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 Police and Fire Department
Postemployment Healthcare Plan
Audit of June 30, 2021 OPEB
Actuarial Valuation
March 30, 2022
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]
March 30, 2022
Board of Administration
City of San Jose Police and Fire Department Retirement Plan 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 Actuarial Valuation for the City of San Jose Police and Fire Department Postemployment Healthcare Plan (“the OPEB Plan” or “the Plan”). 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 Plan 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
PP/jl
cc: William Hallmark
Michael Schionning
John Colberg
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Table of Contents
Executive Summary .................................................................................................................... 1 Purpose and Scope of the Actuarial ............................................................................................ 7 Results of the Valuation Audit ..................................................................................................... 8 Review of Economic Assumptions ............................................................................................ 13 Review of Health Care Assumptions ......................................................................................... 14 Items of Note ............................................................................................................................ 15
Exhibits
Exhibit A – Analysis of Participant Data 16-A
Exhibit B – Test Life Comparison 17-A
Exhibit C – Comparison of Results 18-A
Exhibit D – Recommended Action Items On or Before June 30, 2022 Valuation 19-A
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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 Plan. 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 City of San Jose Police and Fire Department 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 for the implicit subsidy payment 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. This audit was based on actuarial reports, employee data and supplemental information provided by both the Plan and Cheiron.
We have performed this actuarial audit of the Plan's June 30, 2021 OPEB Actuarial Valuation to provide assurance to the Plan’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 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 comparable information provided on the Retirement Plan’s website. • In order to determine the maximum subsidy amount payable under the Catastrophic Disability Benefit associated with the VEBA in the June 30, 2021 valuation, Segal valued the single coverage premium for the lowest cost medical plan. However, Cheiron confirmed that they valued a maximum subsidy amount that is blended across single and non-single coverage premiums for the lowest cost medical plan. This means Cheiron valued the single coverage premium for the lowest cost medical plan for future retirees that are expected to be single, but for those expected to be non-single (i.e., married and covering either a spouse or family), Cheiron valued a higher maximum subsidy corresponding to the spouse or family coverage premium for the lowest cost medical plan. As a result, there is an overstatement of the liability by Cheiron of the Catastrophic Disability Benefit for VEBA members. The overstatement varies for males and females. The maximum subsidy for the single lowest cost medical plan is about 70% of the maximum subsidy blended across non-single medical coverage tiers for males. The estimated overstatement of the total present value of future benefits is about $6.1
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million and the estimated overstatement in the City’s Actuarially Determined Contributions is about $580,000 or 0.22% of pay. We understand that Cheiron will reflect this change in the next valuation.
• 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, 2021. A review of those non-economic assumptions is not included in our contract for actuarial service and is therefore beyond the scope of this assignment. The healthcare specific assumptions have been updated to reflect the in-lieu and medical plan election percentages for 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. • The economic (6.25% 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 Board and the investment return assumption was modified to 6.00% as part of the June 30, 2021 valuation. We have performed a high level review of these assumptions for reasonableness and we note that the 6.00% investment return used for the OPEB valuation is lower than the 6.625% investment return assumption used for the pension valuation, which is based on a different asset allocation. We provided commentary on these pension valuation 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 valuation by Cheiron was primarily that supplied by the Plan, and included minimal changes made by Cheiron to the final processed data used for the OPEB valuation. Please note that we began with the raw data and used an OPEB Tier map provided by Cheiron as well as the Police and Fire indicators in the final processed pension data as a guideline 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 Plan 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 OPEB Plan. Segal would recommend that the Plan 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 Plan to be accurate and reasonable before the next valuation. • Market value of assets has been maintained by the Plan for each of the Police and Fire Departments in the 401 (h) and 115 Trusts. Since the last audit and beginning with the June 30, 2017 valuation, the Actuarial Value of Assets was set to equal the Market Value of Assets.
As the Plan continues to accumulate more assets in the OPEB plan (funded ratio of 36% for Fire and 37% for Police of the actuarial accrued liability as of June 30, 2021, versus funded ratio of 13% for Fire and 20% for Police of the actuarial accrued liability as of June 30, 2016), we recommend the Board consider the pros and cons of using the same asset smoothing
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policy and amortization policy 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 comparing our results prepared for the non-Medicare eligible, Medicare eligible and implicit subsidy categories for active members, we would expect variations in our results. This is due to the different procedures and methods 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 (Police and Fire) present value of future benefits is 98.7% and 102.3% of Cheiron’s 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.
