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City of Palo Alto

(ID # 2432)

City Council Staff Report


Report Type: Action ItemsMeeting Date: 1/30/2012 Summary Title: Retiree Medical Discussion Title: Retiree Medical Actuarial Report Discussion From: City Manager Lead Department: Administrative Services
Recommendation Staff recommends that Council: Review, discuss and provide feedback on the attached actuarial valuation results (see Attachment A). Council Review and Recommendations On November 28, 2011, Council approved staffs recommendation to review and accept the updated retiree medical actuarial study with valuation dates as of January 1 and June 30, 2011. The actuarial study results are required by the Government Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits other Than Pensions. Included in their approval, Council directed staff to schedule a Council meeting, prior to the midyear budget, with the actuarial consultant who prepared the retiree medical actuarial study, Bartel and Associates. The meeting is scheduled for January 30, 2012. Council requested the meeting in order to have an in-depth discussion on several of the assumptions included in the actuarial study and its conclusions. Among the assumptions up for discussion are the closed amortization period (versus open) and the assumed rate of return on investments going forward and the medical trend assumptions. A listing of all assumptions appears in Attachment A. Council asked for the investment rate of return in the California Employers Retiree Benefit Trust (CERBT) for the Citys trust investment since its inception in March 2008. The rate of return (money-weighted) for the Citys trust investment for the period March 17, 2008 through June 30, 2011 is 3.62 percent. The rate of return (time-weighted) for the CERBT, overall, for the period of June 1, 2007 (trust inception) through June 30, 2011 is 1.24 percent. Attached to this memo are the related staff reports from the Finance Committee discussion on October 18, 2011 and the Council discussion on November 28, 2011.

January 30, 2012 (ID # 2432)

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Attachments: Attachment A: Retiree Medical Report (ID 2345) (PDF) (PDF) Attachment B: Excerpt from Finance Committee meeting of November 28, 2011

Prepared By: Department Head: City Manager Approval:

David Ramberg, Assistant Director Lalo Perez, Director ____________________________________ James Keene, City Manager

January 30, 2012 (ID # 2432)

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Attachment A

City of Palo Alto


Report Type: Consent Calendar

(ID # 2345)

City Council Staff Report


Meeting Date: 11/28/2011

Summary Title: City Council to Approve Retiree Medical Title: Finance Committee Recommendation that the Council Approve and Accept the Updated Retiree Medical Actuarial Study From: City Manager Lead Department: Administrative Services
Recommendation The Finance Committee recommends that the Council approve and accept the updated retiree medical actuarial study (Attachment A). Committee Review and Recommendations On October 18, 2011, the Finance Committee voted unanimously to accept staffs recommendation to review and accept the updated retiree medical actuarial study with valuation dates as of January 1 and June 30, 2011. The actuarial study results are required by the Government Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The updated study results in an increase of $3.8 million (39%) in the Citys retiree medical liability between 2009 and 2011. The result is that the Citys cost for retiree medical goes from $9.8 million to $13.6 million annually. The reasons for the cost increase are based on changes to actuarial assumptions and demographic changes and other changes as discussed in detail in Attachment A. Staff will provide funding recommendations as part of the FY2012 mid-year budget process and as part of the FY2013 proposed budget. In addition, staff will include the revised costs in the long range financial forecast, which will be presented to the Finance Committee in early 2012.

Attachments: Attachment A: Retiree Medical Study Attachment C: Staff Presentation(PDF) Attachment D: At places memo (PDF) (PDF) (PDF) Attachment B: Finance Committee minutes 10/18/2011

November 28, 2011 (ID # 2345)

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Prepared By: Department Head: City Manager Approval:

David Ramberg, Assistant Director Lalo Perez, Director James Keene, City Manager

November 28, 2011 (ID # 2345)

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Attachment A

City of Palo Alto

(ID # 2180)

Finance Committee Staff Report


Report Type: Meeting Date: 10/18/2011 Council Priority: City Finances Summary Title: Retiree Medical Study Title: Review and Acceptance of Updated Retiree Medical Actuarial Study Valuation Date January 1, 2011 and Valuation Date June 30, 2011 From: City Manager Lead Department: Administrative Services
EXECUTIVE SUMMARY This report provides the City Council with the actuarial study results required by the Government Accounting Standards Board's (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions. The results of the study as compared to the 2009 study show a fairly dramatic increase in Citywide costs. See Attachment B, slide 31 for a summary of the study results. RECOMMENDATION Staff recommends that the Council review and approve the attached actuarial valuation results (see Attachment A). BACKGROUND Per GASB Statement No. 45, beginning in Fiscal Year 2008, like other governmental entities, the City of Palo Alto was required to recognize in its financial statements any unfunded, earned retiree medical costs including those for current active employees. GASB 45 also requires the City to complete an actuarial study on a biennial basis, to determine the retiree medical liability and how much the City should be setting aside each year to fund that liability, the annual required contribution (ARC). In Fiscal Year 2008, the City established an irrevocable trust with California Employers Retirees Benefit Trust (CERBT) for retiree medical benefits. In Fiscal Year 2008, the City transferred $33.8 million to the trust. As of January 1, 2011, the trust was valued at $40.2 million, and as of June 30, 2011, it was valued at $44.8 million. Of course, recent market volatility may have a downward effect on future figures, not included in this study. DISCUSSION

October 18, 2011 (ID # 2180)

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Bartel and Associates completed an actuarial valuation for the City on October 11, 2011 with two valuation dates: January 1, 2011 and June 30, 2011. The reason for the two valuation dates goes back to a new regulation pertaining to members of the CERBT (trust). All the Citys past valuations have used a January 1 valuation date. However, beginning FY 2012, members of the CERBT are required by GASB 57 to switch to a common valuation date of June 30. Therefore for this study only, the City opted to utilize both the January 1 and June 30 valuation dates. The January 1, 2011 valuation determines the Actuarially Required Contribution (ARC) for FY 2012; the June 30, 2011 valuation determines the ARC for FY 2013 and FY 2014. January 1, 2011 Valuation Date The actuarial study using a valuation date of January 1, 2011 valued the City's unfunded retiree medical liability at $134.7 million, compared to the unfunded liability of $105.0 million on January 1, 2009 a 28% increase. The Annual Required Contribution (ARC) associated with the January 1, 2011 valuation is $13.6 million for Fiscal Year 2012. This is an increase of $3.8 million (39%) over the ARC of $9.8 million associated with the January 1, 2009 valuation. The dramatic increase in the Citys retiree medical liability between the 2009 and 2011 studies is attributable to several differences in assumptions used by the respective actuarial firms (Milliman and Associates performed the 2009 study, and Bartel and Associates performed the current study). Those differences are as follows (Attachment A, page 7 also summarizes the assumption changes and their impact on the Citys liability): 1. New CalPERS Decrements. The most recent CalPERS experience study which gathers demographic information throughout the state noted increasing lifespans of retirees, decreasing average retirement age, and other factors, all of which increase the Citys projected unfunded liability by approximately $8 million. 2. Recent Spike in Palo Alto Retirements as cost-sharing and wage freezes have been implemented, many people have accelerated their retirement plans. There were more than the projected retirements between 2009 and 2011. All of the retirements since the last study added $2.7 million to the Citys unfunded liability. 3. Medical Trend Assumptions The table below shows the difference in medical premium growth rates assumed in the respective studies. Milliman assumed a slow but steady increase in rates ranging from 6.5% in the early years and settling at 5.85% from 2018 on. On the other hand, Bartel assumes that the rate of increase will be more frontloaded, starting at 9% and settling to 5% per year starting in 2021. Cumulative increases assumed in the more recent report are higher than those assumed in 2009. (See Attachment B, slide 10 for a comparison of specific medical trend assumptions in the two studies, and Attachment C for PERS Medical Plan rate changes 2002-2012.) This added $4.8 million to the Citys unfunded liability.

October 18, 2011 (ID # 2180)

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4. Actuarial Load This is a 2% premium applied to assumed costs based on the premise that PERS Preferred Provider (PPO) Medical Plan premiums have been increasing at a slower rate than have claim costs. PERS has been funding the difference from reserves, but Bartel believes that eventually rate increases will need to bounce upward to more evenly match the increased costs. This anticipated bounce adds $3.4 million to the Citys unfunded liability. 5. Cost Sharing by Miscellaneous Group This change in benefits was implemented after the 2009 study and caused the Citys unfunded liability to decrease by $14.2 million. Note that the impact of any public safety group concessions is not included in this study. 6. Migration of Retirees to More Expensive Medical Plans While 13% of actives are enrolled in PERS PPO plans, that percentage rises to 32% for retirees under 65, and to 54% of retirees over 65. This seems to be due to the increased portability of the PPO plans for retirees who move out of the area. The last study may not have recognized this trend, which adds $7.7 million to the Citys unfunded liability. (See Attachment B, slide 7 for enrollment statistics for active and retired employees.) 7. Asset Smoothing Bartel recommends smoothing gains and losses in the trust balance over 5 years, to avoid volatility in the Citys ARC. For example, the year-end 2010 Trust balance was $40.2 million, an increase of 26% over the year-end 2009 balance of $32.0 million. With asset smoothing, the actuarial value of the trust assets for year-end 2010 would be $35.3 million, since that 26% gain is spread over the next five years. By saving some of the market gain for subsequent years when there may be losses, the City assumed an additional $4.6 million in unfunded liability. 8. Closed Amortization Period Rather than continually re-up the 30-year amortization period, which would never actually completely pay off the liability, Bartel recommends amortizing over the remaining 28 years of the 30-year period beginning 2009. The impact of this change on the Citys unfunded liability is included in that of the Demographic and Other Factors discussed below. 9. Demographic and Other Factors These are ways in which the City's actual experience differs from what is assumed in the CalPERS experience study. For example, to the extent that City employees retire earlier or later than average, or go out on disability more or less than the statewide average, this affects the liability. In our case these factors add $12.4 million to our unfunded liability. (See Attachment B, slide 5 for statistics on active and retired employees included in the study.) The General Funds share of the citywide ARC totals approximately $9.5 million annually for FY 2012, an increase of $2.7 million from the amount budgeted for FY 2012 based on the January 1, 2009 valuation. That amount can be funded from the CERBT trust, if needed. Staff will provide more precise figures for the General Fund portion by the October 18 Finance Committee meeting. (See Attachment D: Results by Fund.)
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June 30, 2011 Valuation Date The actuarial study using a valuation date of June 30, 2011 valued the City's unfunded liability at $139.7 million, which is an increase of $5.0 million over the January 1 valuation date. The ARC associated with this valuation is $14.4 million for Fiscal Year 2013, and projected at $14.8 million for 2014. (Again, see Attachment B, slide 31.) The $0.8 million jump in the ARC between FY 2012 and FY 2013 is primarily due to the decrease in assumed discount rate from 7.75% to 7.25%. The reasons for the respective discount rate assumptions are: The January 1, 2011 valuation assumed a discount rate of 7.75% as mandated by CERBT. Beginning Fiscal Year 2013, CERBT requires that each member agency employ a discount rate no higher than 7.61%, as applicable to its selected asset allocation. The trust offers three possible asset allocations, of which Option 1 the Citys chosen option - has the highest projected yield. CERBTs expected return over a 20-year period for Option 1 Asset Classifications is 7.61%, with a 50% confidence limit. Bartel recommends dropping the assumed rate to 7.25% to achieve a 60% confidence limit. The General Fund portion of the FY 2013 and FY 2014 ARCs is $10.0 million and $10.3 million, respectively. Again, staff will provide more precise figures for the General Fund portion of the FY 2013 and 2014 ARCs by the October 18 Council meeting. RESOURCE IMPACT The FY 2012 budget allocated $9.8 million towards the ARC for all funds, but this amount was an estimate before the actuarial study was completed. The ARC contained in the actuarial study was $13.6 million, representing an increase of $3.8 million across all City funds. The General Fund portion of the increase is $2.3 million for FY 2012, which may be drawn from the trust, if needed. Future years ARC funding will need to be incorporated into those years budgets. Staff will provide funding recommendations during the Mid-Year or FY 2013 proposed budget process. ENVIRONMENTAL REVIEW The action recommended is not a project for the purposes of the California Environmental Quality Act.

Attachments: -a: Attachment A: Executive Summary (PDF) -b: Attachment B: Revised Preliminary Results (PDF) -c: Attachment C: 2002-2012 PEMHCA Premiums -d: Attachment D: Results by Fund (PDF)
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(PDF)

October 18, 2011 (ID # 2180)

Prepared By: Department Head: City Manager Approval:

Nancy Nagel, Senior Financial Analyst Lalo Perez, Director ____________________________________ James Keene, City Manager

October 18, 2011 (ID # 2180)

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City of Palo Alto


-: Attachment A: Executive Summary (2180 : Retiree Medical Study) Packet Pg. 43

Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary

October 11, 2011 Bartel Associates, LLC 411 Borel Avenue, Suite 101 San Mateo, California 94402 Phone: 650-377-1600 Email: jbartel@bartel-associates.com

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O:\Clients\City of Palo Alto\OPEB\2011 val\Reports\BA PaloAltoCi 11-10-11 OPEB 6-30-11 Valuation Executive Summary.doc

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-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary
Governmental Accounting Standards Board Statement No. 45 (GASB 45), Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions provides standards for the financial reporting of the Citys Retiree Healthcare Plan. The City implemented GASB 45 for the 2007/08 fiscal year. The January 1, 2011 actuarial valuation provides the financial reporting information for the Citys 2011/12 fiscal year and the June 30, 2011 actuarial valuation provides the financial reporting information for the Citys 2012/13 and 2013/14 fiscal years. VALUATION RESULTS Participants: The same participant data was used to prepare both the January 1, 2011 and June 30, 2011 actuarial valuations. A summary of this data as of June 30, 2011 is: Participants Actives Number Average Age Average City Service Average PERS Service Average Pay Total Payroll (000s) Retirees Number Average Age Average Retirement Age 6/30/11 923 44.7 10.8 13.7 $86,007 $79,384 860 67.0 55.5

Plan Assets: Assets must be set aside in a trust that cannot legally be used for any purpose other than to pay retiree healthcare benefits in order to be considered plan assets for GASB 45 purposes. The City's retiree healthcare plan is currently funded with the CalPERS Trust (CERBT). The City began prefunding the plans obligations during 2007/08. The Citys intention is to fund the full ARC each year. Investment gains and losses relative to the assumed net rate of return are spread over a 5year period by using an Actuarial Value of Assets rather than the Market Value of Assets to determine the plans costs and funded status. This helps smooth any volatility in the Market Value of Assets and provides an element of stability for the plan expense and City contributions. The Actuarial Value of Assets is kept within a corridor of 80% to 120% of the Market Value to make sure it does not diverge significantly from the Market Value of Assets. The Market Value of Assets was $40,213,000 and the Actuarial Value of assets was $35,294,000 on January 1, 2011. The Market Value of Assets was $44,774,000 and the Actuarial Value of assets was $40,222,000 on June 30, 2011. The following table shows how the Market Value of Assets changed through 6/30/11 and is projected to change during 2011/12.

