Anexo

ATTACHMENT #1 LF&A Committee Meeting of 01/26/2009 City of Dover, Delaware GASB 45 Results For 2008/09 LF&A Committee Meeting of 01/26/2009 Presented by ATTACHMENT #1 Randy Gomez, FSA, EA Alliance Benefit Group January 2009

Table of Contents z Current Retiree Health Program – Health Provisions – Cost of Health Care z Key Actuarial Assumptions z GASB 45 Accounting Treatment z Prefunding with an OPEB Trust z Explanation of Implicit Subsidy z Impact of Participating in State Health Plan z Medicare Part D Options z Other Methods to Manage Liability 1 1/16/2009

Retiree Health Plan Provisions Retiree Health Varies by (1) Civilians and Sworn Officers, (2) date of hire and (3) Union Eligibility for Subsidy Coverage Lifetime coverage Benefits Provided Health coverage (retiree and spouse) and Medicare Part B premium reimbursement (retiree only) Plan Financing The City participates in the State’s health plan as a non-state employer. Premiums are set by the state and updated annually. No reconciliation is made between premiums and actual claims paid. The City’s premiums are not experience-rated. City Explicit Retirees have no contribution requirements. Subsidy Spouses pay 25% of monthly premium; IBEW employees hired after July 1986 will pay 100% of the monthly premium. Part B premium reimbursements are being phased out for new retirees. Existing retirees were assumed to retain the reimbursement. Spouse Coverage Coverage after death of retiree or active employee eligible to retire 2 1/16/2009

The Cost of Retiree Health Care How premium rates are determined Claims Fixed Cost Inflation Divided by Retiree Retiree and Monthly Premiums Only Spouse Blue Care $ 515 $ 1,078 Comp. PPO $ 550 $ 1,136 # of Enrollees Medicfill (Medical only) $ 183 $ 365 (actives and retirees) Medicfill (Rx only) $ 197 $ 394 3 1/16/2009

The Cost of Retiree Health Care z Explicit subsidy – 100% subsidy for retirees and 75% subsidy for spouses – Medicare Part B premium reimbursement z No implicit subsidy based on current arrangement z Expected cash costs for 2008/09 $3,500 Projected Subsidies – $1,536,000 explicit subsidies $3,000 – $ 0 implicit subsidies $2,500 – $1,536,000 total subsidies $2,000 $1,500 $1,000 $500 $- 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 4 1/16/2009

Key Actuarial Assumptions z Key assumptions – When do employees quit and retire – How long do they live after retirement – What assets are being used to pay health premiums z 4.5% return if using current assets z 7.5% return if GASB 45 trust is setup and implement long-term investment strategy – How many actually elect to stay on with the City z Using 100% participation since coverage is heavily subsidized – 10-year funding strategy to reach fully-funded status 5 1/16/2009

Key Actuarial Assumptions z Key assumptions – Health Care Trend Rate (how fast premiums go up) 6 1/16/2009

GASB 45 Accounting Treatment z Current treatment (pay-as-you-go basis) – Health care expense = Premiums paid less contributions received – No distinction between active and retired costs. The only number that matters is the total. – No year-end obligation under pay-as-you-go basis because Cash Spent (Credit) = Expense (Debit) Year-end Liability = $0 Debit Credit Record expense equal to Spend cash to pay cash spent premiums 7 1/16/2009

GASB 45 Accounting Treatment z Summary of Actuarial Liabilities as of July 1, 2008 based on current health plan arrangement Current Future Total Retirees Retirees Retiree Liabilities $ 27,269 $ 21,000 $ 48,269 Spouse Liabilities $ 7,088 $ 4,860 $ 11,948 Part B Reimbursements $ 3,556 $ 524 $ 4,080 Total $ 37,913 $ 26,384 $ 64,297 8 Results are in 000’s 1/16/2009

GASB 45 Accounting Treatment # 1 Under GASB 45 must disclose the actuarial present value of accrued liabilities in a footnote disclosure. Does not impact balance sheet or income statement Required Supplementary Information Actuarial Accrued Liability $ 64,297,000 Assets Set Aside $ 0 Unfunded Actuarial Accrued Liability $ 64,297,000 Funded Ratio 0.0% Total Payroll $ 18,162,000 Unfunded as a % of Payroll 354.0% 9 1/16/2009