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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 98.7% and 102.3% of Cheiron’s total present value of future benefits on the explicit subsidy and the implicit subsidy, respectively.
• In the table below, we compare the present values of future benefits provided in the Plan’s June 30, 2021 valuation report with those calculated by Segal.
Present Vale of Future Benefits ($000)
Police Fire
Explicit Subsidy Cheiron Segal Cheiron Segal
Non-Medicare Eligible $154,566 $153,171 $85,433 $84,869 Medicare Eligible 294,752 286,756 189,338 187,121
Dental 32,507 33,933 20,635 20,945
Total Explicit Subsidy $481,826 $473,860 $295,405 $292,935
Implicit Subsidy $45,659 46,184 $27,233 $28,354
Grand Total $527,485 $520,044 $322,639 $321,289
Note: Total above may not add due to rounding.
Present Vale of Future Benefits ($000)
Total
Explicit Subsidy Cheiron Segal
Non-Medicare Eligible $239,999 $238,039
Medicare Eligible 484,090 $473,877
Dental 53,142 54,879
Total Explicit Subsidy $777,231 $766,795
Implicit Subsidy $72,892 $74,538
Grand Total $850,123 $841,333
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• A comparison of Segal’s present values of future benefits (PVB) to Cheiron’s present values by benefit type for each of Police and Fire and in Total 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 subsidy and the effect of the age- adjusted costs.
SEGAL/CHEIRON % DIFFERENCE Police Fire Total
Explicit Subsidy
Non-Medicare Eligible -0.9% -0.7% -0.8%
Medicare Eligible -2.7% -1.2% -2.1%
Dental 4.4% 1.5% 3.3%
Total Explicit Subsidy -1.7% -0.8% -1.3%
Implicity Subsidy 1.1% 4.1% 2.3%
Grand Total -1.4% -0.4% -1.0%
• Segal’s total actuarial accrued liability as of June 30, 2021 is 99.9% and 102.1% of Cheiron’s 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, Unfunded Actuarial Accrued Liability (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 97.4% of that calculated by Cheiron. • In order to determine the maximum subsidy amount payable under the Catastrophic Disability Benefit associated with the VEBA in the June 30, 2021 valuation, Segal valued the single coverage premium for the lowest cost medical plan. However, Cheiron confirmed that they valued a maximum subsidy amount that is blended across single and non-single coverage premiums for the lowest cost medical plan. This means Cheiron valued the single coverage premium for the lowest cost medical plan for future retirees that are expected to be single, but for those expected to be non-single (i.e., married and covering either a spouse or family), Cheiron valued a higher maximum subsidy corresponding to the spouse or family coverage premium for the lowest cost medical plan. As a result, there is an overstatement of the liability by Cheiron of the Catastrophic Disability Benefit for VEBA members. The overstatement varies for males and females. The maximum subsidy for the single lowest cost medical plan is about 70% of the maximum subsidy blended across non-single medical coverage tiers for males. The estimated overstatement of the total present value of future benefits is about $6.1 million and the estimated overstatement in the City’s Actuarially Determined Contributions is about $580,000 or 0.22% of pay. We understand that Cheiron will reflect this change in the next valuation.
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• For funding purposes, market value of assets has been maintained by the Plan for each of the Police and Fire Departments in the 401 (h) and 115 Trusts. Since the last audit and beginning with the June 30, 2017 valuation, the Actuarial Value of Assets was set to equal the Market Value of Assets. We note that the amount of assets for the OPEB Plan increased from $135.2 million (funded ratio of 13% for Fire and 20% for Police of the actuarial accrued liability) as of June 30, 2016 to $276.3 million (funded ratio of 36% for Fire and 37% for Police of the actuarial accrued liability) as of June 30, 2021. As the Plan 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) providing additional transparency on how market value investment volatility is managed separate from other volatilities and (b) relying on level percentage of payroll (no phase-in) 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 as a level percentage of payroll over 25-year periods with a 3-year phase-in and phase-out. We believe that the methodology applied is reasonable.
