Healthcare Analytics Consulting. Actuarial Valuation of Postemployment Benefits as of Fiscal Year End June 30, Arthur J. Gallagher & Co.

Transcription

1 Healthcare Analytics Consulting Village of Milford Actuarial Valuation of Postemployment Benefits as of Fiscal Year End June 30, 2017 July 31, 2017 Arthur J. Gallagher & Co. Healthcare Analytics Consulting Village Boulevard, Princeton, NJ Phone: Fax:

2 Village of Milford Table of Contents Table of Contents Executive Summary... 1 Actuarial Certification... 3 Plan Provisions... 4 Actuarial Assumptions and Methods... 5 Census Summary... 8 Glossary... 9 Summary of Governmental Accounting Standards Board Statements No. 74 and No Supporting Exhibits Balance Sheet and Income Statement Items... Exhibit 1 Schedule of Changes and Deferred Inflows/Outflows... Exhibit 2 Sensitivities and Cash Flows... Exhibit 3

3 Village of Milford 1 Executive Summary Executive Summary Scope This report presents the results of the actuarial valuation of the Village of Milford ( Village ) postemployment benefit plan (other than pensions) as of the valuation date of fiscal year end June 30, 2017 under the Governmental Accounting Standards Board Statements No. 74 and No. 75 ( GASB 74/75 ). The purpose of the report is to: Determine the plan s liabilities as of June 30, 2017, Determine the Annual OPEB expense for the period July 1, 2016 to June 30, 2017 under GASB 74/75 Provide an estimate of the June 30, 2017 total OPEB liability; and Document actuarial assumptions and plan provisions used in the June 30, 2017 actuarial valuation. Summary of GASB 74/75 versus GASB 43/45 On June 2, 2015, the Governmental Accounting Standards Board ( GASB ) released Statements No. 74 and No. 75, which replaces the requirements of the former GASB Statements No. 43 and No. 45 as of the required implementation date. The new requirements have been incorporated in this valuation. A summary of key changes is below: The Village must now recognize the total OPEB liability, as opposed to an amortized portion of the liability (the Net OPEB Obligation). The annual OPEB expense replaces the Annual Required Contribution (ARC), with faster recognition than what was previously required. Entry age normal cost method is required to determine liability. Discount rate is based on employer s assets and calculation of Actuarial Determined Contribution (ADC) if prefunding. If the plan is unfunded, a 20 year tax exempt municipal bond yield used. Enhanced disclosures of historical contributions, funded status and basis for actuarial assumptions is required. Description of any benefit and assumption changes as well as an expanded Notes section and Required Supplementary Information (RSI) requirement. This valuation s assumptions and supporting documentation for GASB 74/75 are contained in the appendix. Postemployment Benefits The Village provides postemployment benefits for eligible participants enrolled in Village-sponsored plans. The benefits are provided in the form of an explicit subsidy where the Village contributes towards the retiree health premium equivalents. Page 4 describes the postemployment benefits and plan provisions.

4 Village of Milford 2 Executive Summary Key Results A summary of the key valuation results is shown below. See glossary for a description of each item. June 30, 2017 Liabilities Present Value of Future Benefits $1,449,000 Total OPEB Liability (BOY) $1,554,000 Total OPEB Liability (EOY) $1,392,000 Fiduciary Net Position $1,489,000 Net OPEB Liability ($97,000) Actuarial Determined Contribution Since the village has overfunded the benefits thus far, it is assumed that there is no need to contribute to the trust as of this point in time, thus the ADC is $0. Reconciliation to Prior Valuation Healthcare Analytics Consulting did not prepare the prior valuation for the village, however we were able to distinguish changes in assumptions/experience based on the prior alternative method model used. The changes due to each liability category can be found below: Impact of Changes of Benefit Terms There were no changes of benefit terms that impacted the valuation. Impact of Plan Experience The impact of plan experience is valued at a gain of $77,000. This resulted from census changes mostly. Impact of Changes of Assumptions There was an additional gain in assumption changes of $132,000. This was the result of using more recent mortality tables, and revising the termination/retirement tables as well.