GASB 45 Accounting Treatment #2 Income statement impact – Being asked to record expense today for money to be spent later Pay-as-you-go Accounting Debit Credit 1. Active health costs 4. Cash on actives 2. Retiree health costs $1,536,000 5. Cash on retirees $1,536,000 3. Total health expense = 1 + 2 6. Total cash spent = 4 + 5 GASB 45 Accrual Accounting Debit Credit 1. Active health expense 5. Cash on active 2. Retiree health costs $1,536,000 6. Cash on retirees $1,536,000 3. Additional GASB expense for future 7. Spend $315,000 in cash on ARC is based subsidies $4,692,000 prefunding on year-1 of 10- 4. Total retiree health expense Total credits = 5 + 6 + 7 (short 10 year strategy $6,228,000 = ARC = 1 + 2 + 3 $4,377,000) 1/16/2009

GASB 45 Accounting Treatment #3 Balance sheet impact – Recognize an obligation caused by “contribution shortfall” from income statement Balance Sheet Assets Liabilities OPEB Obligation increases liabilities by $4,377,000 Fund Balance Fund Balance is reduced by $4,377,000 11 1/16/2009

Prefunding with an OPEB Trust z Pre-funding is not a requirement for compliance with GASB 43/45 z Bond rating agencies have indicated that in order to maintain good credit quality, it will be important to – Demonstrate a strategy in dealing with their OPEB obligations – Making steady progress toward reaching the actuarially determined annual contribution level. z If the decision to prefund is made, then an OPEB Trust should be established to hold the build-up of assets. z Each entity must assess the relative benefits associated with its chosen funding strategy. z For many the most optimal vehicle for pre-funding may be the creation of an IRS Code Section 115 Irrevocable Trust 12 1/16/2009

Prefunding with an OPEB Trust z The Trust must, at a minimum, have the following protections: – A legally separate entity under the control of a trustee or board of trustees. – Employer no longer has ownership or control of the assets; the Trust is IRREVOCABLE. – Trust monies are dedicated to OPEB liabilities and may not be diverted by the employer to other purposes. – Legally protected from the employer’s and administrator’s creditors. z The existence of a Trust with broad investment powers and a long- term contribution policy is the basis for using a long-term investment rate of return, in the range of 7-9%. 13 1/16/2009

Prefunding with an OPEB Trust No Pre- 10-year Full Pre- Measure funding Phase-in funding Interest Rate 4.5% 4.8% 7.5% Annual OPEB Cost $ 6,420,000 $ 6,228,000 $ 4,688,000 Cash Contribution (1,536,000) (1,851,000) (4,688,000) End of Year OPEB Obligation $ 4,884,000 $ 4,377,000 $ 0 Current Year Retiree Premiums $ (1,536,000) $ (1,536,000) $ (1,536,000) End of Year Asset $ 0 $ 327,000 $ 3,268,000 Actuarial Accrued Liabilities (AAL) as of July $ 67,588,000 $ 64,297,000 $ 41,762,000 1, 2008 14 1/16/2009

Prefunding with an OPEB Trust 15 1/16/2009

Explanation of Implicit Subsidy z Cost of health coverage varies by age (defines implicit subsidy) Retiree Costs by Age Group $1,200 Blended Cost < Age 65 = $550 $1,000 $800 $600 $400 Female Female Female Male Male Male Average Age: 43 $200 Comp PPO Cost = $550 for single $- 50-54 55-59 60-64 coverage 16 1/16/2009

Impact of Participating in State Health Plan z As part of the State Health Plan – Plan operates as a community-rated plan and thus there is no GASB implicit subsidy z By becoming self-insured or fully-insured (“stand on your own”) – There will be GASB implicit subsidy – Premium rates and benefit payment expenses may be lower or higher – The City will have more control over plan designs 17 1/16/2009

Medicare Part D Options z Change prescription drug coverage to secondary (some Rx coverage) z Eliminate prescription drug (no Rx coverage) z Any change would require State approval or for City to “stand on its own” z Lose Part D tax subsidy money (about $ 500/yr for each beneficiary) Primary Rx No Rx coverage coverage Actuarial Accrued Liabilities (AAL) $ 64,297,000 $ 41,239,000 Annual Required Contribution (ARC) $ 6,228,000 $ 3,957,000 18 1/16/2009

Medicare Part D Options Illustration of Changing Rx Coverage for Medicare Retirees Stay Rx Change to Rx No Rx Primary Secondary Coverage Monthly premium $ 197/mo $ 60/mo $ 0/mo Part D tax subsidy $ 42/mo $ 0/mo $ 0/mo Net City premium $ 155/mo $ 60/mo $ 0/mo 19 1/16/2009

Other Methods to Manage Liability z Do nothing – Depends on impact of credit rating z Traditional and newer methods – Raise retiree contributions – Reduce benefits – Change to single employer health plan – Medicare Advantage fully insured plan for Medicare retirees – Switch to individual health accounts for current employees 20 1/16/2009