ARMP Presentation - the City of Beverly Hills

Scott G. Miller, City of Beverly Hills
Chief Financial Officer / Director – Administrative Services
1

Implement Short, Mid and
Long-Term Structural
Changes to Reduce Employee
Benefit Costs
2

Program 1: Tied employee salary and benefit levels to the market
as a total compensation model (Short-Term)
• Projected savings of $730K - $2M over 5 years
• Projected savings of $214M - $565M over 40 years
Program 2: Implemented an expanded benefit cafeteria plan
(Short-Term)
• Projected savings of $2.1M - $4.8M over 5 years
• Projected savings of $445M - $814M over 40 years
Program 3: Alternative Retiree Medical Plan (ARMP) Phase I:
Implemented a two-tier plan for new employee retiree health
benefits (Short & Mid-Term)
• Projected savings of $55.0M over 40 Years
3

Program 4: Alternative Retiree Medical Plan (ARMP)
Phase II: Implementing a defined contribution retiree
health plan for current employees (Mid & Long Term)
• Projected savings: $91 Million in unfunded liabilities
Program 5: Developing a two-tier CalPERS employee
retirement program for both Safety & Non-Safety
personnel (Long-Term)
• Projected savings: TBD
4

Current Employees
New Employees
Compensation Tied to Market Rates
and Total Compensation Model
(Program 1)
Compensation Tied to Market Rates
and Total Compensation Model
(Program 1)
Cafeteria Health Plan (Program 2) Cafeteria Health Plan (Program 2)
Choice of Current Retiree Medical
Benefits or ARMP (Program 4)
Defined Contribution Plan for Retiree
Medical Plan (Program 3)
Current CalPERS Retirement Plan
(2.5% @ 55 – Miscellaneous;
3% @ 50 – Public Safety)
2 nd Tier CalPERS Retirement Plan
(Program 5 – To be negotiated upon
MOU renewals in 2011 & 2013)
5

$800,000,000
$700,000,000
Projected 40-Year Savings (Programs 1-4) for Non Safety
Employees
$714,000,000
$600,000,000
$500,000,000
$445,000,000
$400,000,000
$300,000,000
$214,000,000
$200,000,000
$100,000,000
$55,000,000
$91,000,000
$-
Program 1:
Tie Salary &
Benefit Levels to
Market
Program 2:
Cafeteria Plan
Program 3:
Defined
Contribution Plan
for New Hires
Total Projected 40
Year Savings For
All Four Programs
Projected 40 Year
OPEB Liability
Savings
6

Employing salary and benefit surveys of
comparable cities, the City of Beverly Hills tied
employee compensation to market levels
• Assures employees that they are at least at the 75 th percentile of
salary and benefits in the area
• Enables the City to more accurately plan for salary and benefit
related expenses
• Provides a quantitative basis for salary and benefits levels
during negotiations
7

The City implemented a Cafeteria Plan that
capped contribution limits and allowed
employees to either opt out or choose from a
variety of healthcare plans
• The Cafeteria Plan gives employees the option to choose from
multiple vision, dental and medical PPO and HMO plans
• Employees benefit if they choose lower cost plans or opt out
completely by having a portion of the savings passed on to
them as a cash payment
•
• The City benefits from a cap on the gross amount of insurance
costs and savings from employees who pick less costly plans
8

$106,000,000
Program 2: Cost of Employee Health Care Benefits
$96,000,000
$86,000,000
Add graph
$76,000,000
$66,000,000
$56,000,000
$46,000,000
$36,000,000
$26,000,000
$16,000,000
$6,000,000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
Projected Health Benefit Costs Without Cafeteria Plan (Based on Historical 6.5% Increase)
Projected Health Benefit Costs With Current Cafeteria Plan (City Council Increases Benefit Level by 5% Annually)
Projected Health Benefit Costs With Current Cafeteria Plan (City Council Increases Benefit Level by 3% Annually) 9

