This report has been prepared at the request of the Board of Administration to assist in administering the fund. This report may not otherwise be copied or reproduced in any form without the consent of the Board of Administration and may only be provided to other parties in its entirety, unless expressly authorized by Segal. The measurements shown in this report may not be applicable for other purposes. © 2022 by The Segal Group, Inc.
City of San Jose Federated City Employees’
Retirement System PostEmployment Healthcare Plan
Audit of June 30, 2021 OPEB
Actuarial Valuation
February 10, 2022
5c(2)
FCERS 2-17-22
180 Howard Street
Suite 1100
San Francisco, CA 94105-6147
segalco.com
T 415.263.8273 / [email protected]
T 415.263.8283 / [email protected]
T 860.678.3062 / [email protected]
February 11, 2022
Board of Administration
City of San Jose Federated City Employees’ Retirement System 1737 North 1st Street, Suite 600
San Jose, CA 95112
Re: Audit of June 30, 2021 OPEB Actuarial Valuation
Dear Members of the Board:
We are pleased to present the results of our audit of the June 30, 2021 OPEB Actuarial Valuation for the City of San Jose Federated City Employees’ Retirement System (“System”) Postemployment Healthcare Plan (“OPEB”). The purpose of this audit was to verify the calculations completed by Cheiron and to offer comments on the methodology and the results of their actuarial valuation.
This review was conducted by Paul Angelo, a Fellow of the Society of Actuaries, Member of the American Academy of Actuaries, and an Enrolled Actuary under ERISA, Andy Yeung, an Associate of the Society of Actuaries, Member of the American Academy of Actuaries, and an Enrolled Actuary under ERISA and Samuel Boustani, an Associate of the Society of Actuaries and Member of the American Academy of Actuaries. This review was conducted in accordance with the standards of practice prescribed by the Actuarial Standards Board.
The assistance of Cheiron and the System is gratefully acknowledged. We appreciate the opportunity to be of service to the Board of Administration, and we are available to answer any questions you may have on this report.
We are Members of the American Academy of Actuaries and we meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion herein.
Sincerely,
Paul Angelo, FSA, MAAA, FCA, EA Andy Yeung, ASA, MAAA, FCA, EA Senior Vice President and Actuary Vice President and Actuary
Samuel Boustani, ASA, MAAA
Consulting Actuary
AYY/jl
cc: Wiliam Hallmark
Michael Schionning
John Colberg
5703774v4/14413.003
Table of Contents
Executive Summary .................................................................................................................... 1 Purpose and Scope of the Actuarial ............................................................................................ 5 Results of the Valuation Audit ..................................................................................................... 6 Review of Economic Assumptions ............................................................................................ 10 Review of Health Care Assumptions ......................................................................................... 11 Items of Note ............................................................................................................................ 12
Exhibits
Exhibit A - Analysis of Participant Data 13-A
Exhibit B – Test Life Comparison 14-A
Exhibit C – Comparison of Results 15-A
Exhibit D – Recommended Action Items On or Before June 30, 2022 Valuation 16-A
1 Executive Summary
This report has been prepared by Segal to present an audit of the June 30, 2021 OPEB Actuarial Valuation performed by Cheiron for the System. As described in the contract for actuarial audit services, the scope of our audit is to review the data and valuation results issued for the actuarial funding valuation for the City of San Jose Federated City Employees’ Retirement System Postemployment Healthcare Plan. Because the implicit subsidy payment is not prefunded (as it is paid on a pay-as-you-go basis as a part of the health premiums for active employees), the liability and associated cost are not included in our review of the Actuarially Determined Contribution Rate. However, as Cheiron has included the present value of benefits and actuarial accrued liability associated with the implicit subsidy in their report, we have also included a comparison of the same in our audit report.
Summary of Results
This audit report includes an independent reproduction of the detailed valuation results that appear in the June 30, 2021 valuation report prepared by Cheiron, after reflecting certain adjustments made by Cheiron following discussions with Segal. This audit was based on actuarial reports, employee data and supplemental information provided by both the System and Cheiron.
