County of Sonoma Actuarial Valuation and Review of Other Postemployment Benefits (OPEB) as of June 30, 2011 In accordance with GASB Statements No. 43 and No. 45 Copyright 2011 by The Segal Group, Inc., parent of The Segal Company. All rights reserved.
SECTION 1 SECTION 2 SECTION 3 SECTION 4 EXECUTIVE SUMMARY VALUATION RESULTS VALUATION DETAILS SUPPORTING INFORMATION Purpose... 1 Highlights of the Valuation... 1 Summary of Valuation Results... 2 Actuarial Certification... 3 CHART 1 Actuarial Present Value of Total Projected Benefits (APB) and Actuarial Balance Sheet... 4 CHART 2 Actuarial Accrued Liability (AAL) and Unfunded AAL (UAAL)... 5 CHART 3 Table of Amortization Bases... 6 CHART 4 Determination of Annual Required Contribution (ARC) Payable Throughout Fiscal Year 7 CHART 5 Required Supplementary Information Schedule of Employer Contributions... 9 EXHIBIT A Summary of Participant Data... 12 EXHIBIT B Cash Flow Projections... 13 EXHIBIT I Summary of Required Supplementary Information... 14 EXHIBIT II Actuarial Assumptions and Actuarial Cost Method... 15 EXHIBIT III Summary of Plan... 28 EXHIBIT IV Definitions of Terms... 33 EXHIBIT V Accounting Requirements... 36 EXHIBIT VII GASB 43/45 Concepts... 38 APPENDIX 1 Annual Required Contribution at Various Timing Scenarios... 40 CHART 6 Required Supplementary Information Schedule of Funding Progress... 10 APPENDIX 2 Breakdown of Implicit Subsidy Portion of Results... 41 CHART 7 Required Supplementary Information Net OPEB Obligation (NOO)... 11
SECTION 1: Executive Summary for County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 PURPOSE This report presents the results of our actuarial valuation of the County of Sonoma (the Employer ) OPEB plan as of June 30, 2011. The results are in accordance with the Governmental Accounting Standards, which prescribe an accrual methodology for accumulating the value of other postemployment benefits (OPEB) over participants active working lifetimes. HIGHLIGHTS OF THE VALUATION The unfunded actuarial accrued liability (UAAL) as of June 30, 2011 is $297,691,344, an increase of $38,953,786, from the prior valuation UAAL of $258,737,558. The Annual Required Contribution (ARC) increased to $24,687,305 for the year ending June 30, 2012. The ARC was $21,767,498 for the year ending June 30, 2010. As a percentage of payroll, the ARC increased from 7.05% in the prior year to 7.86% this year. The Annual OPEB Cost (AOC) increased to $26,313,226 for the year ending June 30, 2012. The AOC was $22,548,641 for the year ending June 30, 2010. As of June 30, 2011, the ratio of assets to the AAL (the funded ratio) is 6.01%. The Net OPEB Obligation (NOO) decreased to $31,481,613 for the year ending June 30, 2011. The NOO generally increases if the contributions in relation to the ARC are less than the ARC. The contributions in relation to the ARC during the year ending June 30, 2011 were $30,626,559 compared to the ARC of $22,692,617. Contributions in relation to the ARC totaled 134.96% of the ARC in the year ending June 30, 2011. Chart 7 shows the detailed derivation of the NOO and will be completed once actual contributions for fiscal year ending June 30, 2012 are known. 1
SECTION 1: Executive Summary for County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The key valuation results for the current and prior years are shown. SUMMARY OF VALUATION RESULTS June 30, 2011 June 30, 2009 Actuarial Accrued Liability (AAL) $316,736,980 $268,453,913 Actuarial Value of Assets 19,045,636 9,716,355 Unfunded Actuarial Accrued Liability 297,691,344 258,737,558 Funded Ratio 6.01% 3.62% Market Value of Assets $19,045,636 $9,716,355 Annual Required Contribution (ARC) for Fiscal Year Ending: June 30, 2012 June 30, 2010 Normal cost (beginning of year) $8,401,497 $7,200,607 Amortization of the unfunded actuarial accrued liability 15,381,416 13,745,178 Adjustment for timing 904,392 821,713 Total Annual Required Contribution, including adjustment for timing $24,687,305 $21,767,498 Covered payroll (1) $314,044,571 $308,594,897 ARC as a percentage of pay 7.86% 7.05% Total Participants (1) 6,183 6,278 Annual OPEB Cost (AOC) for Fiscal Year Ending: June 30, 2012 June 30, 2010 Annual Required Contributions $24,931.626 (2) $21,767,498 Interest on Net OPEB Obligations 2,439,825 2,761,921 ARC Adjustments -1,752,687-1,980,778 Total Annual OPEB Cost $25,618,764 $22,548,641 AOC as a percent of pay 8.16% 7.31% (1) This total does not include Courts. It does include consideration for the cash allowance and no offset for salary reductions due to the mandatory time off (MTO) period, as benefits are not reduced for MTO, only salary is reduced. The 2011/2012 projected payroll is based on the 2010/2011 payroll of $301,241,795 provided by the County, adjusted by payroll growth of 4.25%. (2) Includes interest adjustment to the end of the year. 2
SECTION 1: Executive Summary for County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 ACTUARIAL CERTIFICATION December 2, 2011 This is to certify that The Segal Company has conducted an actuarial valuation of certain benefit obligations of County of Sonoma s other postemployment benefit programs as of June 30, 2011, in accordance with generally accepted actuarial principles and practices. The actuarial calculations presented in this report have been made on a basis consistent with our understanding of GASB Statements 43 and 45 for the determination of the liability for postemployment benefits other than pensions. The actuarial valuation is based on the plan of benefits verified by the Employer and reliance on participant, premium, claims and expense data provided by the Employer or from vendors employed by the Employer. The Segal Company does not audit the data provided. The accuracy and comprehensiveness of the data is the responsibility of those supplying the data. Segal, however, does review the data for reasonableness and consistency. The actuarial computations made are for purposes of fulfilling plan accounting and funding requirements. Determinations for purposes other than