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OPEB Actuarial Valuation Report as of 6-30-17 for District November 13, 2017 PRIVATE Mr. James Riley Interim Finance Director City of Encinitas 505 S. Vulcan Avenue Encinitas, CA 92024 Re: OPEB Actuarial Valuation Dear Mr. Riley: We are presenting our report of the June 30, 2017 actuarial valuation conducted on behalf of San Dieguito Water District (the “District”) for its retiree health program. The purpose of the valuation is to measure the District’s liability for other postemployment benefits (OPEB) and to determine an actuarially determined contribution (ADC). The ADC is a target or recommended contribution to a defined benefit OPEB plan for the reporting period, determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. The valuation results may also serve as the basis for complying with GASB 75 for the fiscal year ending June 30, 2018. The Nyhart Company is an employee owned actuarial, benefits and compensation consulting firm specializing in group health and retiree health and qualified pension plan valuations. We have set forth the results of our study in this report. We have enjoyed working on this assignment and are available to answer any questions. Sincerely, NYHART Marilyn K Jones, ASA, MAAA, EA, FCA Consulting Actuary MKJ:rl Enclosure San Dieguito Water District OPEB Actuarial Valuation Retiree Health Program As of June 30, 2017 C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx San Dieguito Water District OPEB Actuarial Valuation Retiree Health Program As of June 30, 2017 Table of Contents Page Section I. Executive Summary ..................................................................................................................... 1 Section II. Financial Results ........................................................................................................................... 4 Section III. Projected Cash Flows ................................................................................................................... 7 Section IV. Benefit Plan Provisions ................................................................................................................ 9 Section V. Valuation Data .............................................................................................................................. 11 Section VI. Actuarial Assumptions and Methods ........................................................................................ 12 Section VII. Actuarial Certification .................................................................................................................. 15 Section VIII. Definitions ..................................................................................................................................... 17 C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 1 SECTION I. EXECUTIVE SUMMARY Background The San Dieguito Water District (the “District”) selected Nyhart to perform an updated actuarial valuation of its retiree health program. The purpose of the valuation is to measure the District’s liability for OPEB benefits and to determine an actuarially determined contribution (ADC) for the fiscal periods ending June 30, 2019 and June 30, 2020. The ADC is a target or recommended contribution to a defined benefit OPEB plan for the applicable period, determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. The valuation results may also serve as the basis for complying with GASB 75 applicable for the fiscal year ending June 30, 2018. To be eligible for retiree health benefits, an employee must retire from the District and commence pension benefits under PERS (typically on or after age 50 with at least 5 years of PERS eligible service). The District’s financial obligation is to provide the CalPERS minimum required employee contribution ($1 28 per month in 2017, $133 per month in 2018, and in future years, indexed to medical CPI increases). The District currently has 22 active employees who are working and earning service credit for eligibility of retiree health benefits. The District currently provides a contribution towards retiree medical benefits which are provided through the CalPERS Health Program for 13 retirees. The District participates in the CalPERS Health Program for its retiree medical coverage. In general, the premium rates charged to participating employers are the same for each medical plan within each region (or “community”) and are the same for both active and retired employees covered under the same medical plan. An implied rate subsidy can exist when the non-Medicare rates for retirees are the same as for active employees. Since non-Medicare eligible retirees are typically much older than active employees, their actual medical costs are typically higher than for active employees. Both GASB accounting standards and actuarial standards of practices (ASOPs) require that implied rate subsidies be considered in the valuation of medical costs. This valuation includes an estimate of the liability for the implicit rate subsidy. Results of the Retiree Health Valuation We have determined that the amount of the present value of the projected District contributions (actuarial liability) for OPEB benefits, as of June 30, 2017, the valuation date, is $604,589 (including $131,034 for the implicit rate subsidy). This amount is based on a discount rate of 7.0%. The amount represents the present value of all benefits projected to be paid by the District for current and future retirees. If the District were to have this amount in a fund earning interest at the rate of 7.0% per year, and all other actuarial assumptions were met, the fund would have enough to pay the District’s required contribution for retiree health benefits. This includes benefits for the current retirees as well as the current active employees expected to retire in the future. The valuation does not consider employees not yet hired as of the valuation date. If the amount of the actuarial liability is apportioned into past service, current ser vice and future service components; the past service component (actuarial accrued liability now referred to as Total OPEB Liability) is $493,240 (including $90,175 for the implicit rate subsidy), the current service component (normal cost or current year accrual) is $14,241 (including $5,011 for the implicit rate subsidy) and the future service component (not yet accrued liability) is $97,108 (including $35,848 for the implicit rate subsidy). C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 2 Changes from Prior Valuation The valuation reflects updated census, plan and rate information. The valuation includes assumption and method changes as noted in Section VI including a lowering of the discount rate to 7.0% for the CERBT investment