RESOLUTION ELECTING TO ESTABLISH A HEALTH BENEFIT VESTING REQUIREMENT FOR FUTURE RETIREES UNDER THE PUBLIC EMPLOYEES MEDICAL AND HOSPITAL CARE ACT

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1 Agenda Item No. 9a November 11, 2008 TO: FROM: SUBJECT: Honorable Mayor and City Council Attention: David J. Van Kirk, City Manager Dawn M. Villarreal, Director of Human Resources RESOLUTION APPROVING AN AGREEMENT TO PRE-FUND OTHER POST- EMPLOYMENT BENEFITS THROUGH CALPERS AND APPROVING THE DELEGATION OF AUTHORITY TO REQUEST DISBURSEMENT FROM THE OTHER POST-EMPLOYMENT BENEFITS PRE-FUNDING PLAN RESOLUTION ELECTING TO ESTABLISH A HEALTH BENEFIT VESTING REQUIREMENT FOR FUTURE RETIREES UNDER THE PUBLIC EMPLOYEES MEDICAL AND HOSPITAL CARE ACT RESOLUTION FIXING THE EMPLOYER S CONTRIBUTION UNDER THE PUBLIC EMPLOYEES MEDICAL AND HOSPITAL CARE ACT RESOLUTION MODIFYING ELIGIBILITY FOR CITY COUNCILMEMBERS TO ELECT TO PARTICIPATE IN THE CITY OF VACAVILLE S EXISTING RETIREMENT, HEALTH AND WELFARE BENEFIT PLANS DISCUSSION: The City of Vacaville participates in California Public Employees Retirement System (CalPERS) medical insurance through the Public Employees Medical and Hospital Care Act (PEMHCA). PEMHCA is the CalPERS Health Benefits Program as authorized by the California Government Code commencing with Section Under PEMHCA, the City s retiree medical insurance program is linked to the City s active employee medical insurance program, which means the City must pay the same maximum amount of health care premium for active and retired members. During the last round of labor negotiations (in 2007 and 2008), each of the City s bargaining units independently agreed to a re-opener clause in their labor contracts to discuss medical insurance and health care benefits. Contract negotiations were re-opened in May 2008 using a collaborative style of bargaining. All City bargaining units participated. The bargaining teams met and conferred 11 times between May 2008 and October The primary focus of the negotiations process was addressing the increasing cost of the medical insurance program for both employees and retirees. All bargaining units reached agreement to implement changes in the employee benefit package, resulting in approximately $1.5M annual savings to the City. The annual savings is achieved through a combination of factors: establishment of an irrevocable trust fund to accumulate money for retiree medical benefits similar to that used to fund pension benefits; implementing a retiree medical vesting program; having both current employees and retirees contribute more toward the cost of medical benefits; and implementing an opt-out program for employees with access to medical coverage provided through a source other than the City. Details of the agreement are outlined below, along with the necessary resolutions to implement the changes. Retiree Benefit Trust The tentative agreement with the bargaining units calls for the City s participation in the CalPERS Employers Retiree Benefit Trust Fund (CERBT) for the purpose of pre-funding medical benefits for eligible City retirees. By participating in the CERBT, the City would deposit with CalPERS funds set aside on an annual basis to fund future retiree medical benefits. The CERBT qualifies as a third-party irrevocable trust fund, thus allowing the City to apply a higher discount rate in the actuarial valuation for retiree medical benefits, thereby reducing the overall unfunded liabilities and annual required contribution rates. In order to comply with the financial reporting requirements of Government Accounting Standards Board (GASB) Statement No. 45, the City must begin reporting the funding status of its retiree medical benefits plan in the City s financial statements for fiscal year 2008/09. While GASB 45 does not require the City to modify its current funding of retiree medical benefits, implementation of this financial reporting requirement highlights the City s true cost of current

