mark pollack, scott kremer, todd holder, mark benton

PENSION & OPEB FINANCING

Presented to

November 21, 2008

Florida Government Finance Officers Association

Pension & OPEB Financing

Participants

Todd H. Holder Director Citigroup Global Markets Inc. 200 Crescent Court, Suite 830 Dallas, Texas 75201 P: 214-720-5074 E: [email protected]

Mark S. Benton Finance Director City of Gainesville 200 E. University Avenue Gainesville, Florida 32601 P: 352-334-5054 E: [email protected]

Mark G. Pollock CLU, ChFC Principal The Financial Group, LLC 28601 Chargrin Boulevard, Suite 550 Cleveland, Ohio 44122 P: 216-455-2100 E: [email protected]

Scott D. Kremer Director of Institutional Markets The Financial Group, LLC 28601 Chargrin Boulevard, Suite 550 Cleveland, Ohio 44122 P: 216-455-2141 E: [email protected]

Pension & OPEB Financing

PART ONECity of Gainesville OPEB Case Study

PART TWOThe iPeb Structured Finance Strategy

City of Gainesville OPEB Case Study


• In the early 1980’s the City had a 30 year, non-contributory pension plan and the City funded 100% of retiree’s health insurance costs

• In 1985 normal retirement moved to 20 years & plan became contributory

• By 1985 City was picking up 80% of retirees’ dependent costs in addition to 100% of retirees


• 20 year retirement shifted ratio between actives & retirees• Increased pension cost covered by member contributions• Rising pay-as-you-go retiree health insurance cost began to have

fiscal impact on City


• In 1992 City performed actuarial valuation on existing retiree health insurance structure

• AAL of $92M for 100% retiree/80% dependent• Began to look toward cost sharing formula to ensure continued

provision of benefit


• Staff & actuary worked for two years on various allocations of cost

• Chose premium sharing formula basing City contribution on years of service & age at point of accessing retiree health plan

• City contribution capped at 50% of single premium


• Discussions with actives, retirees and City Commission• Formula implemented in1995; initial valuation resulted in $18M

AAL under revised model • At same time new formula implemented, City began program of

periodic valuations with contributions based on % of covered payroll

RETIREE HEALTH INSURANCE PLAN Funded Status Trend

$0

$3,469,916$4,674,726

$8,974,921

$12,726,000

$18,000,000

$22,857,342

$29,811,096

$45,584,730$47,386,000

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

4/30/94 9/30/98 9/30/00 9/30/03 3/31/05

Actuarial value of assets

Actuarial accrued liability



• By 2005 plan had UAAL of $34,660,000, with a % of payroll contribution associated with the UAAL of 4.19%

• Translated to an annual City contribution of approximately $4.2M, with covered payroll growing 4-5% per year.

• Issued $35.2M in 10 year taxable bonds and substituted debt service for UAAL amortization payments

• All-in cost of 4.892%, projected gross savings of $7M, PV savings of $5.5M over 10 year life of bonds


• Early in 2005 hired plan consultant through RFP process• Created trust document for the plan, and separate investment

policy for the trust• Through plan consultant six external investment managers were

retained in various investment disciplines• Bond proceeds deposited in trust in 70/30 equity fixed income

mix

1

PROJECTED SAVINGS Taxable OPEB Bonds vs. Unfunded Actuarial Accrued Liability Amortization

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

OPEB debt service

UAAL amortization


RETIREE HEALTH INSURANCE PLAN Funded Status Trend

$0$3,469,916 $4,674,726

$8,974,921

$12,726,000

$49,249,256$51,805,265

$49,166,121

$18,000,000

$22,857,342

$29,811,096

$43,879,000$43,617,805

$47,381,963$47,386,000$45,584,730

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

4/30/94 9/30/98 9/30/00 9/30/03 3/31/05 9/30/05 9/30/06 9/30/08

Actuarial value of assets

Actuarial accrued liability



• State of Florida prohibits separately rating employees • $34.6M UAAL based on blended premium; premium charged is

higher than actual only & lower than retiree only• Implicit rate subsidy – not age adjusted premium as called for by