We have performed this actuarial audit of the System's June 30, 2021 OPEB Actuarial Valuation to provide assurance to the System's Board of Administration that the actuarial calculations are reasonable and that the actuarial process was conducted according to generally accepted actuarial principles and practices. Our audit confirms that the results of the actuarial calculations (including adjustment made by Cheiron following discussions with Segal) as of June 30, 2021 are reasonable, and that those calculations are based on generally accepted actuarial principles and practices.
The following is a high-level summary of the results from our audit of the June 30, 2021 OPEB Actuarial Valuation:
• We have reviewed the plan of benefits to confirm the summary included in the valuation report matches the comparable information provided on the Retirement System’s website. • The valuation results were prepared using the non-economic (demographic) actuarial assumptions approved by the Board based on the experience study as of June 30, 2019.
Those non-economic assumptions were first adopted in the June 30, 2019 valuation and have been carried over unchanged for the June 30, 2021 valuation. A review of those non- economic assumptions is not included in our contract for actuarial services and is therefore beyond the scope of this assignment. The healthcare specific assumptions have been updated to reflect the medical plan election percentages due to a change in the different options available to retirees beginning January 1, 2022. We have performed a high level review of those healthcare specific assumptions to ensure they are reasonable.
2 • The economic (6.00% investment return, 2.25% price inflation and 3.00% wage inflation) actuarial assumptions previously used in the June 30, 2020 valuation were subsequently reviewed by the System and all of these assumption were unchanged as part of the June 30, 2021 valuation. We have performed a high level review of those assumptions for reasonableness and we note that the 6.00% investment return used for the OPEB valuation (based on a different asset allocations) is lower than the 6.625% investment return assumption used for the pension valuation. We provided commentary on these assumptions in our audit report for the pension valuation as of June 30, 2021. Even though the City is not fully prefunding the implicit subsidy and that might result in the use of a lower discount rate for financial reporting purposes under Governmental Accounting Standards Board Statements 74 and 75, for the purposes of determining the Actuarially Determined Contributions for all the benefits other than the implicit subsidy, we agree with Cheiron’s application of the 6.00% discount rate based on the expected rate of return for the investment portfolio.
We have also reviewed the health care related assumptions used by Cheiron and found them to be reasonable. A high level discussion of some of those assumptions is provided in this report.
• The demographic data used in the 2021 OPEB valuation by Cheiron was primarily supplied by the System, and included minimal changes made by Cheiron to the final processed data used for the pension valuation. Please note that pension data was the starting point to derive the OPEB data used for the June 30, 2021 valuation. Our pension audit report discusses the reconciliation of the data supplied by the System to the final processed data used by Cheiron for the 2021 pension valuation. We have concluded that Cheiron’s valuation data in whole is reasonable for use in the June 30, 2021 valuation for the System. Segal would recommend that the System request Cheiron provide a copy of the final membership data file used in the valuation so that any differences could be reviewed and confirmed by the System to be accurate and reasonable before the next valuation.
• During the last audit, market values of assets had been maintained by the System in the 401(h) and 115 Trust accounts. We understand that the 401(h) account was depleted and all future benefits will be paid from the 115 Trust. Even though the System has continued to use market value of assets in the OPEB valuation since our last audit as of June 30, 2016, we note that the amount of assets increased from $225.8 million (30% of the actuarial accrued liability) as of June 30, 2016 to $384.6 million (59% of the actuarial accrued liability before adjustment and 58% of the actuarial accrued liability after adjustment) as of June 30, 2021.
As the System continues to accumulate more assets in the OPEB plan, we recommend the Board consider the pros and cons of applying the same asset smoothing policy and amortization policy applied in the pension valuation (5-year smoothed market value, various amortization periods depending on the source of the UAAL without 3-year phase-in). • In the table below, we compare the present values of future benefits provided in the System’s June 30, 2021 valuation report with those provided to us after including certain adjustments made by Cheiron following discussions with Segal. We have also included those values calculated by Segal.
3 Present Vale of Future Benefits ($000)
Explicit Subsidy
Cheiron
(Before Adjustment)
Cheiron
(After Adjustment) Segal
Non-Medicare Eligible $145,766 $145,857 $144,045
Medicare Eligible 412,982 424,927 424,238
Dental 61,455 61,455 61,169
Total Explicit Subsidy $620,203 $632,239 $629,452
Implicit Subsidy $76,178 $81,135 $78,204
Grand Total $696,381 $713,374 $707,656
• In comparing our results prepared for the non-Medicare eligible, Medicare eligible and implicit subsidy categories for active members, we would expect our results to be somewhat lower.
