City of Oakland Postretirement Health Insurance Plan GASB 43/45 Actuarial Valuation Report as of July 1, 2015 Produced by Cheiron May 2016 TABLE OF CONTENTS Section Page Letter of Transmittal ........................................................................................................................ i Total Section I - Summary ............................................................................................................1 Section II - Assets ................................................................................................................4 Section III - Valuation Results .............................................................................................5 Section IV - Sensitivity ........................................................................................................9 Section V - Accounting Disclosures ..................................................................................11 Police Section I - Summary ..........................................................................................................14 Section II - Assets ..............................................................................................................16 Section III - Valuation Results ...........................................................................................17 Section IV - Sensitivity ......................................................................................................21 Section V - Accounting Disclosures ..................................................................................23 Fire Section I - Summary ..........................................................................................................26 Section II - Assets ..............................................................................................................28 Section III - Valuation Results ...........................................................................................29 Section IV - Sensitivity ......................................................................................................33 Section V - Accounting Disclosures ..................................................................................35 Miscellaneous Section I - Summary ..........................................................................................................38 Section II - Assets ..............................................................................................................40 Section III - Valuation Results ...........................................................................................41 Section IV - Sensitivity ......................................................................................................45 Section V - Accounting Disclosures ..................................................................................47 Appendices Appendix A – Participant Data, Assumptions and Methods .........................................................50 Appendix B – Substantive Plan Provisions ...................................................................................77 Appendix C – Glossary of Terms ..................................................................................................91 Appendix D – Abbreviation List....................................................................................................93 June 22, 2016 Ms. Katano Kasaine, Treasurer City of Oakland Finance and Management Agency Lionel J. Wilson Building 150 Frank H. Ogawa Plaza, Suite 5330 Oakland, CA 94612-2093 Re: Employees’ Postretirement Health Insurance Plan July 1, 2015 GASB 43/45 Actuarial Valuation Results Dear Katano: As requested by the City, we have performed an actuarial valuation of the postretirement benefits provided by the City of Oakland Postretirement Health Insurance Plan (Plan). The following report contains our findings and disclosures required by the Governmental Accounting Standards Board (GASB). This report is for the use of the City of Oakland and its auditors in preparing financial reports in accordance with applicable law and accounting requirements. These actuarial computations are calculated based on our understanding of GASB 43 and 45 and are for purposes of fulfilling the Plan and employer financial accounting requirements. Determinations for purposes other than meeting the Plan and employer financial accounting requirements may be significantly different from the results in this report. Appendix A describes the participant data, assumptions, and methods used in calculating the figures throughout the report. In preparing our report, we relied on information (some oral and some written) supplied by the Plan’s staff. This information includes, but is not limited to, the Plan provisions, employee data, and financial information. We performed an informal examination of the obvious characteristics of the data for reasonableness and consistency in accordance with Actuarial Standard of Practice #23. The demographic assumptions used in this report are the same as those adopted by the CalPERS Board in February 2014. The economic assumptions are the same as those used in the July 1, 2012 OPEB report prepared by AON, with the exception of the per capita claim costs and healthcare trends. This is the first report in which the implicit subsidy was recognized. Appendix B contains our understanding of the substantive Plan provisions based on the information provided by your office. Future results may differ significantly from the current results presented in this valuation report due to such factors as the following: plan experience differing