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

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

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

3 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

4 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

5 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 55 Miscellaneous; 50 Public Safety) 2 nd Tier CalPERS Retirement Plan (Program 5 To be negotiated upon MOU renewals in 2011 & 2013) 5

6 $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

7 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

8 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

9 $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, 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

10 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, 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

11 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

12 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

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

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15 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

16 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

17 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

18 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

19 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

20 Marcus Wu Partner Hanson Bridgett LLP

21 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

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

23 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

24 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

25 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

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

27 Brad Au Senior Vice President Aon Hewitt

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

29 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 $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

30 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

31 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

32 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

33 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

34 John Kim Partner De La Rosa & Company

35 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

36 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) days required Municipal Bonds Lowest interest cost Maintains reserves/liquidity Interest cost Need to pledge security (typically leased asset) days required Less flexibility to size funding of ARMP prepayments 36

37 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, ,259 Avg Annual Payment 2,388,312 2,299,833 88,478 Total Proceeds 20,000,000 20,000, 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

38 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: Bonds sold out in 53 minutes! 38

39 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

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42 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) sgmiller@beverlyhills.org 42

43 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) brad.au@aonhewitt.com 43

44 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) mwu@hansonbridgett.com 44

45 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) jkim@ejdelarosa.com 45