meeting financial accounting and funding requirements may be significantly different from the results reported here. Accordingly, additional determinations may be needed for other purposes, such as judging benefit security at termination of the plan, or determining short-term cash flow requirements. To the best of our knowledge, this report is complete and accurate and in our opinion presents the information necessary to comply with GASB Statements 43 and 45 with respect to the benefit obligations addressed. The signing actuaries are members of the Society of Actuaries, the American Academy of Actuaries, and other professional actuarial organizations and collectively meet their General Qualification Standards for Statements of Actuarial Opinions to render the actuarial opinion contained herein. Patrick Twomey, ASA, MAAA Assistant Actuary Dave Bergerson, ASA, MAAA, FCA Vice President and Actuary 3
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The actuarial present value of total projected benefits uses the actuarial assumptions disclosed in Section 4 to calculate the value today of all benefits expected to be paid to current actives and retired plan members. The actuarial balance sheet shows the expected breakdown of how these benefits will be financed. CHART 1 Actuarial Present Value of Total Projected Benefits (APB) and Actuarial Balance Sheet Actuarial Present Value of Total Projected Benefits (APB) 2011 2009 Participant Category Current retirees, beneficiaries, and dependents $211,525,040 $180,190,755 Current active members 166,639,196 143,275,888 Terminated members entitled but not yet eligible 0 0 Total as of June 30 $378,164,236 $323,466,643 2011 2009 Actuarial Balance Sheet The actuarial balance sheet as of the valuation date is as follows: Assets 1. Actuarial value of assets $19,045,636 $9,716,355 2. Present value of future normal costs 61,427,256 55,012,730 3. Unfunded actuarial accrued liability 297,691,344 258,737,558 4. Present value of current and future assets $378,164,236 $323,466,643 Liabilities 5. Actuarial Present Value of total Projected Benefits $378,164,236 $323,466,643 4
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The actuarial accrued liability shows that portion of the APB (Chart 1) allocated to periods prior to the valuation date by the actuarial cost method. The chart below shows the portion covered by accumulated plan assets. CHART 2 Actuarial Accrued Liability (AAL) and Unfunded AAL (UAAL) June 30, 2011 June 30, 2009 Participant Category Current retirees, beneficiaries, and dependents $211,525,040 $180,190,755 Current active members 105,211,940 88,263,158 Terminated members entitled but not yet eligible 0 0 Total $316,736,980 $268,453,913 Net employer actuarial accrued liability $316,736,980 $268,453,913 Actuarial value of assets 19,045,636 9,716,355 Unfunded actuarial accrued liability $297,691,344 $258,737,558 5
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The unfunded actuarial accrued liability may be amortized over periods of up to 30 years. Amortization payments may be calculated as level dollar amounts or as amounts designed to remain level as a percent of a growing payroll base. County of Sonoma has elected to amortize unfunded actuarial accrued liability using the following rules: 30 year open period Level percent of payroll CHART 3 Table of Amortization Bases Type Date Established Initial Year Initial Amount Annual Payment* Years Remaining Outstanding Balance Total Unfunded 07/01/2011 30 $297,691,344 $15,381,416 30 $297,691,344 * Level percentage of pay. 6
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The Annual Required Contribution (ARC) is the amount calculated to determine the annual cost of the OPEB plan for accounting purposes as if the plan were being funded through contributions to a trust fund. The GASB standards cannot require the contributions actually be made to a trust fund. The ARC is simply a device used to measure annual plan costs on an accrual basis. The calculation consists of adding the Normal Cost of the plan to an amortization payment. The resulting sum is then adjusted to the start of the accounting period and adjusted as if the annual cost were to be contributed throughout the year. The amortization payment is based on a 30-year amortization of the Unfunded Actuarial Accrued Liability on a level percent of payroll basis. CHART 4 Determination of Annual Required Contribution (ARC) Payable Throughout Fiscal Year Cost Element Fiscal Year Beginning July 1, 2011 and Ending June 30, 2012 Percentage of Amount Compensation Fiscal Year Beginning July 1, 2009 and Ending June 30, 2010 Percentage of Amount Compensation 1. Normal cost $8,401,497 2.68% $7,200,607 2.33% 2. Amortization of the unfunded actuarial accrued liability (30 years) 15,381,416 4.90% 13,745,178 4.45% 3. Adjustment for timing 904,392 0.28% 821,713 0.27% 4. Total Annual Required Contribution (ARC), payable $24,687,305 7.86% $21,767,498 7.05% throughout the year 5. Total Compensation (1) $314,044,571 $308,594,897 (1) This total does not include Courts. It does include consideration for the cash allowance and no offset for salary reductions due to the mandatory time off (MTO) period, as benefits are not reduced for MTO, only salary is reduced. The 2011/2012 projected payroll is based on the 2010/2011 payroll of $301,241,795 provided by the County, adjusted by payroll growth of 4.25%. 7
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The Annual OPEB Cost (AOC) adjusts the ARC for timing differences between the ARC and contributions in relation to the ARC. The AOC is the cost of OPEB actually booked as an expense for the Fiscal Year under GASB 45. CHART 4 (continued) Determination of Annual OPEB Cost (AOC) Payable at the end of the Fiscal Year Cost Element Fiscal Year Beginning July 1, 2011 and Ending June 30, 2012 Percentage of Amount Compensation Fiscal Year Beginning July 1, 2009 and Ending June 30, 2010 Percentage of Amount Compensation 1. Annual Required Contribution $25,626,088 (1) 8.16% $21,767,498 7.05% 2. Interest on Beginning of Year Net OPEB Obligation (NOO) 2,439,825 0.78% 2,761,921 0.89% 3. ARC adjustment -1,752,687-0.56% -1,980,778-0.63% 4. Annual OPEB Cost $26,313,226 8.38% $22,548,641 7.31% (1) Includes interest adjustment to the end of the year. 8
