Memo- Early Retirement Program
Memorandum
To:
Hopkins City Council
Jim Genellie
From:
Date:
Subject:
October 6, 2006
Early Retirement Program
The City of Hopkins currently has an early retirement program that provides health insurance
coverage for those who retire before age 65:
8 .13 EARLY RETIREMENT
An employee who has been with the City for at least ten years and is:
1. age 60 years or older, or
2. eligible for full PERA retirement benefits
may retire and receive full single health coverage until eligible for Medicare or age 65
whichever comes first.
This early retirement program is not available for any employee hired after July 1, 1993.
This program was put into place in 1985. It enabled some employees, who had health problems, to
retire from the City. The cost of the program was offset by the fact that the new employees hired to
replace the retiring employees received lower salaries and benefits.
The rising cost of health insurance has made this program more expensive. In 1985 the most
expensive single health insurance was $97 per month. In 2006 the same insurance cost $470. The
current annual cost to the City for the early retirement program is $76,450.
The City has always paid for this benefit on a pay-as-you-go basis. In 2003, the Government
Accounting Standards Board (GASB) announced new rules (GASB 45) requiring all government
entities to calculate the accrual of OPEB (other post-employment benefits) liabilities over the
expected working career of plan members and to expense those accrued liabilities over the same
period.
The result - the City of Hopkins has to report the accrued value of its early retirement benefit on its
annual financial report as a liability. The City hired an actuary to help determine the future cost of
its early retirement benefit as well as the "implicit rate subsidy! ."
1 The "implicit rate subsidy" is another component to GASB 45 which will show up as a liability on the City's financial
statement. Minnesota Statute 471.61, Subd 2b: "A unit oflocal government must allow a former employee and the
employee's dependents to continue to participate indefinitely in the employer-sponsored hospital, medical, and dental
insurance group that the employee participated in immediately before retirement. .. (b) Until the former employee
reaches age 65, the former employee and dependents must be pooled in the same group as active employees for purposes
of establishing premiums and coverage for hospital, medical, and dental insurance."
Because the retired employees are pooled with current, younger employees they pay a lower insurance premium than
they would if they had to get health insurance based upon their age. This difference is the implicit rate subsidy and must
be accounted for.
\Early Retirement Memo 06.doc
1
What does the City of Hopkins have to do? The attached article from the League of Minnesota
Cities sets out six steps that employers should undertake.
Retain an actuary to value OPEB liabilities and provide reporting requirements.
The City of Hopkins has retained Jill Urdahl, of Hildi Incorporated, to estimate the City's accrued
liability. The actuary has determined that accrued liability is $3,337,000 dollars, including the
implicit rate subsidy. About half of this accrued liability is due to the early retirement program.
Review existing OPEB plans and research alternative plan designs to control costs.
City staff will present a plan for reducing the future cost of the City's early retirement program. City
staffwill continue to work with our consultant on ways to reduce the implicit rat subsidy. However,
only the State of Minnesota can amend the law that creates the subsidy.
Seek benefit concessions from active and retired employees.
It is unlikely that the City can affect the benefits already being earned by retired employees. Existing
case law in Minnesota has determined that benefits may not be changed after an employee retires.
The City can change the plan for current employees who have not yet retired.
Assess how OPEB liabilities will affect bond credit ratings, selling bonds and the cost of borrowing.
It is not clear what the affect these accrued liabilities will have on the City's bond rating. Every
public entity in the state of Minnesota will have an accrued liability due to the "implicit rate
subsidy." A number of other states have similar requirements. The City's early retirement benefit is
also not unusual. Many school districts and a number of cities have similar, or even more generous,
benefits. Even if the City did nothing, this liability would disappear by 2033.
Determine whether and how to fund the OPEB liabilities.
GASB 45 does not require the City to change the way it is funding OPEBs. The City can continue to
pay these benefits on a pay-as-you-go basis. The accrued liability, however, will continue to
increase. In order to fully fund the City's OPEB liabilities, the City would have to dedicate funds for
this purpose. It is not clear at this time whether the City has the legal authority to reserve money in a
trust account which is what would be required.
Report OPEB liabilities on financial statements.
The City will be reporting these liabilities beginning in 2008.
