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F.10 - Unfunded OPEB LiabilityCity of Grand Terrace Unfunded Other Post- Employment Benefits (OPEB) Liability Unfunded OPEB Liability ▪The City of Grand Terrace provides certain medical benefits to eligible retirees.To be eligible to receive the benefits,retirees must have retired directly from the City under CalPERS with a service or disability retirement.Such benefits are commonly referred to as Other Post-Employment Benefits (“OPEB”). ▪At present,Public Agencies have two options for covering OPEB costs.One option is referred to as “pay-as-you-go,”where an employer makes the required insurance premium payments for its retirees as those premiums are due,out of its current year operating budget.This is the City’s current method.The other option is “pre-funding,”where funds are set aside in a dedicated trust account.Establishing and funding an OPEB trust ensures than an employer can meet its future obligations by leveraging the higher yields,thus decreasing the amount needed to be paid by the City’s General Fund. Unfunded OPEB Liability ▪The Government Accounting Standards Board (GASB 75)requires agencies to account for and disclose their OPEB costs for all active and retired employees. ▪As of the most recent valuation (June 2019)the City's Net OPEB Liability is $1,964,307 million for benefits already earned. ▪At its meeting of June 14,2022,Council indicated they would like to further explore the use of a Section 115 Trust to address the City’s unfunded liabilities.This report to the City Council is a recommendation to setup a Section 115 Trust to better plan for and manage the City’s OPEB unfunded liability. ▪Staff contacted four providers to solicit proposals from qualified vendors for IRS Section 115 OPEB Trust Services.Finance staff reviewed,compared,and evaluated the respective proposal responses.Interviews were conducted by the Interim Finance Director with each respondent. ▪In total,the City received three responses to the request for information:CalPERS,Keenan,and PARS.The fourth provider PFM declined to respond.Finance Staff found all three firms to be professionally qualified to provide trust services. Unfunded OPEB Liability ▪Staff were unanimous in recommending CalPERS for providing trust services based on qualifications,experience,staff knowledge,cost,and ease of administrative process. ▪The California Public Employee Retirement System (CalPERS)has established a program called the California Employers’Retiree Benefit Trust (CERBT),which is an IRS Section 115 Trust set up for the sole purpose of receiving employer contributions that will pay for OPEB costs.This program has been around since 2007 with $15.3 billion in assets under management and has over 600 participants including cities,counties,school districts,and special districts ▪As CERBT is an IRS approved Section 115 Irrevocable Trust,this action would allow funds deposited into the trust to earn market rates of return greater than otherwise allowed by the City's investment policy and will offset the City's Unfunded Actuarial Accrued Liability thereby providing a more secure financial future for the City. Unfunded OPEB Liability Reasons to Prefund ▪Greater expected rate of return (discount rate)which lowers your liabilities. ▪Investment flexibility with Section 115 Trust compared to restrictions on general fund investments (Govt. Code 53216). ▪Contributions into trust are “assets”that offset liabilities on the financial statements. ▪Can help with the City’s credit ratings. ▪OPEB assets are accessible for OPEB expenses at any time. ▪Prefunding has no downside other than market fluctuation (like pension). Unfunded OPEB Liability The City would have total financial control of the Section 115 Trust.At this time,staff is recommending a one-time contribution to open the 115 Trust.There is no required annual funding amount.The City can make deposits into the Trust as funds become available to the City. Additional benefits are provided below: Higher-yielding investments The CERBT program has averaged 8.06%yield over the past 10 years,with current yields being closer to 6.50%-7%.With higher yield,the City would benefit from the effects of compounding interest. Reduce unfunded liabilities and future contributions The CERBT program provides the City the ability to utilize the interest earned to pay the annual contribution and unfunded OPEB liability. Improve financial reporting outcomes The OPEB actuary would utilize the CERBT’s discount rate,instead of the US Treasury Bond Buyer rate,lowering the City’s overall OPEB liability.This would improve City’s overall financial condition. CalPERS low administrative fee of 10 basis points (0.1%) CalPERS CERBT program is the largest provider of Section 115 Trusts with the lowest Administrative Fee at 10 basis points. CalPERS will not invoice the City separately for their service;the agency would debit the cost out of the interest earned. Unfunded OPEB Liability Unfunded Other Post Employment Benefit Plan The City’s OPEB Plan currently does not have any plan assets and is a pay as you go.We budget and make the retiree medical premiums each fiscal year which is approximately $36,000 per fiscal year. As of June 30,2021 the unfunded OPEB Liability was $1,964,307 with a discount rate of 1.92%,because the City does not have any plan assets. Unfunded OPEB Liability Possible Funding Options ▪Use one-time revenue sources, such as proceeds from the sale of property ▪Lower the minimum General Fund Reserve level percentage ▪Contribute a certain percentage of any given year’s realized General Fund surplus ▪Annual appropriation in each year’s budget Staff is recommending using a portion of the proceeds from the sale of the Fire Station Unfunded OPEB Liability ▪CERBT does come with risk in that it would be more prone to market and economic volatility compared to the City’s current investment in LAIF or CAMP. Also,the IRS Section 115 Trust is irrevocable,meaning the investment can be only utilized for OPEB costs and not to pay for other unforeseen costs. ▪Staff recommends the City Council approve a Prefunding Agreement and election to pre-fund Other Post-Employment Benefits (“OPEB”)through the California Employers’ Retiree Benefit Trust (“CERBT”)fund administered through the California Public Employees’Retirement System (“CalPERS”);authorize the City Manager (or designee)to execute all documents to fund and maintain participation in the trust;and authorize staff to file the necessary forms with CalPERS and to make an initial investment of $100,000. Unfunded OPEB Liability •Questions