from that anticipated by the assumptions; changes in assumptions; and changes in plan provisions or applicable law. i CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION I – SUMMARY The City of Oakland, California engaged Cheiron to provide an analysis of the Employees’ Postretirement Health Insurance Plan’s liabilities as of July 1, 2015. The primary purposes of performing this actuarial valuation are to:  Determine the Annual Required Contribution (ARC) and the Net Other Postemployment Benefit (OPEB) Obligation (NOO) of the retiree health benefit under GASB Statements 43 and 45 and the current funding strategy;  Provide projections for the actuarial liabilities, the ARC, and the NOO; and  Provide sensitivities for the actuarial liabilities and the ARC by using a 1% increase and a 1% decrease in both healthcare trend and discount rates; and  Provide disclosures for financial statements. We have determined costs, liabilities and trends for the substantive Plan using actuarial assumptions and methods that we consider reasonable. GASB’s OPEB Requirements GASB’s Statement 43 refers to the financial reporting for postemployment benefit plans other than pension plans and Statement 45 refers to the employer accounting for these plans. Statement 43 is generally applicable where an entity has a separate trust or fund for OPEB benefits. We understand that the City has a trust used to fund future OPEB obligations. Statement 45, which was adopted in the fiscal year ending (FYE) June 30, 2008, requires the plan sponsor to book the actuarial cost (net of employee, retiree, and their dependents’ contributions) of the plan as an expense on its financial statements and then accrue a liability to the extent actual contributions were less than this expense. Additional disclosures include a description of the substantive plan, summary of significant accounting policies (not included in this report), contributions, and a statement of funding progress, along with the methods and assumptions used for those disclosures. This report does not reflect any changes in postemployment benefit accounting requirements from GASB No. 74 and 75 Statements for OPEB plans, which will replace GASB No. 43 and 45, respectively. GASB No. 74 is effective for the fiscal year ending June 30, 2017, and GASB 75 is effective for employers’ fiscal years ending June 30, 2018. All references and calculations with respect to GASB reflect current Statements No. 43 and 45. 1 CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION I – SUMMARY Funding Policy The City's funding policy is to partially pre-fund the actuarially determined Other Postemployment Benefits (OPEB) costs, which include both normal costs and amortization of unfunded actuarial liability, by contributing to the California Employers’ Retiree Benefit Trust (CERBT) sponsored by CalPERS. The CERBT Fund is a Section 115 trust fund dedicated to prefunding Other Postemployment Benefits (OPEB) for all eligible California public agencies. The City expects to contribute $1.1 million to the CERBT annually in addition to the benefit payments for retirees currently with medical coverage. Valuation Results The table below presents the key results of the July 1, 2015 valuation compared to those of the last actuarial valuation as of July 1, 2013. Table I-1 TOTAL Summary of Key Valuation Results July 1, 2013 July 1, 2015 Actuarial Liability (AL) $ 463,850,944 $ 862,891,642 Assets 0 2,901,346 Unfunded Actuarial Liability (UAL) $ 463,850,944 $ 859,990,296 Fiscal Year Ending June 30, 2014 June 30, 2016 Annual Required Contribution $ 39,418,149 $ 74,094,179 Actual / Expected Contribution $ 20,632,950 $ 25,359,800 Expected Net Explicit Benefit Payments $ 18,173,363 $ 19,494,447 Expected Net Implicit Benefit Payments N/A 4,765,353 Expected Net Total Benefit Payments $ 18,173,363 $ 24,259,800 Actual / Expected Net OPEB Obligation at End of Fiscal Year $ 235,094,820 $ 305,024,063 Discount Rate 5.59% 4.00% This report reflects claims, premiums and expenses determined as of July 1, 2015. There have been no significant changes in experience, population or plan design since the last valuation. However, there were changes in assumptions since the prior valuation which had an effect on the costs of the Plan. 2 CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION I – SUMMARY Additionally, an implicit subsidy was first valued for this actuarial valuation. An implicit subsidy measures the actual cost per participant against the charged cost, or premium. Until recently, an implicit subsidy was assumed to not exist for community rated plans. However, Actuarial Standard of Practice (ASOP) No. 6 modified this assumption, making it necessary to value an implied subsidy cost for these plans effective for actuarial valuations on or after March 31, 2015. Since the City of Oakland participates in the Public Employees' Medical and Hospital Care Act (PEMHCA) plans, which are considered community rated plans, the City has not needed to value an implied subsidy cost until this actuarial valuation. The Annual Required Contribution (ARC) for the fiscal year ending June 30, 2016 increased by $34.2 million over the expected ARC due to the following: $0.7 million due to the covered population, $14.8 million due to a change in the discount rate to align with the City’s contribution practices, $15.0 million due to recognizing the implicit subsidy, $2.0 million due to changes in future expected decrements, and $1.7 million due to changes in anticipated health care costs and their increases. The Unfunded Actuarial Liability (UAL) increased by approximately $352 million over the expected UAL. More detail on