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Purpose and Scope of the Actuarial
Audit
Purpose of the Audit
Segal has performed an actuarial audit of Cheiron’s Actuarial Valuation as of June 30, 2021 for the City of San Jose Police and Fire Department Postemployment Healthcare Plan to provide assurance to the Plan'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 Plan'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 Plan website. • Completion of a parallel valuation as of June 30, 2021 using the assumptions, methodologies and funding methods used by the Plan’s consulting actuary in their performance of the June 30, 2021 valuation.
• Evaluation of the parallel valuation results for the Plan 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 Plan's consulting actuary.
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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.
Step 1: Compare the demographics of the 2021 data
provided by the Plan 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., Tier 1 eligible for Full Benefits from the OPEB Plan and Tier 1 or Tier 2 VEBA members eligible for the Catastrophic Disability Benefit), 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 Plan. 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. The Plan’s raw data was the starting point for this process. We used our pension team’s method to assign statuses to members, retirees, and beneficiaries in the raw data. We also used an OPEB Tier map provided by Cheiron to supplement the OPEB data replication.
Cheiron assigned the Police/Fire indicator in the final processed data and we referenced this field to fill any blanks in the raw data per discussions with Cheiron.
2. Cheiron provided to us a supplemental OPEB Tier map that was required to determine which members were Tier 1 that are eligible to receive Full Benefits from the OPEB Plan or Tier 1 and Tier 2 VEBA members eligible to receive the Catastrophic Disability Benefit. We used the tier mapping to determine which actives were eligible for health benefits. Term vested members were determined according to plan provision eligibilities.
3. In regards to current payees, we used the tier mapping along with medical or dental elections to determine who should be included in the valuation. Cheiron noted that participants were only included in the valuation if they elected a medical or dental plan.
Records without a medical or dental plan were removed. Duplicate records were removed when applicable.
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4. We recommend that Cheiron consider showing retiree married spouse counts in the report similar to the San Jose Federated Retirement System OPEB valuation report. We also recommend that Cheiron be asked to send the final processed OPEB data back to the Plan for validation.
Step 2: Develop a valuation program based on the
relevant provisions of the Plan as summarized in the
Summary Plan Descriptions (Appendix C – Summary
of 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. The test life information also indicated that the implicit subsidy reflected differences in age-based costs and premium rates for Medicare retirees.
Cheiron makes adjustments to the aggregate liabilities outside the valuation program to exclude the effect of aging for Medicare payees enrolled in Anthem because the claim costs that are in excess of the maximum subsidy would only impact the retiree-paid portion of the Medicare Part B premium subsidy. However, this adjustment is not reflected in the test life results. While we agree with their calculation of reflecting age-adjusted costs as described in Actuarial Standard of Practice No. 6 (ASOP 6), we recommend Cheiron reflect any adjustments to liabilities for Medicare payees enrolled in Anthem on an individual basis so that the sum of the of the trace liabilities are tied to the liabilities in aggregate.
Step 3: Run the valuation program with specific
individuals (test lives) who illustrate particular benefit provisions and compare results to Cheiron’s results
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.
• Present Value of Future Benefits: This liability 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,
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disability and turnover. This value is the cornerstone for the entire valuation as it represents the amount 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, is about 99% (range from 70% to 100%) for the active test lives. The ratio of Segal’s results to Cheiron’s results is about 99% for the terminated vested and retired test lives.
The lower end of the range for active lives comes from Segal’s comparison of the VEBA members where there is an overstatement of the Catastrophic Disability Benefit by Cheiron as discussed on page 5 of this report. The ratio of Segal’s results to Cheiron’s results for the active test lives excluding the VEBA members range from 99% to 100%.
Given the explanation by Cheiron on how they value the liabilities for the VEBA members, 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 Plan, 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. The actuarial accrued liability is the sum 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 93% (range from 68% to 97%) for the present value of future normal costs and about 101% (range from 83% to 103%) for the actuarial accrued liability [See pages 17-A]. As discussed above, the lower end of the range comes from Segal’s comparison to the liabilities for the VEBA members where Cheiron’s results reflect some overstatement of the Catastrophic Disability Benefit.
