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HomeMy WebLinkAboutMINUTES - 02282006 - D.2 1>2a TO: BOARD OF SUPERVISORS w'"s .•L __ Contra __ __,•. FROM: JOHN SWEETEN, %_ COUNTY ADMINISTRATOR - �' ' Costa ,'940 �' DATE: February 28, 2006 °°rT;-�QU `� County SUBJECT: ACCEPT REPORT ON NEW ACCOUNTING STANDARDS FOR OTHER POST- EMPLOYMENT BENEFITS AND APPROVE CONTRACT WITH BUCK CONSULTANTS FOR GASB 45 COMPLIANCE SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATIONS: 1. ACCEPT this initial report on new accounting standards for retiree healthcare and other post- employment benefits (OPEB) described in Government Accounting and Standards Board (GASB) Statement No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions." 2. APPROVE and AUTHORIZE the County Administrator, or designee to execute a contract with Buck Consultants, LLC, in an amount not to exceed $59,000 for actuarial analysis related to compliance with the requirements of GASB 45 and management of the County's OPEB liability. 3. APPROVE and AUTHORIZE Appropriation Adjustment No. 5081 transferring appropriations in the amount of $59,000 from Benefits Administration (Budget Unit 0035) to the County Administrator (Budget Unit 0003) for actuarial services related to GASB 45 compliance. 4. REFER the issue of OPEB liability to the Finance Committee for future progress reports and development of recommendations for ongoing management of the County's OPEB liability. FINANCIAL IMPACT: The cost of this contract will be allocated to County departments as a component of the interdepartmental charge associated with the administration of employee benefits. An estimated 73% of the cost will be offset by intergovernmental revenues. BACKGROUND: The Growing Cost of Retiree Healthcare Benefits Like many other public sector employers in California and across the nation, Contra Costa County offers post-employment benefits in addition to pension benefits. Most notably, this includes retiree healthcare benefits, but also includes other benefits such as dental care for retirees. Retiree healthcare benefits have been a rapidly growing cost center for Contra Costa County in recent years. The County offers the same healthcare benefits to retirees as it does to employees, CONTINUTA)ON ATTACHMENT: X YES SIGNATURE: ----- -�ORDC�M --- --------- ------------ RECOMME•NDATION 01;COUNTY ADMINISTRATOR RIECOMMENDA" NOMIT"1'FF APPROVE OTHER SIGNATURE(S): ------------------------ -- -------------------------------------------------------------ACTION 01' BOARD ON RECO OTHER �t ��e• G�'��--�wQ—�C r�—s��e G�aG��j VOTE OF SUPF-.RVISO S I HEREBY CERTIFY THAT THIS IS A TRUIE AND CORRECT COPY OF AN ACTION"TAKEN UNANIMOUS(ABSENT_ ) AND ENTERED ON THE MINUTES OF THE I30ARD OF SUPERVISORS ON'I HI'.DATE AYES: NOES: SH WN. ABSFNI': ABSTAIN: ar,'I�� A"I�"TESTED ' -/J/[.V CONTACT: J.Crapo JOHN SWEETEN,CLERK 01;TH .BOARD OF. UPLiRVISORS AND COUN1Y14ISTRATOR CC: County Administrator/Capital Facilities Human Resources—Employee Benefits Auditor/Controller 1 reasurerfI'ax-Collector c BY O DEPUTY with both the County and the retiree paying a share of the cost.' The County's gross retiree healthcare expenses have increased from $13.5 million in FY 2000-01 to a budgeted amount of $28.7 million in the current year and a projected amount of $33.1 million for FY 2006-07. 2 Based an analysis performed by the County's pension consultant, the County's cost for retiree healthcare is projected to increase to $108 million in 10 years. Retiree healthcare costs are increasing rapidly due to a combination of compounding factors that are affecting many public sector employers. First, healthcare costs are increasing faster than overall inflation, and most experts believe this trend will continue. Second, due to the demographics of the. County's workforce, the number of retirees will continue to grow relative to the number of employees. Finally, the average length of time that retiree healthcare benefits are provided is increasing, as retirees are both retiring earlier and living longer. The Role of GASB 45 Like nearly all government entities that offer retiree healthcare and other post-employment benefits, Contra Costa County pays for, and accounts for, such benefits in the year they are received by retirees. This is commonly referred to as a "pay-as-you-go" approach. The County's accounting practices for OPEB will change when GASB 45 becomes effective in FY 2007-08. Under GASB 45, OPEB must be accounted for in the year they are earned (while an employee is working) rather than the year in which the benefits are received (after an employee retirees). In 2004, the Government