5 Village of Milford 3 Actuarial Certification Actuarial Certification At the request of the Village of Milford, Healthcare Analytics Consulting, a division of Arthur J. Gallagher, has completed an actuarial valuation as of fiscal year end June 30, 2017 under Statements No. 74 and No. 75 of the Governmental Accounting Standards Board. The calculations derived for this report have been made on a basis consistent with our understanding of GASB 74/75. The valuation has been conducted in accordance with generally accepted actuarial principles and practices as set forth in the following Actuarial Standards of Practice: ASOP No. 6 Measuring Retiree Group Benefit Obligations ASOP No. 21 Responding to or Assisting Auditors of Examiners in Connection with Financial Statements for All Practice Areas ASOP No. 23 Data Quality ASOP NO. 41 Actuarial Communications The results of this report are to be used solely for the purpose of meeting employer financial accounting requirements. In preparing the results of this report, we have relied on employee data, plan information and claims data provided by the Village of Milford. While the scope of the engagement did not call for us to perform an audit or independent verification of this information, we reviewed it for reasonableness. The accuracy of the results presented in the report is dependent upon the accuracy and completeness of the underlying information. The undersigned is a member of the American Academy of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Respectfully Submitted, Healthcare Analytics Consulting Christopher Diorio, ASA, MAAA Consulting Actuary July 31, 2017

6 Village of Milford 4 Plan Provisions Pension Eligibility Criteria Plan Provisions For Police: Early Retirement: Minimum of age 55 with at least 15 years of service. Normal Retirement: Minimum of age 60 with at least 10 years of service. For Patrol and Command: Early Retirement: Minimum of age 55 with at least 25 years of service. Normal Retirement: Minimum of age 60 with at least 8 years of service. For Non-Union: Early Retirement: Minimum of age 55 with at least 15 years of service. Normal Retirement: Minimum of age 60 with at least 8 years of service. Retiree Health Subsidy Eligibility The Village provides a monthly stipend for medical coverage only. This is dependent on bargaining unit and years of service. Bargaining Unit DOH Requirement Years of Service Amount DPS & WWTP Hired before 7/1/ $385 Hired before7/1/ $400 Patrol Hired before 7/1/ $525 Hired on or after 7/1/ $350 Command Hired before 7/1/ $525 Hired on or after 7/1/ $350 Non-Union Hired before 7/1/ $400

7 Village of Milford 5 Actuarial Assumptions and Methods Actuarial Assumptions and Methods Valuation Date June 30, 2017 Discount Rate Salary Increase Rate Inflation Rate Census Data Marriage Rate Spouse Age Medicare Eligibility Actuarial Cost Method Amortization Method Plan Participation Percentage 7.0% per annum The discount rate is based on expected long-term rate of return on plan investments where assets are projected to cover all future benefit payments plus inflation. 2.0% per annum 2.5% per annum The census was provided by the Village as of January The plan does not cover spouses or other dependents. Spouse dates of birth were not provided by the Village. Where this information is missing, male spouses are assumed to be three years older than female spouses. All current and future retirees are assumed to be eligible for Medicare at age 65. Entry Age Normal based on level percentage of projected salary Experience gains and losses are amortized over a closed period of 10.4 years equal to the average remaining service of active and inactive plan members (who have no future service) The participation percentage is the assumed rate of future eligible retirees who elect to continue health coverage at retirement. It is assumed that 100% of all employees who are eligible for early retiree benefits will participate in the retiree medical plan. This assumes that a one-time irrevocable election to participate is made at retirement. Mortality Rates RP-2014 trended back to 2006 and projected generationally using Scale MP-16, applied on a genderspecific basis

8 Village of Milford 6 Actuarial Assumptions Retirement Age Annual retirement probabilities have been developed from the Municipal Employees Retirement System of Michigan Actuarial Valuation Report as of December 1, Sample retirement ages and associated probabilities are as follows. All members are assumed to retire at the later of age 70 or a member s age on the valuation date. Early Retirement Age Percent % % % % % % % % % % Normal Retirement Sample Replacement Index Percent 5 8.0% % % % % % % % % % % % % % %

9 Village of Milford 7 Actuarial Assumptions Termination Annual termination probabilities have been developed from the Municipal Employees Retirement System of Michigan Actuarial Valuation Report as of December 1, Sample rates are provided below. Years of Service Male/Female % % % % % % % % % %

10 Village of Milford 8 Census Summary Census Summary A summary of the current active employee and retired population for the City is provided in the tables below: ACTIVE POPULATION* Age Group Fully Eligible Not Fully Eligible Total RETIRED EMPLOYEES < Total *eligible to receive subsidy A summary of the current active employees (who are eligible for postemployment benefits) based on years of service is provided in the table below: Age Group Total < Total

