Fremont City Council Meeting: 04/12/22 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Plans, Policies and Studies
SCHEDULED
Sponsors:
STAFF REPORT (ID # 4583) DOC ID: 4583
Updated: 4/6/2022 5:58 PM by Susan Gauthier Page 1
ADDITIONAL CONTRIBUTION TO RETIREE HEALTHCARE TRUST – Appropriate an Additional Contribution to the CERBT to Reduce the City’s Unfunded Liability for Retiree Healthcare
Contact Persons:
Name: David Persselin
Title: Finance Director
Div/Dept: Finance Department
Phone: 510-494-4631
E-Mail: [email protected]
Executive Summary: The FY 2021/22 Mid-Year Budget Report projected that a combination of higher than anticipated revenues and lower than anticipated expenditures would result in an ending unreserved fund balance of $38.8 million in the General Fund.
The purpose of this staff report is to recommend that the City Council act to convert a portion of this one-time budgetary surplus into ongoing expenditure savings that can be used to support ongoing services in the community by appropriating an additional payment into the City’s retiree healthcare trust.
The recommended additional payment of $10 million will reduce the City’s unfunded liability for retiree healthcare and is estimated to create ongoing annual expenditure savings of approximately $1 million through June 30, 2037.
BACKGROUND: The City provides medical benefits to retirees. To be eligible, the retiree must have retired directly from the City, attained a minimum age of 50, and ha ve earned at least 5 years of CalPERS service or a disability retirement. The benefit consists of all or part of the premium payments for medical insurance, and the reimbursement amounts, which vary by hire date and retirement date, are established by memoranda of understanding (MOU) with the various City bargaining units. The benefit is paid monthly to the retiree, subject to proof of coverage and attestation of premium payment, and generally ceases upon the death of the retiree.
Until FY 2015/16, the City paid its OPEB expenses as they came due (the monthly reimbursements to retirees) rather than as they were earned, resulting in the accumulation of an unfunded liability for the future benefits. In May 2015 the City Council directed staff to begin prefunding OPEB benefits through annual contributions to the California Employers’ Retiree Benefit Trust (CERBT) managed by CalPERS.
The CERBT is an IRS Section 115 trust - set up for the purpose of receiving employer contributions that will prefund OPEB costs for retirees and their beneficiaries. The assets held in the CERBT are co-invested and managed by the same CalPERS investment staff that manage the City’s pension assets. As with our pension funds, our OPEB assets are accounted for in a separate City account.
Staff Report (ID # 4583) Meeting of April 12, 2022
Updated: 4/6/2022 5:58 PM by Susan Gauthier Page 2
Contributing to the CERBT allows the City to make long-term investments to match its long- term obligation to provide health benefits to retirees. Because professionally managed long - term investments can be expected to earn a higher rate of return than the short-term investments held by the City’s cash pool, our participation in the CERBT is resulting in a lower total cost to the City for providing retiree healthcare benefits.
Every two years the City’s OPEB actuary prepares a valuation report which identifies the remaining unfunded liability and determines the annual OPEB contributions for the next two years. The unfunded liability is paid down in equal annual installments over a period ending on June 30, 2037. The actuarially determined contribution (ADC) for each year is the amount necessary to both pay the City’s ongoing benefit costs and pay down the unfunded liability. The ADC for next fiscal year will be approximately $9.9 million. The next actuarial valuation report will be based on the City’s accumulated retiree healthcare liability and the value of assets held in the CERBT as of June 30, 2022 and will determine our OPEB contributions for fiscal years 2023/24 and 2024/25.
DISCUSSION/ANALYSIS: On March 8, 2022 the City Council received the FY 2021/22 Mid-Year Budget Report which projected that a combination of higher than anticipated revenues and lower than anticipated expenditures would result in an ending unreserved fund balance of $38.8 million in the General Fund. Having previously acted to res tore and increase the Budget Uncertainty Reserve, the City Council directed staff to move $21.8 million of those one-time funds to the Capital Improvements Fund, where they will be available to support capital projects identified in the City’s capital improvement plan.
The remaining projected ending fund balance presents an opportunity for the City to convert a one-time budgetary surplus into ongoing expenditure savings that can be used to support ongoing services to the community. Using a portion of these one-time funds to make an additional payment into the City’s retiree healthcare trust will reduce the unfunded liability and result in lower annual OPEB contributions. As an example, if the City were to make an additional contribution by the next actuarial valuation date of June 30, 2022, the City’s actuary has estimated that the ADC for FY 2023/24 and each subsequent year would be reduced by approximately $100,000 for every $1 million contributed.
Because we still face significant revenue uncertainty and are just beginning contract negotiations with our labor units, and because there are specific capital projects addressing Council priorities that may be included in the proposed operating budget for next year, staff does not recommend using the entire remaining projected ending fund balance to make an additional OPEB contribution.
Instead, staff recommends that the City Council approve an additional contribution of $ 10 million to be made during the current fiscal year so that the reduced annual expenditur es of $1 million can be realized starting in FY 2023/24. The additional contribution will be offset by increases in General Fund revenue estimates, totaling $5 million, and a $5 million increase in the Citywide savings estimate. Based on the amounts presented in the FY 2021/22 Mid-Year Budget Report, approximately $7 million will remain as projected ending unreserved fund balance.
FISCAL IMPACT: Adoption of staff’s recommendation will result in an estimated ongoing annual reduction of $1 million in OPEB contributions through June 30, 2037. If approved, that reduction will create additional operating budget capacity beginning in FY 2023/24 that Staff Report (ID # 4583) Meeting of April 12, 2022
Updated: 4/6/2022 5:58 PM by Susan Gauthier Page 3
will be reflected in the General Fund forecast presented as part of the FY 2022/23 proposed operating budget.
ENVIRONMENTAL REVIEW: The proposed pension liability funding policy is not a project subject to the California Environmental Quality Act (CEQA) per CEQA Guidelines Section 15378, definition of a project.
ATTACHMENTS: None.
RECOMMENDATIONS:
1. Increase revenue estimates, totaling $5 million, in the General Fund as follows:
a. Property Tax - $1 million
b. Business Tax - $1 million
c. Transient Occupancy Tax - $0.5 million
d. Property Transfer Tax - $0.5 million
e. Charges for Services - $1 million
f. Fines - $1 million
2. Increase the Citywide expenditure savings estimate in the General Fund by $5 million.
3. Appropriate $10,000,000 in the General Fund as an additional contribution to the CERBT to reduce the City’s unfunded liability for retiree healthcare.