The information contained in this report is not intended to be, and does not constitute advice from De La Rosa & Co. De La Rosa & Co.

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2 The information contained in this report is not intended to be, and does not constitute advice from De La Rosa & Co. De La Rosa & Co. is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. The information was prepared by De La Rosa & Co. sales, trading, banking or other non research personnel. This is not a research report and the views and information contained herein should not be viewed as independent of the interests of De La Rosa & Co. trading or sales desks. By submitting this document to you, De La Rosa & Co. is not advising you to take any particular action based on the information, opinions or views contained in this document and acceptance of this document will be deemed by you as acceptance of these conclusions. To the extent that that any price levels are noted, they are for informational purposes only and are not intended for use by third parties and are indicative as of the date of this document and are not a commitment by De La Rosa & Co. to trade at any price. We make no express or implied representation or warranty with respect to the accuracy or completeness of this material nor are we obligated to provide updated information on the securities or strategies discussed. 1

3 Section I Program Overview & Cost Containment Strategies Section II Alternative Retiree Medical Program (ARMP) Overview Section III ARMP Legal Considerations Section IV ARMP Actuarial Considerations Section V ARMP Financing Considerations Section VI Panelist Contact Information Appendix Pros & Cons ARMP FAQ Sample Letter Cities on Two Tier Program 2

4 Dr. Scott Miller Chief Financial Officer City of Beverly Hills

5 Develop more cost efficient benefit programs; The City would like to continue providing employees with competitive benefits while retaining financial control of retirement and health programs 4

6 Program 1: Tied employee salary and benefit levels to the market as total compensation up to $565 million savings over 40 years Program 2: Implemented an expanded benefit cafeteria plan up to $814 million savings over 40 years Program 3: Implemented a two-tier plan for employee retiree health benefits up to $55 million savings over 40 years Program 4: Implemented an alternative retiree medical program (ARMP) for current non-safety employees up to $30.9 million savings in long term benefits costs and $157 million in unfunded liabilities Program 5: Developing a two-tier CalPERS employee retirement program for both Safety & Non-Safety personnel IN DEVELOPMENT savings: TBD 5

7 Conservative 40-Year Savings Projections (Programs 1-4) $800,000,000 $745,988,000 $700,000,000 $600,000,000 $500,000,000 $445,673,000 $400,000,000 $300,000,000 $200,000,000 $214,438,000 $157,100,000 $100,000,000 $55,000,000 $30,877,000 $- Program 1: Tie Salary & Benefit Levels to Market Program 2: Cafeteria Plan Program 3: Defined Contribution Plan for New Hires Program 4: Alternative Retiree Medical Program (ARMP) Total Projected 40-Year Savings For All Four Programs Projected 40 Year OPEB Liability Savings Projected 40-Year Savings 6

8 Historical average salary increase for all employee associations over the past 10 years was 3.2% Projected future average salary increase of market driven model is 2.93% % = savings of $565.6M over 40 years 3.10% = savings of $214.4M over 40 years Certain percentile levels for each Associations was negotiated Typically, it s the 75 th percentile of total compensation. 1 Average CPI since 1985, Bureau of Labor Statistics 7

9 $450,000,000 Projected Result of Tying Salary & Benefit Levels to Market over 40 Years $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $- Annual Salary (All funds) with Past Practice Increase of 3.2% Annual Salary (All funds) with Future Projected Increase of 3.1% 8

10 The City paid 100% of all health care increases for all associations, regardless of plan or number of eligible dependents Health care costs continued to increase: 6.5% average increase over the past 39 years 1 40 year savings based on: 3% annual increase to the benefit level: $814M 5% annual increase to the benefit level: $445M 1 Source: BLS, , Medical Costs of Average US City 9

11 $106,000,000 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) 10

12 The four components of the expanded Cafeteria Plan: 1. City Contribution Limitations 2. Employee Selection of Core Benefits (Medical, Dental, and Vision) 3. Opt-Out Incentives 4. Selection Incentives 11

13 Employees hired after 1/1/10 receive a defined contribution plan for benefits vs. a defined benefit plan Caps the cost of future retiree medical benefits for new non-safety employees Eliminates OPEB unfunded liabilities for new employees Different defined contribution amounts were negotiated with each association (same or lower than current benefit value) 12