Accounting and Standards Board issued Statement No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions." GASB 45 is based on the concept that post-employment benefits are part of the compensation that employees receive for the work they perform, and that the cost of such benefits to the employer should be accounted for during the period in which the benefits are earned. Therefore, GASB 45 requires employers to report the cost of OPEB earned by current and former employees, even though these benefits may not be provided for years to come. This is similar to the accounting standard that is currently applied to pension benefits, which are also earned well in advance of when they are provided. To comply with GASB 45, the County will have to calculate the value of its OPEB liability to current and former employees and report the annual required contribution (ARC) necessary to pay the full cost of this liability over a period not to exceed 30 years. Importantly, GASB 45 does not require the County to pay the full ARC each year, only to report the ARC in the County's financial statements. Credit rating agencies will monitor strategies developed by public agencies for managing their OPEB liabilities and will evaluate the impact of such plans on credit quality. Implications of GASB 45 for Contra Costa County The County must hire an actuary to perform the calculations required by GASB 45. Last fall, the County Administrator established an interdepartmental team to develop a Request For Proposals (RFP) for actuarial services. As a result of the ensuing RFP process, staff recommends the County hire Buck Consultants, LLC (Buck) as its actuary for GASB 45 compliance. Buck distinguished itself from other respondents to the RFP through its combination of outstanding actuarial experience and familiarity with the County's healthcare benefit programs. In addition to performing the required actuarial calculations, the proposed scope of Buck's work with the County includes additional services related to managing the County's OPEB liability. Staff anticipates that the value of the County's OPEB liability will be very large and will represent a significant financial challenge. The County's pension consultant has estimated the County's OPEB liability to be in the range of $960 million to $2.1 billion.3 The ARC required to fully fund an OPEB liability of this size over 30 years would be at least $82 million in the first year — nearly a three-fold increase in the County's current annual expense for retiree healthcare. Even though these figures are preliminary and subject to change based on the more complete analysis that Buck will perform, these estimates indicate the significant magnitude of the financial challenge associated with GASB 45. GASB 45 will lead the County to consider options for mitigating and funding its OPEB liability. To this end, Buck will assist the County in developing and costing benefit plan changes that may reduce the County's liability. Staff recommends that progress on compliance with the require- ments of GASB 45 and the development of recommendations to the Board concerning manage- ment of the County's OPEB liability be reported to the Board through the Finance Committee. 1 The portions of cost paid by the County and the retiree depend on the health plan selected by the retiree. 2 Approximately 81%of the County's gross cost for retiree healthcare benefits is offset by revenues other than County general purpose revenues. 3 This range is based on the assumed rate of investment earnings on assets set aside to pay for future benefits. If investments earn a return of 7.9%, consistent with the rate of return assumed by the County Retirement Association,then the liability would be approximately$1 billion. The upper end of the range assumes a lower return of 4%. ADDENDUM TO D.2 FEBRUARY 28, 2006 On this day the Board considered accepting report on new accounting requirements for retiree healthcare and other post-employment benefits(OPEB); approving and authorizing the County Administrator, or designee, to execute a contract with Buck Consultants, LLC, in an amount not to exceed $59,000 for actuarial analysis related to compliance with new accounting requirements and management of the County's OPEB liability for the period January 15,2006 through June 30, 2007; and approving related appropriations and revenue adjustments. Jason Crapo, Deputy County Administrator presented the report noting this item addresses an increasing financial challenge facing the public sector regarding retiree health care and other employment benefits. He explained that the County must prepare to comply