2 benefits. Long-term cost projections strongly suggest the need to move from the historical payas-you-go funding practice to a more prudent and appropriate pre-funding approach. Prefunding implies that funds are set aside during the course of eligible employees service with the City sufficient to cover the cost of benefits paid over the course of the employees retirement, in the same way that employees regular pension benefits are currently funded. There are several steps required of the City as a direct consequence of complying with the requirements of GASB 45. These include: Obtain an actuarial valuation of the unfunded retiree medical benefit liability and related Annual Required Contribution (ARC); Establish a retiree medical benefits funding plan either in-house or via a third-party administrator; and Reporting of unfunded liabilities in the City s consolidated annual financial statements. One of the considerations in evaluating funding options for retiree medical benefits is how assets set aside to fund these benefits are managed. There are significant fiscal impacts on the long-term cost of retiree medical benefit plans, depending on how the City elects to establish these set-asides. Revocable Special Reserve Funds Merely setting aside funding in a Special Reserve fund within the City budget serves the purpose of setting funds aside to pay for future benefits. However, this approach would still result in the recording of unfunded liabilities on the employer s financial statements, as funds set aside in a revocable fund are not restricted and are not guaranteed to be committed to the payment of retiree medical benefits. In addition, public agencies are subject to specific restrictions on how public non-pension funds can be invested and, therefore, will generally earn a lower rate of return on assets set aside in the budget and invested along with other City assets. Third-Party Irrevocable Trust Funds In order to meet the definition of a pre-funded plan, the City must establish an irrevocable trust fund which restricts use of assets to payment of plan benefits. Advantages of establishing a third-party trust fund include having the potential to earn significantly higher rates of return, as such programs are not restricted in their investment options in the same way cities are. These funds would presumably be invested in similar fashion to current pension plans, which can invest in longer-term, higher-risk and higher-yield opportunities. An additional advantage to such plans is the ability to contract with a third-party for administration of the City s post-employment benefit plan, so that payment of insurance premiums, reimbursement of retirees, and management of plan assets are all handled (on a fee basis) via the third-party administrator. In order to take full advantage of the benefits of establishing a third-party trust fund, it is recommended that the City Council authorize participation in the California Employers Retiree Benefit Trust. The CERBT was recently established by CalPERS for public agencies to use in pre-funding their respective retiree medical benefits. Participation in CERBT is recommended for the following reasons: 1. The City already participates in CalPERS for administration of pension benefits; 2. The City currently participates in CalPERS health benefits program for both active and retired employees; 3. CalPERS has over 75 years of experience in administering employer-sponsored benefit plans; 4. CalPERS is the largest pension system in the United States; 5. CalPERS has an excellent record in management of pension assets, averaging a 10% annual rate of return over the past 20 years, and currently utilizes a 7.75% annual rate of return assumption; and 6. CERBT has among the lowest management fees related to trust services. 2

3 In order to participate in CERBT, CalPERS requires that the City Council authorize executing the attached agreement as well as designate staff members who will have authority to request disbursement from the trust fund for authorized expenditures. Staff recommends that authority be delegated to the Human Resources Director and the Finance Director. CalPERS also requires certification of actuarial valuation results from the City s consulting actuary, as well as certification of the City s funding policy. Once the City s application to participate in CERBT is processed by CalPERS, the City would immediately transfer an estimated $3,000,000 in funding already set aside for the purpose of pre-funding retiree medical benefits. An additional $800,000 has been set aside in the FY2008/09 budget and will be transferred to CERBT over the course of this fiscal year. In the short term, it is anticipated the City would continue to pay for current retiree medical benefits from funds allocated in the annual budget for that purpose while transferring to CERBT funds set aside annually in excess of the funds required to pay current benefits. Health Benefit Vesting Requirement Another of the outcomes of the negotiations process was unanimous support for the implementation of the CalPERS post-retirement vesting requirement in accordance with Section of the California Government Code. This section of the Government Code allows the employer to adopt the vesting resolution prospectively, affecting employees hired on or after its adoption. Current employees would have the ability to opt in to the post-retirement vesting program one time a year. The vesting program requires that an employee have a minimum of five years with the City of Vacaville to be eligible. A summary of the post-retirement vesting schedule is outlined below: Minimum Credited Years of PERS Service Percentage of Employer Contribution to Retiree Medical Benefits <10 0% 10 50% 11 55% 12 60% 13 65% 14 70% 15 75% 16 80% 17 85% 18 90% 19 95% % Under the CalPERS post-retirement vesting plan, the monthly premium is determined each year by CalPERS using a formula called the 100/90 formula. The 100/90 formula is based on the four CalPERS medical plans with the largest number of State employee enrollments and it is established on 100 percent of the weighted average of the health benefit plan premiums for annuitants enrolled for self alone and 90 percent of the weighted average of the health benefit plan for family members. The 100/90 formula is the minimum contribution amount to be paid for retiree medical benefits by an employer under the vesting provision of Government Code Employer Contribution The Public Employees' Medical and Hospital Care Act requires participating agencies to adopt a resolution stating the employer contribution toward the employees and retirees medical plans. The resolution is adopted annually or when there are changes in the bargaining unit agreements. In accordance with the recent negotiations with all of the City s bargaining units, effective January 1, 2009, the employer's contribution for each employee and annuitant shall be the amount necessary to pay the cost of his/her enrollment, including the enrollment of family members, in a health benefits plan up to a maximum of 96 percent (96%) of the Kaiser premium based on the Bay Area/Sacramento regional pricing, which is $ for employee only, $ for employee plus one, and $1, for employee plus two or more, and Council is set at $ (1 single rate). For Councilmembers not eligible to participate in CalPERS medical, the City will pay the equivalent single rate to an alternate health care provider. 3

