Resolution on 6/17 to Increase Premiums, Spousal Carve Out, Smoker Surcharge Increase

Whereas, the premiums for the Basic and Premier PPO plans have not been increased since FY11 and for the past few years the healthcare fund balance has been negative due to Plan revenues not being increased to match Plan Expense FY10 - the beginning balance for Health Fund was a positive $1.635M. A $10.121M transfer out resulted in a negative fund balance of $6.4M at year end FY11 & FY12 – the negative fund balance of $6.4M was reduced to $510k

Whereas, in FY13 the healthcare fund ended the year with a negative fund balance of $2.685M FY13 – $22M in employer paid retiree healthcare was not included in budget which was originally planned to be covered by OPEB trust – Only $6M of OPEB trust (originally funded by the Healthcare Fund) was used and not paid back – Healthcare fund ended with a net deficit of $2.685M Inconsistent FY13 Actuals makes it difficult to interpret the funds activities for that FY – FY15 Proposed Budget, FY15 Adopted Budget, FY15 HR budget presentations, and 2013 CAFR all contain different FY13 Actuals as it pertains to the Healthcare Fund

Whereas the administration forecasted a deficit of $11.5M for the FY14 budget; however, Council approved additional funding of only $4.2M FY14 Adopted Budget Excerpt- The Healthcare Fund is budgeting revenues of $125.1 and expenses of $127 million for FY This will produce a deficit for FY 2014 of $1.9 million; however the general fund will transfer $4.0 million to the health fund which will eliminate the deficit. FY15 Adopted Budget – showed FY14 forecasted revenue to be higher than plan and claims expense forecasted was less than plan resulting in a net positive fund balance for FY14 Significant FY14 forecast variances when comparing FY15 Proposed Budget, FY15 Adopted Budget, FY15 HR budget presentations

Internal Service Fund Concerns Fund Balance for FY11 Actuals (both beginning of year and end of year) in Internal Service Summary within FY13 Adopted Budget shows a positive balance when it should be a negative The “Internal Service Funds Combining Statement of Revenues, Expenses, & Changes in Fund Net Assets” within the CAFR (FY10 – FY13)contain significant variances when compared to the Internal Service Summary within Adopted Budgets Starting FY13 - Death Benefits of $522k paid out of Healthcare Fund; as well as, $22k in capital outlay Significant formula errors – FY14 forecast for Fleet Mngmnt (FY15 Adopted budget) shows a $7.4M loss that should have been a $7.4M gain – FY13 Adopted Budget for Healthcare shows a $3.5M loss that should have been a $3.5M gain

Retirement Healthcare Cuts

Excerpt From FY15 Adopted Budget The City will continue to pay for the retiree healthcare cost for persons that are not eligible for Medicare, and the City will identify ways to ease this transition of all impacted employees and retirees.

Council Rationale for Cuts: Healthcare ARC when combined with Pension ARC creates a $100M expense from State Treasurer states the following: – No statute or rule that requires immediate payment of OPEB unfunded liability – Multiple jurisdictions only use a pay as you go policy By creating and investing in an OPEB trust (created in 2009), the city of Memphis represents prudent financial practice as it pertains to OPEB

Council Rationale for Cuts : Healthcare ARC when combined with Pension ARC creates a $100M expense What is the true expense of the Healthcare Unfunded Liability? – Only one actuarial estimate obtained for the Healthcare Unfunded Liability the actuary used to provide the Healthcare Unfunded Liability misstated Pension Unfunded Liability by $200M

Council Rationale for Cuts: By Cutting Retiree Benefits, We Can Repurpose Those Dollars to Fund the Pension ARC Proposed FY15 Budget reflected a $27M savings with only $15M going to Pension ARC. What happened to the additional $12M in savings? – $12M decrease in property tax revenues going to the General Fund as a result of the Property Tax Reapportionment to Debt Service Adopted Budget reflects a $23M savings with $15M going to Pension ARC. What happened to the additional $8M in savings? – $8M decrease in property tax revenues going to the General Fund as a result of the Property Tax Reapportionment to Debt Service higher overall property tax revenue in adopted budget; as well as, a small decrease in amount of property tax reapportioned to debt service

The City has a Debt Crisis not a Healthcare Crisis

Impact of 2010 Debt Refinancing Over the past 2 fiscal years, property tax revenue has been reapportioned from the General Fund to the Debt Service Fund No slowing down on new Debt FY15 proposed budget exceeded the policy for G.O. Bond issuance by approx. $20M

Additional Concerns Police Division – The FY15 Proposed Budget for Police Division was based on a “new mission” that has not been defined; however, the purpose is to no longer offer a Full Service Police Department in Memphis in FY15. No recruitment class expense in Proposed Budget 236 reduction in authorized complement – Inflated expenses Ex. In FY15, over $4M transferred to debt service for vehicles that are budgeted in General Services – The use of attrition line to capture savings on vacant positions that are budgeted at 100% with no intention of backfilling Over $40M in attrition savings over FY14 and FY15

Budget accuracy and transparency – Council analyst denied “read only” access to the legal level detail of the Adopted Budget – Numerous formula errors i.e. Internal Service Funds – Forecasting errors i.e. FY14 forecasted expense (in FY15 Proposed Budget) for sick leave was included in Full Time Salaries expense line; as well as, Sick Leave expense line resulting in an over statement of expense of $2M within Police Division alone. Additional Concerns

Proposal Based on the information we have provided today, delay the healthcare changes for FY15. During the next FY, obtain the following: – Get accurate information to obtain a baseline Independent audit and analysis of city financials specific to the Internal Service Fund; as well as, OPEB Trust Obtain multiple actuarial estimates on Healthcare Unfunded Liability (similar to pension)based on current benefit offerings – Explore ALL options Create financial models for both Healthcare and Pension Unfunded Liabilities – Adjust variables/assumptions to see unfunded liability impact RFP for insurance (CIGNA contract will be up) High deductible option