with"GASB 45", the Governmental Accounting Standards Board's (GASB) new standards for Other Post Employment Benefits(OPEB). Mr. Crapo explained that typically, government employers have reported the cost of heath care and other non-pension benefits on a "pay as you go" basis. The annual cash paid for benefits has been the annual expense with no other liabilities or funding requirements. Under the new GASB 45 standards, state and local government employers must account for, and report, the annual cost of OPEB in the same way they report pensions. As a result, the annual OPEB costs for most employers will be based on actuarially determined amounts rather than in the "pay-as-you-go" method. Mr. Crapo said the County will have to calculate the value of its OPEB liability to current and former employees and report the annual required contribution(ARC) necessary to pay the full cost of this liability over a period not to exceed 30 years. He said it is important to note GASB 45 does not require the County to pay the full ARC each year, only to report the ARC in the County's financial statements, and credit rating agencies will monitor strategies developed by public agencies for managing their OPEB liabilities and will evaluate the impact of such plans on credit quality. Mr. Crapo went on to say GASB 45 becomes effective for Contra Costa County in fiscal year 2007-2008. He said based on a review of proposals from a group of highly qualified firms, staff recommends Buck Consultants, LLC. as the best qualified firm for this assignment. He asked the Board to authorize the County Administrator to execute a contract with Buck Consultants, LLC, in an amount not to exceed $59,000 for actuarial analysis related to compliance with the requirements of GASB 45 and management of the County's OPEB liability. Chair Gioia noted that what is expected is to do the analysis and then come up with a long-term plan. He noted that if the County renegotiates health plan benefits with active emplovees, that would ininlediately lessen the liability that the County would Have toward retirees and said this is an important point to understand; that whatever number comes out will be the nuniber given current assumptions and as changes are made among active members it would reduces the liabiliti,towai-d retirees because if a benefit is-adjusted with active nienibets, it is adjusted intntediately with current retirees. He reasoned whatever number comes out,the hope is that liability will be less as changes are implemented, and stressed even though retirement benefits cannot change for people who have vested in the system, the nature of health benefits can be changed or adjusted. Supervisor Piepho said it is important to note the last paragraph of the Board Order.. "GASB 45 will lead the County to consider options for mitigating and funding its OPER liability To this end, Buck will assist the County in developing and casting benefit plan changes that inay reduce the County's liability " She stressed it is not just the today's County formula,but also how to curve it down in the future to help address the extreme financial difficulties that are currently projected for the General Fund. Chair Gioia noted the issue of reporting financially with all public agencies has raised the visibility of the whole issue of health care for retirees, and said he hopes this will help drive discussions on pension reform Februaly_ 28, 2006 D.2 Page 2 of'3 Supervisor Piepho asked Mr. Crapo when he would get a response from Buck Consultants. Mr. Crapo responded "the next step is for County to work closely with Buck Consultants, LLC., to provide them with the raw data that they will need to develop their actuarial calculation of the Counties liability— and went on to say that process will take two to three months to have a preliminary figure from Buck Consultants." Mr. Sweeten said Contra Costa County conducted a study of a survey of 58 counties and received responses from 49 Counties, and that survey went on to become one of the subjects at a state-wide conference in January in Sacramento on the implications of retiree health. Mr. Sweeten said according to Dr. William Walker, Health Services Director, the issue is clearly going to drive some sort of a universal health care proposal and noted discussions are going on among health professionals at various levels. Supervisor DeSaulnier suggested, Sarah Hoffman,Deputy County Administrator, develop the County's legislative action plan to look at reform on the County's legislative agenda both federally and statewide. Chair Gioia explained it is important the current contract allow for discussions