This is due to the method we use to approximate the value of the benefits paid assuming a middle of year timing of the decrements (i.e., service retirement, disability retirement, etc.). • Segal’s total present value of future benefits is -0.4% and -3.6% of Cheiron’s (after adjustment) total present value of future benefits on the explicit subsidy and the implicit subsidy, respectively. This key result is the basis for all other liabilities and cost calculations in the valuation.
• A list of all action items we would recommend as either before or part of the June 30, 2022 valuation is provided in Exhibit D.
Detailed Findings and Recommendations
Our detailed findings and recommendations are summarized as follows:
• Segal’s total present value of future benefits as of June 30, 2021 is -0.4% and -3.6% of Cheiron’s (after adjustment) total present value of future benefits on the explicit subsidy and the implicit subsidy, respectively.
• A comparison of Segal’s present value of future benefits (PVB) to Cheiron’s present values by benefit type indicates that the total liabilities of each plan are reasonable as shown in the following table. We note that ‘Explicit Subsidy Medicare Eligible’ in Cheiron’s report includes both explicit and implicit subsidy.
Benefit Type
Ratio of Segal’s PVB to Cheiron’s
PVB (after adjustment)
Explicit Subsidy
Non-Medicare Eligible -1.2%
Medicare Eligible -0.2%
Dental -0.5%
Total Explicit Subsidy -0.4%
Implicity Subsidy -3.6%
Grand Total -0.8%
4 • Segal’s total actuarial accrued liability as of June 30, 2021 is 0.1% and -3.0% of Cheiron’s (after adjustment) liability on the explicit subsidy and the implicit subsidy, respectively. • For this audit, our first focus was on matching the core numbers on which the ultimate plan of benefits depend: the present values of future benefits. The results of this analysis were shown in the previous table. We also focused on more detailed analyses of (i) the breakdown of the total present value of future benefits in the benefit subsidy types listed in Cheiron’s report (i.e., non-Medicare Eligible, Medicare Eligible, Dental and Implicit Subsidy), and ii) the determination of the Actuarially Determined Contributions (ADC) on the explicit subsidy.
Those detailed analyses produced the following findings and recommendations:
• Overall, we have verified the method used by Cheiron to calculate the normal cost, UAAL and the total City’s ADC are reasonable. We have also verified and confirmed the member contribution amount they used in determining the City’s net ADC is reasonable.
Segal’s total ADC is about -1.4% of that calculated by Cheiron (after adjustment). It should be noted that Cheiron’s ADC after the adjustment has been estimated by Segal and that calculation has not been provided by Cheiron.
Segal’s total City ADC is $18.5 million and Cheiron’s total City ADC is $18.8 million after adjustment ($18.3 million prior to adjustment) for FYE 2023. It is our understanding that Cheiron will discuss with the Board in determining whether an update to the valuation results contained in their June 30, 2021 report is necessary.
• For funding purposes, market value of assets has been maintained by the System for the 115 Trust account. (As we note earlier, the 401(h) Trust was depleted.) We have reviewed and agreed with the calculation of the market value of assets used in the valuation. Even though the System has continued to use market value of assets in the OPEB valuation since our last audit as of June 30, 2016, we note that the amount of assets increased from $225.8 million (30% of the actuarial accrued liability) as of June 30, 2016 to $384.6 million (59% of the actuarial accrued liability before adjustment and 58% of the actuarial accrued liability after adjustment) as of June 30, 2021. As the System continues to accumulate more assets in the OPEB plan, we recommend the Board consider the pros and cons of applying the same asset smoothing policy and amortization policy applied in the pension valuation (5-year smoothed market value, various amortization periods depending on the source of the UAAL without 3- year phase-in). The rationale for using the pension model would be: (a) to provide additional transparency on how market value investment volatility is managed separate from other volatilities and (b) relying on level (no phase-in) 20 year amortization as sufficient volatility management for non-investment volatility.
