PEB Committee Preliminary Recommendations Presentation to Board of
PEB Committee Preliminary Recommendations Presentation to Board of Selectmen April 23, 2019 PEB Committee
Table of Contents v OPEB & PEB Committee History v Background on Benefits § OPEB Liability & Trust Fund § Healthcare Benefits § Norfolk County Pension v PEB Committee Recommendations § Strategic § Economic v Next Steps 1 PEB Committee
OPEB Committee History 2014 -2015 COMPLETED WORK In 2014 -15, the OPEB committee, worked with actuarial studies, discussed trends and budget forecasts. This committee developed a clearer understanding of the Town’s OPEB liability and the future risks associated with not addressing this liability. The OPEB Committee recommended to the Board of Selectmen to move the retired teacher pool from GIC plans to MIIA plan options and future retirees to 50/50 contribution rate. This resulted in significant future healthcare savings to the Town. 2 PEB Committee
PEB Committee History 2018 -2019 COMMITTEE CHARGE In order to take a broader look at both health and pension liabilities, the Board of Selectmen would like to re-charge the OPEB Study Committee to look at not only long -term retiree health care liability and ways to fund it, but also long-term pension liabilities and alternatives to manage these increasing expenses. The Cohasset Board of Selectmen hereby tasks the Post-Employment Benefits Study Committee with the following goals and objectives: § Update the issues and options regarding the town’s PEB obligations. This phase should include document search and review, review of best practices and innovative solutions undertaken by other towns in Massachusetts; § Review and evaluate the Town’s membership in the Norfolk County Pension System, including the exploration of alternative options and best practices including participation in the State’s Pension Reserves Investment Trust; § Update the Board of Selectmen and Town Manager at least quarterly and seek advice on soliciting input from town staff, School Committee, Advisory Committee, and other boards/committees, as prudent; § Issue recommendations to the Board of Selectmen by Spring 2019 3 PEB Committee
PEB Committee History MEMBERS OF COMMITTEE v Tim Davis, Chairman v Katie Dugan, Member v Donna Collins, Member v Carl Forsythe, Member v Mark Maggi, Member v Don Piatt, Town Accountant v Diane Kennedy, Board of Selectmen Liaison v Paul Carlson, Advisory Committee Liaison v Ellen Maher & Barb Stefan, School Committee Liaisons v Brian Host, Citizen at Large & Member of Former OPEB Committee v Linda Bournival, KMS Actuaries 4 PEB Committee
PEB Committee History WORK TO DATE v PEB Committee met 10 times since May 2018 v Completed benchmarking on the following communities PEB efforts: § Belmont § Hingham § Hull § North Andover** § Norwell § Plymouth § Scituate § Wayland** ** Read and discussed OPEB committee reports from these Towns v Gathered analyzed data on Town healthcare, pension, and OPEB liability with the help of Don Piatt v Consulted with KMS (Linda Bournival) to discuss actuarial report and funding scenarios 5 PEB Committee
Background on Benefits OPEB LIABILITY v Since the original OPEB Committee issued its recommendations, GASB 45 has been replaced with new accounting standard GASB 75 which has changed reporting and measurement requirements for OPEB liabilities OLD - GASB 45 NEW - GASB 74/75 § GASB 45 replaced with GASB 75 § § Disclose information about plan assets and liabilities § New definition of OPEB expense Effective for fiscal year ending June 30, 2018 § Net OPEB Obligation (NOO) is cumulative difference between ARC and actual contributions § Net OPEB liability (OPEB liability minus market value of assets) is reported on balance sheet § GASB 45 does not require funding OPEB liabilities, just reporting them § § No current requirement or statute under M. G. L. for prefunding OPEB No change to GASB position that funding is a policy decision for government officials to determine 6 PEB Committee
Background on Benefits OPEB LIABILITY v Changes in accounting standards, actuarial assumptions, and proactive actions taken by the Town have driven fluctuations in Net OPEB Liability 2014 Actuarial Valuation GASB 45 2018 Actuarial Valuation GASB 74/75 Discount Rate 4. 75% 3. 95% Long-Term Rate of Investment Return 4. 75% 7. 5% Inflation 3. 0% 8% decreasing 1% per year to an ultimate rate of 5% 511 555 Key Assumptions Healthcare Cost Trends Total Plan Members Under GASB 74/75, the discount rate used to measure the total OPEB liability was 3. 95%. Based on current Town funding policy, the OPEB plan’s fiduciary net position was projected to be insufficient to make all projected benefit payments of current plan members. Therefore, the long-term expected rate of return on OPEB plan investments was applied to the first 7 periods of projected benefit payments and the 3. 87% municipal bond rate was applied to all periods thereafter to determine the OPEB liability. Based on a fully funded model, if the Net OPEB Liability was discounted at the longterm expected rate of return of 7. 5% it is projected be $24. 5 million. 7 PEB Committee