4 Additionally, the City and all bargaining units agreed to the following: Effective January 1, 2010, the employer contribution will be reduced to 92 percent (92%) of the Kaiser premium. Effective January 1, 2009, employees will contribute $25.00 per month (pre-tax) towards the cost of dental premiums. Effective January 1, 2009, employees demonstrating other medical coverage may opt out of the City s CalPERS medical plan and, in consideration, will receive a $ monthly City contribution to their deferred compensation account. Effective January 1, 2009, participation in the Internal Revenue Code Section 125 plan will be extended to Vacaville Fire Association, Local 3501, and the International Union of Operating Engineers, Stationary Local 39, AFL-CIO. This plan allows pre-tax premium contributions. Labor and management worked hard to address this issue and will revisit our progress in July RECOMMENDATION: 1. By simple motion, that the City Council adopt the resolution approving an agreement to prefund other post-employment benefits through CalPERS and approving the delegation of authority to request disbursement from the other post-employment benefits pre-funding plan. 2. By simple motion, that the City Council adopt the resolution electing to establish a health benefit vesting requirement for future retirees under the Public Employees Medical and Hospital Care Act. 3. By simple motion, that the City Council adopt the resolution fixing the employer s contribution under the Public Employees Medical and Hospital Care Act. 4. By simple motion, that the City Council adopt the resolution modifying eligibility for City Councilmembers to elect to participate in the City of Vacaville s existing retirement, health and welfare benefit plans. 4

5 RESOLUTION NO. RESOLUTION APPROVING AN AGREEMENT TO PRE-FUND OTHER POST-EMPLOYMENT BENEFITS THROUGH CALPERS AND APPROVING THE DELEGATION OF AUTHORITY TO REQUEST DISBURSEMENT FROM THE OTHER POST-EMPLOYMENT BENEFITS PRE-FUNDING PLAN WHEREAS, the City Council is the governing body of the City of Vacaville; and WHEREAS, the California Public Employees Retirement System (CalPERS) has recently established the California Employers Retiree Benefit Trust Fund (CERBT) for California Public Agencies to use to pre-fund future retiree health and other post-employment benefits; and WHEREAS, in order to participate in the CERBT program, CalPERS requires that the City Council approve the Agreement and Election to Pre-Fund Other Post-Employment Benefits through CalPERS (see Attachment A); and WHEREAS, CalPERS requires the governing body to authorize the delegation of authority to certain staff to request disbursements from the Other Post-Employment Benefit Pre- Funding Plan established through the CERBT; and WHEREAS, the Delegation of Authority included as Attachment A to this resolution establishes that authority to authorize disbursements shall be delegated to the Human Resources Director and Finance Director. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Vacaville authorizes the Mayor, as presiding officer, to sign the attached CERBT agreement; and BE IT FURTHER RESOLVED that the City Council of the City of Vacaville authorizes the Mayor, as presiding officer, to sign the attached Delegation of Authority. I HEREBY CERTIFY that the foregoing resolution was introduced and passed at a regular meeting of the City Council of the City of Vacaville held on the 11th day of November, 2008, by the following vote: AYES: NOES: ABSENT: ATTEST: Michelle A. Thornbrugh, City Clerk 5

6 RESOLUTION NO. RESOLUTION ELECTING TO ESTABLISH A HEALTH BENEFIT VESTING REQUIREMENT FOR FUTURE RETIREES UNDER THE PUBLIC EMPLOYEES MEDICAL AND HOSPITAL CARE ACT WHEREAS, Government Code provides that a local agency contracting under the Public Employees Medical and Hospital Care Act (the Act ) may amend its resolution to provide a post retirement vesting requirement; and WHEREAS, the City of Vacaville is a local agency contracting under the Act, and WHEREAS, the City of Vacaville certifies certain employees are represented by bargaining units and subject to memoranda of understanding; and WHEREAS, the credited service for purposes of determining the percentage of employer contributions shall mean service as defined in Section 20069, except that not less than five years of that service shall be performed entirely with the City of Vacaville; and WHEREAS, the contribution for active employees shall not be less than what is defined in Government Code Section 22892(b); NOW, THEREFORE, BE IT RESOLVED that the City of Vacaville s contribution for each retired employee first hired on or after January 1, 2009 shall be the amount necessary to pay the full cost of his/her enrollment, including the enrollment of family members, in a health benefits plan, up to a maximum of 100 percent of the weighted average of the CalPERS health benefits plan premiums for employees or annuitants enrolled for self alone plus 90 percent of the weighted average of the additional premiums required for enrollment of family members in the four health benefits plans that have the largest number of enrollments during the fiscal year to which the formula applied, plus Administrative fees and Contingency Reserve Fund. NOW, THEREFORE BE IT FURTHER RESOLVED, that the percentage of employer contribution payable for post retirement health benefits for each retired employee shall be based on the employee s completed years of credited service based upon Government Code Section plus administrative fees and Contingency Reserve Fund assessments. NOW, THEREFORE BE IT FURTHER RESOLVED, that coverage under the Act be effective on January 1, I HEREBY CERTIFY that the foregoing resolution was introduced and passed at a regular meeting of the City Council of the City of Vacaville held on the 11th day of November 2008, by the following vote: AYES: NOES: ABSENT: ATTEST: Michelle A. Thornbrugh, City Clerk 6

