Memorandum

City of Lawrence

Finance Department

TO:

Dave Corliss, City Manager

 

FROM:

Ed Mullins, Finance Director

 

 

 

Date:

May 31, 2011

 

RE:

OPEB Liability

 

 

         

Background 

 

The Government Accounting Standards Board (GASB) has adopted GASB 45 that establishes standards for reporting fund post employment benefits other than pensions.  For most governments, these other post employment benefits (OPEB) are primarily retiree health care expenses.  For the city of Lawrence, employees receiving a retirement or disability benefit through KPERS will pay 80% of the monthly premium equivalent for their health care benefits. The City will fund the remaining 20%.  In addition, Lawrence utilization factors are included in the calculations.

 

The City of Lawrence began reporting its OPEB liabilities in 2008.  To determine its OPEB liabilities the city has hired the actuary firm of EFI Actuaries.  The company recently updated its calculations to cover the city’s 2011 and 2012 fiscal years.  An actuarial study is required every two years.

 

Description

 

The calculation of the city’s OPEB liability requires that assumptions be made concerning the demographics of future retirees, future pay increases, rates of retirement, expected claim levels, and medical inflation rates.  The actuary uses the relevant assumptions used by the Kansas Public Employees Retirement System.   The calculated OPEB liability for the city of Lawrence as of 12/31/10 was $21.3 million.  To keep this liability from increasing, a $1.6 million contribution towards OPEB would need to be made in 2011.  It is projected that actual net contribution will only total $529,000 in 2011.

 

The actuary uses these assumptions to forecast future retiree health care benefits.  The city of Lawrence is required by state statute to allow employees to participate in its health care plan until they are eligible for Medicare.  These future benefits are called the city’s fully projected liability.  The city of Lawrence has decided to pay these future benefits on a pay-as-you-go basis.  As a result, the city has no assets devoted to paying these future costs.  The future costs will increase as more employees retire and the cost of health care costs increase.  These costs are expected to escalate from $500,000 in 2011 to $2.0 million in 2024.  The annual cost after 2024 will average around $2.8 million.  This calculation is based upon the current employees and will change as the work force adds and subtracts individuals.

 

The report by EFI Actuaries is attached.

 

Options

 

The city may elect to prefund this liability by depositing funds in an irrevocable trust established in accordance with the accounting standard.  An initial deposit of $15.1 million is the required amount according to the OPEB report.  These funds would be isolated from other city funds and used solely for the payment of retiree OPEB expenses.

 

A survey of how other area governments are funding retiree health care is attached.  Two of the cities included in the survey have established OPEB trust funds.  In a survey published by the Government Finance Officers Association, 30% of the responders are partially or fully funded their OPEB liabilities with a trust fund.

 

Another option is to have the City Commission commit or the City Manager assign an amount of money for paying future OPEB expenses.  While these funds will not reduce the reported OPEB liability because they are not in an irrevocable trust, the funds will be available to reduce the future burden of OPEB expenses and to demonstrate to bond rating firms that the city is attempting to address the issue.  The recommended source of the commitment or assignment of fund balance would be the health insurance fund.

 

 

Action Requested

 

The City Commission is requested to commit $2,500,000 of the health insurance fund balance to pay future OPEB expenses.  It is also recommended that the health insurance committee include OPEB costs when determining future revenue requirements for the city’s health care plan.  Consideration should be given to increasing current employee and employer payments to help pay for the costs that will be incurred after the employee retires.  These additional payments should be added to the commitment of fund balance for OPEB expenses.

 

Failure to address the city’s OPEB liabilities will have two consequences.  First of all, the amount of liability will continue to increase. The calculated annual required contribution for 2011 is $1.6 million.  This will increase to $2.1 million in 2012 and $3.5 million in 2013 under current projections.  Secondly, bond rating firms are beginning to question a government’s plan for addressing its OPEB.  If a plan is not developed to fund these liabilities, the city’s bond rating could be negatively impacted.