• In determining the UAAL amortization payment, UAAL bases subsequent to the June 30, 2017 valuation date are amortized over 20-year periods with a 3-year phase-in and phase- out. We believe that the methodology applied is reasonable.
5 Purpose and Scope of the Actuarial
Audit
Purpose of the Audit
Segal has performed an actuarial audit of Cheiron’s June 30, 2021 OPEB Actuarial Valuation for the City of San Jose Federated City Employees’ Retirement System Postemployment Healthcare Plan to provide assurance to the System’s Board of Administration that the actuarial calculations are reasonable and that the actuarial process was conducted according to generally accepted actuarial principles and practices.
Scope of the Audit
The scope of the audit, as described in the System’s Actuarial Audit Services Agreement with Segal, includes the following:
• Evaluation of the available data for the performance of such valuation, the degree to which such data is sufficient to support the conclusions of the valuation, and the use and appropriateness of any assumptions made regarding such data. • Comparison of the major benefits summarized in Appendix C of Cheiron’s 2021 valuation report match the comparable information provided on the Retirement System website. • Completion of a parallel valuation as of June 30, 2021 using the assumptions, methodologies and funding methods used by the System’s consulting actuary in their performance of the June 30, 2021 valuation.
• Evaluation of the parallel valuation results for the System that were included in the June 30, 2021 Actuarial Valuation Report and reconciliation of any discrepancies between the findings, assumptions, methodology, rates, and/or adjustments with the System’s consulting actuary.
6 Results of the Valuation Audit
Several steps are involved in conducting an actuarial audit of an OPEB program. Outlined below are the primary steps we took to comply with the scope of the audit services. Following each step is a description of our observations.
While working on the 2021 audit, Cheiron was able to answer our questions, address our observations and provide the backup we requested. Our audit results generally confirm and support the results of their final 2021 valuation (after adjustment).
Step 1: Compare the demographics of the 2021 data
provided by the System with the valuation data used
by Cheiron for the June 30, 2021 actuarial valuation
Results
EXHIBIT-A provides a comparison, for all members combined (i.e., Tiers 1, 2A, and VEBA), of the number of active participants, their average ages, average salaries (active members), average service (active members) and those currently collecting benefits (pensioners enrolled in a medical or dental plan). This exhibit indicates that Cheiron had only made a few adjustments, estimations, or corrections to the data received from the System. In general, the data received was “valuation ready” with the exception of adjustments to exclude members, retirees, and beneficiaries not eligible for health benefits.
Observations
1. Cheiron noted that the final processed OPEB data utilizes the final processed pension data as a starting point. Please see our pension audit report for further comments on Cheiron’s data reconciliation process.
2. Cheiron provided us with a map of the active member tier labels and union codes to determine which members were Tiers 1, 2A, and VEBA. We used this map along with the provided pension statuses to determine which actives were eligible for health benefits. Term vested members were determined according to plan provision eligibilities for deferred vested members.
3. In regards to current payees, Cheiron noted that participants were only included in the valuation if they elected a medical or dental plan. Duplicates records were removed when applicable.
4. We recommend that Cheiron should be asked to send the final processed OPEB data back to the System for validation.
7 Step 2: Develop a valuation program based on the
relevant provisions of the System as summarized in
the Summary Plan Descriptions (Appendix C –
Substantive Plan Provisions), using the actuarial
methods and assumptions outlined in the most recent
valuation report, and further defined by Cheiron
Observations
1. Cheiron’s valuation report makes reference to the implicit subsidy. Generally, the term “implicit subsidy” is understood to apply when non-Medicare retiree premium rates are the same as for active employees. Had the active employees not been reflected in the blended premium rate, the retiree premium rates would have been higher. Based on test life information provided by Cheiron, the implicit subsidy appears to reflect the aforementioned subsidy for non-Medicare retirees. However, the test life information also indicated that the implicit subsidy reflected differences in age-based costs and premium rates for Medicare retirees. We agree with their calculation of reflecting age-adjusted costs as described in Actuarial Standard of Practice No. 6 (ASOP 6).
