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%
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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
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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 $48,909 to the plan.
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Required Note Disclosure for December 31, 2014 Financial Statements - Continued
Note X: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - CONTINUED
C. Annual OPEB cost and net OPEB obligation
The City's annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required
contribution of the employer (ARC). The City has elected to calculate the ARC and related information using the
alternative measurement method permitted by GASB Statement No. 45 for employers in plans with fewer than one
hundred total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to
cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to
exceed thirty years.
The following table shows the components of the City's annual OPEB cost for the year, the amount actually contributed
to the plan, and changes in the City's net OPEB obligation:
Annual required contribution 133,480$
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.
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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
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