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 For GASB 43 (plan reporting) purposes, the schedule of employer contributions compares actual contributions to the ARC. For GASB 45 (employer reporting) purposes, the schedule of employer contributions compares actual contributions to the AOC. CHART 5 Required Supplementary Information Schedule of Employer Contributions GASB 43 Fiscal Year Ended June 30 Annual Required Contributions Actual Contributions Percentage Contributed 2008 $37,039,322 $19,543,000 52.76% 2009 38,613,493 21,981,670 56.93% 2010 21,767,498 18,226,000 83.73% 2011 22,692,617 (1) 30,626,559 (3) 134.96% 2012 24,687,305 Not made yet* N/A* Required Supplementary Information Schedule of Employer Contributions GASB 45 Fiscal Year Ended June 30 Annual OPEB Cost Actual Contributions Percentage Contributed 2008 $37,039,322 $19,543,000 52.76% 2009 39,009,366 21,981,670 56.35% 2010 22,548,641 18,226,000 80.83% 2011 24,461,806 31,826,852 (2) 130.11% 2012 26,313,226 Not made yet* N/A* (1) The 2010/2011 ARC is based on the 2009/2010 ARC, adjusted by payroll growth of 4.25%. (2) Includes interest adjustment to the end of the year. (3) Includes interest adjustment to the middle of the year. * Will be updated when actual contributions become available. 9
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 This schedule of funding progress presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. CHART 6 Required Supplementary Information Schedule of Funding Progress Actuarial Valuation Date Actuarial Value of Assets (a) Actuarial Accrued Liability (AAL) (b) Unfunded AAL (UAAL) (b) - (a) Funded Ratio (a) / (b) Covered Payroll (c) UAAL as a Percentage of Covered Payroll [(b) - (a) / (c)] 07/01/2007 $7,000,000 $414,418,582 $407,418,582 1.69% $286,742,000 142.09% 07/01/2009 9,716,355 268,453,913 258,737,558 3.62% 308,594,897 (1) 83.84% 07/01/2011 19,045,636 316,736,980 297,691,344 6.01% 314,044,571 (1) 94.79% (1) This total does not include Courts. It does include consideration for the cash allowance and no offset for salary reductions due to the mandatory time off (MTO) period, as benefits are not reduced for MTO, only salary is reduced. The 2011/2012 projected payroll is based on the 2010/2011 payroll of $301,241,795 provided by the County, adjusted by payroll growth of 4.25%. 10
SECTION 2: Valuation Results for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 The Net OPEB obligation measures the accumulated differences between the annual OPEB cost and the actual contributions in relation to the ARC. CHART 7 Required Supplementary Information Net OPEB Obligation (NOO) Actuarial Valuation Date Fiscal Year End Annual Required Contribution (a) Interest on Existing NOO (b) ARC Adjustment (c) Annual OPEB Cost (a) + (b) + (c) (d) Actual Contribution Amount (e) Net Increase in NOO (d) - (e) (f) NOO as of Fiscal Year (g) 07/01/2007 06/30/2008 $37,039,322 $0 $0 $37,039,322 $19,543,000 $17,496,322 $17,496,322 07/01/2007 06/30/2009 38,613,493 (1) 1,399,706-1,003,833 39,009,366 21,981,670 17,027,696 34,524,018 07/01/2009 06/30/2010 21,767,498 2,761,921-1,980,778 22,548,641 18,226,000 4,322,641 38,846,659 07/01/2009 06/30/2011 23,582,859 (2) 3,107,733-2,228,786 24,461,806 31,826,852 (3) -7,365,046 31,481,613 07/01/2011 06/30/2012 25,626,088 (3) 2,439,825-1,752,687 26,313,226 Not made yet* N/A* N/A* * Will be updated when actual contributions become available. (1) The 2008/2009 ARC is based on the 2007/2008 ARC, adjusted by payroll growth of 4.25%. (2) The 2010/2011 ARC is based on the 20092010 ARC, adjusted by payroll growth of 4.25%, then adjusted with interest to the end of the year. (3) Includes interest adjustment to the end of the year. 11
SECTION 3: Supplemental Valuation Details for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 This exhibit summarizes the participant data used for the current and prior valuations. EXHIBIT A Summary of Participant Data June 30, 2011 June 30, 2009 Retirees Number of retirees 2,698 2,311 Average age of retirees 66.9 66.6 Number of spouses 1,044 1,011 Average age of spouses 64.8 62.8 Surviving Spouses Number 157 142 Average age 74.1 74.3 Active Participants Number 3,328 3,825 Average age 46.5 46.5 Average years of service 10.0 9.9 Average expected retirement age 58.3 59.4 12
SECTION 3: Supplemental Valuation Details for the County of Sonoma June 30, 2011 Measurement Under GASB 43 and 45 EXHIBIT B Cash Flow Projections The ARC generally exceeds the current pay-as-you-go ( paygo ) cost of an OPEB plan. Over time the paygo cost will tend to grow and may even eventually exceed the ARC in a well funded plan. The following table projects the paygo cost as the projected net fund payment over the next twenty years. Year Ending Projected Number of Retirees* Projected Benefit Payments (Net Paid by County) June 30 Current Future Total Current Future Total 2012 3,899 195 4,094 $23,833,993 $1,200,811 25,034,804 2013 3,816 401 4,217 22,684,828 2,513,580 25,198,408 2014 3,729 611 4,340 21,568,169 3,926,103 25,494,272 2015 3,640 816 4,456 21,379,592 5,425,703 26,805,295 2016 3,547 1,022 4,569 21,144,912 7,043,776 28,188,688 2017 3,453 1,236 4,689 20,867,260 8,777,920 29,645,180 2018 3,356 1,452 4,808 20,217,261 10,492,164 30,709,425 2019 3,258 1,668 4,926 19,451,446 12,241,773 31,693,219 2020 3,157 1,871 5,028 18,700,976 13,927,049 32,628,025 2021 3,052 2,052 5,104 17,872,708 15,563,789 33,436,497 2022 2,946 2,225 5,171 17,139,674 16,970,099 34,109,773 2023 2,837 2,373 5,210 16,343,407 18,134,586 34,477,993 2024 2,728 2,500 5,228 15,610,091 19,295,984 34,906,075 2025 2,617 2,610 5,227 14,947,333 20,193,642 35,140,975 2026 2,504 2,704 5,208 14,335,744 20,859,600 35,195,344 2027 2,389 2,784 5,173 13,602,305 21,629,999 35,232,304 2028 2,274 2,848 5,122 12,923,388 22,093,294 35,016,682 2029 2,159 2,901 5,060 12,292,981 22,488,585 34,781,566 2030 2,039 2,943 4,982 11,570,330 22,766,123 34,336,453 2031 1,921 2,975 4,896 10,945,999 22,965,166 33,911,165 * Includes spouses of retirees. 13