October 11, 2011


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-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 2 Plan Assets (Amounts in 000s) Market Value at Beginning of Year Contributions Benefit Payments Administrative Expenses Investment Earnings Market Value at End of Year Actuarial Value at End of Year Annualized Investment Return 1/1/116/30/11 $ 40,213 2,448 (41) 2,155 44,774 40,222 5.3% 7.0% Projected 2011/12 $ 44,774 5,165 3,246 53,185 49,279 7.3% 9.7%
-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

2009 $ 24,616 700 (23) 6,749 32,042

2010 $ 32,042 3,532 (34) 4,674 40,213 35,294 13.7% 11.9%

Market Value Actuarial Value

26.9% 11.6%

Funded Status: A plans funded status is measured by comparing the Actuarial Accrued Liability (see definitions and assumptions section below) with Plan Assets. A plan is considered funded when Plan Assets equal the Actuarial Accrued Liability. As the Citys retiree healthcare plan had not been funded prior to GASB 45 implementation in 2007/08, the City established a contribution policy that would fund benefits as earned for each future year and would fund the Unfunded Actuarial Accrued Liability over a 30-year period. GASB 45 requires the discount rate used to determine the present value of future benefit payments be based on the source of funds used to pay the benefits. This is the expected long-term net earnings rate on plan assets for funded plans and the expected long-term net earnings rate on an agencys investment fund for unfunded plans. A 7.75% and 7.25% discount rate was used for the Citys January 1, 2011 and June 30, 2011 valuations, respectively, representing the long-term expected net return for the CERBT. See page 5 in the Definitions and Assumptions Section for a discussion of the discount rates used in the valuations. The plan was approximately 21% funded as of January 1, 2011, and 22% funded as of June 30, 2011: 1/1/11 Valuation 6/30/11 Valuation 7.75% 7.25% Discount Rate Discount Rate $ 51,179 118,800 169,979 35,294 134,685 21% $ 57,479 122,444 179,923 40,222 139,701 22%

Funded Status (Amounts in 000s) Actuarial Accrued Liability (AAL) Actives Retirees Total Actuarial Value of Plan Assets (AVA) Unfunded AAL (UAAL) Funded Percentage (AVA/AAL)

Annual Required Contribution (ARC): The Annual Required Contribution is the Normal Cost plus an amortization payment toward the Unfunded Actuarial Accrued Liability. The Normal Cost is the value of benefits allocated to the current fiscal year for service worked during that year. The Unfunded Liability is

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 3 amortized as a level percent of payroll over a period of 28 years as of June 30, 2011 (27 years remaining as of June 30, 2012). The Citys Annual Required Contributions for 2011/12, 2012/13 and 2013/14 are as follows: Annual Required Contribution (Amounts in 000s) Normal Cost Unfunded Liability Amortization Annual Required Contribution Estimated Payroll ARC as a % of Payroll Amortization Period 7.75% 2011/12 $ 4,937 8,666 13,603 80,664 16.9% 28 Yrs 7.25% 2012/13 $ 5,609 8,769 14,378 83,285 17.3% 27 Yrs 2013/14 $ 5,791 9,054 14,845 85,992 17.3% 26 Yrs

Net OPEB Obligation (NOO): The Citys Net OPEB Obligation is the historical difference since GASB 45 implementation between actual contributions made and Annual Required Contributions. Benefits paid for current retirees directly from City assets are considered contributions. The Net OPEB Obligation would be zero for an agency that always contributed the Annual Required Contributions. An agency that contributed more than the ARC would have a Net OPEB Asset (NOA). Annual OPEB Cost (AOC): The Annual OPEB Cost is the plans fiscal year expense. It is equal to the Annual Required Contribution plus expected interest on the Net OPEB Obligation less an amortization of the Net OPEB Obligation. It is different from the Annual Required Contribution because the Annual Required Contribution may include a provision for amounts not yet funded that have been expensed in prior Annual OPEB Costs. The Annual OPEB Cost equals the Annual Required Contribution when the Net OPEB Obligation at the beginning of the year is zero. Annual OPEB Cost (Amounts in 000s) Annual Required Contribution Interest on Net OPEB Obligation Amortization of Net OPEB Obligation Annual OPEB Cost Amortization Period 7.75% 2011/12 $ 13,603 (1,781) 1,483 13,305 28 Yrs 7.25% 2012/13 $ 14,378 (1,687) 1,451 14,141 27 Yrs 2013/14 $ 14,845 (1,705) 1,498 14,638 26 Yrs

The Citys expected Net OPEB Obligations for 2011/12, 2012/13 and 2013/14 are: 7.75% 7.25% Estimated Net OPEB Obligation (Amounts in 000s) 2011/12 2012/13 2013/14 Net OPEB Obligation (Asset) at Begin. of Yr $ (22,977) $ (23,275) $ (23,511) Annual OPEB Cost 13,305 14,141 14,638 Estimated Contributions 14,378 14,845 13,603 Net OPEB Obligation (Asset) at End of Yr (23,275) (23,511) (23,718) The Citys actual June 30, 2012, June 20, 2013 and June 30, 2014 Net OPEB Obligations will differ from those shown above because actual contributions may differ from those estimated.

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-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 4 Projection: The following table shows the projected Net OPEB Obligation, Annual Required Contribution, Annual OPEB Contribution, and City Contribution (including benefit payments paid directly by the City) over the next 10 years. Full ARC Pre-Funding Projection 7.25% Discount Rate1 (Amounts in 000s) Annual OPEB Contribution Cost Benefit PreTotal ARC (AOC) Pmts Funding Contrib $13,603 $13,305 $8,438 $5,165 $13,603 14,378 14,141 8,988 5,390 14,378 14,845 14,638 9,986 4,859 14,845 15,327 15,155 10,929 4,398 15,327 15,825 15,690 11,945 3,880 15,825 16,340 16,247 12,940 3,400 16,340 16,871 16,825 13,832 3,039 16,871 17,419 17,425 14,692 2,727 17,419 17,985 18,049 15,574 2,412 17,985 18,570 18,697 16,460 2,110 18,570

DEFINITIONS AND ASSUMPTIONS Present Value of Benefits: When an actuary prepares an actuarial valuation, he or she first gathers participant data (active employees, retirees, and beneficiaries) as of the valuation date. Using this data and appropriate actuarial assumptions, the actuary projects the future benefit payments. The actuarial assumptions estimate when employees will retire, terminate, die or become disabled, as well as salary increases, inflation, and net investment earnings. The expected future benefit payments are discounted back to the valuation date using the expected net investment return or discount rate. This discounted value is the Present Value of Benefits. It represents the funds the plan needs as of the valuation date to pay all expected future benefits if all assumptions are realized and no additional contributions are made by the City. The Citys January 1, 2011 and June 30, 2011 Present Value of Benefits were $204.3 million and $219.2 million, respectively. Actuarial Accrued Liability: The Actuarial Accrued Liability is the portion of the Present Value of Benefits that has been allocated to prior service through the valuation date. The Citys January 1, 2011 and June 30, 2011 Actuarial Accrued Liabilities were $170.0 million and $179.9 million, respectively Normal Cost: The Normal Cost is the portion of the Present Value of Benefits allocated to the current fiscal year. The plans Normal Costs for the 2011/12 and 2012/13 fiscal years are $4.9 million and $5.6 million, respectively.
1

Fiscal year ending 2012 based on prior valuation with 7.75% discount rate.

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-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

Fiscal Year Ending 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Begin Year NOO $(22,977) (23,275) (23,511) (23,718) (23,891) (24,026) (24,119) (24,165) (24,159) (24,095)

Payroll $80,664 83,285 85,992 88,787 91,672 94,652 97,728 100,904 104,183 107,569

Contrib % of Payroll 16.9% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3%

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 5

Actuarial Cost Method: The actuarial cost method determines how benefits are allocated to each year of service. It has no effect on the Present Value of Benefits but has significant effect on the Actuarial Accrued Liability and Normal Cost. The Citys January 1, 2011 and June 30, 2011 retiree healthcare valuations were prepared using the Entry Age Normal cost method. Under the Entry Age Normal cost method, the Plans Normal Cost is developed as a level percent of payroll over the participants working lifetimes. Actuarial Assumptions: Under GASB 45, an actuary must follow current actuarial standards of practice. These standards generally call for the use of explicit assumptions which means that each individual assumption must represent the actuary's best estimate for that assumption. For the January 1, 2011 valuation, a discount rate of 7.75% was used, as required by CalPERS for plans funded in the CERBT. In March 2011, the CalPERS Board approved the following changes to the CERBT: created 3 different asset allocation strategies, each with different expected returns and volatility, revised the discount rate assumption from a mandated rate (7.75%) to provide agencies and their actuaries with the flexibility to select the discount rate (up to a maximum rate based on the selected asset allocation). For each investment option, CalPERS maximum discount rate is the median return2, with lower rates also being acceptable. The following table shows CERBT target asset allocation strategies and CalPERS maximum discount rates: Option 1 Option 2 50.1% 8.0% 3.0% 15.0% 23.9% 100.0% 7.06% Option 3 31.6% 8.0% 3.0% 15.0% 42.4% 100.0% 6.39%
-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

Asset Allocation
Global Equity Global Real Estate Commodities Inflation Linked Bonds U.S. Nominal Bonds Total 66.0% 8.0% 3.0% 5.0% 18.0% 100.0% 7.61%

Maximum Discount Rate

Bartel Associates recommends a lower discount rate than the maximum to build in some level of conservatism, so the assumption is expected to be realized (or exceeded) approximately 55% to 60% of the time. This results in the following discount rates: Option 1 Option 2 6.50% 6.75% Option 3 6.00% 6.25%

60% Realization 55% Realization

7.00% 7.25%

For the June 30, 2011 actuarial valuation, the City chose the Option 1 asset allocation strategy, and agreed that it would be prudent to build in a margin for conservatism when choosing a discount rate. The discount rate for the June 30, 2011 valuation is 7.25%, which represents an estimated 55% confidence level that actual future returns will be at least that high. The change in discount rate from 7.75% to 7.25% between
2

The median return represents the return at which of the returns are expected to be higher and lower.

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 6 these two valuations results in a $10.6 million actuarial loss. The January 1, 2009 Milliman valuation used actual premiums for 2009, and then used a healthcare inflation rate of 6.5% from 2010-2014, 6.0% from 2015-2017, and 5.85% for each year thereafter. In the January 1, 2011 valuation, actual premiums were used for 2011 and 2012. The healthcare inflation rate for nonMedicare eligible participants starts at 9.0% (the increase in 2013 premiums over 2012 premiums) and grades down to 5% after 8 years. The healthcare inflation rate for Medicare eligible participants starts 0.4% higher and also grades down to 5% after 8 years. This change in medical trend leads to a $4.8 million increase in the Actuarial Accrued Liability. This is partially offset by a $3.9 million gain, because of the difference between actual 2011 and 2012 premiums and projected 2011 and 2012 premiums from the January 1, 2009 valuation. A 2% load was added in the January 1, 2011 valuation, to take into account that recent PEMHCA PPO premium increases are believed to be below per capita claims increases. This load results in a $3.4 million increase in the Actuarial Accrued Liability. Retirement, disability, termination, and mortality assumptions were changed from the CalPERS 97-02 Experience Study in the January 1, 2009 valuation to the CalPERS 97-07 Experience Study in the January 1, 2011 and June 30, 2011 valuations. This change results in a $7.9 million increase in the Actuarial Accrued Liability. Another key January 1, 2011 valuation assumption change is the assumed medical plan at retirement. We believe the 2009 valuation assumed each active participant remained in the same plan at retirement and Medicare eligibility (at age 65). The January 1, 2011 valuation assumes percentages, as shown below, based upon actual participation of current retirees, which differs substantially from the participation of current actives. This change increased the Actuarial Accrued Liability by approximately $7.7 million. Medical Plan at Retirement Miscellaneous Safety <65 65+ <65 65+ 35% 20% 35% 20% 25% 25% 25% 25% 30% 20% 20% 20% 10% 35% 10% 35% 0% 0% 10% 0%
-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

Blue Shield Kaiser PERS Choice PERSCare PORAC

A final key assumption change between the January 1, 2009 valuation and the January 1, 2011 valuation is the Medicare eligibility rate. The 2011 valuation assumes 80% of Miscellaneous actives and 90% of Safety actives hired prior to 4/1/86 will be eligible for Medicare, and all actives hired after 4/1/86 will be eligible for Medicare. Similarly, 90% of current retirees under the age of 65 are assumed to be eligible for Medicare. These assumptions produce an approximate increase in the Actuarial Accrued Liability of $2.6 million. The Citys introduction of sharing of future premium cost increases for Management/Confidential, SEIU and UMPAPA for those retiring after April 1, 2011 has led to a $14.1 million decrease in the Actuarial Accrued Liability. The following table shows changes, actual and expected, from the January 1, 2009 valuation to the January 1, 2011 valuation and, subsequently to the June 30, 2011 valuation:

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City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 7

Changes From January 1, 2011 Valuation to June 30, 2011 Valuation (AVA) UAAL AAL $169,979 $(35,294) $134,685 Actual 1/1/11 174,485 (40,222) 134,263 Projected 6/30/11 182,840 (49,279) 133,561 Expected 6/30/12 Assumption Changes Discount Rate 10,613 10,613 Experience (Gains)/Losses Demographic & Other (3,510) (3,510) Total (Gain)/Loss 7,103 7,103 Projected 6/30/12 189,943 (49,279) 140,663