GASB

Age Adjusted BlendedAAL 75,573,136 47,381,963 Actuarial value of assets 49,249,956 49,249,256 UAAL 26,323,180 (1,867,993) Funded ratio 65.17% 103.94%

FISCAL YEAR 05


Age Adjusted BlendedAAL 67,563,979 43,617,805 Actuarial value of assets 51,805,265 51,805,265 UAAL 15,758,714 (8,187,460) Funded ratio 76.68% 118.77%

FISCAL YEAR 06

TREND IN ACTUARIAL ACCRUED LIABILITY

$67,563,979.00

$75,573,136.00

$47,381,963

$18,000,000

$22,857,342

$29,811,096

$45,584,730$47,386,000

$43,617,805

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

4/30/94 9/30/98 9/30/00 9/30/03 3/31/05 9/30/05 9/30/06

AAL - Age Adjusted

AAL - Blended



• Implemented GASB 43 & GASB 45 in fiscal 2005, with required note disclosure

• Instituted separately issued financial statements for Other Post Employment Benefits Fund in Fiscal 2006

November 21, 2008

The iPeb Structured Finance Strategy®

4 MAIN REASONS PEOPLE WORK FOR THE GOVERNMENT

4 Main Reasons People Work

for the Government

(The Country’s Largest Employer)

Flexible Qualifications

Pay and Benefits Hiring OutlookJob Security

421 3

4 MAIN REASONS PEOPLE WORK FOR THE GOVERNMENT

Pay and Benefits

2

Pay Benefits

Pension Healthcare

Competitive Salary 13 Paid Sick Days 10 Paid Holidays Flexible Work Hours Transit Subsidies Recruitment Bonus Student Loan

Repayment Relocation Assistance

Lifetime Pension

Lifetime health Insurance into Retirement

2006 PENSION FUNDING LEVELS

96% - 110%

80% - 95%

55% - 79%

HEALTH CARE - GASB OPEB ISSUES – HISTORICAL PERSPECTIVE

1940

► Medical plans became employer paid

► Unions play roll

► Medical inflation 2X

► Life expectancies increase

► Retire age moved back 55 to 65

2004

► GASB rules released

► Calculate UAAL

► Report liability

► Develop a plan

2007

► GASB rules become effective

► Actuarial reports

► Plan design changes

A B C

2008

► Funding alternatives

► Plan management

D

2006 OPEB FUNDING LEVELS

0%

1% - 35%

Over 35%

THE UNIVERSE IS DIVIDED INTO 2 CAMPS

Those looking atNon-Funding

Solutions

Those looking at Funding

Solutions(after exhausted all Non-Funding

solutions)

A B

METHODS TO ADDRESS OPEB FUNDING

ProsPros

Reducing or limiting a portion of existing benefits can help reduce the UAAL

Private sector precedents

ConsCons

Polarization of employee/ retiree interests

May need to be used in conjunction with other options

Reduce or Control Benefits

ProsPros

Clean template from which to start (for many)

Trust fund treatment can move discount rate to 7%-8%, similar to a pension system.

Discount rate decreases the PV of unfunded liabilities

ConsCons

Limit to how much actuaries will allow

Aggressive assumptions may have negative rating implications

Implement Favorable Actuarial

Assumptions

ProsPros

No immediate impact on budget

Pre-funding not required by GASB

ConsCons

Lack of funding means growing net OPEB obligation on balance sheet

Likely negative rating consequence

Continue Pay-Go Funding Approach

ProsPros

Least complicated

Funds invested to offset future liabilities

If annual budget contribution equals ARC, no balance sheet liability

ConsCons

Annual payments could be substantially higher than current budget

Contributes to Budget Stress

Increase to Annual Required

Contribution

ProsPros

Immediate budget relief possible

Can be used in conjunction with all other strategies

Market gains realized on additional assets

ConsCons

May defer excessive debt service in later years

Legislation may be required in some jurisdictions

Issue

OPEB Bonds

ProsPros

Same as “Issue OPEB Bonds”