Observations
1. Segal’s valuation system generally assumed active members decrement (i.e., retirement, termination, etc.) at the beginning of each plan year (July 1). The Cheiron system, on the one hand, assumes decrements occur in the middle of the year (January 1). As part of this audit for the Plan, we have changed the timing of the decrement to allow middle of the year timing for the decrements assumed by Cheiron.
Either methodology is acceptable, with each actuarial firm establishing its standard for the assumed timing of decrements.
2. As noted on page 4 of this report, there is an overstatement of the liability by Cheiron of the Catastrophic Disability Benefit for VEBA members, The amount of overstatement varies for males and females. The single coverage maximum subsidy for the lowest cost medical plan is about 70% of the maximum subsidy blended across medical coverage tiers for males.
This explains why Segal’s liabilities are about 70% of Cheiron’s results for the Catastrophic
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Disability Benefit. The impact from overstatement is about $6.1 million of the total PVB and about $580,000 (0.22% of pay) of the City’s ADC.
3. There are two separate indicators for spouse coverage for retiree medical versus dental benefits. Cheiron confirmed that the wrong spouse coverage indicator was used in the situation where the retiree’s married spouse coverage is not the same for both medical and dental benefits (i.e., they have spouse coverage for one of the benefits but not the other).
As a result, Cheiron updated their valuation program to correct this issue, and provided Segal revised test life results but this correction is not reflected in the aggregate liabilities provided in the detailed valuation results and valuation report. There are about 1,600 married spouses with medical or dental coverage, and a little over 200 married spouses with either medical or dental coverage (but not both). Based on our review of spouse coverage information in the final processed data, any understatement of dental benefits for married spouses are offset by some overstatement of medical benefits for married spouses and therefore not a concern.
Step 4: Run the valuation program with all participant
data, compile results, and compare to Cheiron’s
results
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 98% to 103% for the implicit and explicit subsidy. In total, our present value of future benefits is 99% of Cheiron’s present value as shown in the column labeled “TOTAL” on page 18-A.
• The actuarial accrued liability depends in part on the actuarial firm’s valuation system 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 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 members’ contributions.
• Segal’s present value of future normal costs is 89% of Cheiron’s present value of future normal costs. About half of the difference between Segal and Cheiron’s present value of future normal costs can be explained by the overstatement by Cheiron of the Catastrophic Disability Benefit for VEBA members. Other differences can generally be explained by differences in procedures and methods used by Segal and Cheiron in allocating the present value of future benefit between past actuarial accrued liability and future normal cost. • Segal’s total City ADC is $28.4 million and Cheiron’s total City’s ADC is $29.2 million. The total City ADC calculated by Segal is about 97% of that calculated by Cheiron. Most of difference can generally be explained by differences in procedures and methods used by
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Segal and Cheiron in allocating the present value of future benefit between past actuarial accrued liability and future normal cost. Overall, we have verified that Cheiron’s calculations of the normal cost, UAAL and the total City’s ADC are reasonable. Similarly, we have verified that Cheiron’s calculations of the normal cost, UAAL and the total member contribution rate as a percentage of payroll are reasonable.
• For funding purposes, market value of assets has been maintained by the Plan in the 115 Trust and 401(h) account separately by Tier for each of the Police and Fire Departments. We have reviewed and agreed with the reconciliation of the market value of assets used in the valuation.
Observations
• Cheiron's methodology for valuing the over 65 explicit subsidy costs for retirees and beneficiaries involves adjustments outside the valuation program on an aggregate basis and therefore total liabilities are not tied directly to the individual liabilities. For example, for some sample payee test lives, the preliminary results were provided to Segal for comparison, before reflecting adjustments. We suggest Cheiron explore possibility of adjusting valuation results for these retirees and beneficiaries on an individual basis.
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 valuation results in detail. Most of our comments based on the valuation report and the 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.
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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 Plan 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 is lower than the 6.625% investment return assumption used for the pension valuation, which is based on a different asset allocation.
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.
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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.
H ealth 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% for Medicare) 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%.
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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 43 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 date 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 49 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 (such as the the municipal code online) 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 60 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 5% of their base salary for Tier 1 members or 4% of their base salary for Tier 2 members. 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. Finally, Cheiron confirmed that the maximum subsidy amount under the Catastrophic Disability Benefit associated with the VEBA should be valued as the single coverage premium for the lowest cost medical plan (as discussed on page 5 of this report). We understand that Cheiron will reflect this change in the next valuation.
