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7A Page 2 The City pays the debt service (principal and interest payments) on the Public Finance Authority bonds from the UUT revenues. These payments average around $2.3 million per year. The balance, $5.5 million, is then appropriated for capital projects. Losing $2 million per year of UUT revenues will reduce funding for capital projects by 36% unless another source of funding is identified. Workers' Compensation Self-Insurance Fund At the February 6, 2006 Council priority setting session, staff advised the Council that the City's workers' compensation self-insurance fund had $2.1 million in negative fund equity (liabilities exceed assets by this amount). Although this is a concern, staff views this as a medium to long-term issue as this fund has sufficient cash to finance the liabilities coming due in the current fiscal year and likely each of the next two fiscal years. Our recommendation is to wait until the middle of FY 2006/07 when the next actuarial valuation of this fund is scheduled to be conducted and report back to Council at that time. The possibility exists that the existing liabilities estimated by the actuary may decline by that time due to changes in state laws and programmatic changes implemented by the Human Resources Department. Retirement System Contributions On May 8, 2006 the Council received and acknowledged a report describing changes made by the Board of the California Public Employees Retirement System (PERS) and the impact upon the City's contributions in FY 2006/07 and future years. Without these changes in the manner PERS amortizes certain unfunded liabilities, the City's required contribution to PERS would be about $1.4 million higher each year and would likely have resulted in staff recommending general fund expenditure reductions. The disadvantage to this change is that it is uncertain when, or if, approximately $41 million of unfunded liabilities in the City's two retirement plans will be paid off. Funding Retiree Health Benefits [Governmental Accounting Standards Board Statement No. 45 Other Post Employment Benefits (OPEB)] The City Council Finance Committee recommends that the City Council review the information provided on GASB 45, Other Post Employment Benefits (Attachment II), and begin to develop a strategy for the City's implementation of GASS 45 by fiscal year 2007- 08. GASB 45 is similar to previous GASS guidance for pensions in that it requires the recognition of the cost of post employment benefits during the years of an employee's active years of service to the City, and utilizes a calculation referred to as the annual required contribution (ARC) to fund the cost of the benefit. The City currently provides one post employment benefit in the form of health insurance for retirees. This benefit is currently accounted for on a "pay-as-you-go" basis, which means that costs are recognized as health premium payments are made for retirees. Therefore, the City is currently recognizing only the health insurance costs associated with the actual retiree health insurance payments being made, and not recognizing the costs of this benefit which is accruing for active employees. 2 .