2. Based on conversations with Cheiron, Cheiron discovered the need to adjust some of their valuation results. Subsequently Cheiron revised their numbers to reflect the following:
a. Maximum subsidy amount under the catastrophic disability benefit associated with the VEBA. The maximum subsidy amount should be capped at the single coverage premium for the lowest cost plan, and not to be valued based on a blended maximum subsidy amount (blended over coverage tiers).
b. For Terminated Vested, Cheiron was applying 60% adjustment to enrollment. A double counting, which understated the liability for Terminated Vested. c. For female future retirees, an explicit subsidy cap was too high, and needed to be adjusted down.
It is our understanding that Cheiron will discuss with the Board in determining whether an update to the valuation results contained in their June 30, 2021 report is necessary.
Step 3: Run the valuation program with specific
individuals (test lives) who illustrate particular benefit provisions and compare results to Cheiron’s result
Results
EXHIBIT-B provides a comparison of Segal’s and Cheiron’s test life results for (i) the present value of future benefits, (ii) the present value of future normal costs, and (iii) the actuarial accrued liability.
8 • Present Value of Future Benefits: This measure represents the current value of the member’s projected benefits, recognizing the time value of money (i.e., the investment return assumption), the salary increase assumption and the probabilities of retirement, death, disability and turnover. This value is the cornerstone for the entire valuation as it represents the amount expected to be needed to provide all future expected benefit payouts for current members, based on the valuation assumptions.
The ratio of Segal’s results to Cheiron’s results, on a total present value of future benefits basis, are about 94% (range from 89% to 101%) for the active test lives. The ratio of Segal’s results to Cheiron’s results are about 100% (range from 97% to 101%) for the terminated vested and retired test lives.
In comparing our results prepared for the non-Medicare eligible, Medicare eligible and implicit subsidy categories for active members, we would expect our results to be somewhat lower.
This is due to the method we use to approximate the value of the benefits paid assuming a middle of year timing of the decrements (i.e., service retirement, disability retirement, etc.).
We believe our results are within an acceptable range of Cheiron’s results to provide assurance that the significant plan liabilities are properly valued. • Present Value of Future Normal Costs and Actuarial Accrued Liability: The funding method adopted by the System, the Entry Age Actuarial Cost Method, separates the present value of future benefits for active members into two components, the actuarial accrued liability and the present value of future normal costs. Simply stated, the Entry Age Actuarial Cost Method determines a level cost as a percentage of pay for each year of service, called the normal cost. For active members, the actuarial accrued liability is the accumulated value of past normal costs (less any expected benefits, and assuming all actuarial assumptions were exactly realized), while the present value of future normal costs represents the current value of future normal costs required to fully fund the member’s projected benefits before the member is expected to retire.
The method used to separate the present value of projected benefits into its two components can differ somewhat from valuation system to valuation system, even though the underlying funding method used in the systems is the same.
For the active test lives, the ratios of Segal’s results to Cheiron’s is about 90% (range from 87% to 111%) for the normal costs and about 96% (range from 81% to 97%) for the actuarial accrued liability [See page 14-A]. Due to the method we use to approximate the value of the benefits paid assuming a middle of year timing of the decrements, we do expect results to vary.
9 Step 4: Run the valuation program with all participant data, compile results, and compare to Cheiron’s
results (including adjustment made by Cheiron
following discussions with Segal)
Results
EXHIBIT-C provides a comparison, by benefit subsidy type, of Segal’s results and Cheiron’s results for (i) the present value of future benefits, (ii) the present value of future normal costs, (iii) the UAAL, (iv) the total normal cost and Actuarially Determined Contributions (ADC). • The ratios of Segal’s results to Cheiron’s results, on a total present value of future benefits basis, range from 99% to 100%. In total, our present value of future benefits is 99% of Cheiron’s present value as shown in the column labeled “TOTAL” on page 15-A. • The actuarial accrued liability depends in part on the valuation system’s methodology for separating the present value of projected benefits into its two components – the actuarial accrued liability and the present value of future normal costs. The UAAL is then simply the difference between the actuarial accrued liability and the actuarial value of assets. Therefore, differences in the actuarial accrued liabilities due to the variations in the valuation systems impact the UAAL, and the related City’s net normal cost contribution rate after accounting for the member’s contributions.