11 Village of Milford 9 Glossary Glossary Actuarial Assumptions Factors that must be assumed for purposes of projecting future benefit payments as part of an actuarial valuation. Actuarial Cost Method A procedure for determining the Actuarial Present Value of pension plan benefits and expenses and for developing an actuarially equivalent allocation of such value to time periods, in the form of a Normal Cost and an Actuarial Accrued Liability. GASB 74/75 requires Entry Age Normal Method assuming Service Cost is determined as a level percent of pay that would fully fund the benefit promise by the time of retirement. Actuarial Determined Contributions of the Employer (ADC) The contribution determined by the adopted OPEB Funding Policy. Actuarial Valuation A process used by actuaries to 1) project future benefit payments, 2) discount those payments to their total present value, and 3) systematically allocate an appropriate portion of that amount to each period of employee service using the EAN actuarial cost method. Advance Funding A method of financing benefits by placing resources in trust as employees earn benefits so that the resources thus accumulated, along with related earnings, can be used to make benefit payments as they become due. Discount (or Interest) Rates The rates used to reflect the time value of money. Discount rates are used in determining the present value as of the valuation date of future cash flows currently expected to be required to satisfy the postretirement benefit obligation. For unfunded plans, interest rate using a long-term expected rate of return on tax-exempt, high-quality municipal bond. For funded plans, the expected long-term rate of return on trust assets, to the extent the net fiduciary position is projected to be sufficient to provide the benefits. For partially funded plans or if a funded shortfall is projected, the interest rate is blended between the funded and the unfunded rate. Explicit Subsidy is created when the public entity contributes to any or all of the retiree healthcare cost. Implicit Subsidy is created when Public entities offer eligible early retirees the opportunity to purchase lower than age-adjusted premiums through the use of a single/common or blended premium for both retirees and active employees. Measurement Date The Net OPEB Liability must be measured as of a date no earlier than the end of the prior fiscal year and no later than the end of the current fiscal year. GASB 74/75 requires measurement date to be within 30 months and one day of the end of the most recent fiscal year. Net OPEB Liability (NOL) (GASB 74/75) or Unfunded Actuarial Accrued Liability ( UAAL ) (GASB 43/45) is the difference between the AAL and the actuarial value of plan assets. Plan assets are financial assets that are segregated and restricted in a trust (or equivalent arrangement). Assets in this trust are

12 Village of Milford 10 Glossary dedicated to providing benefits to plan participants and are legally protected from creditors of employers. Normal Cost / Service Cost is the portion of the Actuarial Present Value of plan benefits and expenses for active employees which is allocated to a valuation year by the Actuarial Cost Method. OPEB Expense (GASB 74/75) reflects the annual change in the employer s net OPEB liability, with deferred recognition provided for certain items. Other Postemployment Benefits (OPEB) are benefits (other than pensions) that employers provide to their former employees. These benefits principally involve health care benefits, but also may include life insurance, dental, disability, legal, and other services when those benefits are provided separately from a pension plan. Pay-as-you-go A method of financing benefits by making required payments only as they come due. The Present Value of Future Benefits (PVFB) is the present value of the cost to finance benefits payable in the future, discounted to reflect the expected effects of the time value of money and the probabilities of payment. Future benefits include all benefits estimated to be payable to plan members as a result of their service through the valuation date and their expected future service. Total OPEB Liability (TOL) (GASB 74/74) or Actuarial Accrued Liability (AAL) (GASB 43/45) is the portion of the actuarial present value of the total projected benefits allocated to years of employment prior to the measurement date.

13 Village of Milford 11 Summary of Governmental Accounting Standards Board Statements No. 74 and No. 75 Summary of Governmental Accounting Standards Board Statements No. 74 and No. 75 Applicability of Accounting Standards The Governmental Accounting Standards Board released Statements No. 74 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans ( GASB 74 ) and Statement No. 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions ( GASB 75 ) in June These two statements supersede GASB Statements 43 and 45, respectively, and establish uniform accounting and financial reporting standards for state and local governmental entities related to postemployment benefits other than pensions. GASB 74 must be adopted for fiscal years beginning after June 15, 2016, and GASB 75 must be adopted for fiscal years beginning after June 15, While the previous statements allowed smaller entities the ability to have valuations every three years, the replacement standards require all entities, regardless of size, to have a valuation performed every two years, with roll forward valuations performed on years in between. Actuarial Cost Method Whereas GASB 43 and GASB 45 allowed for one of six different actuarial cost methods, GASB 74 and GASB 75 require the Entry Age Normal cost method based on a level percentage of projected salary. Required Notes to Financial Statements The following information is required to be disclosed in the notes to financial statements: Plan description Sources of changes in the net OPEB liability Significant assumptions used to calculate the total OPEB liability Required Supplementary Information The following information is to be included as Required Supplementary Information ( RSI ): A ten-year schedule of changes in the net OPEB liability that separately presents the information required for each year A ten-year schedule presenting the components of the net OPEB liability and related ratios Actuarially-determined contributions (if applicable), with notes showing significant methods and assumptions used in the determination of contributions

