1. City of Kansas City, Missouri Accounting for Other Post-Employment Benefits Thursday, May 1, 2008

2. 2 What is GASB/OPEB  GASB statement 45 is an accounting statement that advises governmental entities on how to expense and book retiree medical liabilities  The statement does not mandate funding, but there are implications when the liabilities are not funded  The statement recognizes that most retiree medical plans are paid on a pay-as-you-go basis, and GASB now requires that benefits be expensed as they are earned (while members are still employees)

3. 3 What are the benefits?  Police/Civilian members receiving retirement benefits from the Police Retirement System are eligible to elect to continue their health care coverage.  The Police/Civilian members pay the blended premium rate plus 30%.  Fire/Civilian members who are receiving retirement benefits are eligible to elect to continue their health care coverage.  The Fire/Civilian members pay the blended premium rate.

4. 4 How are most entities responding?  To comply with the statement, most entities are performing their first valuation  To manage liabilities, the entities look at three key areas: ► OPEB benefits ► Financing/funding ► Underlying health care claim management  The valuation for the City has been completed; ideas for other approaches have just begun to be discussed

5. 5 Valuation of Retiree Medical Benefits  An initial scoping meeting was held, where process and assumptions were set  A draft report was prepared and presented  This report outlined the GASB costs for the fiscal year 2007/2008  Upon presentation, it was recognized that two assumptions needed to be changed

6. 6 From Draft Report to the Revised Report  For the Police/Civilian plan, the original assumption was the 90% of members were not in Medicare; the assumption has been changed to 25% of members will not receive Medicare benefits ► This is an important assumption since it determines how many will have Medicare as their primary plan ► This assumption is consistent with the Fire employees as well

7. 7 From Draft Report to the Revised Report  For both plans, when assuming a short term rate, the first draft used the assumption of 4% (as was set in the scoping meeting)  Upon further analysis it was determined that a more appropriate rate, consistent with earnings in the general fund, would be 4.5%

8. 8 Actuarial Valuation – Initial Results GASB annual required contribution ARC (in Millions) OPEB Plan Group4.5% Discount Rate7.5% Discount Rate Police/Civilian$2.2$1.3 Fire/Civilian$16.0$11.2 Total$18.2$12.5

9. 9 Actuarial Valuation – Initial Results Accrued Liability Funding to ARCNo pre-funding Accrued Liabilities 7.5% Discount Rate4.5% Discount Rate Police/Civilian$16.4 million$31.4 million Fire/Civilian$93.5 million$150.4 million Total$110 million$182 million

10. 10 Summary of Results  Continuing without change creates a net OPEB obligation each year (the obligation each year is the difference between the expense and the actual premiums paid)  At the end of 30 years, the obligation will be over $1 Billion dollars  This represents a claim against future revenues to fund this obligation ► Creates a discussion around the trade-off between retiree medical and basic services

11. 11 First Study - Closing the Plan  Next, the idea of closing the plan to new hires was discussed ► The ARC for the current year would remain the same ► As time goes on, the ARC will decrease since a greater proportion of the population will not be participating (solution by attrition) ► Using this approach as a solution will depend on two things How fast does the amount of ARC and liabilities need to decrease? Will the needed cash flow be affordable over time? ► Extremes seen include eliminating benefits to fully funding benefits

12. 12 Next Analysis - Flat Dollar Benefit  The next idea reviewed was an “access only plan” without blended rates and with an explicit subsidy provided to the retired members ► Assumed that as of 5/1/2010 the plan would change for all current members ► To the extent current member benefits are protected, the cost savings will not materialize as quickly ► Used $10 per month per year of service

13. 13 Actuarial Valuation – Flat Dollar Benefit $10 per month ARC (in Millions) OPEB Plan Group4.5% Discount Rate7.5% Discount Rate Police/Civilian$2.6$2.0 Fire/Civilian$6.4$5.1 Total$9.0$7.1

14. 14 Next Study- Changing the Underlying Health Plan  Look at how the OPEB liabilities and costs would be affected if only the health plan were changed  To do this, the OPEB liability would be managed through driving all participation into the lowest cost health plan  Conclusion: this approach has very little impact since this strategy has largely occurred

15. 15 Next Study - Changing the Underlying Health Plan  First, we worked to design a lower cost health plan than the one currently available to the City  We determined that the City already has a lowest cost health plan

16. 16 Next Study - Changing the Underlying Health Plan  The study looked at a cut off for 5, 10 and 20 years of service ► This means that, anyone who, as of the transition date, has less than those years of service, they would be transferred into the low cost health plan ► They would never be able to move back into a higher cost health plan ► All new hires would go into the lowest cost plan ► Thus, over time, there would only be one plan offered- the lowest cost health plan ► Must take into account recruiting and retention issues

17. 17 Next Study - Changing the Underlying Health Plan  Note-most employees have already elected the low cost health plan ► Thus, the cost savings are not as great as hoped

18. 18 All Members into Low Cost Health Plan 5 Years of Service May Stay ARC (in Millions) OPEB Plan Group4.5% discount rate7.5% discount rate Police/Civilian$2.2$1.3 Fire/Civilian$15.4$10.8 Total$17.6$12.1

19. 19 Combining of Studies  These studies are mostly mutually exclusive ► This implies that the decision is to choose, rather than combine, to achieve the desired result 1. Cut off for new hires 2. Flat dollar benefit 3. Mandate participation in lowest cost plan

20. 20 Combining of Studies  Combination of “cut off for new hires” and “mandating lowest cost health plan”: ► Would not impact OPEB liabilities further, since the plan would no longer exist Largest portion of actives is already in the lowest cost plan

21. 21 Combining of Studies  Combination of “Flat Dollar Benefit” with “mandating lowest cost plan”: ► OPEB liability would be just the flat dollar liability (as long as there is also no implicit subsidy) ► It would no longer matter what plan the retirees choose, since the City’s obligation would be only for the flat dollar benefit But it would matter to the retiree-the gap between the flat dollar benefit and the cost of the plan The “true” cost for a pre65 retiree can be quite a lot higher than their blended rate

22. 22 Summary  Must determine what is affordable from the City’s perspective  Using the affordable amount, develop a long term benefit package that remains affordable and sustainable and is also of optimal advantage to the employee  Must take into account labor contracts as well as all other employee groups  May also wish to integrate pension, active health benefits into the total benefit package

23. 23 Next Steps (what others have done)  Form a subcommittee to study alternatives  Meet monthly with the following flow of agenda items: ► Basic retiree medical/OPEB education ► Review current state and the thirty year projections ► Review alternative plan designs Have actuary present pricing and projection analysis for top desired plan design alternatives ► Perform a comparability analysis looking at other similarly situated governmental entities ► Have rating agency representative speak on GASB/OPEB implications for the City