7 RESOLUTION NO. RESOLUTION FIXING THE EMPLOYER'S CONTRIBUTION UNDER THE PUBLIC EMPLOYEES' MEDICAL AND HOSPITAL CARE ACT WHEREAS, Government Code Section 22892(a) provides that a local agency contracting under the Public Employees' Medical and Hospital Care Act shall fix the amount of the employer's contribution at an amount not less than the amount required under Section 22892(b) of the Act; and WHEREAS, the City of Vacaville is a local agency contracting under the Act. NOW, THEREFORE BE IT RESOLVED that based on recent negotiations with all of the City s bargaining units, effective January 1, 2009, the employer's contribution for each employee and annuitant shall be the amount necessary to pay the cost of his/her enrollment, including the enrollment of family members, in a health benefits plan up to a maximum of 96 percent of the Kaiser premium based on the Bay Area/Sacramento regional pricing, which is: Contribution per month Code Bargaining Unit 1 party 2 party Family 01 Vacaville Police Officers Association $ $ $ Vacaville Firefighters Association, Local 3501 $ $ $ Vacaville City Employees Association $ $ $ Vacaville Managers Organization, Local 1 $ $ $ Unrepresented-Department Head/AMG/PMG/FMG $ $ $ Stationary Engineers, Local 39 $ $ $ Councilmembers $ N/A N/A Plus administrative fees and Contingency Fund assessments. I HEREBY CERTIFY that the foregoing resolution was introduced and passed at a regular meeting of the City Council of the City of Vacaville, held on the 11th day of November 2008, by the following vote: AYES: NOES: ABSENT: ATTEST: Michelle A. Thornbrugh, City Clerk 7

8 RESOLUTION NO. RESOLUTION MODIFYING ELIGIBILITY FOR CITY COUNCILMEMBERS TO ELECT TO PARTICIPATE IN THE CITY OF VACAVILLE S EXISTING RETIREMENT, HEALTH AND WELFARE BENEFIT PLANS WHEREAS, Government Code section allows the payment of retirement, health and welfare benefits to City Councilmembers, without such benefits being included as salary, so long as the same benefits are available and paid by the City for its employees; and WHEREAS, the City has established retirement, health and welfare benefit plans for all employee bargaining groups, as previously directed and approved by the City Council; and WHEREAS, the City Council previously adopted Resolution establishing eligibility for City Councilmembers to elect to participate in the City of Vacaville s existing retirement, health and welfare benefit plans; NOW, THEREFORE, BE IT RESOLVED, that the City Councilmembers of the City of Vacaville shall be eligible for the following modified retirement, health and welfare benefits on an elective basis, in accordance with the retirement, health and benefit plans available to City employees: HEALTH The City will contribute the amount necessary to pay the cost of City Councilmembers to enroll in a health benefits plan, up to a maximum of the established single rate available to the unrepresented Administrative Managers Group (AMG), as the same currently exists or may hereafter be modified. If a Councilmember is not eligible to participate in CalPERS medical, the City will pay the equivalent single rate to an alternate health care provider. City Councilmembers will not be eligible to receive cash in lieu of this benefit. DENTAL The City will contribute the amount necessary to pay the cost of the City Councilmembers to enroll in the City s established dental benefits plan, at the established single rate available to the unrepresented AMG, as the same currently exists or may hereafter be modified. VISION The City will contribute the amount necessary to pay the cost of City Councilmembers to enroll in the City s established vision benefits plan, at the established single rate available to the unrepresented AMG, as the same currently exists or may hereafter be modified. DEFERRED COMPENSATION City Councilmembers may contribute to an IRC 457 plan available to other City employees, as the same currently exists or may hereafter be modified. I HEREBY CERTIFY that the foregoing resolution was introduced and passed at a regular meeting of the City Council of the City of Vacaville, held on the 11th day of November 2008, by the following vote: AYES: NOES: ABSENT: ATTEST: Michelle A. Thornbrugh, City Clerk 8

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