EXHIBIT I Summary of Required Supplementary Information Valuation date June 30, 2011 Actuarial cost method Projected Unit Credit Amortization method 30-year Open, Level Percent of Payroll Remaining amortization period 30 years as of June 30, 2011 Asset valuation method Market Value Actuarial assumptions: Investment rate of return 7.75% Inflation rate 3.50% Projected salary increases 4.25% County Health Plan Medical cost trend rate 10.0% in 2011/2012, graded down to ultimate rate of 5.0% over 10 years County Healthy Plan Drug cost trend rate 9.5% in 2011/2012, graded down to ultimate rate of 5.0% over 9 years Kaiser Medical/Drug cost trend rate 9.0% in 2011/2012, graded down to ultimate rate of 5.0% over 8 years UHC AARP Medicare Supplement trend rate 8.0% in 2011/2012, graded down to ultimate rate of 5.0% over 6 years Plan membership: June 30, 2011 June 30, 2009 Current retirees, beneficiaries, and dependents 3,899 3,464 Current active participants 3,328 3,825 Terminated participants entitled but not yet eligible 0 0 Total 7,227 7,289 14
EXHIBIT II Actuarial Assumptions and Actuarial Cost Method Post-Retirement Mortality Rates: Healthy Retirement: For General RP-2000 Combined Healthy Mortality Table set back two years. For Safety RP-2000 Combined Healthy Mortality Table set back one year. Disabled Retirement: For General RP-2000 Disabled Retiree Mortality Table set back four years. For Safety 1981 Safety Disability Mortality Table set back four years. These tables reasonably reflect the projected mortality experience of the Plan as of the measurement date. The RP-2000 Healthy Combined Table (separate tables for males and females) with ages set back and the tables used for Disabled Retirement were determined to contain sufficient provision appropriate to reasonably reflect future mortality improvement, based on a review of mortality experience as of the measurement date. The following are sample rates (%): Healthy Life Mortality* Disabled Life Mortality* General Safety General Safety Age Male Female Male Female 30 0.04 0.02 0.04 0.02 0.75 0.26 35 0.06 0.04 0.07 0.04 0.75 0.33 40 0.10 0.06 0.10 0.06 0.75 0.42 45 0.13 0.09 0.14 0.10 0.75 0.54 50 0.19 0.14 0.20 0.16 0.82 0.71 55 0.29 0.22 0.32 0.24 1.25 0.99 60 0.53 0.39 0.59 0.44 1.76 1.77 * Mortality rates as used in the Sonoma County Retirement Valuation Report. 15
Termination Rates Before Retirement: Mortality Rates: Rate (%) General Safety Age Male Female Male Female 30 0.02 0.01 0.02 0.01 35 0.03 0.02 0.04 0.02 40 0.05 0.03 0.05 0.03 45 0.06 0.05 0.07 0.05 50 0.09 0.07 0.10 0.08 55 0.15 0.11 0.16 0.12 60 0.26 0.20 0.30 0.22 This table reasonably reflects the projected mortality experience of the Plan as of the measurement date. The RP-2000 Healthy Combined Table (separate tables for males and females) with ages set back was determined to contain sufficient provision appropriate to reasonably reflect future mortality improvement, based on a review of mortality experience as of the measurement date. 16
Disability Rates: Rate (%) Age General (1) Safety (2) 20 0.05 0.06 25 0.05 0.16 30 0.06 0.39 35 0.12 0.82 40 0.21 1.66 45 0.31 2.38 50 0.45 2.87 55 0.59 3.58 60 0.73 0.00 (1) 60% of General disabilities are assumed to be service connected disabilities. The other 40% are assumed to be non-service connected disabilities. (2) 90% of Safety disabilities are assumed to be service connected disabilities. The other 10% are assumed to be non-service connected disabilities. 17
Withdrawal Rates: Rate (%) Withdrawal (< 5 Years of Service) Years of Service General Safety 0 7.0 5.5 1 6.0 4.0 2 5.0 3.0 3 4.0 2.0 4 3.0 2.0 Rate (%) Withdrawal (5+ Years of Service) Age General Safety 20 3.00 2.00 25 3.00 2.00 30 2.70 1.58 35 1.60 0.88 40 0.85 0.42 45 0.66 0.18 50 0.48 0.00 55 0.28 0.00 60 0.14 0.00 No withdrawal is assumed after a member is assumed to retire. 18
Termination Rates: Rate (%) Termination (<5 Years of Service) Years of Service General Safety 0 4.0 3.0 1 3.0 3.0 2 2.0 3.0 3 2.0 3.0 4 2.0 3.0 Rate (%) Termination (5+ Years of Service) Age General Safety 20 2.00 2.00 25 2.00 2.00 30 2.00 2.00 35 2.00 1.40 40 2.00 0.94 45 1.64 0.84 50 0.98 0.00 55 0.52 0.00 60 0.40 0.00 No vested termination is assumed after a member is assumed to retire. 19
Retirement Rates: General Rate (%) Safety Age Before 30 Years On or After 30 Years Before 30 Years On or After 30 Years 50 6.0 10.0 10.0 10.0 51 6.0 10.0 12.0 12.0 52 6.0 10.0 16.0 18.0 53 7.0 10.0 18.0 25.0 54 8.0 10.0 20.0 50.0 55 9.0 20.0 25.0 100.0 56 10.0 21.0 20.0 100.0 57 12.0 22.0 20.0 100.0 58 13.0 23.0 20.0 100.0 59 14.0 24.0 20.0 100.0 60 19.0 40.0 100.0 100.0 61 24.0 40.0 100.0 100.0 62 40.0 40.0 100.0 100.0 63 30.0 40.0 100.0 100.0 64 30.0 40.0 100.0 100.0 65 30.0 40.0 100.0 100.0 66 30.0 40.0 100.0 100.0 67 40.0 40.0 100.0 100.0 68 50.0 50.0 100.0 100.0 69 80.0 80.0 100.0 100.0 70 100.0 100.0 100.0 100.0 20
Future Benefit Accruals: 1.0 year of service per year. Unknown Data for Members: Definition of Active Members: Same as those exhibited by members with similar known characteristics. If not specified, members are assumed to be male. First day of pay period following employment. Net Investment Return: 7.75%; net of administration and investment expenses. Salary Scale: Annual Rate of Compensation Increase Inflation: 3.50% per year; plus Across the Board salary increases of 0.75% per year; plus Merit and Promotion increases as follows: Years of Service General Safety 0 6.00% 8.00% 1 5.00 4.75 2 4.00 3.75 3 3.00 2.75 4 2.00 1.75 5+ 0.50 0.75 Actuarial Value of Assets: Market value of assets 21