Disclosure of different spouse assumptions for various benefits: Spouse assumptions used vary depending on the benefit (e.g., medical versus dental). We suggest clearly disclosing each of these assumptions in the report.
We observed numerous inconsistencies through the report. For example, (i) the 3,936 member count used to derive the contribution administrative expenses on page 23 does not match 4,023 on page 35, (ii) the projected normal cost for Fire in FY 2023 on page 20 ($5,452K) does not match $5,447K on page 24, (iii) Total payroll on page 9 and in the detailed valuation results ($253,435K) do not match Total payroll in final processed OPEB data and on page 33-34 ($252,558K) used to derive the ADC rates, (iv) City ADC amounts for Fire ($11,187K) and Total ($29,196K) on page 9 do not match the figures on page 24 ($11,183K and $29,192K, respectively), and (v) the beneficiary mortality table on page 47 is not same as in Cheiron’s pension report. We suggest Cheiron address such inconsistencies to prevent confusion in the next valuation.
16-A
Exhibit – A
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Analysis of Participant Data
Active Member Data
Full Benefits Catastrophic Disability Total
Plan Cheiron Plan Cheiron Plan Cheiron
Police
Number 517 517 564 564 1,081(1) 1081
Average Age 46.7 46.7 31.7 31.7
Average OPEB Service(2) 18.7 18.7 3.4 3.4
TOTAL POLICE
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule(3)
$85,177,803 $85,177,803 $71,823,129 $71,823,129 $157,000,932 $157,000,932 % DIFFERENCE
Number
0.0%
0.0%
0.0%
Average Age
0.0%
0.0%
0.0%
Average OPEB Service
0.0%
0.0%
0.0%
TOTAL POLICE
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule
(3)
0.0%
0.0%
0.0%
Fire
Number 469 469 188 188 657(1) 657
Average Age 47.1 47.1 35.6 35.6
Average OPEB Service(2) 17.4 17.4 4.8 4.8
TOTAL FIRE
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule(3)
$72,131,382 $72,131,382 $23,425,509 $23,425,509 $95,556,891 $95,556,891 % DIFFERENCE
Number
0.0%
0.0%
0.0%
Average Age
0.0%
0.0%
Average OPEB Service
0.0%
0.0%
TOTAL FIRE
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule(3)
0.0%
0.0%
0.0%
16-B
Exhibit – A (Continued)
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Analysis of Participant Data
Active Member Data
Full Benefits Catastrophic Disability Total
Plan Cheiron Plan Cheiron Plan Cheiron
TOTAL
Number 986 986 752 752 1,738(1) 1,738
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule(3)
$157,309,184 $157,309,185 $95,248,638 $95,248,638 $252,557,822 $252,557,823 % DIFFERENCE
Number
0.0%
0.0%
0.0%
Estimated salary for 7/1/2021-
6/30/2022, Cheiron’s Police
and Fire Plan Rule(3)
0.0%
0.0%
0.0%
(1) 13 records in the Plan’s original data reported as actives were reclassified as non- vested terminated members based on the response to a data question raised by Cheiron.1 record with very low service and no plan assignment was excluded from the valuation.
(2) Included members’ “SADRO service” with their benefit service.
(3) 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 - An annualized salary was calculated by multiplying “Compensation Rate 2 Pensionable” times 365/14 and increased with one year of wage inflation (3.00%) and one year of merit.
Step Two – Pensionable Compensation was increased with one year of wage inflation (3.00%) and one year of merit.
Step Three – Expected Salary for 2021/2022 was calculated as the greater of the salaries calculated in Step One and Step Two. The assumed wage inflation was 3.00% and not the bargained increases of 4.25% and 3.85% for FYE 2022 for Fire and Police members, respectively.