• Segal’s total City ADC is $18.5 million and Cheiron’s total City ADC is $18.8 million after adjustment ($18.3 million prior to adjustment) for FYE 2023. Note that Cheiron’s ADC after adjustment was estimated by Segal, given that it was not provided by Cheiron. This level of difference can generally be explained by differences in procedures and methods used by Segal and Cheiron in allocating the present value of future benefits between the past actuarial accrued liability and the future normal costs.
Step 5: Evaluate the valuation results and
methodology as presented in the Cheiron actuarial
valuation report
Observations
1. We have reviewed Cheiron’s actuarial report, and revised valuation results in detail. Most of our comments based on the valuation report and the revised valuation results are already discussed in the previous steps. Our other comments provided in the Items of Note Section are relatively minor and deal primarily with providing additional disclosures for documentation purposes.
10 Review of Economic Assumptions
The economic assumptions reviewed by Cheiron during the 2021 actuarial valuation are the investment rate of return, price inflation and wage growth (price inflation and real wage increases). Actuarial Standard of Practice No. 27 (ASOP 27) provides the actuary guidance in developing these assumptions. Furthermore, Government Accounting Standards Board Nos. 74 and 75 (GASB 74 & 75) provide guidance in preparing the blended discount rate assumption for OPEB programs such as the System that is not fully prefunding all the liabilities (i.e., explicit plus implicit).
Note: Our comments with respect to the investment rate of return in general (before reflecting the prefunding of only the explicit subsidy), inflation and wage increase were provided in our audit report for the pension plan. Those comments would apply to the OPEB plan even though the 6.00% investment return used for the OPEB valuation (based on a different asset allocations) is lower than the 6.625% investment return assumption used for the pension valuation
Results
Even though the City is not fully prefunding the implicit subsidy and that might result in the use of a lower discount rate for financial reporting purposes under GASB 74 and 75, for the purposes of determining the Actuarially Determined Contributions for all the benefits other than the implicit subsidy, we agree with Cheiron’s application of the 6.00% discount rate based on the expected rate of return for the investment portfolio.
11 Review of Health Care
Assumptions
The following are points of note related to the health care assumptions used by Cheiron in their valuation:
Claim costs are based on the fully insured premiums charged to the City and were developed using combined data for Federated, Police and Fire. Pre-Medicare adult claims curves were loaded for children. Child load was applied to the retiree claims curves and not to the spouse. Blended premiums were developed separately for Pre-Medicare and Medicare, based on enrollment data. Age-related morbidity factors were applied to develop age-adjusted costs, in accordance with Actuarial Standards of Practice. The health care cost methodology and assumptions appear to be reasonable.
Health care cost trend assumption also appears to be overall reasonable. Typically, these assumptions start with a short-term trend rate, reflecting current and projected near-term experience, and then graded down to an ultimate level over time, reflecting estimates of long-term health care inflation. Medical trend assumptions were developed using 2021 Getzen model published by the Society of Actuaries. The initial trend rates (8.00% for Pre- Medicare, 4.00%) are within the ranges used by most actuarial firms, including Segal.
However, we would like to note that the 3.78% ultimate trend rate used appears to be out of step with customary observed ultimate trend rates assumptions. Based on our experience, low end ultimate trends used by most actuarial firms are typically in the range of 4.00% -
4.50%.
12 Items of Note
The following are our comments and observations based on discussions with Cheiron in relation to methodology and disclosure of assumptions in their June 30, 2021 OPEB report:
Per Person Cost Trends (page 32 of report): Current assumptions are disclosed on a calendar year (CY) basis, with the first CY trend referring to “Actual Premiums Used”.
Given that the valuation plan is July 1, and for better transparency to both readers and users, we suggest disclosing the trend on a plan year basis (July 1 – June 30) and clearly disclose the actual trend used in the first years, when applicable. In-Lieu Assumptions (page 38 of report): The report discloses that “the amount of the In- Lieu credit is based on the tier of coverage for which they qualify”. Based on other documents and discussions with Cheiron, we later determined that the “credit” amount is equal to 25% of the explicit subsidy for the tier coverage for which retirees qualify. We suggest Cheiron to clearly disclose this information in the report. VEBA and service-connected disability (page 49 of report): Per Appendix C – Summary of Plan Provisions, “VEBA members on service-connected disability will receive benefits from the Postemployment Healthcare Plan only up to age 65 once VEBA funds are exhausted”. The report doesn’t disclose how the VEBA funds are built up. We understand, from discussions with Cheiron, that all current active VEBA members were assumed to contribute 3% of their base salary. We suggest disclosing this assumption clearly in the report. Also, the report is not explicit in respect to how the VEBA funds are drawn down (e.g. premium blending used, any adjustment factor, etc.) . We suggest those assumptions to be clearly disclosed as well.