Data: Actuarial Cost Method: Detailed census data and financial data for postemployment benefits were provided by the County of Sonoma. Projected Unit Credit Measurement Date June 30, 2011 Census Date: June 30, 2011 Discount Rate: 7.75% Annual Inflation Rate: 3.50% Annual Payroll Growth 4.25% Administrative Expenses: HMOs County Plan Other Marital Status: Spouse Age Difference: Participation: Administrative expenses were included in the premiums, not valued separately. An annual ASO fee for Fiscal Year 2011-2012 of $357 per retired life was valued. We include any expense associated with benefits (ASO, for example) or any administrative fees paid out of an OPEB trust. In accordance with the GASB Implementation Manual, we do not include County personnel or system costs to operate the plan. At the time of retirement, 70% of male employees and 35% of female employees are assumed to have spouses who elect coverage. Husbands are assumed to be 3 years older than their wives. 95% of the current active employees with medical coverage are assumed to continue medical coverage at retirement. 22
Health Care Cost Subsidy Trend Rates: Health care trend measures the anticipated overall rate at which health plan costs are expected to increase in future years. Trend rates are used to increase the stated subsidies into the future. For example, if the County Plan medical cost for the plan year 2011-2012 was $1,000, the assumed cost for 2012-2013 would be $1,100 [($1,000 x (1+10.0%)]. Year ending June 30 County Health Plan Medical County Health Plan Prescription Drug HMO UHC AARP Medicare Supplement Plan Medicare Part B Premium* 2012 10.0% 9.5% 9.0% 8.0 0% 2013 9.5 9.0 8.5 7.5 0 2014 9.0 8.5 8.0 7.0 0 2015 8.5 8.0 7.5 6.5 0 2016 8.0 7.5 7.0 6.0 0 2017 7.5 7.0 6.5 5.5 0 2018 7.0 6.5 6.0 5.0 0 2019 6.5 6.0 5.5 5.0 0 2020 6.0 5.5 5.0 5.0 0 2021 5.5 5.0 5.0 5.0 0 2022 and Later 5.0 5.0 5.0 5.0 0 * Note that we have assumed that under the new plan, Sonoma County will not increase its reimbursement beyond the 2008 calendar year premium level of $96.40. Also, employees hired after December 31, 2008 will not receive County paid reimbursement for Medicare Part B premiums. 23
Plan Design: Per Capita Cost Development: Blue Cross (Medical and Drugs) HMO Plan (Medical and Drugs) Other Development of plan liabilities was based on the substantive plan of benefits in effect as described in Exhibit III. Per capita claims costs were based on actual paid claim experience furnished by the County for the period July 1, 2008 through June 30, 2011. Claims were separated by plan year and participant status (Medicare vs. Non-Medicare), then adjusted as follows: paid claims were multiplied by a factor to yield an estimate of incurred claims, total claims were divided by the number of adult members to yield a per capita claim, the per capita claim was trended to the midpoint of the valuation year at assumed trend rates, and the per capita claim was adjusted for the effect of any plan changes. Per capita claims for each plan year were then combined by taking a weighted average. The weights used in this average account for a number of factors including each plan year s volatility of claims experience and distance to the valuation year. Actuarial factors were then applied to the weighted average cost to estimate individual retiree and spouse costs by age and by gender. Per capita costs were based on the actual HMO monthly premiums. Actuarial factors were applied to the non-medicare premiums to estimate individual retiree and spouse costs by age and by gender. For the County Plan (Blue Cross), an annual ASO fee for Fiscal Year 2011-2012 of $357 per retired life was valued. The monthly Medicare Part B premium for calendar year 2011 was $96.40, resulting in an annualized premium of $1,157. 24
Per Capita Costs (continued) Kaiser Retiree Spouse Age Male Female Male Female 50 $7,621 $8,680 $5,323 $6,970 55 9,050 9,344 7,123 8,068 60 10,748 10,072 9,536 9,357 64 12,331 10,684 12,037 10,531 65 4,112 4,112 4,112 4,112 70 4,112 4,112 4,112 4,112 75 4,112 4,112 4,112 4,112 80 4,112 4,112 4,112 4,112 County Plan Medical Drug Retiree Spouse Retiree Spouse Age Male Female Male Female Male Female Male Female 50 $6,896 $7,855 $4,817 $6,307 $2,428 $2,766 $1,696 $2,221 55 8,190 8,455 6,446 7,300 2,883 2,977 2,269 2,570 60 9,726 9,114 8,629 8,467 3,424 3,209 3,038 2,981 64 11,158 9,668 10,893 9,530 3,929 3,404 3,835 3,355 65 1,366 1,161 1,366 1,161 4,067 3,457 4,067 3,457 70 1,583 1,251 1,583 1,251 4,714 3,725 4,714 3,725 75 1,706 1,347 1,706 1,347 5,080 4,010 5,080 4,010 80 1,837 1,452 1,837 1,452 5,470 4,323 5,470 4,323 25
Retiree Health Insurance Premiums Used in the June 30, 2011 Valuation For retirees in pay status, we use the relevant premiums provided on participant records. In cases where the carrier elections are unknown, we will assume the participant elects carriers in the same proportion as current retirees in that group. The table below shows the distribution of medical insurance carriers for retirees as of June 30, 2011 and premium rates for the premium year ending May 31, 2012. Election Percent Under Age 65 Single Party Premium Participant + 1 Family Carrier Recommended Observed 2011-2012 2011-2012 2011-2012 County Health Plan PPO 45% 42.5% $816.81 $1,605.59 $2,243.72 County Health Plan EPO 0% 4.0% $671.50 $1,311.72 $1,829.69 Kaiser Permanente (California) 55% 53.5% $545.97 $1,091.94 $1,545.09 Age 65 and Over Election Percent Single Party Over 65 Carrier Recommended Observed 2011-2012 County Health Plan PPO 65% 62.2% $439.43 County Health Plan EPO 0% 0.5% $361.26 Miscellaneous Others 0% 5.3% N/A Kaiser Senior Advantage(over 65) 35% 32.0% $339.81 26
Dental Subsidy Medicare Part B Subsidy Because most retirees are assumed to pay the full cost of dental insurance, dental benefits will not be included in this valuation. County paid dental coverage will not be valued as the number of current and future retirees eligible for this benefit is de-minimis. We have assumed that the County of Sonoma will reimburse the basic monthly premium of $96.40 for 2009 and thereafter with no future increases. We have assumed that retirees will pay any additional premium. In addition, employees hired after December 31, 2008 will not receive County paid reimbursement for Medicare Part B premiums. Changes in Actuarial Assumptions: The discount rate was lowered from 8.00% to 7.75%. Trend rates were updated. Per capita costs were updated. Based on the December 31, 2008 triennial experience study for the Sonoma County Employees Retirement Association, the mortality, disability, turnover and retirement incidence assumtions were updated. 27
