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Attachment 2 6.3C Page 1 0 Attachment t EXECUTIVE SUMMARY Background In June 2004, the Governmental Accounting Standards Board (GASS) issued Statement Number 45 providing new requirements for the accounting and financial reporting by employers for post employment benefits other than pensions (OPES). This new statement is similar to previous GASa 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. Under GASS 45, if the costs are recognized and funded during an employee's active years of service, then in theory. when the employee retires, the funds required to pay for the retiree's health would have been previously accumulated and would then be available for the actual health premium payments. The City currently provides one post employment benefit in the form of health insurance for retirees. This benefit is currently accounted for on a llpay-as-you-go" basis, which means that costs are recognized as payments are made. 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 for active employees. The City currently pays for the health insurance of 268 retirees, and it is projected that the 2006-07 "pay-as-you-go" amount for this benefit will be $1.3 million. To determine the costs of OPES, GASS 45 requires a biennial actuarial valuation of benefits. The City retained Bartel Associates to prepare this valuation. The actuarial valuation calculates the Actuarial Accrued Liability (AAL), or the discounted value of benefits earned by employees to-date, the Actuarial Value of Assets (AVA) which is the value of assets available to fund the AAL (the city currently has no assets), the Unfunded Actuarial Liability (UAL) which represents the difference between the AAL and the AVA, and the Annual Required Contribution (ARC) which is the actuarially determined contribution requirement. The ARC consists of the value of benefits earned during the year (the normal cost) plus amortization of the UAL over a period not to exceed 30 years. A discount rate is utilized in actuarial calculations and represents the estimated interest earnings on accumulated funds that will offset the OPES costs. This discount rate ranges from 4.25% for assets held by the City and pooled with the City's investments, or 70/0 for assets held in an irrevocable trust (most likely placed with a trustee). The irrevocable trust provides a higher discount rate as these assets are restricted solely for OPES, and are invested In securities with longer-term maturities. The use of the higher discount rate results in a lower ARC. However, by entering into an irrevocable trust agreement, the City loses access to those funds. GASS 45 does not require the City to fully fund the ARC, however, any unfunded portion must be recorded as a liability in the Enterprise Funds (Water, Sewer, Parking and Port Funds), and in the Statement of Net Assets for the Governmental Funds (General Fund, Redevelopment Agency, etal.). Additionally, any unfunded ARC will increase subsequent ARC calculations when the next biennial valuation is performed. The City may choose to fund the ARC at any level, from zero to fully funded. Any amount of the ARC funded over the current "pay-as-you-go" amount will trigger the need for the City to report these funds in a pension trust fund, unless the City utilizes an outside administrator, in which case the plan administrator will account for and invest these funds (at the previously mentioned higher discount rate). 5