October 11, 2011

Packet Pg. 51

-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

Changes From January 1, 2009 Valuation to January 1, 2011 Valuation (AVA) UAAL AAL $129,661 $(24,616) $105,045 Actual 1/1/09 150,971 (42,322) 108,649 Expected 6/30/11 Assumption Changes Medical Trend 4,840 4,840 New CalPERS Decrements 7,916 7,916 Actuarial Load 3,421 3,421 Medical Plan at Retirement 7,740 7,740 Medicare Eligibility 2,625 2,625 Asset Smoothing 4,552 4,552 Contribution Loss (2,452) (2,452) Plan Change Cost Sharing (14,194) (14,194) Experience (Gains)/Losses Caps/Premiums < Expected (3,917) (3,917) New Retirees 2,700 2,700 Demographic & Other 12,383 12,383 Total (Gain)/Loss 23,514 2,100 25,614 Projected 6/30/11 174,485 (40,222) 134,263

2.a

City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 8

RETIREE HEALTHCARE BENEFITS Eligibility Retiree Medical (Hired<1/1/043)

Retire directly from the City under CalPERS (age 50 and 5 years of
CalPERS service or disability)

Retired < 1/1/074 Full employee premium and percentage of dependent premium (90% in
2011, 95% in 2012, 100% in 2013+)
-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

Retired > 1/1/074 Same as above but premium limited to 2nd most expensive Basic
medical plan in the Bay Area Region

For non-Safety Mgmt/Conf, SEIU and UMPAPA


Retired > 4/1/115, all premium increases starting 1/1/11 shared evenly between City and employee, up to 10% Retiree Medical (Hired>1/1/046)

Vesting schedule (based on all CalPERS Service)7: Years of Service % < 10 0% 10 50% > 20 100% Vesting applies to 100/90 formula amounts:
Single 2-Party Family from City 2011 $ 542 1,030 1,326 2012 $ 566 1,074 1,382

Police and Fire with 20 years City service do not need to retire directly For Mgmt/Conf, SEIU and UMPAPA Retired > 4/1/118, all premium
increases starting in 1/1/11 shared evenly between City and employee, up to 10% Dental, Vision & Life

None

3 4 5 6 7 8

1/1/05 for SEIU and 1/1/06 for PAPOA 1/1/08 for PAPOA 2/1/10 for SEIU 1/1/05 for SEIU and 1/1/06 for PAPOA Minimum 5 years City Service. 100% vested for disability retirement 2/1/10 for SEIU

October 11, 2011

Packet Pg. 52

2.a

City of Palo Alto Retiree Healthcare Plan January 1, 2011 & June 30, 2011 Actuarial Valuations Executive Summary Page 9 Surviving Spouse Benefit Benefit Changes from Prior Valuation

100% of retiree benefit continues to surviving spouse if retiree elects


CalPERS survivor allowance

New Benefit Provision: cost sharing of future premium increases for


Mgmt/Conf, SEIU and UMPAPA retiring after 4/1/2011

October 11, 2011

Packet Pg. 53

-: Attachment A: Executive Summary (2180 : Retiree Medical Study)

2.b

CITY OF PALO ALTO RETIREE HEALTHCARE PLAN January 1, 2011 and June 30, 2011 GASB 45 Actuarial Valuations Revised Preliminary Results
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 54

Presented by John E. Bartel, President Prepared by Deanna Van Valer, Assistant Vice President & Actuary Adam Zimmerer, Actuarial Analyst Bartel Associates, LLC October 11, 2011

Agenda
Topic Benefit Summary Participant Statistics Actuarial Assumptions Highlights Actuarial Methods Assets Results January 1, 2011 Valuation Results June 30, 2011 Valuation CERBT Investment Options Bartel Associates GASB 45 Database Other Issues Exhibits Page 1 5 9 15 17 19 29 41 43 46 48

O:\Clients\City of Palo Alto\OPEB\2011 val\Reports\BA PaloAltoCi 11-10-11 OPEB 6-30-11 Revised Preliminary Val Results.doc

BENEFIT SUMMARY
Eligibility Retire directly from the City under CalPERS (age 50 and 5 years of

2.b

CalPERS service or disability) Medical CalPERS health plans (PEMHCA) Provider Non-Safety PEMHCA resolution provides only for PEMHCA minimum (additional benefits paid by City) 2 Retiree Medical Retired < 1/1/07 (Hired<1/1/041) Full employee premium and percentage of dependent premium (90% in 2011, 95% in 2012, 100% in 2013+)
Retired > 1/1/07
2

For non-Safety Mgmt/Conf, SEIU and UMPAPA

Retired > 4/1/113, all premium increases starting 1/1/11 shared evenly between City and employee, up to 10%

1 2 3

1/1/05 for SEIU and 1/1/06 for PAPOA 1/1/08 for PAPOA 2/1/10 for SEIU

October 11, 2011

BENEFIT SUMMARY
Retiree Medical Vesting schedule (based on all CalPERS Service)5:

(Hired>1/1/044)

Years of Service % < 10 0% 10 50% > 20 100% Vesting applies to 100/90 formula amounts: 2011 2012 Single $ 542 $ 566 2-Party 1,030 1,074 Family 1,326 1,382 Police and Fire with 20 years City service do not need to retire directly from City 6 For Mgmt/Conf, SEIU and UMPAPA Retired > 4/1/11 , all premium increases starting in 1/1/11 shared evenly between City and employee, up to 10%

4 5 6

1/1/05 for SEIU and 1/1/06 for PAPOA Minimum 5 years City Service. 100% vested for disability retirement 2/1/10 for SEIU

October 11, 2011

Packet Pg. 55

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Same as above but premium limited to 2nd most expensive Basic medical plan in the Bay Area Region

BENEFIT SUMMARY
Dental, Vision None 100% of retiree benefit continues to surviving spouse if retiree

2.b

& Life
Surviving

Spouse Benefit
Benefit

elects CalPERS survivor allowance


New Benefit Provision: cost sharing of future premium increases

Changes from Prior Valuation


Pay-As-You-

for Mgmt/Conf, SEIU and UMPAPA retiring after 4/1/2011


FY 2011/12 (Est) $8,142 FY 2010/11 FY 2009/10 FY 2008/09 FY 2007/08
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 56

Go ($000s)

$6,216 $5,519 $5,204 $4,646

October 11, 2011

BENEFIT SUMMARY
Implied Non-Medicare eligible retirees pay active rates instead of actual cost Active employee premiums subsidize retiree cost
Single Retiree Medical Cost
1,000 800

Subsidy

Monthly Cost

Premium Male Cost Female Cost

600 400 200 0

30

35

40

45 Age

50

55

60

65

GASB 45 includes active implied subsidy with retiree cost Community rated plans not required to value implied subsidy PEMHCA is a community rated plan for most employers Valuation does not include an implied subsidy

October 11, 2011

PARTICIPANT STATISTICS

2.b

Participant Statistics
June 30, 2011

Miscellaneous Actives Count Average Age Average City Service Average PERS Service Average Salary Total Salary (000s) Retirees: Count Average Age7 Average Retirement Age8

Police 82 38.2 10.8 11.4 $117,924 $9,670 87 63.0 47.9

Fire 104 43.4 14.0 15.0 $112,185 $11,667 114 67.2 52.1

Total 923 44.7 10.8 13.7 $86,007 $79,384 860 67.0 55.5

659 67.5 57.2

7 8

1 retiree with missing birth date assumed to retire at average retirement age Excludes 3 retirees with missing retirement date

October 11, 2011

PARTICIPANT STATISTICS

Participant Statistics9
January 1, 2009

Miscellaneous Actives Count Average Age Average City Service Average Salary Total Salary (000s) Retirees: Count Average Age Average Retirement Age

Police n/a n/a n/a n/a n/a n/a n/a n/a

Fire n/a n/a n/a n/a n/a n/a n/a n/a

Total 955 45.3 11.2 $103,602 $98,940 710 67.2 n/a

n/a n/a n/a n/a n/a n/a n/a n/a

From 1/1/09 Milliman report

October 11, 2011

Packet Pg. 57

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

737 45.7 10.4 13.8 $78,762 $58,047

PARTICIPANT STATISTICS

2.b

Medical Plan Participation Non-Waived Participants


Retirees Medical Plan Blue Shield Blue Shield NetValue Kaiser PERS Choice PERSCare PORAC Total Actives 44% 0% 34% 13% 0% 9% 100% < 65 34% 0% 25% 21% 11% 10% 100% 65 21% 0% 24% 18% 36% 1% 100% Total 27% 0% 25% 19% 25% 5% 100%
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 58

October 11, 2011

PARTICIPANT STATISTICS

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October 11, 2011

ACTUARIAL ASSUMPTIONS HIGHLIGHTS January 1, 2011 & June 30, 2011 Valuations January 1, 2011 Fiscal Year 2011/12 ARC (end of year) June 30, 2011 Fiscal Years 2012/13 & 2013/14 ARCs (end of year) Same

2.b

January 1, 2009 Valuation10


Valuation Date January 1, 2009 Fiscal Years 2009/10 & Funding Policy Full Pre-funding through Discount Rate Payroll

2010/11 ARCs (end of year)

1/1/11 7.75% 6/30/11 7.25%

Aggregate Increases 3.25% Aggregate Increases 3.25% Merit Increases CalPERS Merit Increases CalPERS

Increases

1997-2002 Experience Study


10

1997-2007 Experience Study

From 1/1/09 Milliman report

October 11, 2011

ACTUARIAL ASSUMPTIONS HIGHLIGHTS January 1, 2011 & June 30, 2011 Valuations
Year 2009 2010 2011 2012 2013 2014 2015 2016 Increase from Prior Year Non-Medicare Medicare n/a n/a Premiums Premiums 9.0% 9.4% 8.5% 8.9% 8.0% 8.3% 7.5% 7.8% 2021+ 5.0% 5.0%

January 1, 2009 Valuation10


Medical Trend
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018+ Increase from Prior Year Premiums 6.50% 6.50% 6.50% 6.50% 6.50% 6.00% 6.00% 6.00% 5.85%

October 11, 2011

10

Packet Pg. 59

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

CalPERS trust (CERBT) 7.75%

ACTUARIAL ASSUMPTIONS HIGHLIGHTS January 1, 2011 & June 30, 2011 Valuations 2.0% load PEMHCA PPO premium increases below per capita claims increases CalPERS 1997-2007 Experience Study
Benefit ERA Misc Fire Police 2.7%@55 3%@50 3%@50 54.5 54.0
11

2.b

January 1, 2009 Valuation10


Actuarial Load n/a

Retirement,

CalPERS 1997-2002

Mortality, Termination, Disability

Experience Study
Benefit Misc Fire Police 2.7%@55 3%@50 3%@50

Participation at n/a

DOH < 1/1/04: 100% DOH > 1/1/04: 95% Employees with cost sharing:

Retirement

reduce above %s by 5%
11

Applies to employees hired after July 17, 2010

October 11, 2011

11

ACTUARIAL ASSUMPTIONS HIGHLIGHTS January 1, 2011 & June 30, 2011 Valuations Miscellaneous: <65 65+ Blue Shield 35% 20% Kaiser 25% 25% PERS Choice 30% 20% PERSCare 10% 35% Safety: <65 65+ Blue Shield 35% 20% Kaiser 25% 25% PERS Choice 20% 20% PERSCare 10% 35% PORAC 10% 0%

January 1, 2009 Valuation10


Medical Plan at n/a

Retirement

October 11, 2011

12

Packet Pg. 60

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

2%@60 57.5

ACTUARIAL ASSUMPTIONS HIGHLIGHTS January 1, 2011 & June 30, 2011 Valuations Actives hired < 4/1/86: Miscellaneous 80% Safety 90% Actives hired > 4/1/86: 100% Retirees < 65: 90% Everyone eligible for Medicare will elect Part B coverage Retirees missing PERS group assumed to be Misc unless fund designates Police or Fire

2.b

January 1, 2009 Valuation10


Medicare n/a

Eligible Rate

Missing PERS

n/a

Group

October 11, 2011

13

ACTUARIAL ASSUMPTIONS HIGHLIGHTS

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October 11, 2011

14

Packet Pg. 61

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

ACTUARIAL METHODS January 1, 2011 & June 30, 2011 Valuations Cost Method Entry Age Normal Level % of Same Pay Unfunded 30 years open period 28 years (closed period) Fresh Liability Start for total 6/30/2011 UAAL Amortization (27 years remaining on 6/30/12) 15 years (closed period) for future gains and losses Maximum 30-year combined period Method January 1, 2009 Valuation12

2.b

12

From 1/1/09 report by Milliman.

October 11, 2011

15

ACTUARIAL METHODS January 1, 2011 & June 30, 2011 Valuations Market Value of Assets Investment gains and losses spread over a 5-year rolling period Not less than 80% nor more than 120% of market value Same as CalPERS, but shorter period Employer cost for allowing retirees to participate at active rates Community rated plans are not required to value an implied subsidy if active rates are independent of number of retirees PEMHCA is a community rated plan for most employers Valuation does not include an implied subsidy

Method
Actuarial

January 1, 2009 Valuation12

Value of Assets

Implied

Subsidy

October 11, 2011

16

Packet Pg. 62

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

ASSETS

2.b

Market Value of Plan Assets


(amounts in 000s)

2009
MVA (Beg. of Year) Contributions Benefit Payments13 Admin. Expenses Investment Return MVA (End of Year) Approx. Annual Return

2010

1/1/116/30/11

Projected 2011/12

$ 24,616 $ 32,042 $ 40,213 $ 44,774 700 3,532 2,448 5,165 (23) (34) (41) 4,674 2,155 3,24614 6,749 26.9% 13.7% 5.3% 7.3%
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 63

32,042

40,213

44,774

53,185

13 14

Benefit Payments made outside of trust by City. Refer to Slide 3 for fiscal year amounts. Investment return based on 7.25% net of expenses

October 11, 2011

17

ASSETS

Actuarial Value of Plan Assets


(amounts in 000s)

2009
AVA (Beg. of Year) Contributions Benefit Payments15 Exp. Inv. Return Exp. AVA (End of Year) Preliminary AVA Min AVA (80% MVA) Max AVA (120% MVA) AVA (End of Year) Approx. Annual Return
15

2010 $ 28,209 3,532 2,323 34,064 35,294 32,170 48,255 35,294 11.9%

1/1/116/30/11 $ 35,294 2,448 1,342 39,084 40,222 35,819 53,729 40,222 7.0%

Projected 2011/12 $ 40,222 5,165 2,916 48,303 49,279 42,548 63,822 49,279 9.7%

$ 24,616 700 1,935 27,251 28,209 25,633 38,450 28,209 11.6%

Benefit Payments made outside of trust by City. Refer to Slide 3 for fiscal year amounts.