during negotiations to talk about how the County's liability could go up further under different reform scenarios: if we do X or Y ..how would that change our liability? Chair Gioia said eventually the goal is to continue to provide health care for our retirees an in a way that is most cost-effective so the dollars go farther. Mr. Crapo confirmed the contract does allow for such discussions. Chair Gioia asked for public comment. The following person addressed the Board: • Rollie Katz, Public Employees Union, Local 1, concerned there is going to be a headline the County is in debt$900 million to$2 billion for retiree health care or something along those lines, and said that it is very important for people listening and reading to know when the study is being done the County will not be writing a check for$900 million; that this is simply an accounting procedure. In conclusion, Chair Gioia explained the retirement benefits which are vested are the obligation of the County to pay and are not going to go down. He said regarding retiree health care,because we can re- negotiate benefits with active employees,which in turn affects retirees, it is a very different situation and actions of this Board in the future could actually lessen the liability; but that how much that will happen is dependent on many causes Supervisor Piepho, in recognizing Mr. Katz's comments,noted the County is paying$33.1 million for these benefits and over the next ten years it is projected to increase to$108m yearly. . The Board of'Supervisors took the following action by un.anin1ous decision with Supel-visor Uilkellia being absent: • ACCEPTED report on new accounting standards for retiree healthcare and other post- employment benefits(OPEB)described in Government Accounting and Standards.Board(GASB) Statement No. 45, "Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions;" • APPROVED and AUTHORIZED the County Administrator, or designee to execute a contract Febritan)28, 2006 D.2 Page 3 of'3 with Buck Consultants, LLC, in an amount not to exceed $59,000 for actuarial analysis related to compliance with the requirements of GASB 45 and management of the County's OPEB liability; • APPROVED and AUTHORIZED Appropriation Adjustment No. 5081 transferring appropriations in the amount of$59,000 from Benefits Administration (Budget Unit 0035)to the County Administrator(Budget Unit 0003)for actuarial services related to GASB 45 compliance; and • REFERRED the issue of OPEB liability to the Finance Committee for future progress reports and development of recommendations for ongoing management of the County's OPEB liability. AUDITOR-CONTROLLER USE ONLY CONTRA COSTA COUNTY FINAL APPROVAL NEEDED BY: APPROPRIATION ADJUSTMENT XQ BOARD OF SUPERVISORS T/C 27 F-1 COUNTY ADMINISTRATOR ACCOUNT CODING BUDGET UNIT: County Administrator(0003), Human Resources(0035) EXPENDITURE ORGANIZATION SUB-ACCOUNT EXPENDITURE ACCOUNT DESCRIPTION <DECREASE> INCREASE 1334 2310 Non-County Professional Specialized Svcs 59,000 00 1200 2310 Non-County Professional Specialized Svcs 59,000 00 TOTALS 59,000 00 59,000 00 APPROVED EXPLANATION OF REQUEST AUDITOR-CONTROLLER: BY: DATE Transfer$59,000 in appropriations from Benefits Admin to County Admin for contract with Buck Consulting for GASB 45 contract. COUNTY I TRATOR: BY: DATE201bb BOARD OF SUPERVISORS: AYES: SUI'E,tVISORS PIEPHO, DeS:\l.il_N1ER, GLOVER, GJOIA O�: N ON E ABSENT: SUPL�.R\%ISOR Ull_KE�►A ABSTAIN: NONE John Sweeten Jerk of the Board ofSr.Dpty Co Admin 2/21/os A�I�GNATURE TITLE DATE Supervisors County Admini'tr o vr0,5/ APPROPRIATION APOO BY: DATE ADJ.JOURNAL NO. (M129 Rev 2186) AUDITOR-CONTROLLER USE ONLY CONTRA COSTA COUNTY FINAL APPROVAL NEEDED BY: APPROPRIATION ADJUSTMENT BOARD OF SUPERVISORS TIC 27 F_� COUNTY ADMINISTRATOR ACCOUNT CODING BUDGET UNIT: County Administrator(0003),Human Resources(0035) EXPENDITURE ORGANIZATION SUB-ACCOUNT EXPENDITURE ACCOUNT DESCRIPTION <DECREASE> INCREASE 1334 2310 Non-County Professional Specialized Svcs 59,000 00 1200 2310 Non-County Professional Specialized Svcs 59,000 00 TOTALS 59,000 .00 59,000 00 APPROVED EXPLANATION OF REQUEST AUDITOR-CONTROLLER: BY: DATE Transfer$59,000 in appropriations from Benefits Admin to County Admin for contract with Buck Consulting for GASB 45 contract. COLIN Y I TRATOR: BY: DATE 1 D BOARD OF SUPERVISORS: AYES: SUPERVISORS PIEPFIO, ,D, S,AULNIErt. GLOVER, GIOIA NO9j: NONE ABSEN-r: SUPERVISOR UILKEMA AE3S,T.-,\ NONE L�weeten, Sr.Dpty Co Admin 2/21/06 JClerk of the Board of IGNATURE TITLE DATE Sd C© .d inist or n / APPROPRIATION APOO �y�I BY: ATE ADJ.JOURNAL NO. 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