14 Provides a voluntary alternative to employees current retiree medical benefit The biggest benefit for the City was the reduction in OPEB unfunded liabilities, however there are projected cost savings of $30M Employees received the option of participating in the ARMP after successful negotiations with each of the City s non-safety employee associations Substituted low cost bonded dollars for high cost future dollars, thus capping the City s costs & lowering OPEB unfunded liability 13

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16 Current Retiree Medical Benefit: Full time employees hired before January 1, 2010 are provided a certain level of retiree medical coverage as defined in their MOU or Compensation Plan The Choice Current Retiree or Alternative Medical Benefit Retiree Medical Program (ARMP) 15

17 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: 1-time transition amount: actuarially determined Residual monthly amount if your aren t fully vested Deposited into an RHS account Amounts are specific to each employee 16

18 Three options when receiving the initial Transition Amount: 1. Cash Taxable, distributed in Feb Deferred Compensation Tax deferred, deposited in Dec Combination of Option 1 & 2 *20% of the Transition Amount is deposited into an RHS 17

19 (i.e. IRS-qualified health reimbursement arrangement) Directed by Employees 18

20 Reduces the City s current OPEB unfunded liability by $157 million dollars over 40 years (35% participation) Reduces long term benefit costs for current non-safety employees by $30.9 million over 40 years 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 Keeps employee benefits highly competitive which aids recruitment and retention Formulated the new retiree medical benefit to attract and entice the younger generation of employees 19

21 $180,000,000 $160,000,000 Impact of Current Non-Safety Employees Electing the Alternative Retiree Medical Program (ARMP) $157,100,000 $140,000,000 $120,000,000 $100,000,000 $80,000,000 $79,303,000 $60,000,000 $48,426,000 $40,000,000 $20,000,000 $- Current City Program (Pay As You Go) $33,000 Proposed City Program - 35% of Current Non-Safety Employees Electing ARMP Total Projected Cost Over 40 Years Unfunded Accrued Liability Over 40 Years 20

22 $250,000,000 Impact of Current & Future Safety Employees Electing an Alternative Retiree Medical Program $216,934,000 $200,000,000 $150,000,000 $100,000,000 $85,438,000 $72,695,000 $50,000,000 $- Current City Program (Pay As You Go) $83,000 Potential City Program - 35% of Current Safety Employees & All Future Safety Employees Elect ARMP Total Projected Cost Over 40 Years Unfunded Accrued Liability Over 40 Years 21

23 $400,000,000 $350,000,000 Potential City Program - 35% of Current Non-Safety & Safety Employees & All Future Safety Employees Elect ARMP $374,034,000 $300,000,000 $284,041,000 $250,000,000 $244,420,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $- Current City Program (Pay As You Go) $68,000 Potential City Program - 35% of Current Non-Safety & Safety Employees & All Future Safety Employees Elect ARMP Total Projected Cost Over 40 Years Unfunded Accrued Liability Over 40 Years 22

24 Marcus Wu Partner Hanson Bridgett LLP

25 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 24

26 Informed consent Full and free choice between benefit programs Shifting legal landscape 25

27 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 Risk can be minimized, but not avoided 26

28 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) 27

29 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 28

30 Near term Employer paid member contributions (EPMCs) Employees pay higher % of contribs for optional benefits Employees pay % of agency s contributions Money is fungible cut medical benefits? Longer term 2 tier-new hires Limits within statutory plans? Options outside statutory plans? Current (and future) pension litigation 29

31 Brad Au Senior Vice President Aon Hewitt

32 Cost neutral or better cost avoidance Cap the City s future medical cost increases Supportable / reasonable assumptions Fair / attractive to employees 31

33 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 32

34 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 33

35 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 34

36 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 35

37 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 36

38 John Kim Partner De La Rosa & Company

39 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 38

40 Cash Pros No interest cost Ease of execution Ability to size funding of ARMP prepayments No financing costs Cons Decreased reserves/liquidity Loss of interest income Conventional Bank Loan Low interest cost Maintains reserves/liquidity Ability to size funding of ARMP prepayments Minimal financing costs Interest cost Up front financing costs Need to pledge security (collateral) days required Municipal Bonds Lowest interest cost Maintains reserves/liquidity Interest and financing costs Need to pledge security (typically leased asset) days required Less flexibility to size funding of ARMP prepayments 39

41 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) 40

42 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! 41

43 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? 42

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46 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, Deloitte/Touche 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 45

47 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 46

48 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 47

49 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 48