October 11, 2011

18

RESULTS JANUARY 1, 2011 VALUATION

2.b

Funded Status 7.75% Discount Rate


(Amounts in 000s)
16

1/1/09
Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Actuarial Value of Assets (AVA) Unfunded AAL Funded Ratio Normal Cost Pay-As-You-Go Cost
16

1/1/11 $ 85,476 118,800 204,276 51,179 118,800 169,979 35,294 134,685 21%

Projected 6/30/11

$ 78,831 78,384 157,215 51,277 78,384 129,661 24,616 105,045 19% 3,478 6,075

$ 174,485 40,222 134,263 4,937 8,438

From 1/1/09 report by Milliman.

October 11, 2011

19

RESULTS JANUARY 1, 2011 VALUATION

Actuarial Gain/Loss 7.75% Discount Rate


(000s Omitted)

Actual 1/1/09 Expected 6/30/11 Assumption Changes Medical Trend New CalPERS Decrements Actuarial Load Medical Plan at Retirement Medicare Eligibility Asset Smoothing Contribution Loss Plan Change Cost Sharing Experience (Gains)/Losses Caps/Premiums < Expected New Retirees Demographic & Other Total (Gain)/Loss Projected 6/30/11

AAL $129,661 150,971 4,840 7,916 3,421 7,740 2,625

(AVA) $(24,616) (42,322)

UAAL $105,045 108,649 4,840 7,916 3,421 7,740 2,625 4,552 (2,452) (14,194) (3,917) 2,700 12,383 25,614 134,263
Packet Pg. 64

4,552 (2,452) (14,194) (3,917) 2,700 12,383 23,514 174,485


20

2,100 (40,222)

October 11, 2011

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

RESULTS JANUARY 1, 2011 VALUATION

2.b

Annual Required Contribution (ARC) 7.75% Discount Rate


(Amounts in 000s)

3.5% 6.4% 9.9%

3.5% 6.6% 10.1%

6.1% 10.7% 16.9%

October 11, 2011

21

RESULTS JANUARY 1, 2011 VALUATION

Estimated Net OPEB Obligation (NOO) Illustration 7.75% Discount Rate


(Amounts in 000s)

Estimated Net OPEB Obligation (Asset) NOO at Beginning of Year Annual OPEB Cost Annual Required Contribution Interest on NOO NOO Adjustment Annual OPEB Cost Contributions 17 Benefit Payments Outside Trust Trust Funding Total Contributions NOO at End of Year

CAFR Estimate Estimate 2009/10 2010/11 2011/12 $(26,352) $(23,242) $(22,977) 9,786 (2,042) 2,585 10,329 5,519 1,70018 7,219 (23,242) 10,349 (1,801) 2,213 10,760 6,216 4,280 10,496 (22,977) 13,603 (1,781) 1,483 13,306 8,438 5,165 13,603 (23,275)

17 18

Estimated cash payments shown for years after 2010/11. Actual cash payments should be used for OPEB footnote. Shortly after year end, the City contributed another $1.832 million to the trust

October 11, 2011

22

Packet Pg. 65

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Annual Required Contribution ARC - $ Normal Cost UAAL Amortization Total Projected Payroll ARC - % Pay Normal Cost UAAL Amortization Total

1/1/09 Valuation 2009/10 2010/11 $ 3,478 6,308 9,786 98,940 $ 3,591 6,757 10,348 102,156

1/1/11 Valuation 2011/12 $ 4,937 8,666 13,603 80,664

RESULTS JANUARY 1, 2011 VALUATION

2.b

Amortization Bases 7.75% Discount Rate


(000s Omitted)

1/1/2009 Valuation 6/30/2009 6/30/2010


Outstanding Balance

1/1/2011 Valuation 6/30/2011 $ n/a n/a 134,263 134,263

October 11, 2011

23

RESULTS JANUARY 1, 2011 VALUATION

Amortization Payments 7.75% Discount Rate


(000s Omitted)

1/1/2009 Valuation 2009/10 2010/11


Amortization Payment - $

1/1/2011 Valuation 2011/12 $ n/a n/a 8,666 8,666

2009 UAAL19 2010 Gains & Losses 2011 Fresh Start UAAL20 Total

$ 6,308 6,308

$ 6,513 244 6,757

19 20

Amortized over 30 years beginning 2009/10 Amortized over 28 years beginning 2011/12

October 11, 2011

24

Packet Pg. 66

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

2009 UAAL 2010 Gains & Losses 2011 Fresh Start UAAL Total

$ 105,045 105,045

$ 106,878 2,567 109,445

RESULTS JANUARY 1, 2011 VALUATION

2.b

Actuarial Obligations 7.75% Discount Rate


January 1, 2011
(Amounts in 000s)

Benefits < Benefits > Age 65 Age 65


Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Normal Cost

Total $ 85,476 118,800 204,276


-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 67

$ 45,464 37,577 83,041 26,106 37,577 63,683 2,711

$ 40,013 81,223 121,236 25,074 81,223 106,297 2,226

51,179 118,800 169,979 4,937

October 11, 2011

25

RESULTS JANUARY 1, 2011 VALUATION

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October 11, 2011

26

RESULTS JANUARY 1, 2011 VALUATION

2.b

Actuarial Obligations 7.75% Discount Rate


January 1, 2011
(Amounts in 000s)

Misc
Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Actuarial Value of Assets21 Unfunded AAL Normal Cost Pay-As-You-Go Cost

Police

Fire

Total

$ 54,725 $ 12,832 $ 17,919 $ 85,476 86,109 14,722 17,969 118,800 140,834 27,554 35,888 204,276 33,204 86,109 119,313 24,774 94,539 3,381 6,285 6,496 14,722 21,218 4,406 16,812 719 935 11,479 17,969 29,448 6,114 23,334 836 1,218 51,179 118,800 169,979 35,294 134,685 4,937 8,438

21

Allocated in proportion to the Actuarial Accrued Liability.

October 11, 2011

27

RESULTS JANUARY 1, 2011 VALUATION

Annual Required Contribution (ARC) 7.75% Discount Rate


2011/12 Fiscal Year
(Amounts in 000s)

Misc
ARC - $ Normal Cost UAAL Amortization ARC Projected Payroll ARC - % Normal Cost UAAL Amortization ARC
22

Police $ 719 1,087 1,807 9,826 7.3% 11.1% 18.4%

Fire $ 836 1,507 2,344 11,855 7.1% 12.7% 19.8%

Total $ 4,937 8,666 13,603 80,664 6.1% 10.7% 16.9%

$ 3,381 6,072 9,453 58,983 5.7% 10.3% 16.0%

22

Allocated in proportion to the Actuarial Accrued Liability.

October 11, 2011

28

Packet Pg. 68

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

RESULTS JUNE 30, 2011 VALUATION

2.b

Actuarial Obligations
(Amounts in 000s)

1/1/11 Valuation Projected 1/1/11 6/30/11 7.75%


Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Actuarial Value of Assets Unfunded AAL Funded Ratio Normal Cost Pay-As-You-Go Cost
October 11, 2011

6/30/11 Valuation Projected 6/30/11 6/30/12 7.25% $ 96,769 122,444 219,213 57,479 122,444 179,923 40,222 139,701 22%
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

$ 85,476 118,800 204,276 51,179 118,800 169,979 35,294 134,685 21%

$ 174,485 40,222 134,263 4,937 8,438

$ 189,943 49,279 140,663 5,609 9,986

29

RESULTS JUNE 30, 2011 VALUATION

Actuarial Gain/Loss
(000s Omitted)

Actual 1/1/11 Projected 6/30/11 Expected 6/30/12 Assumption Changes Discount Rate Experience (Gains)/Losses Demographic & Other Total (Gain)/Loss Projected 6/30/12

AAL $169,979 174,485 182,840 10,613 (3,510) 7,103 189,943

(AVA) $(35,294) (40,222) (49,279)

UAAL $134,685 134,263 133,561 10,613

(49,279)

(3,510) 7,103 140,663

October 11, 2011

30

Packet Pg. 69

RESULTS JUNE 30, 2011 VALUATION

2.b

Annual Required Contribution (ARC)


(Amounts in 000s)

Annual Required Contribution


ARC - $ Normal Cost UAAL Amortization Total Projected Payroll ARC - %Pay Normal Cost UAAL Amortization Total

1/1/11 Valuation 2011/12 7.75% $ 4,937 8,666 13,603 80,664 6.1% 10.7% 16.9%

6/30/11 Valuation 2012/13 2013/14 7.25% $ 5,609 8,769 14,378 83,285 6.7% 10.6% 17.3% $ 5,791 9,054 14,845 85,992 6.7% 10.6% 17.3%
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 70

October 11, 2011

31

RESULTS JUNE 30, 2011 VALUATION

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October 11, 2011

32

RESULTS JUNE 30, 2011 VALUATION

2.b

Amortization Bases
(000s Omitted)

1/1/2011 Valuation 6/30/2011 Valuation 6/30/2011 6/30/2012 6/30/2013 7.75% 7.25%


Outstanding Balance

2011 Fresh Start UAAL Total

$ 134,263 134,263

$ 140,663 140,663

$ 142,093 142,093
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 71

October 11, 2011

33

RESULTS JUNE 30, 2011 VALUATION

Amortization Payments
(000s Omitted)

1/1/2011 Valuation 2011/12 7.75%


Amortization Payment - $

6/30/2011 Valuation 2012/13 2013/14 7.25% $ 8,769 8,769 $ 9,054 9,054

2011 Fresh Start UAAL23 Total

$ 8,666 8,666

23

Amortized over 28 years beginning 2011/12

October 11, 2011

34

RESULTS JUNE 30, 2011 VALUATION

2.b

Estimated Net OPEB Obligation (NOO) Illustration


(Amounts in 000s)

8,438 5,165 13,603 (23,275)

8,988 5,390 14,378 (23,511)

9,986 4,859 14,845 (23,718)

24

Estimated cash payments shown for all years. Actual cash payments should be used for OPEB footnote.

October 11, 2011

35

RESULTS JUNE 30, 2011 VALUATION

Estimated Full ARC Funding Projection 7.25% Discount Rate25


(Amounts in 000s)

Fiscal Begin Year Year ARC End NOO 2012 $(22,977) $13,603 2013 (23,275) 14,378 2014 (23,511) 14,845 2015 (23,718) 15,327 2016 (23,891) 15,825 2017 2018 2019 2020 2021
25

Annual OPEB Contribution Cost Benefit PreTotal (AOC) Pmts Funding Contrib $13,305 $8,438 $5,165 $13,603 14,141 8,988 5,390 14,378 14,638 9,986 4,859 14,845 15,155 10,929 4,398 15,327 15,690 11,945 3,880 15,825 16,247 16,825 17,425 18,049 18,697 12,940 13,832 14,692 15,574 16,460 3,400 3,039 2,727 2,412 2,110 16,340 16,871 17,419 17,985 18,570

Pay $80,664 83,285 85,992 88,787 91,672 94,652 97,728 100,904 104,183 107,569

Contrib % of Payroll 16.9% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3% 17.3%

(24,026) (24,119) (24,165) (24,159) (24,095)

16,340 16,871 17,419 17,985 18,570

Fiscal year ending 2012 based on prior valuation with 7.75% discount rate.

October 11, 2011

36

Packet Pg. 72

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Estimated Net OPEB Obligation (Asset) NOO at Beginning of Year Annual OPEB Cost Annual Required Contribution Interest on NOO NOO Adjustment Annual OPEB Cost Contributions Benefit Payments Outside Trust24 Trust Funding Total Contributions NOO at End of Year

1/1/11 Valuation Estimate 2011/12 $(22,977) 13,603 (1,781) 1,483 13,305

6/30/11 Valuation Estimate Estimate 2012/13 2013/14 $(23,275) $(23,511) 14,378 (1,687) 1,451 14,141 14,845 (1,705) 1,498 14,638

RESULTS JUNE 30, 2011 VALUATION

2.b

Actuarial Obligations 7.25% Discount Rate


June 30, 2011
(Amounts in 000s)

Benefits < Benefits > Age 65 Age 65


Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Normal Cost

Total

$ 49,568 $ 47,201 $ 96,769 36,082 86,361 122,444 85,650 133,562 219,213


-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

28,139 36,082 64,221 2,978

29,340 86,361 115,701 2,631

57,479 122,444 179,923 5,609

October 11, 2011

37

RESULTS JUNE 30, 2011 VALUATION

Actuarial Obligations 7.25% Discount Rate


June 30, 2011
(Amounts in 000s)

Misc
Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total 26 Actuarial Value of Assets Unfunded AAL Normal Cost Pay-As-You-Go Cost

Police

Fire

Total

$ 61,777 $ 14,823 $ 20,168 $ 96,769 88,563 15,240 18,641 122,444 150,340 30,063 38,809 219,213 37,268 88,563 125,831 28,129 97,702 3,823 7,385 7,445 15,240 22,685 5,071 17,614 825 1,132 12,766 18,641 31,407 7,021 24,386 960 1,469 57,479 122,444 179,923 40,222 139,701 5,609 9,986

26

Allocated in proportion to the Actuarial Accrued Liability.