Lowers net cost of capital through insurance proceeds

Possible credit enhancement to stand alone bond issue

Private sector precedents

ConsCons

Requires employees to acknowledge insurable interest

Mortality assumptions may not match cash flows

iPeb Structured Finance Strategy®

LIABILITY MANAGEMENT COMPONENTS

BASIC iPebTM OVERVIEW STRUCTURE

= iPebTMBond

Insurance

Benefits Trust

3 Pieces:

iPeb STRUCTURED FINANCE STRATEGY® MECHANICS SUMMARY

GOVERNMENTAL ENTITY

OPEB TRUST

BONDS

RETIREE BENEFITS

Fund Retirement Payments

$25% 75%

Buy Ins. on employees

Cash

Sets

Up

Trust

Transfers

OPEB

Liability

Issue Bonds

Make P&I Payments

Receives $

Transfer Both

Buckets to Trust

Death

Benefits

Pledged to

Bond

Holders

Invested in Portfolio

CashInsurance

DeathBenefit

DeathBenefit CV

#1 #2

ANALYSIS OF FUNDING ALTERNATIVES

Establish projected cash flows to fund UAAL

Identify sources of funding

Comparison of cash flows

Purpose:

Actuarial funding method Entry age vs.. projected unit credit

UAAL amortization method Level dollar vs.. level % of payroll

Actuarial discount rate Projected UAAL amortization

Payroll growth assumption Projected level % payroll amortization

Long-term medical inflation rate Projected normal cost

Projected retiree healthcare costs Projected liquidity

Mortality table Projected mortality

Actuarial Components of Funding:

Project Unfunded Actuarial Accrued Liability (UAAL)

Level % of Payroll Amortization

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

Year E nding

Unf

unde

d A

AL

EO

Y

• Initial UAAL of $100 million.

• The UAAL projection is based upon level percentage of payroll amortization. The salary growth is projected at

5%. The interest rate assumption is 7.5% net of expenses.

UAAL Amortization

Total Cash Flow:

$316,176,024

Average Annual Deposit:

$10,539,200

Lowest:

$4,758,903

Highest:

$19,588,290

$100 Million UAAL Amortization over 30 years

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

• Amortization based upon 7.5% discount rate and 5% salary growth.

• Middle of year payments necessary to fully fund UAAL.

Annual Level Savings

Annual Level Savings UAAL Amortization vs. Refunding Debt Service

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

UAAL Amortization Debt S ervice

Total Cash Flow:

$272,353,171

Savings:

$38,971,576

PV Savings:

$-15,062,820

% Savings:

-14.95%

Net Cost of Capital:

8.43%

Debt Service Comparisons

UAAL Amortization vs.. OPEB Bond Debt Service vs. iPeb Debt Service

Total Cash Flow:

$289,025,069

Savings:

$27,150,996

PV Savings:

$7,616,370

% Savings:

7.56%

Net Cost of Capital:

6.43% 0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

UAAL Amortization Debt S ervice iP eb S olution

iPebTM: AN ALTERNATIVE TO CUTTING BENEFITS

We believe the iPebTM meets the following 3 major objectives:

Reduces the cash flow necessary to fund the OPEB

obligation

Provides sufficient liquidity to meet future liabilities

Strengthens the balance sheet and GASB 43/45

reporting

Cash Flow LiquidityBalance Sheet

Impact

321

Source: Clark ConsultingTM; Executive Benefits – A Survey of Current Trends 2005; 152 of Fortune 1000 Companies Responded

EMPLOYER OWNED LIFE INSURANCE UTILIZED TO FUND RETIREE COMPENSATION PLANS

PRIVATE SECTOR PRECENDENCE

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Important Information Regarding Insurance Products

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are NOT insured by the FDIC

are NOT deposits or other obligations of any bank and are NOT guaranteed by any bank; and

are subject to investment risks, including the possible loss of principal if the issuing company is unable to meet its obligations.

PATENT PENDING

© 2006 by The Financial Group, LLC. All Rights Reserved.

mark pollack, scott kremer, todd holder, mark benton

Economy & Finance

city commission formula

annual city contribution

years plan

noncontributory pension

pension cost

hired plan consultant

retiree health insurance

benefits pension healthcare