Finally, there is some good news that was received since staff first brought this matter before the
City Council in 2005. The City of Hopkins, like a number of other public entities, cuts off its benefit
when the retiree reaches the age of65. The Equal Employment Opportunity Commission (EEOC)
determined that ending the benefit for retirees older than 65 was not a violation of the Age
Discrimination Act.
The American Association of Retired Persons (AARP) sought to reverse this decision and have
programs such as ours, that cut off the benefit at age 65, be considered as age discrimination.
The EEOC disagreed and ultimately prevailed in a lawsuit filed by AARP.
\Early Rettrement Memo 06.doc
2
Attachments:
"New GASB Accounting Standards for OPEB." League of Minnesota Cities
"Gasping over GASB." Federal Reserve
\Early Retirement Memo OS.doc
3
HR UPDATE
New GASB Accounting Standards for OPEB
By Chris Grabrian, EA,ASA, 1\1.AAA,Actuarial Consultant
ew Government Accounting
Standards Board (GASB) State-
ments No. 43 and No. 45 establish
accounting and financial report-
ing standards for Other Post-
Employment Benefits (OPEB)
offered by public-sector employers.
o PEB primarily relates to
retiree health care, but also includes
other benefits offered after employment.
OPEB liabilities have been over-
whelming employers and will signifi-
cantly affect their financial statements
and credit ratings. Cities should take
steps now to ensure the most positive
outcome; the new standards take effect
late in 2006.
"What do the new accounting stan-
.ds mean? Most public-sector
ployers currently report OPEB costs
as expenses/expenditures and finance
them on a pay-as-you-go basis. GASB
views OPEB as similar to pension ben-
efits in that the cost of the promised
benefits should be recognized when the
employer receives the services of the
employee-not when the benefits are
paid after the employee leaves service
or retires. New standards require OPEB
costs to be measured on an accrual
accounting basis over the career of
employees; the pay-as-you-go basis will
no longer be acceptable.
The standards do not increase the
actual cost of employee compensation
(which includes benefits). Instead, the
standards shift the future cost of benefits
provided after employment to the years
of employment. This approach increases
the understanding and disclosure of
employees' total cost of compensa-
tion. The standards force employers to
understand and quantify benefits they
have promised to current and future
retirees and report this information to
taxpayers and bondholders.
~Under the new standard, the
ployer isn't required to pre-fund
t ese promised benefits, but must deter-
mine and disclose how they plan to pay
for these benefits in the future. Employ-
ers failing to pre-fund will likely expe-
rience negative consequences related to
their credit ratings, selling of bonds, and
borrowing of money.
"Who is affected? Public-sector
employers who follow Generally
Accepted Accounting Principles and
offer OPEB are affected. Examples
include municipalities, public educa-
tional institutions, utilities, and hospitals
and other health care providers.
Some Minnesota municipalities have
mistakenly assumed they have no OPEB
liability because they have few employees,
don't currently have retirees, or charge
retirees the "full" rate. Virtually all
Minnesota public-sector employers
have an OPEB liability, regardless of
their size, thanks to the provisions of
Minnesota Statute 471.61.
In Minnesota, when a person retires
under age 65, the most an employer can
charge is the group premium rate for
active employees, which is less than the
retiree's expected cost. This difference,
known as the Implicit Rate Subsidy, is
considered an OPEB and must be quan-
tified under the new standards. Some
employees will be covered to age 65,
others for life. Spouses may also be cov-
ered in those same timeframes, creating
additional liabilities. Each employer's
situation depends on the promises made
to their current and future retirees.
When are the standards ~ective?
The standards will be phased-in based
on annual revenue of the employer.
The effective dates are included in the
table below.
Effective dates for CASB reporting standards
Revenue
inFY
Ending After
6/15/99
GASB No. 45 GASB No. 43
Effective FY Effective FY
Beghudng Beghurlng
After: After:
"What do employers need to do?
Be proactive. While it seems like there
is a lot of time to comply with the new
standards, there are a number of steps
involved:
. Retain an actuary to value OPEB liabili-
ties and provide reporting requirements.
The actuarial consultant will analyze
the impact the standards will have
on your organization and provide
requirements for financial statements.