October 11, 2011

38

Packet Pg. 73

RESULTS JUNE 30, 2011 VALUATION

2.b

Annual Required Contribution (ARC) 7.25% Discount Rate


2012/13 Fiscal Year
(Amounts in 000s)

Misc
ARC - $ Normal Cost UAAL Amortization ARC Projected Payroll ARC - % Normal Cost UAAL Amortization ARC
27

Police $ 825 1,116 1,941 10,145 8.1% 11.0% 19.1%

Fire $ 960 1,541 2,501 12,240 7.8% 12.6% 20.4%

Total $ 5,609 8,769 14,378 83,285 6.7% 10.5% 17.3%


-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 74

$ 3,823 6,111 9,934 60,900 6.3% 10.0% 16.3%

27

Allocated in proportion to the Actuarial Accrued Liability.

October 11, 2011

39

RESULTS JUNE 30, 2011 VALUATION

This page intentionally blank

October 11, 2011

40

CERBT INVESTMENT OPTIONS


Additional CERBT asset allocations and revised discount rate assumption Agency selects one option effective July 1, 2011 Target asset allocations

2.b

Option 3 5.25% 6.39% 7.47% 7.27%

Standard Deviation

11.73%

9.46%

28

Confidence Limits Actual Return will exceed the given rate with indicated probabilities, rates vary by year.

October 11, 2011

41

CERBT INVESTMENT OPTIONS


CalPERS discount rate development: 1st 10 year expected returns based on asset advisors 10 year projections Significantly higher returns assumed after 10 years

based on long term historical returns st implies actuarial losses in 1 10 years achievable? Requirement that discount rate cannot be greater than 50% confidence limit rate Bartel Associates Recommendation: select rate at 55% or 60% confidence limit Option 1 Option 2 Option 3 55% Confidence Limit Discount Rate 7.25% 6.75% 6.25% Maximum Discount Rate 7.61% 7.06% 6.39% Margin for Adverse Deviation (0.36%) (0.31%) (0.14%) 60% Confidence Limit Discount Rate 7.00% 6.50% 6.00% Maximum Discount Rate 7.61% 7.06% 6.39% Margin for Adverse Deviation (0.61%) (0.56%) (0.39%)

October 11, 2011

42

Packet Pg. 75

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Asset Classifications Option 1 Option 2 Global Equity 66.0% 50.1% US Nominal Bonds 18.0% 23.9% REIT's 8.0% 8.0% U.S. Inflation Linked Bonds 5.0% 15.0% Commodities 3.0% 3.0% Total 100.0% 100.0% CalPERS reported expected returns (20 year period): Option 1 Option 2 28 75% Confidence Limit 5.80% 5.60% 50% Confidence Limit 7.61% 7.06% 25% Confidence Limit 9.43% 8.52%

Option 3 31.6% 42.4% 8.0% 15.0% 3.0% 100.0%

BARTEL ASSOCIATES GASB 45 DATABASE

2.b

GASB 45 Retiree Medical Benefits Comparison Sample Percentile Graph

60% 55% 50% 45% 40%

100th Percentile 95th Percentile

75th Percentile 50% of results are within this range 90% of results are within this range 100% of results are within this range

Percent of Pay

35% 30% 25% 20% 15% 10% 5% 0%

50th Percentile

25th Percentile

5th Percentile 0th Percentile

October 11, 2011

43

BARTEL ASSOCIATES GASB 45 DATABASE


GASB 45 Retiree Medical Benefits Comparison Normal Cost & Annual Required Contribution
60% 50% 40% 30% 20% 10% 0% -10%

Miscellaneous NC ARC 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Percent of Pay Percentile 11.7% 7.5% 3.6% 1.3% 0.6% 6.3% 67% 31.4% 19.4% 8.9% 3.3% 1.3% 16.3% 67%

Safety NC 11.9% 7.0% 2.9% 1.4% 0.7% 8.0% 82%

ARC 32.2% 20.5% 10.2% 3.6% 1.8% 19.9% 73%

Discount Rate = 7.25%, Amortization Period = 27 Years

October 11, 2011

44

Packet Pg. 76

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Percent of Pay

BARTEL ASSOCIATES GASB 45 DATABASE


GASB 45 Retiree Medical Benefits Comparison Actuarial Accrued Liability
500% 450% 400%

2.b

Percent of Pay

350% 300% 250% 200% 150% 100% 50%

Miscellaneous 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Percent of Pay Percentile 251% 151% 74% 23% 8% 207% 89% Discount Rate = 7.25%

Safety 275% 166% 87% 28% 12% 242% 92%

October 11, 2011

45

OTHER ISSUES
GASB Pension Accounting Exposure Draft for pension accounting changes issued 7/8/2011:

Usually the last public document issued before issuing final statement Similar views expected for OPEB Comment deadline 9/30/11 Likely effective for 2013/14 fiscal year Major issues: Unfunded liability on balance sheet Lower discount rate if funding less than ARC Immediate recognition of: Service & Interest Cost Benefit changes Inactive gains/losses & assumption changes Deferred recognition of: Active gains/losses & assumption changes, over (future working lifetime) closed period Asset gains/losses, over 5 years Entry age normal cost method National Health Care Reform Too early to know impact

October 11, 2011

46

Packet Pg. 77

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

0%

OTHER ISSUES

2.b

Timing:

Present preliminary results Present revised preliminary results

September 26, 2011 October 11, 2011

October 11, 2011

47

EXHIBITS

Topic Premiums Data Summary Actuarial Assumptions Definitions

Page E- 1 E- 3 E-29 E-36

October 11, 2011

48

Packet Pg. 78

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

PREMIUMS

2.b

2011 PEMHCA Monthly Premiums


Bay Area Non-Medicare Eligible Medical Plan Blue Shield Blue Shield NetValue Kaiser PERS Choice PERS Select PERSCare PORAC Single 581.24 568.99 563.40 492.68 893.95 527.00 2-Party 1,162.48 1,137.98 1,126.80 985.36 1,787.90 987.00 Family 1,511.22 1,479.37 1,464.84 1,280.97 2,324.27 1,254.00 Medicare Eligible Single 337.88 282.30 375.88 375.88 433.66 418.00 2-Party 675.76 564.60 751.76 751.76 867.32 833.00 Family 1,013.64 846.90 1,127.64 1,127.64 1,300.98 1,331.00
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

$675.51 $1,351.02 $1,756.33 $337.88

$675.76 $1,013.64

October 11, 2011

E-1

PREMIUMS

2012 PEMHCA Monthly Premiums


Bay Area Non-Medicare Eligible Medical Plan Blue Shield Access+ Blue Shield NetValue Kaiser PERS Choice PERS Select PERSCare PORAC Single 611.59 610.44 574.15 487.39 1,029.23 556.00 2-Party 1,223.18 1,220.88 1,148.30 974.78 2,058.46 1,041.00 Family 1,590.13 1,587.14 1,492.79 1,267.21 2,676.00 1,323.00 Medicare Eligible Single 337.99 277.81 383.44 383.44 432.43 418.00 2-Party 675.98 555.62 766.88 766.88 864.86 833.00 Family 1,013.97 833.43 1,150.32 1,150.32 1,297.29 1,331.00 $675.98 $1,013.97

$711.10 $1,422.20 $1,848.86 $337.99

October 11, 2011

E-2

Packet Pg. 79

DATA SUMMARY

2.b

Active Medical Coverage


Bay Area Plans Medical Plan Blue Shield Blue Shield NetValue Kaiser PERS Choice PERSCare PORAC Waived Total Single 90 2 74 22 12 200 2-Party 68 1 65 39 7 180 Family 210 1 151 47 1 54 464 Waived 79 79 Total 368 4 290 108 1 73 79 923
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 80

October 11, 2011

E-3

DATA SUMMARY
Retiree Medical Coverage - Under Age 65
Plan Blue Shield Region Bay Area Los Angeles Northern CA Sacramento Southern CA Bay Area Northern CA Out of State Sacramento Southern CA Bay Area Northern CA Out of State Sacramento Southern CA Bay Area Northern CA Out of State Sacramento Southern CA Single 48 1 4 37 2 3 2 22 3 7 1 2 11 1 13 2 1 10 170 2-Party 42 1 3 1 26 1 5 3 1 19 2 13 5 2 2 14 140 Family 25 1 1 11 3 1 1 7 2 2 1 12 67 Total 115 1 2 8 1 74 6 6 6 4 48 5 22 1 2 18 3 15 3 1 36 377

Kaiser

PERS Choice

PERSCare

PORAC Total

October 11, 2011

E-4

DATA SUMMARY
Retiree Medical Coverage - Over Age 65
Plan Blue Shield Region Bay Area Northern CA Sacramento Southern CA Blue Shield NetValue Southern CA Kaiser Bay Area Northern CA Out of State Sacramento Southern CA PERS Choice Bay Area Los Angeles Northern CA Out of State Sacramento Southern CA PERSCare Bay Area Northern CA Out of State Sacramento Southern CA PORAC Total Single 53 1 2 1 44 2 4 6 1 14 1 3 12 1 4 47 9 41 3 5 1 255 2-Party 40 2 3 42 2 3 6 21 5 17 3 1 34 7 19 4 3 1 213 Family 2 6 1 1 2 2 1 15 Total 95 2 1 5 1 92 4 7 13 1 35 1 9 31 4 5 81 16 62 7 8 3 483

2.b

October 11, 2011

E-5

DATA SUMMARY

Medical Plan Participation Non-Waived Participants


Retirees Medical Plan Blue Shield Blue Shield NetValue Kaiser PERS Choice PERSCare PORAC Total Actives 44% 0% 34% 13% 0% 9% 100% < 65 34% 0% 25% 21% 11% 10% 100% 65 21% 0% 24% 18% 36% 1% 100% Total 27% 0% 25% 19% 25% 5% 100%

October 11, 2011

E-6

Packet Pg. 81

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

DATA SUMMARY

2.b

Retiree Medical Coverage by Age Group


Miscellaneous Age Under 50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 Over 85 Total Average Age
October 11, 2011

68.7
E-7

67.4

59.5

67.5

DATA SUMMARY

160 140 120 Number 100 80 60 40 20 0 <50

Retiree Age Distribution Miscellaneous

50-54

55-59

60-64

65-69 Age

70-74

75-79

80-84

85

October 11, 2011

E-8

Packet Pg. 82

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Single 2 20 55 61 58 55 32 24 28 335

2-Party 17 38 62 68 41 23 15 12 276

Family 2 8 17 14 5 1 1 48

Total 4 45 110 137 131 97 55 40 40 659

DATA SUMMARY

2.b

Retiree Medical Coverage by Age Group


Police Age Under 50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 Over 85 Total Average Age
October 11, 2011

64.8
E-9

62.7

56.5

63.0

DATA SUMMARY

18 16 14 12 Number 10 8 6 4 2 0 <50 50-54

Retiree Age Distribution Police

55-59

60-64

65-69 Age

70-74

75-79

80-84

85

October 11, 2011

E-10

Packet Pg. 83

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Single 5 6 8 8 6 5 4 4 2 48

2-Party 3 3 5 6 3 1 2 4 27

Family 1 4 4 2 1 12

Total 9 13 17 16 10 6 6 8 2 87

DATA SUMMARY

2.b

Retiree Medical Coverage by Age Group


Fire Age Under 50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 Over 85 Total Average Age
October 11, 2011

70.6
E-11

69.8

55.0

67.2

DATA SUMMARY

30 25 20 Number 15 10 5 0 <50 50-54

Retiree Age Distribution Fire

55-59

60-64

65-69 Age

70-74

75-79

80-84

85

October 11, 2011

E-12

Packet Pg. 84

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Single 1 1 5 7 4 11 5 4 4 42

2-Party 1 2 2 8 8 16 8 4 1 50

Family 3 10 4 3 2 22

Total 5 13 11 18 14 27 13 8 5 114

DATA SUMMARY

2.b

Actives by Age and Service


Miscellaneous City Service Age <1 1-4 5-9 10-14 15-19 20-24 25 Total

October 11, 2011

E-13

DATA SUMMARY

This page intentionally blank

October 11, 2011

E-14

Packet Pg. 85

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

< 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 Total

1 9 7 6 3 4 7 1 38

2 22 39 25 24 31 20 13 8 184

1 11 23 25 21 17 23 11 4 2 138

2 16 23 31 46 31 25 13 3 190

4 3 14 34 23 11 8 4 101

3 23 15 10 7 1 59

5 14 4 4 27

4 44 89 82 96 160 133 75 40 14 737

DATA SUMMARY

2.b

Active Age Distribution Miscellaneous


180 160 140 120

Number

100 80 60 40 20 0
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 86

<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 Age

65

October 11, 2011

E-15

DATA SUMMARY

Active Service Distribution Miscellaneous


250 200 150 100 50 0 0-4 5-9 10-14 15-19 20-24 >25 Service

October 11, 2011

Number

E-16

DATA SUMMARY

2.b

Actives by Age and Service


Police City Service Age <1 1-4 5-9 10-14 15-19 20-24 25 Total

October 11, 2011

E-17

DATA SUMMARY

This page intentionally blank

October 11, 2011

E-18

Packet Pg. 87

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

< 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 Total

1 1 2

2 6 10 3 1 22

2 9 6 3 1 1 22

1 7 1 2 1 12

2 4 6 12

1 1 4 1 7

4 1 5

2 9 21 19 9 17 5 82

DATA SUMMARY

2.b

Active Age Distribution Police


25 20 15 10 5 0 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 Age 65

Number

October 11, 2011

E-19

DATA SUMMARY

Active Service Distribution Police


30 25 20 Number 15 10 5 0 0-4 5-9 10-14 15-19 20-24 >25 Service

October 11, 2011

E-20

Packet Pg. 88

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

DATA SUMMARY

2.b

Actives by Age and Service


Fire City Service Age <1 1-4 5-9 10-14 15-19 20-24 25 Total

October 11, 2011

E-21

DATA SUMMARY

This page intentionally blank

October 11, 2011

E-22

Packet Pg. 89

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

< 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 Total

1 2 3

2 3 3 4 1 13

2 4 4 4 4 18

10 9 7 2 1 29

1 3 6 10

1 13 5 1 20

2 7 1 1 11

3 5 9 19 17 33 14 2 2 104

DATA SUMMARY

2.b

Active Age Distribution Fire


25 20 15 10 5 0 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 Age 65

Number

October 11, 2011

E-23

DATA SUMMARY

Active Service Distribution Fire


30 25 20 Number 15 10 5 0 0-4 5-9 10-14 15-19 20-24 >25 Service

October 11, 2011

E-24

Packet Pg. 90

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

DATA SUMMARY

2.b

Actives by Age and Service


Total City Service Age <1 1-4 5-9 10-14 15-19 20-24 25 Total

October 11, 2011

E-25

DATA SUMMARY

This page intentionally blank

October 11, 2011

E-26

Packet Pg. 91

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

< 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 Total

2 10 10 6 3 4 7 1 43

6 31 52 32 24 32 21 13 8 219

1 15 36 35 28 22 24 11 4 2 178

2 17 40 41 55 34 26 13 3 231

4 6 21 46 23 11 8 4 123

1 5 40 21 10 8 1 86

11 22 5 1 4 43

9 58 119 120 122 210 152 77 42 14 923

DATA SUMMARY

2.b

Active Age Distribution Total


250 200 150 100 50 0

Number

<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 65 Age

October 11, 2011

E-27

DATA SUMMARY

Active Service Distribution Total


300 250 200 Number 150 100 50 0 0-4 5-9 10-14 15-19 20-24 >25 Service

October 11, 2011

E-28

Packet Pg. 92

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

ACTUARIAL ASSUMPTIONS

2.b

January 1, 2009 Valuation29


Valuation Date January 1, 2009 Fiscal Years 2009/10 & Funding Policy Full Pre-funding through General