The City instituted a defined contribution retiree
health plan to replace the prior defined benefit
plan. This applied to all employees hired after
January 1, 2010.
• Caps the cost of future retiree medical benefits for new nonsafety
employees
• Eliminates OPEB unfunded liabilities for new employees
• As a defined contribution plan it is portable and transferrable;
does not require employee to retire with the City
• Still provides a generous retiree health plan benefit that is
geared to younger workers
10

The ARMP is a voluntary option that allows current
employees to choose a defined contribution retiree
medical plan in lieu of a defined benefit plan.
11

Current Defined Benefit vs. Defined Contribution:
Current employees hired before January 1, 2010 are provided a
certain level of retiree medical coverage as defined in their MOU
but the use of these plans is heavily restricted and is non
transferrable.
• The ARMP allows employees to receive the net present
actuarial value of their current retiree benefit now, instead of
waiting until they retire
• Employees get a one-time transition amount which is
actuarially determined and a residual monthly amount into an
RHS account if not fully vested
• Amounts are specific to each employee
12

The Choice
Current Retiree or Alternative
Medical Benefit
Retiree Medical
(Defined Benefit)
Program (ARMP)
(Defined Contribution)
13

Benefits to the City
Reduces the City’s current OPEB
unfunded liability by a projected $91
million dollars over 40 years with
58% participation
Allows the City to cap the costs of the
retiree health program instead of
being at the mercy of Cal-PERS and
future health care costs increases
Benefits to the Employee
Gives participating employees the
option of receiving lump sum amount
in cash, a deferred compensation
plan, or a combination of the two for
maximum flexibility
Allows portability of the defined
contribution: employee can take the
benefit with them even if they decide
to separate from the city
15

Benefits to the City
Keeps employee benefits highly
competitive which aids recruitment
and retention
Benefits to the Employee
Builds trust by allowing employees to
positively affect the City’s fiscal health
while benefiting at the same time
Substitutes low cost bonded dollars
for high cost future dollars, thus
capping the City’s costs & lowering
OPEB unfunded liability
Provides a voluntary alternative to
employees current retiree medical
benefit
16

Impact of ARMP (Safety & Non-Safety) on Projected
Unfunded Accrued Liability Over 40 Years
$400,000,000
$350,000,000
$217,000,000
$300,000,000
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$-
$157,000,000
Past City Program (Pay As You Go)
$109,000,000
$66,000,000
50% of Current Safety & 58% of Non-Safety
Employees Electing to Convert to a Defined
Contribution Plan
Police & Fire (Safety)
Non-Safety
17

Results and Follow up of the ARMP:
• 58% participation from eligible participants
• Generated interest from the Police and Fire
departments; looking ahead to a second
offering for Safety employees
18

• Plan to implement a two-tier pension plan for
all Public Safety and Miscellaneous employees
• Proactive step in tackling the runaway issue of
pension costs: actuarial analysis show that CalPERS
pension plans are unsustainable 1
• Does not affect current employees or impinge on
negotiated benefits
• Allows the City to keep in line with an increasing
number of municipalities instituting two tier plans
1
Ron Seeling, Chief Actuary at CalPERS
19

Marcus Wu
Partner
Hanson Bridgett LLP

Vested-rights law under California
Constitution
Exposure to current taxation (e.g.,
constructive receipt, assignment of
income, cash-or-deferred arrangement
(CODA))
Tax limits on deferred contributions (e.g.
401k and 457b plans)
Overcoming the obstacles
21

Informed consent
Full and free choice between benefit
programs
Shifting legal landscape
22

Structured as choice between programs
Vesting period for cash-outs
Mandatory 20% RHS contribution
Program funded by employer
contributions only; no salary reductions
Election converted nontaxable benefits
to taxable, not vice versa
23

ARMP structured as employer
contributions
Enabled 401k plan to use higher 415(c)
limit
415(m) excess-benefit plan for overflow
(City used ICMA-RC design)
24

Not risk-free, but risk can be managed
Balance against long-term economic
value
Possibly lower risk given current
economic conditions
Don’t try this at home alone
25

Cash-out option under cafeteria plan
Cost-saving opportunity with cash
offering
If in PEMHCA, employer must still make
minimum contributions
26

