OPEB Valuation 2011-13CITY OF NEW HOPE
NEW HOPE, MINNESOTA
GASB STATEMENT NO. 45
FOR THE YEAR ENDED
DECEMBER 31, 2011
l ;We-, EG AWURSLLP
Certified Public Accountants & Cortsadiants March 16, 2012
5201 Eden Avenue
Suite 370
Edina, MN 55436
Mr. Kirk McDonald
City Manager
City of New Hope
4401 Xylon Avenue N.
New Hope, Minnesota 55428
Dear Mr. McDonald,
The purpose of this letter is to inform the City of New Hope (the City) of its Other Postemployment Benefit (OPEB) liability under the
requirements of GASB Statement No. 45 using the Alternative Measurement Method. This valuation has been prepared to present
information for financial reporting purposes. According to information submitted by the City staff on the alternative measurement
method questionnaire, our calculations summarize the following results:
Normal Cost Component
Normal Cost
Interest
Total Normal Cost
Amortization Component
Actuarial Accrued Liability (AAL)
Less: Assets
Unfunded Actuarial Accrued Liability (UAAL)
Divided by PV factor
Amortization payment
Interest
Total Amortization Payment
Annual Required Contribution (ARC)
Interest on net OPEB obligation
Adjustment to ARC
Annual OPEB cost (expense)
Amount paid by the employer in relation to the ARC
Direct (explicit) subsidy
Implicit subsidy
Increase in net OPEB obligation
PY OPEB obligation
OPEB obligation
% of Annual OPEB Cost Contributed
Covered payroll
% of UAAL to covered payroll
12/31/2011
12/31/2012
12/31/2013
$ 57,618
$ 57,618
$ 57,618
2,017
2,017
2,017
59,635
59,635
59,635
$ 4,266,321
$ 4,266,321
$ 4,266,321
1,001,568
1,001,568
1,001,568
1,001,568
1,001,568
1,001,568
26
26
26
38,806
38,806
38,806
1,358
1,358
1,358
40,164
40,164
40,164
99,799
99,799
99,799
1,608
2,917
4,585
(1,799)
(3,263)
(5,130)
99,608
99,453
99,254
(62,228) (51,786) (47,508)
37,380
47,667
51,746
45,949
83,329
130,996
$ 83,329
$ 130,996
$ 182,742
62.5%
52.1%
47.9%
$ 4,266,321
$ 4,266,321
$ 4,266,321
23.5%
23.5%
23.5%
952.835.9090 • Fax 952.835.3261
wmv.aemcpas.com
The AAL includes 67 active employees and 9 retirees participating in the plan in 2011. The City also has 16 active employees that
have chosen not to participate in the plan for 2011. The City is projected to have 8 retirees participating in the plan in 2012 and 7
retirees participating in the plan in 2013. A further breakdown of the AA.L by employee status follows:
Active $ 650,665
Retirees 350,903
$ 1,001,568
The required note disclosures for the City's financial statements are included on pages 3 - 5 of this letter.
If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at your convenience.
We wish to thank you for the opportunity to be of service and for the courtesy and cooperation extended to us by your staff.
Sincerely,
w
ABDO, EICK & ME YERS, LLP
Certified Public Accountants & Consultants
Steven R. McDonald, CPA
Managing Partner
952.835.9090 • Fax 952.835.3261
www.aemcpas.com
Required Note Disclosure for December 31, 2011 Financial Statements
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Other Postemployment Benefits
Under Minnesota statute 471.6 1, subdivision 2b, public employers must allow retirees and their dependents to continue coverage
indefinitely in an employer- sponsored health care plan, under the following conditions: 1) Retirees must be receiving (or eligible to
receive) an annuity from a Minnesota public pension plan, 2) Coverage must continue in a group plan until age 65, and retirees must
pay no more than the group premium, and 3) Retirees are able to add dependent coverage during open enrollment period or qualifying
life event prior to retirement. All premiums are funded on a pay -as- you -go basis. The liability was determined, in accordance with
GASB Statement No. 45, at January 1, 2011.
Note X: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
A. Plan description
The City administers a single- employer defined benefit healthcare plan ( "the Retiree Health Plan "). The plan provides
healthcare insurance for eligible retirees and their eligible dependents through the City's group health insurance plan, which
covers both active and retired members. There are 67 active participants and 9 retired participants. The benefit levels,
employee contributions, and employer contributions are governed by the City and can be amended by the City. The Retiree
Health Plan does not issue a publicly available financial report.
B. Funding policy
All retirees of the City have the option under state law to continue their medical insurance coverage through the City from the
time of retirement until the employee reaches the age of eligibility for Medicare. For members of all employee groups, the
retiree must pay the full premium to continue coverage for medical insurance. The City is legally required to include any
retirees for whom it provides health insurance coverage in the same insurance pool as its active employees. Consequently,
participating retirees are considered to receive a secondary benefit know as an "implicit rate subsidy." This benefit relates to
the assumption that the retiree is receiving a more favorable premium rate than they would otherwise be able to obtain if
purchasing insurance on their own, due to being included in the same pool with the City's younger and statistically healthier
active employees.