EXHIBIT III Summary of Plan This exhibit summarizes the major benefit provisions as included in the valuation. To the best of our knowledge, the summary represents the substantive plans as of the measurement date. It is not intended to be, nor should it be interpreted as, a complete statement of all benefit provisions. Eligibility: Participant must retire from County service, covered under a medical plan of the County at the time of retirement, and be eligible to receive a monthly pension from the Sonoma County s Employees Retirement Association (SCERA) defined benefit pension plan at the time of retirement. For retirees hired prior to 1/1/1990, retirees receive retiree + family coverage without any service requirements. (1) For retirees hired on or after 1/1/1990: 10 years of service is required to receive County-subsidized retiree only medical coverage. 20 years of service is required to receive County-subsidized retiree + one dependent medical coverage. The retiree bears the full cost of premiums for covering additional dependents. Effective April 10, 2007, disability retirees are subject to the same service requirements as regular retirees. (2) In the case of a line-of-duty death, dependents of the deceased law enforcement member(s) are eligible to receive County-subsidized medical coverage. (3) Employees hired after December 31, 2008 will not be eligible for the $500 subsidy or the Medicare Part B Subsidy. They will continue to receive the implicit subsidy. (1) SCLEA:DEA 7/1/90 ESC, Local 39, SCLEMA, DSLEM, SLPDIA 1/1/91 (2) DSA retirees that were offered medical benefits prior to 2007 were allowed to keep this coverage, even if they did not meet the 10 year requirement. (3) Pursuant to California Labor Code 4856. 28
Benefit Types: Duration of Coverage: Dependent Benefits: Dependent Coverage: County Contributions Toward Benefit: Effective June 1, 2011, retirees are eligible for medical and drug benefits provided under two self-insured indemnity plans administered by Anthem Blue Cross (County Health Plan PPO or County Health Plan EPO) or a Kaiser HMO plan. Medicare Part B premiums are reimbursed by the County to eligible retired members, but not dependents. Effective June 1, 2009, Medicare Retirees were offered a Medicare supplement insurance plan from UHC AARP in addition to the current plans. In addition, retirees are eligible for dental benefits from Delta Dental at full cost to the retiree. Since these benefits are fully paid by the retirees, they have been excluded from this valuation. Lifetime, subject to continuing support by the Board of Supervisors Same as retirees Benefits are available for dependents. However, the County does not subsidize coverage for all dependents, except as noted in footnote 2 on first page of Exhibit III. As of April 2007, disabled retirees qualify for dependent coverage the same as regular retirees. Effective June 1, 2009, the County began to phase in a contribution maximum toward the cost of the plan over a 5-year period. Retirees and the County share in the cost of monthly premium for medical coverage. Beginning fiscal year 2008-2009, the County contribution will be adjusted incrementally each year until it reaches a $500 per month maximum contribution, effective June 1, 2013. Retirees may elect to enroll in any County offered medical plan and shall pay for all costs in excess of the County contribution dollar amount. For plans with premiums under $500, the County will pay the full cost of the coverage. Most retirees are responsible for the full cost of dental coverage. Therefore, no retiree dental costs have been reflected in this valuation. 29
Medicare Integration for the PPO Plan: Benefit Descriptions: Carve-out method in which the plan benefit is first determined without regard to Medicare payments, and is then reduced by the amount of such payments. Medicare and Non-Medicare Retirees Medical Annual Deductible County Health Plan PPO In-Network / Out-of-Network $300 per Individual (x3 Family) County Health Plan EPO In-Network Kaiser Permanente $500 per Individual (x3 Family) None Out-of-Pocket Limit $2,000 per Individual (x2 Family) $5,000 per Individual (x2 Family) $1,500 per Individual (x2 Family) Maximum Lifetime Benefit None None None Physicians and Routine Services Physician Office Visits $20 copay / 60% $50 copay (Deductible waived) Retail Prescription Drugs 34 days or 100-unit doses 34 days or 100-unit doses Generic $5 copay $10 copay Brand $15 copay formulary $35 copay formulary Home Delivery (Mail Order) Prescription $30 copay non-formulary 3 months supply for 1 retail co-pay $75 copay non-formulary 3 months supply for 1 retail co-pay $10 copay Up to 100-day supply $5 copay $10 copay Up to 100-day supply for 1 retail co-pay Hospital or Outpatient Facility Inpatient Preauthorization required Preauthorization required No copay (if directed by $125 per admission copay + $500 per admission copay + a plan physician) 90% / 60% 80% Diagnostic X-ray and Lab 90% / 60% 80% No copay Emergency Room Treatment $50 copay (waived if admitted) $100 per visit copay + 90% / 60% (No copay for emergency ambulance services) $150 copay + 80% (No copay for emergency ambulance services) 30
County Health Plan PPO Medical (continued) In-Network / Out-of-Network Mental Health Care and Substance Abuse Treatment County Health Plan EPO In-Network Kaiser Permanente Inpatient mental health care $125 per admission copay + 90% / 60% $500 per admission copay + 80% Non-Medicare: No copay Medicare: No copay, first 190 days per lifetime as covered by Medicare Outpatient mental health care Inpatient substance abuse treatment Outpatient substance abuse treatment 90% / 60% 80% $10/ individual session; $5/ group session $125 per admission copay + 90% / 60% $500 per admission copay + 80% Hospitalization for detox only Non-Medicare: No copay Medicare: No copay, first 190 days per lifetime as covered by Medicare 90% / 60% 80% $10/ individual session; $5/ group session 31