Choose a consultant with the exper-
tise to provide valuations, plan design
analysis, asset/liability projections,
union negotiating strategies, and
reporting disclosure requirements for
OPEB plans. ·
. Review existing OPEB plans and research
alternative plan designs to control costs.
. "Where appropriate, seek benefit conces-
sions from active and retired employees
of collectively bargained plans. This is a
highly sensitive topic. Retiree ben-
efits are becoming an increasingly
popular topic of employment litiga-
tion; employers will fare better if the
issue is addressed head-on.
. Assess how OPEB liabilities will cifJect
bond credit ratings, selling bonds and the
cost of borrowing.
. Determine whether and how to fund the
OPEB liabilities.
. Report OPEB liabilities on financial
statements.
The new standards affect every Min-
nesota public-sector organization. Fig-
ure out the financial impacts and make
plans now for how you'll adjust to life
under this new reality. ...
Chris Crabrian is an actuarial consultant
for Stanton Croup. For more information
on public-sector services provided by Stanton
Group, contact Yvonne Johnson at (763)
278-4462 or yjohnson@Stanton-group.com.
Stanton Croup will host a free CASB
OPEB seminar in Minneapolis;for more
information call (763) 278-4196 or
(888) 624-1575.
MARCH-ApRIL 2006
2 1
> $100 million Dec. 15,2006 Dec. 15,2005
$10-$100 million Dec. 15,2007 Dec. 15,2006
< $10 million Dec. 15,2008 Dec. 15,2007
MINNESOTA CITIES
Federal Reserve
May 2006
Gasping over GASB
Post-retirement health benefits could bring a shock to governments, retirees
Ronald A. Wirtz, Editor
GASB 45. Gaz-bee forty-five.
If you're unfamiliar with this little bit of arcane government lingo, you're hardly alone.
But retirees, current government workers, taxpayers and policymakers are likely to
become better acquainted with GASB 45 over the next few years because it has important
consequences for all four parties.
GASB 45 is a (thankfully) abbreviated reference to Statement Number 45 from the
Government Accounting Standards Board, an independent, not-for-profit agency
designed to improve financial accounting and reporting standards for state and local
governments. The rule has to do with nonmonetary retirement perks called "other post-
employment benefits," or OPEBs. By far, the most important OPEB is retiree health care,
but dental coverage and life insurance are also fairly common.
In 2003, GASB announced new rules requiring all government entities to calculate the
accrual of OPEB liabilities over the expected working career of plan members (rather
than on a pay-as-you-go basis) and to expense those accrued liabilities over the same
period of time.
In days past, OPEB costs were fairly minor. But as the number of pension beneficiaries
increases, and the cost of health care skyrockets, those costs are predicted to climb
steeply, eating into annual budgets. Because these are retirement promises-legacy costs
just like a monthly pension check-GASB figured governments needed to determine the
future cost of those OPEB promises, and how exactly they planned to pay for them.
Wake me when this gets important, right? Well, nudge-nudge: The first wave of GASB
45 reports is due by the end of this year.
Karl Johnson is a project manager with GASB, and he has talked with actuarial firms
about early reports being done for local and state governments. One firm, which Johnson
chose not to disclose, "said the first reaction is that people are just stunned. ... People
think you added an extra zero," Johnson said. The shock effect is wearing off, he said, but
only because elected and pension officials are becoming more familiar with the topic and
the potential financial hazard.
Unlike most retiree benefits, OPEBs are typically not administered through pension
plans. Most OPEBs come directly from (and are paid out of) annual budgets of local and
state government, just like benefits given to the existing workforce. Nobody has a clue as
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to how many governments will be affected-and to what degree-by the new GASB 45
requirements. But we do know that the vast majority of "however many" have set nothing
aside for a retirement benefit and financial liability that is expected to grow immensely
over time.
Excuse me, I have to GASB
When it comes to retiree health coverage, sponsoring governments subsidize retired
employees in two ways, both of which contribute to OPEB liability.
The first is giving retirees the opportunity to buy health insurance at the government-
purchased group rate, which pools all employees and covered retirees. This is called an
implicit rate subsidy to retirees, because it lowers the average cost of health insurance for
retirees compared to what they would pay for a policy at the retail level. It also increases
government's health care costs because retirees raise the pool's average age, and age is
directly related to health care costs. Minnesota requires its governmental units to offer
this insurance benefit.