Brad Au
Senior Vice President
Aon Hewitt

“Cost neutral” or better – cost avoidance
Cap the City’s future medical cost
increases
Supportable / “reasonable” assumptions
Fair / attractive to employees
28

Existing retiree healthcare program description
• CalPERS health program
• 10 bargaining groups, each w/ tiered benefit structures
• Fixed dollar benefits and varying premium coverage
ARMP - employee option to convert Defined Benefit (DB) to Defined
Contribution (DC)
Initial account balance = DB retiree healthcare “accrued liability”
• GASB 45: FYE 2009 - $58 MM (roughly 50% eligible for ARMP; non-safety)
“Residual” payments
• DC annual allocations add to account balance
• Paid for duration of DB “accrual” or “funding” period
• Based on annual cost to provide DB plan
29

Defined Benefit
(DB) Plan
Versus
Defined Contribution
(DC) Plan
Variable Cost Fixed
Known
Level of Healthcare
Coverage
Unknown
Retirement/Non-
Portable
Eligibility Termination/Portable
City Who Takes Risk Employee
Interpretation of Plan Provisions
• Vesting vs. accrued
• Benefit accrual period
• Targeted benefit
Projection of Results
• GASB 45 OPEB results
• Unfunded liability
• Cash flow / financing
• Sensitivity to assumption variability
30

Supportable, equitable, communicable, sellable
• GASB OPEB where possible / practicable - valuation vs. individual
calculations
• Considered historical – investment returns, trend, retirement
• CalPERS assumptions
• No single “right” answer
Types of assumptions
• General – discount rate / investment return, healthcare trend, mortality,
full/partial value
• Bargaining group – retirement age, accrual period
• Individual – plan election, marital, spousal age difference, gender
Impact of assumptions
• Understand what’s important
• Drivers of costs, benefits, emotions
• Many have considerable (e.g., 50%+) impact on results
31

Numerous assumption sets
• Start w/ GASB OPEB valuation assumptions
• 15+ versions…w/ a, b, c scenarios
• Conservative vs. “reasonable” vs. aggressive
Final assumptions
• 6% investment return (City’s historical return: 9.8%),
10% to 5% trend, full value of accrued liability
• Retirement ages 52 to 63, primarily 20 year accrual /
“funding”
• Most valuable benefit election, same age spouse,
gender neutral
32

General Process
1) Set goals
2) Understand provisions (e.g., MOU, other communication)
3) Establish assumptions
4) Preliminary results
5) Review / modify assumptions
6) Review / interpret MOUs
7) Revise results and reassess
8) Repeat steps 5-8 as many times as necessary
Methodology is important
• 10 bargaining groups, tiered benefit structures, MOU vs. administrative
practice
Valuation vs. individual considerations
• Calculations are different, e.g., we don’t all die at the same age…
Need to Educate
• City Council, City Manager, Finance, HR, actuary / consultant,
bargaining units, individual employees
33

John Kim
Partner
De La Rosa & Company

Two options for funding the ARMP prepayment
amount:
• Cash
• Borrow money
• Taxable conventional bank financing (i.e. line of
credit)
• Taxable municipal bond financing (i.e. lease revenue
bonds)
The City went out to bid to several commercial
banks and its bond underwriter to select the
lowest cost of borrowing
35

Cash
Pros
• No interest cost
• Ease of execution
• Ability to size funding of ARMP
prepayments
Cons
• Decreased reserves/liquidity
Conventional
Bank Loan
• Low interest cost
• Maintains reserves/liquidity
• Ability to size funding of ARMP
prepayments
• Interest cost
• Need to pledge security
(collateral)
• 60-90 days required
Municipal
Bonds
• Lowest interest cost
• Maintains reserves/liquidity
• Interest cost
• Need to pledge security (typically
leased asset)
• 60-90 days required
• Less flexibility to size funding of
ARMP prepayments
36