Contribution requirements are set by the City annually on a pay -as- you -go basis. The City contributes none of the cost of
current year premiums for eligible retired plan members and their dependents except for the implicit rate subsidy described
above. For fiscal year 2011, the City contributed $62,228 to the plan.
C. Annual OPEB cost and net OPEB obligation
The City's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required
contribution of the employer (ARC). The City has elected to calculate the ARC and related information using the alternative
measurement method permitted by GASB Statement No. 45 for employers in plans with fewer than one hundred total plan
members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year
and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years.
Required Note Disclosure for December 31, 2011 Financial Statements — Continued
Note X: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - CONTINUED
The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to
the plan, and changes in the City's net OPEB obligation:
Annual required contribution
$ 99,799
Interest on net OPEB obligation
1,608
Adjustment to annual required contribution
(1,799)
Annual OPEB cost (expense)
99,608
Contributions made
(62,228)
Increase (decrease) in net OPEB obligation
37,380
Net OPEB obligation - beginning of year
45,949
Net OPEB obligation - end of year
$ 83,329
The City's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for
fiscal year 2011 and the two preceding fiscal years were as follows:
Three Year Trend Information
Percentage
Year Annual Annual OPEB Net OPEB
Ending OPEB Cost Contributed Obligation
12/31/11
12/31/10
12/31/09
99,608 62.5 % $ 83,329
20,769 34.6 45,949
20,759 22.7 32,374
D. Funded status and funding progress
As of January 1, 2011, the actuarial accrued liability for benefits was $1,001,568, all of which was unfunded. The covered
payroll (annual payroll of active employees covered by the plan) was $4,266,321, and the ratio of the unfunded actuarial
accrued liability to the covered payroll was 23.5 percent.
The projection of fixture benefit payments for an ongoing plan involves estimates of the value of reported amounts and
assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future
employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the
annual required contributions of the employer are subject to continual revision as actual results are compared with past
expectations and new estimates are made about the future. The Schedule of Funding Progress, presented as required
supplementary information following the notes to the financial statements, presents multi -year trend information about
whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for
benefits.
Required Note Disclosure for December 31, 2011 Financial Statements — Continued
E. Methods and assumptions
Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the
employer and plan members) and include the types of benefits provided at the time of each valuation and the historical
pattern of sharing of benefit costs between the employer and plan members to that point. The methods and assumptions used
include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the
actuarial value of assets, consistent with the long -term perspective of the calculations.
The following simplifying assumptions were made:
Retirement age for active employees - Based on the historical average age of retirement and expectations of management,
the retirement age for active plan members was determined on an individual level. In addition, spouses of retired
employees were assumed to discontinue coverage on the plan when the retired employee reaches Medicare age.
Marital status - Marital status of members at the calculation date was assumed to continue throughout retirement.
Mortality - Life expectancies were based on mortality tables from the National Center for Health Statistics. The 2007
United States Life Tables for Males and for Females were used.
Turnover - Non - group - specific age -based turnover data from GASB Statement No. 45 were used as the basis for
assigning active members a probability of remaining employed until the assumed retirement age and for developing an
expected future working lifetime assumption for purposes of allocating to periods the present value of total benefits to be
paid.
Healthcare cost trend rate - The expected rate of increase in healthcare insurance premiums was based on actual rate
changes for 2011 and 2012 along with projections of the Office of the Actuary at the Centers for Medicare & Medicaid
Services. A rate increase of 5.2 percent initially in 2011, followed by a 6.4 percent decrease in 2012, to an ultimate
average rate increase of 5.2 percent after six years, was used.
Health insurance premiums - 2010, 2011, and 2012 health insurance premiums for retirees were used as the basis for
calculation of the present value of total benefits to be paid.
Inflation rate - The expected long -term inflation assumption of 2.4 percent was based on average changes over the past
ten years in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI -W) in The 2010 Annual
Report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Disability Insurance Trust Funds
for an intermediate growth scenario.
Payroll growth rate - The expected long -term payroll growth rate was assumed to equal the rate of inflation.
Based on the historical and expected returns of the City's short-term investment portfolio, a discount rate of 3.5 percent was
used. In addition, a simplified version of the entry age actuarial cost method was used. The unfunded actuarial accrued
liability is being amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at
December 31, 2011, was thirty years.
REQUIRED SUPPLEMENTARY INFORMATION
Schedule of Funding Progress for the Postemployment Benefit Plan
Unfunded
Actuarial
Actuarial Actuarial Actuarial Accrued
Valuation Value of Accrued Liability
Date Assets Liability (IJAAL)
01/01/11 $ - $ 1,001,568 $ 1,001,568
12/31/08 - 187,037 187,037
UAAL as a
Percentage
Funded Covered of Covered
Ratio Payroll Payroll
% $ 4,266,321 23.5 %
6,256,409 3.0