The second type of subsidy is the extent to which government buys down retirees'
monthly insurance premiums.
Just put it on my tab
But getting a firm grip on comprehensive OPEB liabilities is like trying to nab flies out of
the air. Most investigation to date has been focused at the state level. But that misses the
thicket of local government entities-literally hundreds, sometimes thousands in larger
states, and not all of them small-that could hypothetically offer OPEBs, and thus face
major unfunded liabilities in the future. Exactly how many offer retiree health care, and
to what extent, is anybody's guess: Most are not even required to report on the matter
until 2007 or 2008.
Though it was not required to comply with GASB 45 for another year and a half, the city
of Duluth, Minn., got a head start several years ago, asking an actuarial firm to add up the
lifetime liabilities for retiree health care, which includes spouses and dependents up to
age 26. The tab came to almost $180 million, more than twice the city's total budget. The
city took a deep breath and asked for another tabulation last year. The good news: The
original estimate was wrong. The bad news: The city's liability was even bigger, $280
million.
Duluth might be an extreme case, but it is not likely to find itself alone in discovering
unfunded OPEB liabilities. Erin Rian, benefits manager for the League of Minnesota
Cities, said GASB 45 "impacts potentially any city in the state with group health plans."
To what degree? "We don't know," said Rian. "We suspect in some cases it's
insignificant. But in some cases it will be a large cost. ... There are some Duluths out
there."
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Chris Grabrian is an actuarial consultant with Stanton Group of Minneapolis who works
with local governments on GASB 45 estimates. He said he could not divulge which
governments he worked with, or individual results. But experience has led him to believe
that GASB 45 "is going to have a significant effect" on local governments' unfunded
liabilities.
As Grabrian sees it, virtually all Minnesota local governments will have at least some
GASB 45 liabilities because they are required by state statute to continue offering group
health care coverage to early retirees (and oftentimes their spouses and any dependents).
Once retirees turn 65, Medicare kicks in and governments can push retirees into cheaper,
supplemental purchasing pools limited to seniors.
What now, magic 8 ball?
Governments will not be required to financially backfill unfunded liabilities. GASB 45
merely requires governments to acknowledge their existence and size.
But there will be consequences for governments that sit on their hands, because liabilities
will compound over time as the number of retirees increases and the cost of health care
continues to outpace almost everything. As this red ink pools, it will increasingly color
the financial outlook of local governments, influencing public service levels, future
benefits of workers and retirees, future tax rates and even such mundane things as
borrowing costs.
Grabrian, for example, pointed out that once a local government has even an estimate of
future liabilities, it is required by the Securities and Exchange Commission to disclose
those estimates when it is in the process of issuing bonds. "You can't keep that (GASB
45 liability) up your sleeve," he said.
Dayton, from South Dakota, said some governments might feel the urge to ignore the
new rules, "but they will be forced to do something if they want a clean audit." And
without a clean audit, there may be an impact on a government that is selling bonds for
that new school building or county highway.
What to do? That's a good question with no right answer. Duluth faces unfunded accrued
liabilities about two and a half times its annual budget-and just for retiree medical
benefits. The recent report on the matter stated bluntly: "It would be difficult, if not
impossible, to overstate the financial crisis looming for the City of Duluth. ... The
granting of free medical coverage for retirees beginning in 1983 has turned into a disaster
for the city, totally unforeseen by those who entered into making that decision 22 years
ago. "
The city estimates that it would cost an additional $20 million annually-close to 20
percent of the city's total annual budget-to catch that dog's tail down the road, given
rising retiree and health costs. Literally everything is on the table: a final, mea culpa
3
report of sorts lists 22 possible actions, including higher cost-sharing by retirees and
employees (and taking the matter to court, if necessary), importing drugs from other
countries, increasing property taxes, tapping into other unrelated tax and fee revenue, and
even begging the state for help.
One government source, not connected to the Duluth matter, said that the sticker shock of
GASB 45 might convince many governments to reconsider certain benefits for retirees.
"I'm thinking they'll drop (OPEBs), and that's not all bad."
But for the near future, there will be a fair amount of feeling around in the dark.
"Until quite recently, these are things that have never been measured," said Johnson,
from GASB. "I don't think there's any trend of what governments are planning to do
about this."
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