AgdaPkt 2010-03-08 - Laserfiche WebLink

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REPORT 6.3C Page 1 To the Honorable Mayor and City Council From the Cit Mana er March 8,2010 SUBJECT Irrevocable Trust for Retiree Medical Benefits RECOMMENDATION Approve, by resolution, designating the California Public Employees Retirement System (PERS) as the trustee for retiree medical benefits. BACKGROUND In June 2004 the Government Accounting Standards Board (GASS) adopted new accounting and financial reporting standards, GASS Statement Number 45, which provided new requirements for the accounting and financial reporting by employers for post employment benefits other than pensions (OPEB). The City currently provides one post employment benefit in the form of health insurance for retirees. This new statement 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 rather than the City's current practice of r'pay-as-you- go" in which costs are recognized only as payments are made for retirees. Under GASS 45, an actuarial valuation is performed to determine the total cost of the benefit, and from this valuation the Annual Required Contribution (ARC) is calculated. The ARC consists of the value of benefits earned during the year (the normal cost) plus amortization of the unfunded liability and is the amount an employer needs to contribute to be considered fully funding this benefit. At its September 25, 2006 meeting the Council adopted a staff recommendation to begin a phased-in approach to funding this benefit which contemplated fully funding the City's ARC by FY 2010-11. This recommendation was based upon an actuarial report that was performed in March 2006. A copy of this staff report is attached for your review (Attachment 2). According to the most recent actuarial report (March 2009) the amount included in the FY 2009-10 budget is sufficient to meet the ARC provided that the City places these funds into an irrevocable trust. By placing these funds into an irrevocable trust the actuary is then permitted to use a higher discount rate when computing the City's OPEB liability. A higher discount rate translates into a greater share of the funding of benefits coming from interest earnings. Placing the funds into a trust allows for the selection of investments, such as stocks and long-term bonds that historically have generated higher returns. Keeping the funds within the City's direct control, as the current situation, limits the investments to those set forth in the City's Investment Policy which are short term debt instruments which tend to generate lower investment returns. Policy Considerations of Establishing an Irrevocable Trust Funds deposited into an irrevocable trust may only be used to pay retiree medical benefits. However, should the City elect to stop prefunding retiree medical benefits it