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Presentation of biennial actuarial report of retiree health insurance liability
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Submitted by:
John Ruggini and Beth Mbow
Department:
Finance and Human Resources
A. Issue
This is an informational item reporting on the results of the 2024 retiree medical expense and liability actuarial valuation as required under Governmental Accounting Standards Board Statement 75.
B. Background/Options
GASB 75
Federal law requires the City to have prepared on its behalf an actuarial valuation of the City’s current retiree health benefit program. This is required by the Governmental Accounting Standards Board and is commonly called “GASB 75.” The retiree health program was ended for general employees hired after January 1, 2015. For police officers and supervisors hired after January 1, 2019, and Firefighters hired after January 1, 2021, the City pays a fixed monthly amount towards their retiree health insurance until age 65. A full description of the benefit can be found on page 18-20.
It is important to note that the requirement is only that an actuarial valuation be completed and that the liability be reflected in the City’s financial statements. The City is not required to fund the liability, although the state legislature has considered, but never codified that requirement. Historically, the City pays for its post-employment liability (i.e. retiree health insurance) on a “pay as you go” basis, meaning that the City funds the liability one year at a time and does not pre-fund future liability.
Values Reported:
A representative from Milliman, who conducted the valuation, will be present at Tuesday’s meeting for a more detailed discussion, but the following is a brief summary. GASB 75 liability typically refers to the calculation called “Unfunded Actuarial Accrued Liability.” This is now referred to as the “Other Post-Employment Benefit (OPEB) Liability. This represents the amount of the liability to pay for retirement health insurance for all current employees and retirees in current dollars. It is not what the City owes in any given year, but rather the City’s projected liability to pay for the entire retirement benefit from the stated date until all active employees and retirees are off the plan. This is considered a “closed group” analysis, meaning the analysis does not include future hires.
The Unfunded Actuarial Accrued Liability for the City is:
• December 31, 2024: $39,361,560
• December 31, 2025: $37,097,953
The chart below shows the amount of the retiree health insurance liability since 2010 and shows a downward trend although it has been creeping upwards over the past 4 years.
The $2.8 million increase from 2023 to 2024 is largely the result of assumption changes. An assumed decrease in interest rates from 3.72% to 3.26% based on the 20-year bond rate contributed to 22% of the increase before netting benefit payments. In addition, demographic changes that differed from assumptions, including earlier than assumed protective safety retirements and higher than assumed marital rates, contributed 32% to the increase.
As no new employees are eligible for a defined retiree health insurance benefit (Fire and Police union employees are eligible for a defined $700 monthly contribution) where the City pays a large portion of an ever increasing premium, this liability will eventually begin declining. Importantly, the projected cash flow through 2034 which has the largest impact on the budget is relatively stable as shown below.
Also of note, the 2025 projection from 2016 was $3,035,000 which is 13% more than what is projected below for 2025. This is due to many factors including the cost containments strategies put in place by the City and employees making smart wellness and health consumerism choices.
This report also includes a projection of the sick conversion that was granted in 2008 as part of reduction in the Retiree Health Care benefit. This benefit was ended for general employees hired after January 1, 2015 but police and fire employees still qualify. In the 2024 report, the current accrued liability is $2,748,575 compared to the $1,913,840 reported 4 years ago and will continue to grow as individuals eligible get closer to retirement. The table below shows the expected cash flow projection. A decision will have to be made over the next several years as to try and pre-fund this benefit or continue to cash-finance the annual cost.
C. Strategic Plan (Area of Focus)
Priority Area One: Economic Development & Financial Resilience
D. Fiscal Impact
As a result of this valuation, the liability reported on the Statement of Net Position will increase $2,743,130 to $39,361,560 for the reasons discussed above. A non-cash expense of $4,034,277 will be added to the Health/Life Fund as of 12/31/24.
E. Recommendation
This is an informational report