The City selected
municipal bond
financing based on
the lower cost of
borrowing vs. bank
line of credit
(0.73% lower)
Saved over $900,000
over 11 years, on top
of the long-term
savings for all 4
programs
CITY OF BEVERLY HILLS
CNB Bank Loan vs. Taxable Bond Financing (11 Year Maturity)
CNB Loan Payments 2010 Bond Payments
Annual
Date Annual Date Annual Savings
7/31/2011 2,388,312 6/1/2011 2,299,827 88,485
7/31/2012 2,388,312 6/1/2012 2,302,348 85,963
7/31/2013 2,388,312 6/1/2013 2,300,573 87,738
7/31/2014 2,388,312 6/1/2014 2,299,516 88,796
7/31/2015 2,388,312 6/1/2015 2,298,411 89,900
7/31/2016 2,388,312 6/1/2016 2,301,893 86,419
7/31/2017 2,388,312 6/1/2017 2,299,872 88,440
7/31/2018 2,388,312 6/1/2018 2,297,477 90,835
7/31/2019 2,388,312 6/1/2019 2,298,915 89,397
7/31/2020 2,388,312 6/1/2020 2,299,667 88,644
7/31/2021 2,388,312 6/1/2021 2,299,669 88,643
Total Payments 26,271,427 25,298,168 973,259
Avg Annual Payment 2,388,312 2,299,833 88,478
Total Proceeds 20,000,000 20,000,000
10-Year Treasury 3.03% 3.03%
Spread to Treasury +1.99% +1.26%
All-In Interest Rate 5.02% 4.29%
(Includes Costs of Issuance)
37

The City issued taxable lease revenue bonds secured
by General Fund lease payment
• Utilized unencumbered leased asset (i.e. Rodeo Drive parking
facility)
• Bonds are taxable because proceeds will be used to fund pre-fund
private retiree benefits
Term of the bonds: 11 years
Strong underlying credit ratings (“Aaa/AAA/AAA”)
• No debt service reserve fund
• Overall taxable yield: 4.53%
The City adopted fiscal policies giving Beverly Hills
residents/investors first priority to purchase bonds
• City-hosted website: www.buybeverlyhillsbonds.org
• Bonds sold out in 53 minutes!
38

Educate your elected officials on funding options early
Develop matrix to compare funding options
• Reserves/liquidity
• Interest/upfront costs
• Flexibility to size prepayment amount
• Security needed (i.e. collateral and/or revenue pledge)
• Timing
If conventional bank financing used, consider:
• What collateral (e.g. segregated cash deposit, land)
If municipal bonds are used:
• What is my agency’s credit rating
• Do I have leased assets available
39

Over 29 years experience in both public and private sectors
Has worked in a management capacity for the City of
Claremont, City & County of San Francisco, Turner
Broadcast, Delloitte/Tousche and the City of Palm Desert,
among others
Recipient of commendations from the State of California, the
CSU system, the Municipal Management Assistants of
Southern California, the Municipal Information Systems
Association of CA, the Government Finance Officers
Association
Presented to ICMA, GFOA, State of California, CSMFO and
National Association of Colleges & Universities.
Phone: (310) 285-2411
Email: sgmiller@beverlyhills.org
42

Senior Vice President and actuary in Aon Hewitt’s Los
Angeles office.
Over 15 years of experience consulting on various
employee benefit and retirement programs.
Assists senior management in the strategy and design of
retirement programs that meet organizational goals.
Experience in the public and private sector includes
advising on pension, retiree medical, supplemental
retirement, and other benefit programs
Phone: (213) 996-1729
Email: brad.au@aonhewitt.com
43

Partner based in Hanson Bridgett’s San Francisco Office
Specialist in representing public and private employers
with respect to compensation and benefits matters with
a focus on retirement and deferred compensation,
particularly 401(k) plans and ESOPs
Experienced in helping to establish and administer
health plans, flexible benefit plans, dependant care
plans, and a wide range of severance benefit plans
Phone: (415) 995-5829
Email: mwu@hansonbridgett.com
44

De La Rosa & Co. is a top-five ranked bond
underwriter serving California public agencies
Partner based in Los Angeles Office
Over 14 years of experience working with
cities, counties, special districts and other
public agencies
Specializes in bond financing for public
infrastructure, utilities, redevelopment, schools,
and housing
Phone: (310) 207-1975
Email: jkim@ejdelarosa.com
45