Plan Changes since Prior Valuation: Effective June 1, 2010: - The County Health Value Plan was eliminated and a new County Health Plan EPO was implemented. The EPO plan offers in-network benefits only. - An emergency room copay was added for the County Health Plan PPO (previously County Health Value Plus Plan) and the out-of-network co-insurance changed from 70% to 60%. - Mental health and substance abuse benefits were changed for all plans to be compliant with the Mental Health Parity Act. Effective June 1, 2011, the following changes were made for the CHP plans and the Kaiser non-medicare plan to be compliant with the Affordable Care Act: - The lifetime maximums and annual maximums on essential benefits were removed. - Preventive care services in-network are now covered at 100% with no out of pocket costs. - United Health Care HMO was eliminated. 32
EXHIBIT IV Definitions of Terms The following list defines certain technical terms for the convenience of the reader: Assumptions or Actuarial Assumptions: Actuarial Present Value of Total Projected Benefits (APB): Normal Cost: Actuarial Accrued Liability For Actives: Actuarial Accrued Liability For Retirees: The estimates on which the cost of the Plan is calculated including: (a) (b) (c) (d) Investment return the rate of investment yield that the Plan will earn over the long-term future; Mortality rates the death rates of employees and pensioners; life expectancy is based on these rates; Retirement rates the rate or probability of retirement at a given age; Turnover rates the rates at which employees of various ages are expected to leave employment for reasons other than death, disability, or retirement. Present value of all future benefit payments for current retirees and active employees taking into account assumptions about demographics, turnover, mortality, disability, retirement, health care trends, and other actuarial assumptions. The amount of contributions required to fund the benefit allocated to the current year of service. The equivalent of the accumulated normal costs allocated to the years before the valuation date. The single sum value of lifetime benefits to existing retirees. This sum takes account of life expectancies appropriate to the ages of the retirees and of the interest which the sum is expected to earn before it is entirely paid out in benefits. 33
Actuarial Value of Assets (AVA): Funded Ratio: Unfunded Actuarial Accrued Liability (UAAL): Amortization of the Unfunded Actuarial Accrued Liability: Investment Return (discount rate): Covered Payroll: ARC as a Percentage of Covered Payroll: Health Care Cost Trend Rates: Annual Required Contribution (ARC): The value of assets used by the actuary in the valuation. These may be at market value or some other method used to smooth variations in market value from one valuation to the next. The ratio AVA/AAL. The extent to which the actuarial accrued liability of the Plan exceeds the assets of the Plan. There is a wide range of approaches to paying off the unfunded actuarial accrued liability, from meeting the interest accrual only to amortizing it over a specific period of time. Payments made over a period of years equal in value to the Plan s unfunded actuarial accrued liability. The rate of earnings of the Plan from its investments, including interest, dividends and capital gain and loss adjustments, computed as a percentage of the average value of the fund. For actuarial purposes, the investment return often reflects a smoothing of the capital gains and losses to avoid significant swings in the value of assets from one year to the next. If the plan is funded on a pay-as-you-go basis, the discount rate is tied to the expected rate of return on day-to-day employer funds. Annual reported salaries for all active participants on the valuation date. The ratio of the annual required contribution to covered payroll. The annual rate of increase in net claims costs per individual benefiting from the Plan. The ARC is equal to the sum of the normal cost and the amortization of the unfunded actuarial accrued liability. 34
Net OPEB Obligation (NOO): The NOO is the cumulative difference between the ARC and actual contributions made. If the plan is not pre-funded, the actual contribution would be equal to the annual benefit payments less retiree contributions. There are additional adjustments in the NOO calculations to adjust for timing differences between cash and accrual accounting, and to prevent double counting of OPEB plan costs. 35
EXHIBIT V Accounting Requirements The Governmental Accounting Standards Board (GASB) issued Statement Number 43 -- Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement Number 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Under these statements, all state and local government entities that provide other post employment benefits (OPEB) are required to report the cost of these benefits on their financial statements. The accounting standards supplement cash accounting, under which the expense for postemployment benefits is equal to benefit and administrative costs paid on behalf of retirees and their dependents (i.e., a pay-as-you-go basis). The statements cover postemployment benefits of health, prescription drug, dental, vision and life insurance coverage for retirees; long-term care coverage, life insurance and death benefits that are not offered as part of a pension plan; and long-term disability insurance for employees. The benefits valued in this report are limited to those described in Exhibit III of Section 4, which are based on those provided under the terms of the substantive plan in effect at the time of the valuation and on the pattern of sharing costs between the employer and plan members. The projection of benefits is not limited by legal or contractual limits on funding