City of Culver City, California
Agenda Item Report
Meeting Date: 08/02/2010 Item Number: C-3
CITY COUNCIL AGENDA ITEM: Approval of an Amendment to an Existing
Professional Services Agreement with AON Consulting for the Actuarial Services
Required by Governmental Accounting Standards Board Statement No. 45.
Contact Person/Dept.:
Jeff Muir/Finance
Phone Number:
(310) 253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [] Attachments: []
Commission Action Required: Yes [] No [X] Date: _______________
Public Notification: (E-Mail) Meetings and Agendas – City Council (07/29/10)
Department Approval:
Jeff Muir (07/22/10)
City Attorney Approval:
Carol Schwab (by H. Baker) (07/28/10)
Chief Financial Officer Approval:
Jeff Muir (07/22/10)
Acting City Manager Approval:
Martin R. Cole (07/29/10)
RECOMMENDATION:
Staff recommends the City Council approve an amendment to the existing
professional services agreement with AON Consulting for actuarial services required
by Governmental Accounting Standards Board (GASB) Statement No. 45
BACKGROUND:
GASB Statement 45
In 2004, the Government Accounting Standards Board (GASB) issued rules relating
to the accounting and reporting of Other Post-Employment Benefits (OPEB). These
include all benefits – other than retirement benefits – that are earned by employees
as a result of active service, but are not paid-out as benefits until the beneficiaries
have retired.
The main purpose of implementing the reporting requirements was to ensure that
public entities accurately represent the cost of providing benefits as these costs are
incurred (as benefits are earned), and not at a later date when benefits are paid-out.
The approach implemented by GASB for OPEB is similar to that long-required of
retirement plans in that retirement costs are incurred and reported as active
employees earn the benefits, ensuring that adequate funding is available when
benefits are actually paid-out.
GASB 45 generally requires that public entities account for and report the annual
cost of OPEB, and the outstanding obligations and commitments related to OPEB, in
a manner analogous to pension reporting. City of Culver City, California
Agenda Item Report
Annual OPEB costs for most public entities are based on actuarially determined
amounts that, if paid on an ongoing basis, would provide sufficient resources to pay
for benefits as they come due. The provisions of GASB 45 may be applied
prospectively and do not legally require public entities to fund their OPEB plans. A
public entity may establish its OPEB liability at zero as of the beginning of the initial
year of implementation; however, the unfunded actuarial liability is required to be
amortized over future periods. GASB 45 also establishes disclosure requirements
for information about the plans in which an employer participates, the funding policy
followed, the actuarial valuation process and assumptions, and the extent to which
the plan has been funded over time.
GASB 45 replaced the pay-as-you-go method that many public entities, including
Culver City, utilized, with accrual accounting (recognizing an expense when it is
earned). In addition to paying for current retiree medical premium costs, public
entities must now recognize in their financial statements the “earned” cost of current
employees’ future retiree medical premiums. In reporting these “earned” costs a
public agency is compelled to recognize an important future financial obligation and,
through actuarially determined analyses, annually set-aside amounts that enable a
public agency to manage its OPEB liability judiciously.
Implementing Provisions of GASB 45
The specific requirements of GASB 45 are for public agencies to report annually, the
difference between the Annual Required Contribution (ARC) – as calculated by the
actuarial analysis – and the actual annual contribution made by the agency. The
financial statements will also contain supplemental information related to the overall
funding status of the retiree medical benefit plan. Culver City was required to
implement GASB 45 in Fiscal Year 2008/2009.
The Actuarial Study
In accordance with the aforementioned GASB 45 requirements the City previously
contracted with AON Consulting to perform an actuarial valuation to determine the
City’s unfunded retiree medical insurance liability and the estimated amount the City
should set-aside annually to fully fund the OPEB liability. At that time, an RFP
process was undertaken and AON Consulting was selected. The valuation was
completed in April 2008 and presented to City Council in May 2008.
The following is a summary of the final results of the actuarial valuation of the City’s
retiree medical benefit plan:
1. Our Unfunded Actuarial Accrued Liability as of July 1, 2007 was estimated in
the range of $105.2 million to $208.7 million, depending on actuarial interest
rate assumptions.
City of Culver City, California
Agenda Item Report
2. Both liabilities and Annual Required Contribution Rates (ARC) are highly
sensitive to the discount rate and amortization assumptions. While generally
accepted actuarial methods would amortize unfunded liabilities over 20 years,
GASB allows for up to a 30-year amortization of any unfunded OPEB
liabilities. In addition, the discount rate (investment earnings) applied to plan
assets have a dramatic effect on annual contributions needed to meet future
funding obligations.
3. The following table provides a comparison of using a 4.00% rate (assumed
City’s investment return at the time of the report) and 7.75% rate (the
assumed PERS long-term investment return) for a 30-year amortization of
unfunded liabilities:
4.00% 7.75%
Present Value of Benefits (Total Liability for Current
Retirees and Active Employees)
$208,690,000 $105,154,000
Actuarial Accrued Liability (portion of PVB
attributable to past service)
$158,324,000 $89,558,000
Normal Cost (current year cost for active
employees)
$4,604,000 $1,911,000
Annual Required Contribution $10,681,000 $7,466,000
% of Pay 22.7% 15.9%
For the Fiscal Year ended June 30, 2009, the City paid $3,255,447 (on a pay-as-
you-go basis) for OPEB, which represented about 6.9% of payroll. This compares
with possible full-funding of the OPEB liability that requires 16% to 23% of payroll, or
$7.5 million to $10.7 million annually, based upon different actuarial assumptions.
While GASB 45 does not require the City to modify its current funding of OPEB
benefits, implementation of GASB 45’s reporting requirements highlights the true
cost of these benefits, and long-term cost projections strongly suggest the need to
move from a pay-as-you-go funding practice to a pre-funding approach. The City
was required to record a $7.4 million liability for OPEB on its June 30, 2009 financial
statements.
DISCUSSION:
One of the provisions of GASB 45 is that an updated actuarial report is required
every two years. The City’s last report was completed in 2008, and a new report is
required for the preparation of our June 30, 2010 audit. Staff is recommending the
approval of an amendment to the existing professional services agreement in an
additional amount not-to-exceed $22,000 (for an aggregate contract amount of
$37,000 with AON Consulting to create the actuarial report required by GASB 45.
Pursuant to Section 3.07.070, of the Culver City Municipal Code, professional
services are excluded from formal bid requirements. As mentioned, AON Consulting
was previously selected through an RFP process. They are familiar with the City
and will be able to complete the report in the time frame required by our auditors. City of Culver City, California
Agenda Item Report
FISCAL ANALYSIS:
Sufficient funds for this amendment are available in the City Council Adopted Budget
for Fiscal Year 2010/2011.
ATTACHMENTS:
None.
MOTION:
That the City Council:
1. Approve an amendment to the existing professional services agreement with
AON Consulting for actuarial services required by Governmental Accounting
Standards Board (GASB) Statement No. 45 for an additional amount not-to-
exceed $22,000 (for an aggregate contract amount of $37,000); and
2. Authorize the City Attorney to review/prepare the necessary documents; and
3. Authorize the City Manager to execute such documents on behalf of the City.