Background on Benefits OPEB LIABILITY v The Town’s Net OPEB Liability (NOL) under GASB 74/75 currently stands at $42. 3 million with an Actuarially Determined Employer Contribution (New ARC) at $3. 7 million Approximately 2/3 of the change in NOL can be attributed to reduction in discount rate by 0. 8% 8 PEB Committee
Background on Benefits SENSITIVITY ANALYSIS OPEB LIABILITY v The Net OPEB Liability (NOL) is highly sensitive to actuarial assumptions such as discount rate and healthcare cost trends Sensitivity to Discount Rate Sensitivity to Healthcare Cost Trends § 1% increase in discount rate can decrease NOL by $6 million § § 1% decrease in discount rate can increase NOL by $8 million 1% decrease in healthcare cost can decrease NOL by $8 million § 1% increase in healthcare cost can increase NOL by $11 million 9 PEB Committee
Background on Benefits OPEB TRUST FUND v Since establishing OPEB Trust Fund in 2012, the balance has grown to $3. 3 million v The Town has appropriated over $2. 7 million over the last seven years v Total appropriations to the OPEB Trust Fund have averaged $390, 000 per annum from operating budget (ATM) and free cash (STM) v Over the last 5 years, appropriation at STM have averaged 23% of free cash OPEB Liability 7% Fully Funded 10 PEB Committee
Background on Benefits HEALTHCARE BENEFITS - ACTIVE EMPLOYEES v In FY 18, a total of 270 employees elected town healthcare benefits v The split of active employee healthcare plans is 55% family plans and 45% individual plans 80% of employees choose to enroll in town healthcare benefits 11 PEB Committee
Background on Benefits HEALTHCARE BENEFITS - RETIREES v In FY 18, a total of 241 retirees elected town healthcare benefits v The split of active employee healthcare plans is 7% family plans and 10% individual plans and 83% Medicare plans are 1/3 the cost of HMO or PPO Individual plan 12 PEB Committee
Background on Benefits HEALTHCARE EXPENSE v The Town operating budget for FY 19 includes $5. 4 million in healthcare expense for over 500+ plan participants, which is split on average 75% from active employees and 25% from retirees v Since FY 13, the increase in healthcare expense has averaged 6%, but has varied from as low as 0% in FY 19 to as high as 13% in FY 16. v Over the last seven years, the Town has averaged surpluses of $135, 000 between budgeted and actual healthcare expense 8% (Budgeted) 5% 0. . 0% (Budgeted) Premium 9. 0% Premium + 4. 3% Enrollment 4. 3% Premium + 1. 0% Enrollment 4. 9% Premium + 1. 3% Enrollment 13 PEB Committee
Background on Benefits NORFOLK COUNTY RETIREMENT SYSTEM v As of December 2017, the Norfolk County Total Pension Liability is $1. 5 billion v The Plan Fiduciary Net Position is $963 million or 63. 5% funded v The discount rate is 7. 75% and like the OPEB liability the pension liability is highly sensitive to discount rate - 1% decrease in discount rate will increase the Net Pension Liability by $163 million v 19 municipalities and their respective housing authorities along with the Norfolk County and 5 regional school districts and water districts participate in the plan = 25 entities in the Norfolk County Retirement System (NCRS) The top 5 participants represented 38% of 2017 employee contributions Cohasset is ranked 13 out of 25 based on 2017 employee contributions 14 PEB Committee
Background on Benefits PENSION EXPENSE v The Town operating budget for FY 19 includes $2. 5 million in pension expense. Pension expense allocated to Cohasset is determined annually by Norfolk County Retirement System based on payroll v Since FY 13, the increase in pension expense has averaged 10%, but has varied from as low as 4% in FY 14 to as high as 22% in FY 18 v Going forward, the Norfolk County Retirement System has given guidance to municipalities to budget 10% annual increases (3)% 22% 10% 8% 5% (Budgeted) 10% 4% 15 PEB Committee
PEB Committee Recommendations Strategic § Establish permanent PEB Committee to monitor, benchmark & assist community with ongoing work Economic § Develop Town of Cohasset funding policy for OPEB Trust Fund (two part recommendation) § Establish Town of Cohasset investment policy specific to OPEB Trust Fund § Transition future employees benefits through collective bargaining under MGL 32 B (FURTHER DISCUSSION REQUIRED) 16 PEB Committee