Disclosure of different spouse assumptions for various benefits: Spouse assumptions used vary depending on the benefit (Medical versus dental versus VEBA, etc.). We suggest clearly disclosing each of these assumptions in the report.
13-A
Exhibit – A
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Analysis of Participant Data
Active Member Data
Full Benefits Catastrophic Disability Total
System Cheiron System Cheiron System Cheiron
Number(1) 1,347 1,344 2,287 2,285 3,634 3,629
Average Age 50.7 50.7 39.4 39.4 43.6 43.6
Average OPEB Service 17.8 17.8 3.9 3.9 9.0 9.0
Total Expected Salary
for 7/1/2021-6/30/2022
$336,582,728(1) $339,546,040
% DIFFERENCE
Number -0.2% -0.1% -0.1%
Average Age 0.0% 0.0% 0.0%
Average OPEB Service 0.0% 0.0% 0.0%
Total Expected Salary
for 7/1/2021-6/30/2022(1)
0.9%
(1) The expected salary for 2021/2022 has been calculated using a method consistent with that used by Cheiron and it is as follows:
Step One - For Tier 1 full-time employees, an annualized salary was calculated by multiplying Compensation Rate 2 Earnable times 365/14. For all other actives, an annualized salary was set to equal to Compensation Rate 2 Earnable times 80 divided by Compensation Hours 2 times 365/14.
Step Two – Expected Salary for 2021/2022 was calculated by increasing the annualized salary with one year of wage inflation and one-half year of merit.
The differences in the expected salary between the System and Cheiron can be explained by adjustments for any missing values in the raw data.
13-B
Exhibit – A (continued)
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Analysis of Participant Data
Non-Active Member Data
Full Benefits Catastrophic
Disability
Total
System Cheiron System Cheiron System Cheiron
NUMBER
Retiree & Disabled
A breakdown between Full Benefits and
Catastrophic Disability was not provided in the
Cheiron valuation report
3,172 3,154
Surviving Spouse 417 424
Terminated Vested 151 152
Total 3,740 3,730
% DIFFERENCE
Retiree & Disabled
-0.6%
Surviving Spouse 1.7%
Terminated Vested 0.7%
Total -0.3%
NUMBER
Pre-Medicare Retirees
& Surviving Spouses
855 853
Medicare Retirees &
Surviving Spouses
2,196 2,194
Retirees & Surviving
Spouses Dental
3,476 3,465
Retirees & Surviving
Spouses In-Lieu
237 237
Spouses 1,366 1,358
% DIFFERENCE
Pre-Medicare Retirees
& Surviving Spouses
-0.2%
Medicare Retirees &
Surviving Spouses
-0.1%
Retirees & Surviving
Spouses Dental
-0.3%
Retirees & Surviving
Spouses In-Lieu
0.0%
Spouses -0.6%
5703774v4/14413.003 14-A
Exhibit – B
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Test Life Comparison – Cheiron Results are Shown After Adjustment
ACTIVES
Testlife #1 Testlives#2 Testlife #3 Testlife #4 Testlives #5 Tier 1 Tier 1 Tier 1 Tier VEBA Tier VEBA
Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $191,391 $183,662 $253,269 $241,056 $130,390 $116,684 $1,177 $1,098 $926 $931 Normal Cost $5,630 $5,012 $6,093 $5,576 $5,437 $4,749 $116 $124 $78 $86 Actuarial Accrued Liability $163,282 $159,070 $210,583 $201,846 $65,866 $62,084 $0 $21 $72 $58
RATIO OF SEGAL/CHEIRON
Total PVB 96% 95% 89% 93% 101%
Normal Cost 89% 92% 87% 107% 111%
Actuarial Accrued Liability 97% 96% 94% N/A 81%
ACTIVES
Testlives #1-5
Total Actives
Cheiron Segal
Total PVB $577,152 $543,431
Normal Cost $17,354 $15,547
Actuarial Accrued Liability $439,803 $423,079
RATIO OF SEGAL/CHEIRON
Total PVB 94%
Normal Cost 90%
Actuarial Accrued Liability 96%