14 Exhibit 1 Present Value of Future Benefits PVFB Actives $560,612 Retirees $888,161 Total $1,448,773 Total and Net OPEB Liabilities as of June 30, 2017 Total OPEB Liability Actives $503,716 Retirees $888,161 Total OPEB Liability (TOL) $1,391,877 Fiduciary Net Position (FNP) $1,488,979 Net OPEB Liability (NOL) ($97,102) Covered-employee payroll $2,844,095 NOL as a % of covered payroll -3% Total OPEB Expense FY 2017 Service cost $8,566 Interest cost $112,379 Changes of benefit terms $0 Current Recognized deferred outflows/(inflows): Difference between expected and actual experience ($7,373) Changes in assumptions or other inputs ($19,691) (Other changes, separately identified if significant) $0 Difference of Projected Investment Earnings ($5,785) Total Expense $88,095

15 Exhibit 2 Changes in Net OPEB Liability Total OPEB Liability (a) Increase (Decrease) Plan Fiduciary Net Position (b) Net OPEB Liability (a)-(b) Total OPEB Liability - Start of Year (July 1, 2016) $1,553,724 $1,320,930 $232,794 Changes for the year Service cost $8,566 $8,566 Interest cost $112,379 $112,379 Changes of benefit terms $0 $0 Differences between expected and actual experience ($77,038) ($77,038) Changes in assumptions or other inputs ($205,754) ($205,754) (Other changes, separately identified if significant) $0 $0 Contributions-employer $0 $0 $0 Net Investment Income $0 $199,749 ($199,749) Benefit payments $0 ($28,240) $28,240 Admin Expense $0 ($3,460) $3,460 Net change in total OPEB liability ($161,848) $168,049 ($329,896) Total OPEB Liability - End of Year (June 30, 2017) $1,391,877 $1,488,979 ($97,102) Schedule of Deferred Inflows/Outflows Deferred Outflows Deferred Inflows of Resources of Resources Differences between expected and actual experience $ - $ (69,665) Changes of assumptions/inputs $ - $ (186,063) Net difference between projected and actual investments $ - $ (23,141) Total $ - $ (278,869) Amounts reported as deferred outflows of resources and Deferred Inflows of Resources: For Fiscal Year End: 2018 (32,849) 2019 (32,849) 2020 (32,849) 2021 (32,849) 2022 (27,064) Thereafter (108,256)

16 Exhibit 3 Trend and Discount Rate Sensitivities Trend Total OPEB Liability % Difference 1% Decrease $1,242,000-11% Current Trend $1,392,000 N/A 1% Increase $1,546,000 11% Discount Rate Total OPEB Liability % Difference +1% Discount Sensitivity (8%) $1,238,000-11% Current Discount Rate 7% $1,392,000 N/A +1% Discount Sensitivity (6%) $1,553,000 12% 20 Year Cash Flows Year Total 1st Year $91,000 2nd Year $93,000 3nd Year $0 4th Year $98,000 5th Year $100,000 6th Year $102,000 7th Year $105,000 8th Year $107,000 9th Year $108,000 10th Year $106,000 11th Year $105,000 12th Year $107,000 13th Year $110,000 14th Year $113,000 15th Year $114,000 16th Year $113,000 17th Year $111,000 18th Year $111,000 19th Year $113,000 20th Year $113,000

17 Exhibit 4 Results Split-Out By Employee Group Employee Group Count PVFB NOL Expense Command 5 $91,000 ($6,000) $6,000 DPS 7 $134,000 ($9,000) $9,000 Non-Union 8 $160,000 ($10,000) $11,000 Patrol 12 $84,000 ($4,000) $6,000 WWTP 2 $91,000 ($6,000) $6,000 Retired 15 $888,000 ($62,000) $51,000 Total 49 $1,448,000 ($97,000) $89,000