2010/11 ARCs (end of year)

January 1, 2011 & June 30, 2011 Valuations January 1, 2011 Fiscal Year 2011/12 ARC (end of year) June 30, 2011 Fiscal Years 2012/13 & 2013/14 ARCs (end of year) Same
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study) Packet Pg. 93

CalPERS trust (CERBT) 3.00%


7.75%

Same 1/1/11 7.75% 6/30/11 7.25%

Inflation Discount Rate

29

From 1/1/09 Milliman report

October 11, 2011

E-29

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations Aggregate Increases 3.25% Aggregate Increases 3.25% Merit Increases CalPERS Merit Increases CalPERS 1997-2002 Experience Study 1997-2007 Experience Study January 1, 2009 Valuation29
Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018+ Increase from Prior Year Premiums 6.50% 6.50% 6.50% 6.50% 6.50% 6.00% 6.00% 6.00% 5.85% Increase from Prior Year Non-Medicare Medicare Year 2009 n/a 2010 n/a 2011 Premiums 2012 Premiums 2013 9.0% 9.4% 2014 8.5% 8.9% 2015 8.0% 8.3% 2016 7.5% 7.8% 2017 7.0% 7.2% 2018 6.5% 6.7% 2019 6.0% 6.1% 2020 5.5% 5.6% 2021+ 5.0% 5.0%

Payroll

Increases
Medical Trend

October 11, 2011

E-30

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations 2.0% load PEMHCA PPO premium increases below per capita claims increases CalPERS 1997-2007 Experience Study
CalPERS 1997-2007
Misc Fire Police 2.7%@55 3%@50 3%@50 2%@60 57.5
30

2.b

January 1, 2009 Valuation29


Actuarial Load n/a

Mortality,

CalPERS 1997-2002

Termination, Disability Retirement

Experience Study
CalPERS 1997-2002

Benefit

Misc Fire Police 2.7%@55 3%@50 3%@50

Benefit ERA

54.5

54.0

30

Applies to employees hired after July 17, 2010

October 11, 2011

E-31

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations Hired < 1/1/04: 100% Hired > 1/1/04: 95% Employees with cost sharing: reduce above %s by 5% Miscellaneous: <65 65+ Blue Shield 35% 20% Kaiser 25% 25% PERS Choice 30% 20% PERSCare 10% 35% Safety: <65 65+ Blue Shield 35% 20% Kaiser 25% 25% PERS Choice 20% 20% PERSCare 10% 35% PORAC 10% 0%
Packet Pg. 94

January 1, 2009 Valuation29


Participation at n/a

Retirement

Medical Plan at

n/a

Retirement

October 11, 2011

E-32

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

Experience Study

Experience Study

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations Actives hired < 4/1/86: Miscellaneous 80% Safety 90% Actives hired > 4/1/86: 100% Retirees < 65: 90% Everyone eligible for Medicare will elect Part B coverage Currently covered: based on current elections Currently waived: 80% Actives Misc : 10% until age 65 Safety : 20% until age 65 Retirees: based on current elections until age 65

2.b

January 1, 2009 Valuation29


Medicare n/a

Eligible Rate

Spousal

Actives: 60% Retirees: based on current

Coverage at Retirement
Family

Coverage at Retirement

elections Actives: 18% until age 65 Retirees: based on current elections until age 65

October 11, 2011

E-33

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations Retirees missing PERS group assumed to be Misc unless fund designates Police or Fire Retirees missing bargaining unit assumed to be SEIU unless fund designates Police (PAPOA) or Fire (IAFF) Retirees missing department assumed to be 80% GF, 10% Elec, and 10% WWT People assumed to be 80% GF from above assumption placed in Unknown Fund 100%

January 1, 2009 Valuation29


Missing PERS n/a

Group
Missing n/a

Bargaining Unit
Missing n/a

Department
Missing Fund n/a

Surviving

n/a

Spouse Participation

October 11, 2011

E-34

Packet Pg. 95

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

ACTUARIAL ASSUMPTIONS January 1, 2011 & June 30, 2011 Valuations Actives Males 3 years older Same than females Retirees Males 3 years older than females if spouse birth date not available None Closed Group Same January 1, 2009 Valuation29

2.b

Spouse Age

Future New

Participants
-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

October 11, 2011

E-35

DEFINITIONS
GASB 45 Accrual Accounting Project future employer-provided benefit cash flows for current active employees and current retirees Discount projected cash flow to valuation date using discount rate (assumed return on assets used to pay benefits) and other actuarial assumptions to determine present value of projected future benefits (PVB) Allocate PVB to past, current, and future periods using the actuarial cost method Actuarial cost method used for this valuation is the Entry Age Normal Cost method which determines Normal Cost as a level percentage of payroll (same method used by CalPERS) Normal Cost is amount allocated to current fiscal year Actuarial Accrued Liability (AAL) is amount allocated to prior service with employer Unfunded AAL (UAAL) is AAL less plan assets pre-funded in a segregated and restricted trust Cash subsidy is the pay-as-you-go employer benefit payments for retirees Implied subsidy is the difference between the actual cost of retiree benefits and retiree premiums subsidized by active employee premiums

PayGo Cost

October 11, 2011

E-36

Packet Pg. 96

DEFINITIONS

2.b

Present Value of Benefits

Present Value of Benefits (Without Plan Assets)

Present Value of Benefits (With Plan Assets)

Future Normal Costs Normal Cost Unfunded Actuarial Accrued Liability

Future Normal Costs Normal Cost Unfunded Actuarial Accrued Assets

October 11, 2011

E-37

DEFINITIONS

Annual Required Contribution (ARC)

Required contribution for the current period including: Normal Cost Amortization of: - Initial UAAL - AAL for plan, assumption, and method changes - Experience gains/losses (difference between expected and actual) - Contribution gains/losses (difference between ARC and contributions) ARC in excess of pay-as-you-go costs not required to be funded Net OPEB Obligation is the accumulated amounts expensed but not funded Net OPEB Asset if amounts funded exceed those expensed Expense for the current period including: ARC Interest on NOO Adjustment of NOO NOO adjustment prevents double counting of expense since ARCs include an amortization of prior contribution gains/losses previously expensed

Net OPEB Obligation (NOO) Annual OPEB Cost (AOC)

October 11, 2011

E-38

Packet Pg. 97

-: Attachment B: Revised Preliminary Results (2180 : Retiree Medical Study)

CalPERS 2002-2012 Health Premiums - Regional


Basic
Blue Shield Blue Shield NetValue Kaiser PERS Choice PERS Select PERSCare WHA PORAC 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Average per Percent Percent Percent Percent Percent Percent Percent Percent Percent Percent year Change Change Change Change Change Change Change Change Change Change increase Bay Area 23.35% 17.95% 23.71% 9.11% 13.80% 10.06% 5.19% 2.99% 17.01% 5.27% 12.62%
23.33% 18.88% 22.05% 15.00% 21.25% Percent Change 4.00% 55.60% 13.21% 5.08% 5.92% 21.30% 12.08% 17.83% 18.04% -0.59% 34.23% 9.91% Percent Change 17.95% 31.90% 36.39% -1.40% -1.16% 5.42% 55.09% 16.13% 5.82% 13.80% 15.00% 1.65% Percent Change -10.06% -11.19% 8.96% -8.53% -13.91% 0.00% 0.00% 9.78% 9.43% 9.76% 9.80% 0.00% Percent Change -0.45% -10.13% -19.53% 15.18% 20.01% 0.00% -1.00%

10.73% 12.50% 13.09% 11.80% 9.97%


Percent Change 11.33% 32.52% 29.43% 6.12% 7.05% 0.00% 7.00%

9.16% 6.00% -2.56% 2.99% Percent Change 7.05% -5.63% 9.89% 2.15% 8.86% -9.33%

3.61% 7.99% 0.00% -3.00% 0.00% 6.99% Percent Change 0.00% 0.00% 2.49% 6.75% 0.00% 0.00% 0.00% 7.03%

0.98% 4.77% 5.44% 4.80% 15.78% 0.00% Percent Change -12.27% -1.68% 6.50% 0.16% 2.00% 2.00% 1.48% 10.00%

16.17% 6.84% 10.74% 3.74% 2.97% 8.88% Percent Change 12.80% 12.80% -5.38% 11.11% 5.56% 5.56% 5.62% 15.15%

5.22% 7.28% 1.91% -1.07% 15.13% 5.50% Percent Change 0.03% 0.03% -1.59% 3.40% 2.01% 2.01% -0.28% 0.00%

6.34% 11.25% 8.71% 1.06% 8.65% 16.86% 6.55%

Medicare
Blue Shield Blue Shield NetValue Kaiser Kaiser/OOS PERS Choice PERS Select PERSCare PORAC WHA
Packet Pg. 98

Medicare - All Regions


2.62% 2.63% 7.61% 8.99% 2.66% 2.37% 3.02% 4.63% 12.99%

2.c

-: Attachment C: 2002-2012 PEMHCA Premiums (2180 : Retiree Medical Study)

RESULTS BY FUND

2.d

Actuarial Accrued Liability (AAL)


(Amounts in 000s)

1 2

Assets for Fiber Optics Fund appropriated to Elec due to no Fiber Optics employees in data AAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Funds AAL 3 Assets for Printing & Mailing Fund appropriated to GF due to no Printing & Mailing employees in data

October 12, 2011

RESULTS BY FUND

Annual Required Contribution (ARC)


(Amounts in 000s)

1/1/09 1/1/11 Valuation Valuation Annual Required Contribution 2009/10 2011/12 7.75% 7.75% CIP $ 142 $ 220 1,2 Elec 953 1,164 1 Gas 344 390 3 GF 6825 9,510 ISF - Technology 214 229 ISF - Vehicle 95 126 Refuse 245 402 Storm Drain 36 112 Water1 386 428 1 WWC 169 200 WWT 377 730 Total 9,786 13,603

6/30/11 Valuation 2012/13 2013/14 7.25% $ 237 $ 245 1,235 1,275 515 532 10,018 10,344 245 253 132 136 420 434 118 121 464 479 223 230 771 796 14,378 14,845

October 12, 2011

Packet Pg. 99

-: Attachment D: Results by Fund (2180 : Retiree Medical Study)

CIP Elec1,2 Gas1 GF3 ISF - Technology ISF - Vehicle Refuse Storm Drain Water1 WWC1 WWT Total

January 1, 2009 7.75% $ 1,564 13,214 4,589 91,488 2,226 1,225 3,063 494 4,673 2,013 5,112 129,661

January 1, 2011 7.75% $ 2,409 16,325 6,227 118,946 2,079 1,411 4,931 1,478 5,189 2,103 8,881 169,979

June 30, 2011 7.25% $ 2,572 17,225 6,668 125,564 2,257 1,510 5,256 1,565 5,539 2,313 9,454 179,923

Attachment B

Excerpt from Finance Committee minutes of October 18, 2011.

2. Review and Acceptance of Updated Retiree Medical Actuarial Study Valuation Date January 1, 2011 and Valuation Date June 30, 2011 Director of Administrative Services, Lalo Perez stated in 2008 Government Accounting Standards Board (GASB) required governmental entities to value the benefits of medical plans to determine the liability; the City complied in January of 2009. It was required every two-years to complete a refresh of the value. The presentation showed the differences between the 2009 value of the benefit to the 2011 refresh. The major difference was in the retirees where it went from $78,384,000 to $118,800,000. The positive piece of the information was the assets being set aside had increased and the Citys earning had risen. The assets went from $24.6 million in 2009 to $35.3 million in 2011 bringing the unfunded liability for retiree medical for the full organization to $135 million. Public Employee Retiree Service (PERS) had added the flexibility for the City to select a regular return. After discussions internally and with Bartel Associates, Inc. it was determined a 7.25 discount rate was the rate for the City to use going forward for the Fiscal Years (FY) 2013 and 2014. By following that recommendation it changed the future Annual Required Contribution (ARC) from $13.6 to $14.4 million, approximately $775,000 more for FY13 and if the same rate of assumption was maintained there would be an additional $467,000 for FY14. John Bartel, Bartel Associates, LLC addressed the Actuarial Accrual Liability (AAL) number which was $130 million and the expectation should be for the AAL to grow from one valuation to the next because there were services being rendered and as they were rendered it changed the numbers. He explained if there had been no changes in the assumption and there had been no gains and losses the expected AAL would have been $151 million. Assumptions were thought of future changes for what may occur and no matter how good of an actuarial firm the City hired they did not determine the cost of the plan. The cost of the plan was determined based on the benefits paid, offset by investment earnings received in the Trust and increased by expenses. He reviewed the actuarial gains and losses comparing the 2009 results to the 2011 results and explained the increase.

