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OPEB Valuation 2014-16 April 22, 2015 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 12/31/2014 12/31/2015 12/31/2016 Normal Cost 91,544$ 59,375$ 59,375$ Interest 3,204 2,078 2,078 Total Normal Cost 94,748 61,453 61,453 Amortization Component Actuarial Accrued Liability (AAL)974,843 974,843 974,843 Less: Assets - - - Unfunded Actuarial Accrued Liability (UAAL)974,843 974,843 974,843 Divided by PV factor 26 26 26 Amortization payment 37,422 37,422 37,422 Interest 1,310 1,310 1,310 Total Amortization Payment 38,732 38,732 38,732 Annual Required Contribution (ARC)133,480 100,185 100,185 Interest on net OPEB obligation 6,396 9,332 10,873 Adjustment to ARC (7,086) (10,338) (12,046) Annual OPEB cost (expense)132,790 99,179 99,012 Amount paid by the employer in relation to the ARC Direct (explicit) subsidy - - - Implicit subsidy (48,909) (55,137) (43,500) Increase in net OPEB obligation 83,881 44,042 55,512 PY OPEB obligation 182,742 266,623 310,665 OPEB obligation 266,623$ 310,665$ 366,177$ % of Annual OPEB Cost Contributed 36.8% 55.6% 43.9% Covered payroll 4,810,392$ 4,810,392$ 4,810,392$ % of UAAL to covered payroll 20.3% 20.3% 20.3% -1- The AAL includes 70 active employees and 8 retirees participating in the plan in 2014. The City also has 15 active employees that have chosen not to participate in the plan for 2014. The City is projected to have 8 retirees participating in the plan in 2015 and 6 retirees participating in the plan in 2016. A further breakdown of the AAL by employee status follows: Breakdown of Actuarial Accrued Liability by Employee Status Active 759,242$ Retirees 215,601 974,843$ 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, ABDO, EICK & MEYERS, LLP Certified Public Accountants & Consultants Steven R. McDonald, CPA Managing Partner -2- Required Note Disclosure for December 31, 2014 Financial Statements Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Other postemployment benefits Under Minnesota statute 471.61, 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, 2014. The Insurance Reserve Internal service fund is typically used to liquidate governmental other postemployment benefits payable. 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 70 active participants and 8 retired participants. Benefit provisions are discussed and proposed by an insurance committee made up of employees from all employee groups (both represented and non-union), with the final approval of the plan being given by the City Manager. 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 2014, the City contributed $48,909 to the plan. -3- Required Note Disclosure for December 31, 2014 Financial Statements - Continued Note X: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - CONTINUED C. Annual OPEB cost and net OPEB obligation The City's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC). The City has elected to calculate the ARC and related information using the alternative measurement method permitted by GASB Statement No. 45 for employers in plans with fewer than one hundred total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the City's net OPEB obligation: Annual required contribution 133,480$ Interest on net OPEB obligation 6,396 Adjustment to annual required contribution (7,086) Annual OPEB cost (expense)132,790 Contributions made (48,909) Increase (decrease) in net OPEB obligation 83,881 Net OPEB obligation - January 1, 2014 182,742 Net OPEB obligation - December 31, 2014 266,623$ The City’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal year 2014 and the two preceding fiscal years were as follows: Year Annual Net OPEB Ending OPEB Cost Obligation 12/31/14 132,790$ 36.8 %266,623$ 12/31/13 99,254 47.9 182,742 12/31/12 99,453 52.1 130,996 Three Year Trend Information Percentage Annual OPEB Contributed D. Funded status and funding progress As of January 1, 2014, the actuarial accrued liability for benefits was $974,843, all of which was unfunded. The covered payroll (annual payroll of active employees covered by the plan) was $4,810,392, and the ratio of the unfunded actuarial accrued liability to the covered payroll was 20.3 percent. The projection of future 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. -4- Required Note Disclosure for December 31, 2014 Financial Statements - Continued Note X: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - 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 2010 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 2014 and 2015 along with projections of the Office of the Actuary at the Centers for Medicare & Medicaid Services. A rate increase of 12.9 percent initially in 2014, followed by a 13.1 percent increase in 2015, to an ultimate average rate increase of 5.6 percent after six years, was used. Health insurance premiums - 2013, 2014, and 2015 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 2.5 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 2013 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, 2014, 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 Covered Date Assets Liability (UAAL)Payroll 01/01/14 -$ 974,843$ 974,843$ - %4,810,392$ 20.3 % 01/01/11 - 1,001,568 1,001,568 - 4,266,321 23.5 12/31/08 - 187,037 187,037 - 6,256,409 3.0 Payroll of Covered Percentage UAAL as a Ratio Funded -5-