5703774v4/14413.003 14-B
Exhibit – B (continued)
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Test Life Comparison
INACTIVES
Testlife #6 Testlife #7 Testlife #8 Testlife #9
Terminated Vested
Tier 1
Beneficiary
Tier 1
Disabled Retiree
Tier 1
Retired
Tier 1
Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $212,156 $214,042 $139,190 $139,298 $154,666 $154,764 $110,787 $110,804
RATIO OF SEGAL/CHEIRON
101% 100% 100% 100%
INACTIVES
Testlife #10 Testlife #11 Testlife #12 Testlives #13
Retired Tier 1 Retired Tier 1 Retiree Tier 1 Retiree Tier 1 Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $216,618 $216,628 $143,445 $143,423 $205,225 $205,639 $22,016 $21,998
RATIO OF SEGAL/CHEIRON
100% 100% 100% 100%
5703774v4/14413.003 14-C
Exhibit – B (continued)
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Test Life Comparison
INACTIVES
Testlife #14 Testlife #15 Testlife #6-15
Retired Tier 1 Retired Tier 1 Total Inactives
Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $61,150 $59,426 $207,205 $207,527 $1,472,459 $1,473,549
RATIO OF SEGAL/CHEIRON
97% 100% 100%
5703774v4/14413.003 15-A
Exhibit – C
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
PRESENT VALUE OF
FUTURE BENEFITS (PVB)
Total
Cheiron
(before
adjustment)
Cheiron
(after
adjustement)
Segal
Medical* $634,926 $651,919 $646,487
Dental $61,455 $61,455 $61,169
Total PVB $696,381 $713,374 $707,656
RATIO OF SEGAL/CHEIRON (after
adjustment)
Medical
99%
Dental 100%
Total PVB 99%
*Medical result in Cheiron’s report includes both explicit and implicit subsidy.
5703774v4/14413.003 15-B
Exhibit – C (continued)
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
ADC
Total – Explicit Subsidy
Cheiron
(before
adjustement)
Cheiron
(after
adjustement)*
Segal
Total Normal Cost (including Admin
Expenses) $6,347 $6,536 $6,339
UAL Amortization $20,720 $21,052 $21,063
Total Cost $27,067 $27,588 $27,402
Less Employee Contributions ($8,807) ($8,807) ($8,889)
Total ADC $18,260 $18,781 $18,513
RATIO OF SEGAL/CHEIRON (after
adjustement)
Total Normal Cost
97%
UAL Amortization 100%
Total Cost 99%
Employee Contributions
101%
Total ADC 99%
*ADC after adjustment was estimated and was not provided by Cheiron.
5703774v4/14413.003 15-C
Exhibit – C (continued)
City of San Jose Federated City Employees’ Retirement System June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
UNFUNDED ACTUARIAL
ACCRUED LIABILITY
Total – Explicit Subsidy
Cheiron
(before
adjustement)
Cheiron
(after
adjustement)
Segal
Present Value of Future Benefits $620,203 $632,239 $629,452 PV Future NC Contributions $40,265 $41,853 $38,722
Actuarial Accrued Liability $579,938 $590,386 $590,730 Assets $384,613 $384,613 $384,613
UAAL $195,325 $205,773 $206,117
RATIO OF SEGAL/CHEIRON (after
adjustement)
Present Value of Future Benefits
100%
PV Future NC Contributions 93%
Actuarial Accrued Liability 100%
Current Assets at Actuarial Value
100%
UAAL 100%
5703774v4/14413.003 16-A
Exhibit – D
City of San Jose Federated City Employees’ Retirement System Recommended Action Items On or Before June 30, 2022 Valuation
• Discuss with the Board whether an update to the valuation results contained in the June 30, 2021 report is necessary. • Discuss with Cheiron the pros and cons of applying in the OPEB valuation, the same asset smoothing policy and amortization policy applied in the pension valuation.
• Consider adding the disclosures listed in the “Items of Note” section.