Mr. Perez stated in selecting Bartel and Associates, LLC. as the actuarial firm for the City, Staff had send out a list serve inquiry and the majority of the responses from other agencies for who they had completed their reports were Bartel and Associates, LLC. He spoke to the changes made by the present and prior Council with respect to the longer term benefits; 1) there was a longer vesting period with retiree medical so an employee hired post January 2004 needed 20 years to achieve the 90 percent and 2) for the Public Employee Retirement Service (PERS) Care Family Health Plan the City was not paying 100 percent which was significant since the annual cost was $24,000 for someone with family coverage. In order to mitigate the future costs the City could negotiate with the bargaining units or the other option was to utilize the funds set aside in the Trust to assist paying the difference. Staff hoped to return in early calendar year 2012 to provide recommendations. City Manager, James Keene announced the main action Staff was recommending to the Finance Committee was to set the methodology on the liability and the ARC. The next item on the agenda was a discussion of the 2012 budget and the implications on finances; he felt the two issues were directly linked. In the last actuarial valuation there was a $105 million unfunded liability and currently it was at $134 million even though there was a strong financial performance activity on the assets. He asked if there was a net increase of assets over the last two years. Mr. Perez stated yes there was a net increase in assets. He clarified the firm made a recommendation and the City accepted to smooth out the assumptions of the values of the assets going forward. Mr. Keene asked if the methodology had not been changed would the valuation of the unfunded liability been less in 2009. Mr. Bartel stated if no assumption changes were made then the unfunded liability would have been $109 million. Mr. Perez said Staff was aware from the Council feedback that Bartel felt the assumption of 6 and 6.5 percent for medical cost increases was not sufficient. Mr. Keene asked for confirmation that the unfunded liability would continue to rise even if there were solid investment performances. Mr. Bartel agreed.

Council Member Shepherd asked if a large group of employees retired in a short timeframe caused a bubble which exacerbated the position, when would there be an un-bubble as it were. Mr. Keene clarified if there were no new hires there could be an unbubble but the City needed to replace employees so that was not a probable scenario. He said people were living longer which created a greater long-term cost. Council Member Shepherd saw the mass retirement as a cause and effect of the Citys position to increase the cost of employee contribution to healthcare and what she was asking was would there be a softening effect. Mr. Bartel clarified the firm reviewed the Citys employment population and calculated their age with years vested. He said in considering the data the remaining population who did not retire with the early retirement package were not far from regular retirement. If the City were to split the active liability in half, that would reduce the actuarial liability by $25 million. The liability for retirees themselves was $119 million. Chair Scharff asked when the unfunded liability payment was due. Mr. Bartel said that liability was being paid off over a period of 28 years. The goal was to ensure there were sufficient funds to make the benefits payment but there was no requirement that the payment be made early; it would be prudent to do so if there were the ability but it was not required. Council Member Yeh asked why the firm created a closed amortization period of 30 years. Mr. Bartel clarified the 30 year timeframe was in the prior firms valuation, although the accounting standard recommended not using a period longer than 30 years. It appeared the previous firm was using a rolling 30 year formula but in doing that the City would never pay off the debt. The Citys policy was to payoff the unfunded liability which was a good fiscal policy and in that model there needed to be an end date so the lower the ARC the less of the unfunded liability was paid off. Mr. Keene asked if nothing changed over the next 28 years and the

City made the ARC payments as identified, at the end of the 28 years there would be no unfunded liability. Mr. Bartel said that it did not mean there would not be a required contribution but yes, there would not be an unfunded liability. Council Member Schmid confirmed the formula of applying the health retiree benefits to current employees had three parts; 1) prepaying for the liability he or she would have in the future, 2) past retirement payments, and 3) a portion of the payment would be put off because in the future his or her payment may be higher. Two parts were positive and one negative so he asked how the firm would recommend allocation of shares for each part. Mr. Bartel stated none of the numbers included any payment for current active medical costs today; the formula was for their retirement. The belief was the City was taking into account that the portion of the premiums being paid for the current employee after retirement would be substantially higher than what was being paid today. Council Member Schmid stated within the demographics the actuary firm had built-in an assumption people would compete in the labor market for 28 years prior to retiring. Mr. Bartel disagreed and stated what was being said was when the City reviewed their population they made an assumption of how long they would be working for the City. The formula was to take the pension plan in conjunction with a generous retiree medical plan which took you to an expected retirement age based on Palo Altos demographic. He explained to a large degree the employees at 2.7 had an expected retirement age of 57 based on the demographic. Council Member Schmid asked when a payment was made during the current year was the payment based on an assumption of the number of years of service the employee would have when they retired. Mr. Bartel clarified for the active employees the City may be making payments on their unfunded liability after they had retired. Council Member Schmid asked if the City was adequately providing for those who were currently working. Mr. Bartel said the sooner the unfunded liability was paid off, the

better off the City would be. Council Member Schmid asked what the City should be paying for current employees. Mr. Bartel said for example, if Palo Alto had the funds and if they were able to accommodate it he suggested paying off the unfunded liability closer to a twelve year amortization. Council Member Schmid asked if the firm was assuming the employees were going to be working for 25 years why was the City making payments on the basis of 28 years. Mr. Bartel stated if the City had been pre-funding the retirement medical obligation since it began there would not be a term of 28 years. He felt the City would not run out of funds by following the 28 year plan. Council Member Schmid was concerned that over the past two years the unfunded liability had taken a large jump because assumptions were made of the demographics. He said the asset market value between 2008 and 2011 the total increased by 10 percent but the actuarial value did not increase at all over the same four year period. The projected 2012 value had a substantial growth in asset except it was already the first quarter and the value was at minus 20 percent. Mr. Bartel stated that was correct. Council Member Schmid said if the assumption was a growth of 7.25 rate of return; he asked where the 7.25 came from. He mentioned the Federal Government announced they were going to be driving the bond market as close to 1 to 2 percent as possible for the next two years and global equities were going up and down with no trend of a solid upward momentum. Council Member Shepherd said Palo Alto had a 50 percent confident rating and she asked how a 90 percent confident rating would affect the numbers. Mr. Bartel confirmed if the confident rating rose to 90 percent the number would rise to approximately 4 percent. He stated the firm received their numbers through looking to outside investment advisors and asset classifications then perform statistic projections. He agreed a rate return of 7.25 in the short term was not achievable which was

why he explained asset smoothing was so important. Council Member Schmid was concerned about the smoothing process being represented. Mr. Bartel believed the 50 percent confidence level was close to the 7.61 rate of return but he preferred to air on the conservative side and brought it down to 7.25. Council Member Schmid felt Council should be able to speak to the employees he needed to provide realistic numbers. Mr. Bartel asked what discount rates Council Member Schmid felt should be used. Council Member Schmid stated 7.25; given the current asset allocation was much too high for the amount of risk. Mr. Bartel said the goal should be to asses the type of risk the City was willing to take and setting the discount rate at that level. Council Member Yeh asked the status of legislation to fund the unfunded liability. Mr. Bartel clarified the City would issue their financial statements in compliance with GASB who had a pension exposure draft and although it was not required to place the pension unfunded liability on the financial statement it was clearly the most efficient way to accomplish an accurate accounting. The exposure draft should be issued by the end of 2012. Council Member Yeh asked what the impact of monitoring would be and if Palo Alto changed their methodology would their funded percentage be reduced. Mr. Bartel agreed, the more conservative the assumptions for discount rates the lower the funded percentage would be. Council Member Yeh asked where the rating agencies would go with that type of system. Mr. Bartel said in speaking with the rating agencies if there was a modest liability and the City was doing nothing it would not affect the agencies rating but if there was a valuable promise and the City was not acting on it the rating agency would react.

Council Member Yeh said if GASB did not come out with a prescribed methodology and each city was using different assumptions that would become confusing. Mr. Bartel was told by GASB that the actuaries had a standard of practice and the outside auditors would review their work for reasonableness. His concern was the outside auditors may not be knowledgeable enough in those standards to perform an adequate review. Council Member Yeh noted a higher level of comfort with a higher level of conservativeness but his concern was being more conservative may position Palo Alto in a manner that could hurt the City externally. Mr. Bartel stated his recommendation was to set t he discount rate for the ARC which would also be the discount rate for the financial statements. That left room to use a different rate for internal purposes. He felt the concern over the discount rate was not limited to Other Post Employee Benefit (OPEB), it was part in parcel to the CalPERS pension. Council Member Yeh said when there was only a closed amortization period and new retirees entered the system it created an understated unfunded liability because the new retires had not been included. Mr. Bartel clarified his valuation had anticipated that and noted the level percentage of pay making a negative amortization which meant there was a negative amortization period until the level of amortization was below 20 years. Council Member Yeh said there had been contributions to the Trust since 2008 and asked to what extend had it been spent down. Mr. Perez stated the Trust had risen to $44.8 million and the majority of the increases were from earnings. Council Member Yeh noted he had seen the contributions listing in the Staff Report but his question was whether the City had made the contributions or were they from the structural reforms. Mr. Bartel said they were City contributions. Vice Mayor Yeh asked whether or not to use the Trust Fund to pay a

portion of the increased costs. Mr. Perez noted that was one option to be considered, another option would be budget reductions or increased revenues. Vice Mayor Yeh reiterated the actuary had mentioned with a 30 year amortization the City would not run out of funds. He asked if the funds being refereed to were Trust Funds. Mr. Bartel clarified the City was making their benefit payments for retirees and putting funds aside with the intent of making the benefits payments from the Trust at a future time. The expectation was the City would reach a point in approximately 15 years where there were sufficient funds to be able to expend fewer monies by making the benefits payments out of the Trust. Vice Mayor Yeh asked how much City contribution needed to be added to the Trust in order to achieve the 5.65. If the goal was to continue with the closed amortization and achieve the goal of using the Trust in 15 years, he did not want to run out of funds. Mr. Perez stated the key was to be able to make the payments so there were no funds drawn from the Trust. Mr. Keene asked for clarification that the employee contributions for healthcare were dedicated to the unfunded liability. Mr. Perez stated that was correct. Vice Mayor Yeh asked if that area would be a separate line item in the future. Mr. Perez noted it would be listed in the report under contributions. Council Member Shepherd commented on how the City was placing good faith in the Irrevocable Coffers Trust that sound investment choices were being made with the contributions being placed through them. She noted she was not comfortable with the investment choices. Her preference would be having the City put aside the funds utilizing the mechanisms currently in place for earning interest. She noted the assumptions did not reflect the adjustments from safety units or what might be coming forward with the other bargaining units. Mr. Bartel assured the Committee the rate of return would absolutely

not be 7.25. Council Member Shepherd said it would be less. Mr. Bartel clarified he was uncertain what the percentage rate would be in the short run however not many of their clients were comfortable with how CalPERS had been investing. Council Member Shepherd said they had not changed their manner of thinking on investment strategy during the changing financial crisis. Mr. Bartel disagreed and clarified there were elements that CalPERS had changed but some they had not. In the California Employers Retirees Benefit Trust (CERBT) there were two elements that were in the Pension Trust and they did not invest in specific real estate. Council Member Shepherd understood those points but argued their strategy of investment in the global market place, where they placed the bulk of their funds, had not changed. Mr. Bartel suggested they review what the CalPERS investment staff was doing today, if anything, that was different from their prior practices. CalPERS had a long run of Chief Investment Officer (CIO) turn over until they hired Joe Dear a few years ago who focused on long-term investments and shifted the method of their investment strategy. Council Member Shepherd was familiar with Mr. Dear but did not feel there had been a significant shift in strategy since his arrival. She recommended using the information as a tool during labor negotiations. Chair Scharff agreed and noted it affected how retirees were viewed and whether or not they could switch to a more expensive plan. Council Member Yeh asked if Staff was reviewing the determined funding recommendations for the current year, for example whether the additions to the net increase in the ARC should be funded through the Trust or not. Mr. Perez said the Staff was returning during the Mid-Year to show the Committee where the City was and recommend a decision at that time.

Mr. Keene said the increased payment needing to be made was for FY 2012, the next item on the agenda was on the budget update where there was a recommendation relating to drawing down the Budget Stabilization Reserve because of the over collection of revenues but that did not factor in any additional savings from public safety. Council Member Yeh expressed the information was helpful and asked about the increase of employee contributions and whether there Staff had a process in mind. Mr. Keene agreed with the general statement of Mr. Perez regarding trends that the City had been consistently making with the bargaining units and that he was discussing the equity/parity across the bargaining units but that the contributions would be escalating as time moved forward. The goal was to have all of the units making the same contribution on healthcare. MOTION: Council Member Schmid moved, seconded by Council Member XXX that the Finance Committee accept the Retiree Healthcare Plan January 1, 2011 and June 30, 2011 GASB 45 Actuarial Valuations Revised Preliminary Results and that Staff provide information on an Option to include a 7 percent Discount Rate and move the allocation period to 25 years. MOTION FAILED FOR LACK OF SECOND MOTION: Council Member Shepherd moved, seconded by Vice Mayor Yeh that the Finance Committee accept the Retiree Healthcare Plan January 1, 2011 and June 30, 2011 GASB 45 Actuarial Valuations Revised Preliminary Results. Council Member Shepherd requested the structural changes from the Police and Fire units be included in the report. Council Member Yeh noted the retiree medical benefits were not a two year issue and changes needed to be incorporated into the report being distributed as new information arose. He felt if there were feedback throughout the process it would be more helpful to show different methodologies. Mr. Bartel clarified the modification of the amortization period did not require a new process, his firm would take the unfunded liability and re-run the information with a different number of years to reflect the new amortization date.

Chair Scharff asked if Mr. Bartel was saying it would not cost the City any further expense to re-run the information. Mr. Bartel clarified the alteration of the discount rate to 7 percent would require the firm to complete additional work. He noted in order of magnitude if they ran a 7 percent discount rate and reviewed a different amortization period those fees would be between $1,500 to $2,000 on the outset. Where the amortization change itself would take approximately 2 hours and cost up to $500. Council Member Yeh said the current amortization period was an industry standard of 30 years so he would not want the Citys formal actuarial study to reflect something different. MOTION PASSED: 4-0

Attachment C

October 18, 2011 Finance Committee Meeting


#2180 Retiree Medical Valuation Study

Actuarial Liability 2009 - 11


FUNDED STATUS 7.75% DISCOUNT RATE
(Amounts in 000s)

1/1/09 Present Value of Benefits Actives Retirees Total Actuarial Accrued Liability Actives Retirees Total Actuarial Value of Assets (AVA) Unfunded AAL Annual Required Contribution (ARC) Net Increase in ARC $ 78,831 78,384 157,215 51,277 78,384 129,661 24,616 105,045 9,786

1/1/11 $ 85,476 118,800 204,276 51,179 118,800 169,979 35,294 134,685 13,603 3,817

Projected 6/30/11

174,485 40,222 134,263

Annual Required Contribution FY 2012, 2013 and 2014

Assumption Changes 2009-11

Cost Mitigation Efforts


1.