the plan unless those limits clearly translate into benefit limits on the substantive plan being valued. The new standards introduce an accrual-basis accounting requirement, thereby recognizing the employer cost of postemployment benefits over an employee s career. The standards also introduce a consistent accounting requirement for both pension and non-pension benefits. The total cost of providing postemployment benefits is projected, taking into account assumptions about demographics, turnover, mortality, disability, retirement, health care trends, and other actuarial assumptions. These assumptions are summarized in Exhibit II of Section 4. This amount is then discounted to determine the actuarial present value of the total projected benefits (APB). The actuarial accrued liability (AAL) is the portion of the present value of the total projected benefits allocated to years of employment prior to the measurement date. The unfunded actuarial accrued liability (UAAL) is the difference between the AAL and actuarial value of assets in the Plan. Once the UAAL is determined, the Annual Required Contribution (ARC) is determined as the normal cost (the APB allocated to the current year of service) and the amortization of the UAAL. This ARC is compared to actual contributions made and any difference is reported as the Net OPEB Obligation (NOO). In addition, Required Supplementary Information (RSI) must be reported, including historical information about the UAAL and the progress in funding the Plan. Exhibits IV and VI of Section 36
4 contain a definition of terms as well as more information about GASB 43/45 concepts. The calculation of an accounting obligation does not, in and of itself, imply that there is any legal liability to provide the benefits valued, nor is there any implication that the Employer is required to implement a funding policy to satisfy the projected expense. Actuarial calculations reflect a long-term perspective, and the methods and assumptions use techniques designed to reduce short term volatility in accrued liabilities and the actuarial value of assets, if any. Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future, and the actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. 37
EXHIBIT VII GASB 43/45 Concepts The following graph illustrates why a significant accounting obligation may exist even though the retiree contributes most or all of the blended premium cost of the plan. The average cost for retirees is likely to exceed the average cost for the whole group, leading to an implicit subsidy for these retirees. The accounting standard requires the employer to identify and account for this implicit subsidy as well as any explicit subsidies the employer may provide. Hypothetical Cost Curve $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 Cost Projected Cost Blended Cost Age 38
This graph shows how the actuarial present value of the total projected benefits (APB) is broken down and allocated to various accounting periods. The exact breakdown depends on the actuarial cost method and amortization methods selected by the employer. GASB 43/45 Measurement Elements Using Actuarial Cost Methods Present Value of Future Benefits Future Accounting Periods Future Accruals (Actives) Current Period Historical Accounting Periods Normal Cost (Actives) Actuarial Accrued Liability (Actives + Retirees) Normal Cost + 30 Years Amortization of Unfunded Actuarial Accrued Liability Annual Required Contribution (ARC) Net OPEB Obligation = ARC1 + ARC2 + ARC3 + - Contribution1 - Contribution2 - Contribution3 -... 39
APPENDIX 1: Additional Information for County of Sonoma June 20, 2011 Measurement Under GASB 43 and 45 ANNUAL REQUIRED CONTRIBUTION AT VARIOUS TIMING SCENARIOS SUMMARY OF VALUATION RESULTS June 30, 2011 Actuarial Accrued Liability (AAL) $316,736,980 Actuarial Value of Assets (AVA) 19,045,636 Unfunded Actuarial Accrued Liability (UAAL) $297,691,344 Annual Required Contribution (ARC) for coming year Payable at Beginning of each Quarter Normal cost (beginning of year) $8,401,497 Amortization of the unfunded actuarial accrued liability 15,381,416 Annual Required Contribution (beginning of year) $23,782,913 Adjustment for timing (quarterly) 680,443 Annual Required Contribution (payable beginning of each quarter) $24,463,356 Covered payroll (1) $314,044,571 ARC (quarterly) as a percentage of pay 7.79% Breakdown of quarterly payments: 1 st payment on 7/1/2011 5,945,728 2 nd payment on 10/1/2011 6,057,723 3 rd payment on 1/1/2012 6,171,826 4 th payment on 4/1/2012 6,288,079 Payable at Middle of Year Total Annual Required Contribution (beginning of year) $23,782,913 Adjustment for timing (middle of year) 904,392 Total Annual Required Contribution (payable at middle of year) $24,687,305 ARC (middle of year) as a percentage of pay 7.86% (1) This total does not include Courts. It does include consideration for the cash allowance and no offset for salary reductions due to the mandatory time off (MTO) period, as benefits are not reduced for MTO, only salary is reduced. The 2011/2012 projected payroll is based on the 2010/2011 payroll of $301,241,795 provided by the County, adjusted by payroll growth of 4.25%. 40
APPENDIX 2: Additional Information for County of Sonoma June 20, 2011 Measurement Under GASB 43 and 45 BREAKDOWN OF IMPLICIT SUBSIDY PORTION OF RESULTS SUMMARY OF VALUATION RESULTS June 30, 2011 Implicit Subsidy Normal Cost 3,354,511 AAL 71,925,368 Explicit Subsidy Normal Cost 5,046,986 AAL 244,811,612 Total Normal Cost 8,401,497 Total AAL 316,736,980 Total AVA 19,045,636 Total UAAL 297,691,344 Implicit Subsidy Portion of UAAL (1) 67,600,441 Portion of ARC from Implicit Subsidy (1) Normal Cost 3,354,511 Amortization of UAAL (30 years, level % of pay) 3,492,848 Total ARC (beginning of year) 6,847,359 Timing Adjustment (middle of year) 260,384 Total ARC (middle of year) 7,107,743 Total ARC (middle of year) as a percentage of pay 2.26% (1) Estimated based on assets being allocated in proportion to the respective accrued liabilities. 5158316v3/10520.022 41