16-C
Exhibit – A (continued)
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Analysis of Participant Data
Non-Active Member Data
Police Fire Total
Plan Cheiron Plan Cheiron Plan Cheiron
Number
Retired & Disabled 1,287 1,287 720 720 2,007 2,007
Surviving Spouses 137 137 129 129 266 266
Inactive Vested 9 9 3 3 12 12
Total 1,433 1,433 852 852 2,285 2,285
% DIFFERENCE
Retired & Disabled 0.0% 0.0% 0.0%
Surviving Spouses 0.0% 0.0% 0.0%
Inactive Vested 0.0% 0.0% 0.0%
Total 0.0% 0.0% 0.0%
Number
(Retirees & Surviving
Spouses with Coverage)
Medical and Dental 1,220 1,219 780 780 2,000 1,999 Medical Only 1 1 - - 1 1
In-Lieu Medical and Dental 159 159 44 44 203 203 Dental Only 21 21 16 17 37 38
In-Lieu Medical Only 24 24 8 8 32 32
Total 1,425 1,424 848 849 2,273 2,273
% DIFFERENCE
Medical and Dental -0.1% 0.0% 0.0%
Medical Only 0.0% 0.0% 0.0%
In-Lieu Medical and Dental 0.0% 0.0% 0.0%
Dental Only 0.0% 6.3% 2.7%
In-Lieu Medical Only 0.0% 0.0% 0.0%
Total -0.1% 0.1% 0.0%
5703778v3/09381.007 17-A
Exhibit – B
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Test Life Comparison
_______________________
1 Segal’s PVB is lower than Cheiron’s PVB for the VEBA test lives due the overstatement of the liabilities for VEBA members receiving the Catastrophic Disability Benefit as discussed on page 5 of this report.
ACTIVES
Testlife #1 Testlife #2 Testlife #3 Testlife #4 Testlife #5 Testlives #1-5 Police Tier 1 Police Tier 1 Fire Tier 1 Fire Tier 1 VEBA Police Tier 2 VEBA Total Actives Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $358,962 $359,935 $386,927 $385,237 $343,341 $341,383 $13,722 $11,174 $24,071 $16,823 $1,127,022 $1,114,552 PV – Future
Normal Costs
$81,632 $74,774 $53,455 $51,558 $115,915 $112,590 $5,259 $3,728 $20,755 $14,081 $277,017 $256,731 Actuarial Accrued
Liability
$277,329 $285,161 333,472 333,679 $227,426 $228,793 $8,463 $7,446 $3,315 $2,742 $850,005 $857,821
RATIO OF SEGAL/CHEIRON
Total PVB 100% 100% 99% 81%1 70%1 99%
PV – Future
Normal Costs
92% 96% 97% 71%1 68%1 93%
Actuarial Accrued
Liability
103% 100% 101% 88%1 83%1 101%
5703778v3/09381.007 17-B
Exhibit – B (continued)
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Test Life Comparison
_______________________
1 S egal’s PVB is higher than Cheiron’s PVB because Cheiron’s test life results for retirees and beneficiaries enrolled in Anthem are before reflecting the adjustment to exclude the effect of aging in the Medicare costs that exceed the maximum subsidy. We were able to estimate this adjustment to confirm that the ratio of Segal’s to Cheiron’s PVB would be 98% for Testlife #8 if we included the effect of aging on the Medicare costs.
2 S egal’s PVB is lower than Cheiron’s PVB because Cheiron’s test life results for retirees and beneficiaries enrolled in Anthem are before reflecting the adjustment to exclude the effect of aging in the Medicare costs that exceed the maximum subsidy. We were able to estimate this adjustment to confirm that the ratio of Segal’s to Cheiron’s PVB would be 99% for Testlife #10 if we included the effect of aging over 65 in excess of the maximum subsidy.
