unblended rates.
• At the renewal it was stated, in writing; and in the Council presentation made by staff,
that this action was merely a First year, f=irst step. We discussed options moving forward
to revise our policies.
• 1"he City has engaged a benefit attorney to assist us with legal issues as we review plan
changes, to develop a comprehensive plan document, and to create an OPEB trust for
the funding of the benefit.
• The 2009 actuarial study is underway, and the staff is developing; proposed plan changes
for actuarial review.
• The goal moving forward is:
o Have the study complete, and. recommended plan changes to the Council by
late spring or early summer
o Have the funding plan adopted and :implemented in the 2010-2011 budget
I'he Council must understand that this is a real financial issue. During the recent bond rating
review, both agencies (Moody's and Standard and Poor's) expressed concern over the level of our
liability. We assured them that the City was evaluating the liability and methods of reducing it, and
would have a funding plan in the next budget.
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l~or your information, I am enclosing the follov~ing documents:
1. Five (5) articles from the Port Arthur news on this issue.
2,. Exhibits 10 and 11, Funding Programs for Employee Retirement Systems, Analysis of
Funding Progress, from the September 30, 2008, Comprehensive Annual Financial
Report.
3. Memo from Dr. Albert Thigpen, dated September 4, 2009 regarding the renewal and
rates.
4. PR 15505 as presented to the City Council ait the September 22,, 2009 Council Meeting,
renewing health insurance for November 1, 2009.
5. Presentation and supporting documentation from the October "14, 2009 Special Council
Meeting on this subject.
6. Resolution 09-468, presented at the same nneeting, October 14, 2009, authorizing the
City to engage the Benefits Attorney, Cary Lawson.
7. Mr. Lawson's biographical information.
8. Memo reviewed at the Council Retreat, July 21, 2009.
9. Resolution 08-328, approved July 29, 2008, engaging First Southwest Company to assist
us with the review of the 2007 actuarial study.
10. Resolution 05-308, approved October 25, 2005, engaging the first actuary.
11. Attorney's opinion.
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