the causes of this change can be found in the valuation results section of this report. The figures provided in this report are highly sensitive to the assumptions used. 3 CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION II – ASSETS The Plan’s preceding valuation of liabilities was performed as of July 1, 2013. Table II-1 below shows the reconciliation of assets for the fiscal year ending July 1, 2015 that were used to develop the FYE 2016 ARC. The market value of assets returned -0.2% during the year. Benefit payments are net of the retiree premiums payable for coverage. The City is expected to contribute $1.1 million to the CERBT on an annual basis. Table II-1 TOTAL Reconciliation of Assets Valuation Assets as of July 1, 2013 $ 0 Contributions - to CERBT 2,240,687 Contributions - net benefit payments 19,706,992 Net Benefit Payments (19,706,992) Net Investment Earnings 0 Valuation Assets as of July 1, 2014 $ 2,240,687 Contributions - to CERBT 665,616 Contributions - net benefit payments 19,092,377 Net Benefit Payments (19,092,377) Net Investment Earnings (4,957) Valuation Assets as of July 1, 2015 $ 2,901,346 4 CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION III – VALUATION RESULTS This section of the report calculates the current and expected future contribution requirements under the City’s funding policy. Table III-1 below shows the actuarial liabilities for the Plan as of July 1, 2013 and July 1, 2015, as well as expected amounts as of July 1, 2016. The expected results were calculated using standard roll-forward techniques. Asset projections were calculated based on an assumed 7.28% rate of return and assuming expected benefits along with an additional $1.1 million contribution to the CERBT will be paid in the year ending June 30, 2016. Table III-1 TOTAL Unfunded Actuarial Liability Projected to July 1, 2013 July 1, 2015 July 1, 2016 Present Value of Future Benefits Active Employees $ 382,245,466 $ 857,153,483 $ 891,439,622 Retirees and Beneficiaries 234,384,750 444,754,469 437,804,410 Total $ 616,630,216 $ 1,301,907,952 $ 1,329,244,032 Actuarial Liability Active Employees $ 229,466,194 $ 418,137,173 $ 472,442,335 Retirees and Beneficiaries 234,384,750 444,754,469 437,804,410 Total $ 463,850,944 $ 862,891,642 $ 910,246,745 Assets 0 2,901,346 4,212,564 Unfunded Actuarial Liability (UAL) $ 463,850,944 $ 859,990,296 $ 906,034,180 Funded Ratio 0% 0% 0% Covered Payroll $ 322,169,793 $ 360,857,850 $ 369,879,296 UAL as percentage of Covered Payroll 144% 238% 245% Please note, however, that GASB only requires disclosure of the above actuarial liability in the notes to financial statements and does not require immediate recognition of the entire liability on the balance sheet. GASB’s requirement is to book the Annual OPEB Cost (the ARC adjusted for the difference between the amortization of the NOO and interest on the NOO), and the cumulative difference between the Annual OPEB Cost and actual contributions, beginning in the FYE June 30, 2008, as the NOO on the balance sheet. The ARC consists of two parts: (1) the normal cost, which represents the annual cost attributable to service earned in a given year and (2) the 30-year open amortization of the UAL as a level percentage of payroll. Under the City’s current funding policy, the City intends to contribute $1.1 million to the CERBT and pay benefit payments outside of the CERBT. The difference between the actual contributions made (benefits provided plus additional contributions to the CERBT) and the Annual OPEB Cost is the increase in expense on the financial statements of the City. 5 CITY OF OAKLAND JULY 1, 2015 EMPLOYEES’ POSTRETIREMENT HEALTH INSURANCE PLAN VALUATION TOTAL – SECTION III – VALUATION RESULTS In Table III-2 below, we show the FYE 2014, FYE 2016, and the expected FYE 2017 Annual Required Contribution under the City’s funding policy. The assumed discount rate was 5.59% for the fiscal year end 2014 and 4.0% for the fiscal year end 2016 and 2017. It is assumed the City’s funding policy is to pay $1.1 million to the CERBT annually in addition to benefits paid outside of the CERBT. The UAL amortization is based on an open 30-year amortization period. Table III-2 TOTAL GASB ARC Projected to Fiscal Year Ending June 30, 2014 June 30, 2016 June 30, 2017 Normal Cost at beginning of year * $ 15,344,307 $ 36,134,303 $ 3 7,760,347 UAL Amortization at beginning of year * 23,016,243 35,110,100 36,989,895 Interest to end of year 1,057,599 2,849,776 2,990,010 Total ARC $ 39,418,149 $ 74,094,179 $ 77,740,251 * June 30, 2014 Normal Cost and UAL Amortization are as of the middle of the year. Table III-3 shows the expected benefit payments through the fiscal year ending June 30, 2025. In calculating the liabilities, we project these figures for the life of each existing participant. This projects the anticipated eligible retirees and the change in both claims and premiums. These benefit payments include the explicit and implicit benefit payments and exclude payments made by retirees towards their premiums. Table III-3 TOTAL Expected Net Expected Net Expected Net Total Expected Fiscal Year Implicit Benefit Explicit Benefit ACA Benefit Net Benefit Ending June 30, Payments Payments Payments Payments 2016 $ 4,765,353 $ 1 9,494,447 $ - $ 2 4,259,800 2017 5,167,430 21,180,358 - 26,347,788 2018 5,449,511 22,843,678 - 28,293,189 2019 6,077,553 24,769,853 - 30,847,406 2020 6,515,318 26,633,548 - 33,148,866 2021 7,185,599 28,624,593 190,690 36,000,883 2022 7,629,120 30,599,983 250,506 38,479,609 2023 8,434,676 32,806,329 321,222 41,562,227 2024 9,454,606 35,169,725 405,866 45,030,197 2025 10,209,213 37,552,108 477,859 48,239,180 6