INACTIVES
Testlife #6 Testlife #7 Testlife #8 Testlife #9 Testlife #10 Beneficiary Disability Retired Retired Retired
Police Tier 1 Police Tier 1 Fire Tier 1 Police Tier 1 Fire Tier 1 Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $105,642 $107,867 $203,400 $203,091 $150,567 $154,543 $80,499 $80,396 $361,092 $340,820
RATIO OF SEGAL/CHEIRON
102% 100% 103%1 100% 94%2
INACTIVES
Testlife #11 Testlives #12 Testlife #13 Testlives #6-13 Retired In-Lieu Retired Terminated Vested Total
Police Tier 1 Fire Tier 1 Fire Tier 1 Inactives
Cheiron Segal Cheiron Segal Cheiron Segal Cheiron Segal
Total PVB $433,800 $422,801 $208,714 $210,477 $347,891 $352,104 $1,891,605 $1,872,099
RATIO OF SEGAL/CHEIRON
97% 101% 101% 99%
5703778v3/09381.007 18-A
Exhibit – C
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
PRESENT VALUE OF
FUTURE BENEFITS (PVB)
Police Fire Total
Cheiron Segal Cheiron Segal Cheiron Segal
Medical1 $494,977 $486,110 $302,004 $300,344 $796,981 $786,454 Dental $32,507 $33,934 $20,635 $20,945 $53,142 $54,879
Total PVB $527,485 $520,044 $322,639 $321,289 $850,123 $841,333
RATIO OF SEGAL/CHEIRON
Medical 98% 99%
99%
Dental 104% 102% 103%
Total PVB 99% 100%
99%
_______________________
1 Medical result includes both explicit and implicit subsidy.
5703778v3/09381.007 18-B
Exhibit – C (continued)
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
Explicit Subsidy Only
Police Fire Total
ADC Cheiron Segal Cheiron Segal Cheiron1 Segal
Total Normal Cost $6,148 $5,527 $5,447 $5,192
Administrative Expense 103 103 62 62
UAL Amortization 17,324 17,328 10,648 10,690
Total Cost $23,576 $22,958 $16,157 15,944
Less Employee Contributions 5,567 5,556 4,974 4,916
Total ADC $18,009 $17,402 $11,183 $11,028 $29,192 $28,430
RATIO OF SEGAL/CHEIRON
Total Normal Cost 90%2 95%
Administrative Expense 100% 100%
UAL Amortization 100% 100%
Total Cost 97% 99%
Employee Contributions 100% 99%
Total ADC 97% 99% 97%
_______________________
1 While we were able to locate and opine on Cheiron’s calculations for the total City contribution amount of $29,192 as provided on page 24 of their report, we were not able to locate Cheiron’s breakdown of the total City contribution amount between the normal cost amount and UAAL contribution amount. 2 The 90% ratio of Segal to Cheiron’s Normal Cost is partly due to the overstatement of the liabilities by Cheiron for VEBA members receiving Catastrophic Disability Benefit. Other differences can generally be explained by differences in procedures and methods used by Segal and Cheiron in allocating the present value of future benefit between past actuarial accrued liability and future normal cost.
5703778v3/09381.007 18-C
Exhibit – C (continued)
City of San Jose Police and Fire Department Retirement Plan June 30, 2021 Valuation
Comparison of Results
(All Dollar Amounts are in Thousands)
Explicit Subsidy Only
Police Fire Total
UNFUNDED
ACTUARIAL ACCRUED LIABILITY Cheiron Segal Cheiron Segal Cheiron Segal Present Value of Future Benefits $481,826 $473,860 $295,405 $292,935 $777,231 $766,795 PV Future NC Contributions $42,639 $36,368 $41,100 $37,818 $83,739 $74,186 Actuarial Accrued Liability $439,187 $437,492 $254,305 $255,117 $693,492 $692,609 Current Assets at Actuarial Value $176,841 $176,841 $99,472 $99,472 $276,313 $276,313 UAAL $262,346 $260,651 $154,833 $155,645 $417,179 $416,296
RATIO OF SEGAL/CHEIRON
Present Value of Future Benefits 98% 99% 99%
PV Future NC Contributions 85%1 92%1 89%1
Actuarial Accrued Liability 100% 100% 100%
Current Assets at Actuarial Value 100% 100% 100%
UAAL 99% 101% 100%
_______________________
1 Segal to Cheiron’s Normal Cost is lower partly due to the overstatement of the liabilities by Cheiron for VEBA members receiving Catastrophic Disability Benefit. Other differences can generally be explained by differences in procedures and methods used by Segal and Cheiron in allocating the present value of future benefit between past actuarial accrued liability and future normal cost.
5703778v3/09381.007 19-A
Exhibit – D
City of San Jose Police and Fire Department Retirement Plan Recommended Action Items Before June 30, 2022 Valuation
• Consider adding the disclosures listed in the “Items of Note” section. • Reflect correction to the Catastrophic Disability Benefit associated with the VEBA so that the maximum subsidy valued is the single coverage premium for the lowest cost medical plan.