Preliminary Recommendations FUNDING POLICY - 1 ST RECOMMENDATION v In 2019, the Town appropriated $500, 000 to the OPEB Trust Fund which is above the five year average v The PEB Committee recommends establishing an annual funding target of $500, 000 in 2020 (from operating budget and free cash) which will increase annually at 3 -4% v As a result, the funding target would increase in line with payroll reaching $750, 000 by 2034 and $1, 000 by 2044 v A number of communities are pursuing similar funding policies such as Plymouth, Belmont, and Franklin 17 PEB Committee
Preliminary Recommendations FUNDING POLICY - 1 ST RECOMMENDATION v GASB 74/75 requires actuarial financial statement reporting to discount plans that are not fully funded at a blend of the long-term expected rate of return on OPEB plan investments and the 3. 87% municipal bond rate. At the recommendation of KMS, the PEB Committee has chosen to model the funding policies at the long-term expected rate of return of 7. 5% based on the plan to fully fund the OPEB liability v This funding target will not only allow for a fixed financial goal relative to OPEB, but based on actuarial analysis allow the Town to be 80% (@ 3% compound growth) to 85% (@ 4% compound annual growth) fully funded by 2048 80% Funded @ 3% Annual Increase OR 85% Funded @ 4% Annual Increase 18 PEB Committee
Preliminary Recommendations FUNDING POLICY - 2 ND RECOMMENDATION v MGL Chapter 32, Section 22 D the state has mandated that all pension funds be fully funded by 2040* v The Norfolk County Retirement System (NCRS) is currently on track to be fully funded by 2028 v Based on current forecasts this will free up $2. 7 million in annual Town pension expense by 2029 v The PEB Committee recommends redirecting this pension expense to OPEB Trust Fund as part of annual funding policy once the Norfolk County Retirement is fully funded v A number of communities are pursuing similar strategies such as N. Andover and Belmont *To address this gap and provide fiscal stability to retirement systems, Massachusetts passed pension system funding reform legislation in 1987 that included a mandated pension funding schedule on an actuarial basis which included an amortized payment of a system’s unfunded liability by 2028 (see G. L. c. 32, § 22 D). . Recognizing these financial losses, Massachusetts passed pension reform legislation in 2009 that included an extended amortization deadline of the unfunded liability until 2030 and then passed municipal relief legislation in 2010 that included another extension of the deadline until 2040 (see G. L. c. 32, § 22 F). 19 PEB Committee
Preliminary Recommendations FUNDING POLICY - 2 ND RECOMMENDATION v By accelerating OPEB funding after 2029, this will allow the Town to fully-fund its OPEB liability by 2037 (@100% of NCRS expense 2029 onward) to 2042 (@50% of NCRS expense 2029 onward) Fully Funded by 2037 with 100% of NCRS OR Fully Funded by 2042 with 50% of NCRS 20 PEB Committee
Preliminary Recommendations INVESTMENT POLICY v The OPEB Trust Fund balance is currently $3. 3 million and is projected to grow to over $50 million if funding objectives achieved by 2048 v The funds are currently managed 50% by PRIT (7. 4% return on investment) and 50% by Bartholomew (4. 7% return on investment). The actuarial reports assume a long-term return on investment of 7. 5% v The Town’s Cash and Investment Policy (approved 5/27/2014) does not currently govern OPEB Trust Fund v The PEB Committee recommends that the Board of Selectmen in consultation with the Town Treasurer revise the existing Cash and Investment Policy to specifically address the OPEB Trust Fund – Target equity investment range >70% – Target lower management fees (currently 40 -55 bp) – Specifically address scenarios for future withdrawal of funds from OPEB Trust Fund v The Town of Wayland other communities have put in place specific OPEB investment policies to ensure that investment returns target actuarial assumptions 21 PEB Committee
Next Steps v April - Communicate preliminary PEB recommendations to the community – New BOS members, School Committee, and Advisory Committee – Mariner article for broad communication to citizens v May & June - Continue discussion regarding future employee benefits with Human Resources and School Committee and Board of Selectman (BOS) – Window of opportunity to negotiate changes during FY 20 v Summer 2019 - Begin implementation of preliminary recommendations – Draft funding policy for approval by BOS based on benchmark policies gathered during PEB Committee research – Work with Town Treasurer to draft investment policy for approval by BOS based on benchmark policies gathered during PEB Committee research v Fall 2019 - Define agenda for continued work of PEB Committee – Example: Analyze benefit of OPEB Trust Fund structure under MGL Chapter 32, Section 20 Chapter Municipal Modernization Act (September 2016) - OPEB Trust Fund – Additional priorities to be determined by PEB Committee and BOS 22 PEB Committee
Questions? 23 23 PEB Committee
- Slides: 24