RECOMMENDATIONS (CONT'D)
AUTHORIZE the Plan Administrator to execute the required legal and administrative documents to implement the Trust on behalf of the Authority and to take whatever additional actions are necessary to maintain the Authority's participation in the Trust.
BACKGROUND
On June 2, 2015, the Government Accounting Standards Board (GASB) finalized two new standards affecting the financial accounting and reporting of other post-employment benefits (OPEB) (non-pension benefits such as health plans) for state and local agencies. These new standards supersede prior guidance and bring OPEB accounting and reporting in line with the standards GASB issued for public pensions in 2012. The new standards are effective for fiscal years beginning after June 15, 2017. Since HACCC’s fiscal year begins on April 1st, this means the effective date for HACCC is April 1, 2018.
The first of these two new standards is GASB Statement No. 74, Financial Reporting for Post-Employment Benefit Plans Other Than Pension Plans (GASB 74) which governs the accounting standards used by OPEB plans in their financial reporting.
The second new standard is GASB Statement No. 75, Accounting and Financial Reporting for Post-employment Benefits Other Than Pensions (GASB 75)which updates the guidance for financial reporting by government employers that provide OPEB to their employees. GASB 75 replaces the requirements of GASB Standard No. 45 and GASB Statement No. 57. One of the most significant changes under GASB 75 is a first time requirement that the net liability for publicly sponsored retiree healthcare plans (and other post-employment benefits) be stated on balance sheets. For HACCC, and most employers, the result will be an increase in liability shown on the balance sheet. If not addressed, this could cause HACCC to be rated as “troubled” under HUD’s financial performance measurements among other negative outcomes.
Pre-funding OPEB liabilities is not required under GASB 75. However, if the agency pre-funds OPEB through a plan that is administered through a GASB-qualifying trust (with irrevocable contributions, assets dedicated to providing OPEB in accordance with benefit terms, and assets protected from creditors), then it may report its “net OPEB liability”—its total liability net of the OPEB plan fiduciary’s net position available for paying benefits. If, however, the agency does not have a trust meeting the requirements above, it is required to report its total OPEB liability. Therefore, by pre-funding OPEB via a trust, HACCC will be able to reduce the OPEB liability shown on its financial statements, and thus improve its overall financial position.
By beginning to do so approximately 2 ½ years before required, HACCC should be able to improve its position further by the time it is required to report OPEB using GASB 75 standards. Staff believes it is prudent to start funding OPEB via a trust immediately. Provided HUD funding permits, HACCC will use the annual required contribution (ARC) to determine how much to fund the OPEB trust each year. ARC is an actuarially derived cost based on any new benefits earned in a given year (aka the “normal cost”) plus any additional amount that might be required to make up for shortfalls that have developed in the past. These amounts added together equal the ARC. HACCC’s current ARC rate is approximately $300,000. The use of ARC to determine funding levels will have to be reviewed before HACCC falls under GASB 75, but it is in accord with current GASB standards and can be met under present HUD funding levels.
Because of the agency’s size and benefit levels, the amount of money in HACCC’s trust will remain relatively small for many years. In general, fees are more costly on a percentage basis for smaller trusts than they are for a larger trust. Because of this, and in order to stay in compliance with HUD procurement regulations, staff believes it is prudent that HACCC go out to bid/renegotiate pricing more frequently for OPEB trust services, at least initially. Staff, therefore, proposes that HACCC should reevaluate pricing of trust services prior to falling under GASB 75 rules in 2 ½ years on April 1, 2018.
The three largest and most qualified firms that provide OPEB trust services for California counties and municipalities are: Public Agency Retirement Services (PARS), California Public Employees Retirement System (CalPERS), and ICMA-RC. HACCC sought and received quotes from all three firms. CalPERS quoted a fee of 0.10% of the deposit with a requirement to conduct an actuarial update every two years. ICMA’s fee is 0.15% with an actuarial update required every two years. PARS rate is 0.56%, but currently PARS only requires an actuarial update every three years (this will have to change to every two years under GASB 75). An actuarial for HACCC in the recent past has cost the agency about $6,000. The total anticipated cost for the next two years for CalPERS will be $6,900, for ICMA it will be $7,350 and for PARS it will be $5,040. Therefore, staff recommends that HACCC utilize PARS for its trust services until no later than April 1, 2018. Prior to that date, HACCC will reevaluate pricing.
FISCAL IMPACT
By pre-funding its OPEB costs via a trust, HACCC expects to reduce its outstanding OPEB liability by $90,000 in the first year. Reductions after the first year will be dependent on the investment performance of the trust and the level of ongoing contributions by HACCC.
CONSEQUENCE OF NEGATIVE ACTION
Should HACCC not establish a trust to fund post-retirement health care obligations, then HACCC’s financial position will be negatively impacted as will financial scoring with HUD. Further, not funding a trust for OPEB liabilities may impact HACCC’s ability to secure favorable financing for current and future capital projects.
CLERK'S ADDENDUM