2.

3.

4.

Longer vesting period for retiree medical for post-1/2004 hires Highest-cost medical plan no longer paid 100% by City, since 2007 Miscellaneous group employees ramping up to 10% medical premium cost-sharing, effective 4/1/11 Firefighters will contribute 10% of medical premiums, effective 10/31/11
-- NOT INCLUDED IN THIS ACTUARIAL STUDY --

Next Steps
1.

2.

Continue negotiating with Safety bargaining units Determine funding recommendations for current year

may include drawing from CERBT trust

3.

Determine funding recommendations for FY 2013 and 2014

may include increasing employee contributions

Attachment D

Attachment B

November 28, 2011 Item 3a Excerpt 3a. (Former No. 2) Finance Committee Recommendation that the Council Approve and Accept the Updated Retiree Medical Actuarial Study.

Council Member Klein stated his opinion that the dollar value of the item should have excluded it from the Consent Calendar. He asked Staff to discuss for the benefit of the public why there was a need for a new actuary firm. He said there were recommendations from the actuary which were accepted by the Finance Committee that he did not agree with. Not all of the choices should be conservative. An over funded City could lead to an under funded community which could have a negative financial impact by making the community less desirable. He appreciated the caution being taken over the past few years and warned balance was necessary for a thriving community. Lalo Perez, Director of Administrative Services expressed Staff had intended to continue the use of Milliman, Inc. (Milliman) to conduct the updated actuarial study. When it became evident the City needed to have a firm act as an expert witness in the Binding Arbitration hearing Milliman informed Staff it would not be in their best interest to participate because of work they performed work for the International Association of Fire Fighters (IAFF). The new firm chosen, Bartel Associates, LLC (Bartel) was recommended by CalPERS and they were willing to participate in the Binding Arbitration. James Keene, City Manager added the firm was well recognized across the state and for a period of time were the leading actuarial experts. Council Member Klein asked if the previous firm had completed any work on the project prior to transferring out. Mr. Perez recognized they had completed some partial work. Council Member Klein noted John Bartel had completed the actuarial study differently than Milliman had in the past. He asked whether Milliman would have made the same changes during this update. For example with the medical trend assumptions; Bartels assumptions were the rates would start high and end low which added $4.8 million to the Citys unfunded liability where Millimans started at 6.5 percent and ended at 5.85 percent.

Mr. Perez stated Staff would worked with Millimans staff to adjust their low rate. Comments from Council indicated Long Term Projects rates should be aligned to recent. Council Member Klein asked if there were other incidents that could be questioned. Mr. Perez confirmed there were and explained that CalPERS made changes to the demographics every couple of years and so Milliman did not have the information prior to their departure. An additional factor noticed by Bartel was the employees hired prior to 1986 were not required to contribute to Medicare. If it were determined those Staff members were not covered by Medicare, the City was responsible for the full cost not just the Medicare cost. Milliman had a rolling 30 year amortization but with Bartel it was a 28 year closed end amortization and the last difference was the rate of return assumptions because CalPERS had made changes. Council Member Klein asked the cost difference between the closed amortization period versus the open. Council Member Scharff noted the Staff discussion regarding the differences between open and closed amortization was on packet page 175. Mr. Perez stated he did not recall the number but would review the report and let Council know when the information was ready. Council Member Klein said it was a basic actuarial decision and he was certain Milliman maintained the open 30 year deliberately. His concern was if the rolling period was working for the City what was the benefit to locking in a close date. Mr. Perez said that by moving to the 28 year closed end recommendation by the end of the time the cost would only be for the current employees. The rolling was as if each year the loan was being extended with no reduction. Council Member Klein said Staff told Council two years ago the model being used was accurate and now the new model was the accurate one.

Mr. Perez clarified two years ago was the first time Staff had experienced the program and after review and alterations they felt the proposed program was a better fit for the City. Mr. Keene said the program was meant to be a mix of the goals Council wished to achieve. With any actuarial there was discretion for the City to focus on the mix of assumptions they expected Staff to include. Vice Mayor Yeh said the Finance Committee had discussed the new rules Government Accounting Standards Board (GASB) had implemented and the need to report what the liability was versus the need to fund the liability. He asked what steps had been taken with the different bodies that require the entity fund the liability. The closed end methodology would have a large impact on the steps towards repayment but there was a higher burden within a limited timeframe versus re-upping with the rolling methodology. He said it would be helpful to know if that was a direction GASB or legislation was going in. Mr. Perez acknowledged there was a draft in process but nothing had been released for review. His understanding was most agencies with significant amounts were experiencing difficulty in addressing the liability. His concern for Palo Alto would be because of the changes made he was not clear how the rating agencies would view the City not funding irregardless of GASBs ruling. His secondary concern was the liability amount was beginning to match the General Fund. Vice Mayor Yeh asked if it would be possible to have an actuary calculate through both methodologies. Mr. Perez stated it was possible. It would add to the cost, but Staff would comply with Councils direction. Mr. Keene shared his thoughts about having an unfunded liability. Good financial management would be to reduce or eliminate unfunded liabilities. He clarified either methodology would allow for modifications to accommodate different goals. There were time constrains as far as what assumptions Palo Alto was using to report to CalPERS prior to the end of the 2011 calendar year. Council Member Klein said the language used by Staff throughout the report indicated the City was going to fund the Annual Required

Contribution (ARC) and it was his understanding that was included in the make-up of the budget. Mr. Perez agreed that was how Staff had approached the funding plan for Mid-Year. There was a $4.3 million place holder for safety group concessions; he noted not all of them would be met in the given timeframe. Council Member Klein clarified his concern was with the ARC and the policy had been to fund the full ARC. Mr. Perez confirmed that had been Staffs recommendation. Council Member Klein noted it had been addressed that fully funding the ARC was not a requirement by GASB at this time. Mr. Perez stated that was correct, the report read that it was an annual requirement but in fact it was not. Council Member Klein was concerned that with the change in direction it was not City Staff but an outside entity that had placed a burden on the budget. Mr. Keene informed the Council the City was in the position to not accept the actuarial assumptions. He said there was sound advice in Mr. Bartels recommendations. He agreed the elimination of unfunded liabilities over time was the best way to approach the debt situation. He acknowledged if the proposed assumptions were approved by Council, Staff would return later in the year with recommendations to fund the additional costs in the current budget year for the ARC. Council Member Klein asked if the FY12-13 budget would be prepared in a similar manner. Mr. Perez stated yes. Council Member Klein asked for clarity on the interest rate assumption, he was not quite clear from the wording in the report. On page 114 there was notification of an $800,000 jump in the ARC between FY12 and FY13 because of the decrease in the discount rate from 7.75 percent to 7.25 percent but the next paragraph indicated the PERS Trust offered three possible asset allocations. Number one was the Citys chosen option as the highest yield of 7.61 percent. Mr. Bartel

recommended dropping this to 7.25 percent. He asked if Staff had accepted Mr. Bartels interest rate assumption recommendation. Mr. Perez replied yes. In FY12 Staff was using 7.75 percent. For FY13 was where the PERS Trust options became relevant. Staff was accepting the 7.61 percent with a margin for adverse deviation which dropped the rate to 7.25 percent. Council Member Klein asked if Staff was aware of what Milliman would have recommended in the same situation. Mr. Perez stated no. Council Member Klein mentioned the conservative approach was costing an excess of $800,000 when Staff could have used the 7.61 percent without incident. Mr. Perez noted if the 7.75 percent had been used there would have been a $580,000 difference in the annual payment. Council Member Klein accepted the report but noted there were implications he was not accept because Staff was being overly cautious. MOTION: Vice Mayor Yeh moved, seconded by Council Member Schmid to approve and accept the Updated Retiree Medical Actuarial Study. Vice Mayor Yeh was aware when there was significant change in methodology there would be a robust discussion but having a Mid-Year check-in provided the opportunity to understand the true fiscal impacts. Mr. Keene recommended the Council meet with Mr. Bartel prior to the budget process. Council Member Schmid felt Mr. Bartels assumptions were realistic and noted healthcare costs were rising annually. He acknowledged past Council decisions had passed liability obligations on to the present. He said it was unfortunate the increased revenue generated was being obligated to fund the ARC payment rather than salaries or other obligations. He believed the 30 year timeframe was based on the assumption most workers in the system would work for 30 years. He supported the acceptance of the Bartel recommendation.

Council Member Scharff understood the difference between a retiree paying off a debt when they would no longer be generating income while the City would continue to do so. He agreed it was a positive public policy to payoff the assumptions with a closed end. He asked what the impact was if the present assumptions were not accurate. Mr. Perez said the liability would continue to grow. Council Member Scharff asked what impact the continued growth of the liability would have on the City. Mr. Perez said there would be an increase in the calculation of the payments, if the amount was significant enough to impact the City the concern was with the rating agencies. Council Member Scharff asked why the public safety concessions were not included in the assumptions while the miscellaneous category was and with that there was $14.2 million saved. He asked if during MidYear the public safety would be included. He believed if the City was not going to fully fund the ARC they were better off using the assumptions that would lower the amount. Mr. Perez agreed in concept it made sense to use the assumptions with a lower amount if the full ARC was not being funded. Council Member Scharff stated he supported the Motion. Council Member Shepherd had concerns with the CalPERS 50 percent confidence rate of return. She believed Palo Alto was within the norms of other municipalities so when the reporting occurred to the public, it appeared conservative although she felt for the 28 year period it needed to be reviewed. She was aware without the concessions from fire or police each time Council reviewed the assumptions it would change with the added concessions. She asked if the City would be able to cash flow the payoff with the period of the financial picture. With continued employee retiring there was a need to continue the funding. She noted her support for the Motion. Council Member Burt asked why the item was on the Consent Calendar. Mr. Keene had thought with the Finance Committee approving the item unanimously it would suffice being on the Consent Calendar. He

understood if an item passed unanimously but might be contentious it should not be placed under Consent. Council Member Burt said the subjective criteria was either contentiousness or high consequence. He said $1 million was a high enough consequence and this item was $29 million. He asked for clarity of future criteria for potential policy changes. He noted the concern of the new actuary being too conservative but mentioned the previous actuary understated the liability. He said the difference in the actuarial studies was the public safety groups from $29 million to $43 million. He asked if his interpretation was accurate. Mr. Perez believed that was correct. If there was not a positive of $14 million because of the miscellaneous group the liability would have been $44 million. Council Member Burt shared his concern with the City relying too heavily on an actuary study when they could be varied. His attention was drawn when Milliman refused to be an expert witness because of their association with the Fire Union. Mr. Perez noted it was not the Citys Fire Union but rather the National Fire Fighters Union. Council Member Burt was disturbed that they would disengage their relationship with the City because of the relationship with the Union. He noted one factor to be aware of was the decreased age of retirement and the second was the spike in Palo Alto retirements which altered different elements of liabilities. He noticed the PERS PPO premiums had been increasing at 2 percent annually less than what appeared to be the actual underline costs. Mr. Perez explained the premiums had increased 7 percent while the claims had increased 10 percent. It was recommended by Bartel to adjust the 2 percent differential because the conjecture was the amounts would catch up. PERS was using reserves from the PPO plans to cover the differences, the recommendation was to prepare the City for the true bill. Council Member Burt said that was an indication that PERS was understating the cost. This raised the concern of whether Palo Alto could trust the information coming from PERS. He acknowledged Palo Alto was one of the few Citys confronting the situation head on but there maintained a large unfunded liability.

INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND SECONDER that Staff is to schedule a meeting with Mr. Bartel and full Council prior to the Finance Committee Mid-Year Review. Council Member Holman said this level of impact to the budget deserved enlightened discussions. Council Member Klein said Staffs intention was to fund the full ARC each year which had been City policy. The recent spike to Palo Alto retirements was referred to as a short term occurrence although the actuary did not believe that to be true. Mr. Perez said the actuary requested trending data. The current data was available in the report but was not sufficient for their purposes. Council Member Klein could not see how the level of retirement trends could continue. Mr. Perez clarified the changes made in 2004 to the retirement packages altered to implosion of retirement costs from those who were hired prior and could retire earlier. Council Member Klein said because of the economic trends in the country the national reports indicate a later in life retirement rather than the information presented in the report. Council Member Shepherd asked with the current Motion if the ARC would be funded next year. Mr. Keene said Staff was intending to bring forth during Mid-Year a budget recommendation to fund the ARC in FY12 and unless directed otherwise, the FY2013 budget would begin in spring also funding the ARC. Council Member Shepherd asked if the decision was to not fund the ARC if there would be a discussion. Mr. Perez stated the FY2012 had approximately $10 million to fund the ARC which was adopted by Council previously. The discussion was to return with a recommendation to increase the amount to match the actuarial study recommendation. The payment was not made until the end of the year so Council could direct Staff not to make a payment.

Council Member Shepherd asked if the payment was due at the end of the calendar year or fiscal year. Mr. Keene confirmed the fiscal year, June 30, 2012. Council Member Price asked what the average rate of return had been from CalPERS assumptions over the past 5 years. Mr. Perez said the CalPERS Trust had been up and down, he did not have current numbers in percentages. He noted in January of 2011 it was 18 percent and as of September 30, 2011 there was a significant decrease in the portfolio which was at $44 million and dropped by $5 million. He declared Staff would have the historic percentages when they returned. Council Member Price felt the information would be helpful for the past few years and the assumptions moving forward. Council Member Schmid noted the report showed half of the current active employees were in the age range of 45 to 54 which indicated a steady stream of retirements. MOTION AS AMENDED PASSED: 9-0