strategy 1. A reconciliation of the approximate change in the total OPEB (accrued) liability from the prior valuation is provided below: June 30, 2015 Valuation @7.28% $484,000 Increase due to passage of time 37,000 Net experience gain ( 43,000) Net increase due to updated assumption and method changes 1,000 Increase due to lowering the discount rate to 7.0% 14,000 June 30, 2017 Valuation @7.0% $493,000 Funding The District’s funding policy is to pre-fund the actuarially determined contribution (ADC) through the California Employers’ Retiree Benefit Trust (CERBT) under investment strategy 1. The market value of assets in the CERBT as of June 30, 2017 is $177,437. The actuarial value of assets is equal to the market value of assets. The Net (unfunded) OPEB Liability at June 30, 2017 is $315,803. The Plan’s funded ratio (actuarial value of assets over Total OPEB Liability) is 36%. The estimated District contribution amount for retiree health benefits for the 2017/2018 fiscal year is approximately $26,924 (including $5,914 for the implicit rate subsidy). This amount includes payments for employees expected to retire during the 2017/2018 fiscal year. Actuarially Determined Contribution (ADC) The actuarially determined contribution (ADC) assuming the District’s funding strategy is to fund the normal cost (current accrual for benefits being earned) plus an amortization of the unfunded accrued liability or net OPEB liability over 20 years (on a level dollar basis) is equal to $48,200 for the fiscal year ending June 30, 2019. This includes $33,355 for the District’s explicit contribution and $14,845 for the implicit rate subsidy. The projected contribution for the fiscal year ending June 30, 2020 is $48,689. Actuarial Basis The actuarial valuation is based on the assumptions and methods outlined in Section VI of the report. To the extent that a single or a combination of assumptions is not met the future liability may fluctuate significantly from its current measurement. As an example, the healthcare cost increase anticipates that the rate of increase in medical cost will be at moderate levels and decline over several years. Increases higher than assumed would bring larger liabilities and expensing requirements. A 1% increase in the healthcare trend rate for each future year would increase the actuarially determined contribution by 21%. A 1% decrease in the healthcare trend rate for each future year would decrease the actuarially determined contribution by 17%. Another key assumption used in the valuation is the discount (interest) rate which is based on the expected rate of return of plan assets. The valuation is based on a discount rate of 7.0%. A 1% decrease in the discount rate would increase the actuarially determined contribution by 13%. A 1% increase in the discount rate would decrease the actuarially determined contribution by 11%. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 3 Scheduled to take effect in 2020, the "Cadillac Tax" is a 40% non-deductible excise tax on employer-sponsored health coverage that provides high-cost benefits. For insured plans, the insurance company is responsible for payment of the excise tax. For self-funded plans, the employer is responsible for payment of the excise tax. The valuation does not include any additional liability for the Cadillac Tax. Based on current rates the amount would be de minimis. The valuation is based on the census, plan and rate information provided by the District. To the extent that the data provided lacks clarity in interpretation or is missing relevant information, this can result in liabilities different than those presented in the report. Often missing or unclear information is not identified until future valuations. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 4 SECTION I I. FINANCIAL RESULTS A. Valuation Results The table below presents the employer liabilities associated with the District’s retiree health benefits. The actuarial liability is the present value of all District-paid benefits projected to be paid under the program. The total OPEB liability (TOL) previously referred to as the actuarially accrued liability reflects the amount attributable to the past service of current employees and retirees. The normal cost reflects the accrual attributable for the current period. Explicit Implicit Total 1. Actuarial Liability or Present Value of Benefits Actives $172,015 $100,315 $272,330 Retirees 301,540 30,719 332,259 Total $473,555 $131,034 $604,589 2. Total OPEB Liability (TOL) Actives $101,525 $ 59,456 $160,981 Retirees 301,540 30,719 332,259 Total $403,065 $ 90,175 $493,240 3. Normal Cost $ 9,230 $ 5,011 $ 14,241 No. of Active Employees 22 Average Age 44.0 Average Past Service 9.8 No. of Retired Employees 13 Average Age 70.1 Average Retirement Age 58.8 B. Reconciliation of Market Value of Plan Assets The reconciliation of Plan Assets for the last two fiscal years is presented below: Fiscal Year Ending 6/30/2016 6/30/2017 1. Beginning Market Value of Assets $113,485 $124,701 2. Contribution 28,794 52,780 3. Fund Earnings (gross) 1,807 18,830 4. Benefit Payments ( 19,266) ( 18,716) 5. Administrative Expenses ( 69) ( 91) 6. Investment Expenses ( 50) ( 67) 7. Ending Market Value of Assets $124,701 $177,437 8. Estimated Return 1% 13% C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 5 C. Development of Actuarial Value of Assets The actuarial value of assets is based on the market value of assets plus any contribution receivable or benefits payable. The actuarial value of assets at June 30, 2017 is $177,437. D. Development of Net OPEB Liability (NOL) The table below presents the development of the net OPEB liability previously referred to as the unfunded actuarial accrued liability. The net OPEB liability is the excess of the TOL over the actuarial value of plan assets. Explicit Implicit Total 1. Total (Accrued) OPEB Liability $ 403,065 $ 90,175 $ 493,240 2. Actuarial Value of Assets ( 177,437) 0 ( 177,437) 3. Net (Unfunded Accrued) OPEB Liability (NOL) $ 225,628 $ 90,175 $ 315,803 E. Amortization of NOL The amortization of the NOL component of the actuarially determined contribution (ADC) is being amortized over a period of 20 years on a level-dollar basis. Under the level-dollar method, the amortization payment is scheduled to remain constant in future years. 1. NOL $ 225,628 $ 90,175 $ 315,803 2. Amortization Factor 9.90091 9.90091 9.90091 3. Amortization of NOL $ 22,788 $ 9,108 $ 31,896 F. Actuarially Determined Contribution The table below presents the development of the actuarially determined contribution (ADC) for the fiscal year ending June 30, 2019 and for the fiscal years ending June 30, 2020. FY2018/2019 1. Normal Cost at End of Fiscal Year $ 10,567 $ 5,737 $ 16,304 2. Amortization of NOL 22,788 9,108 31,896 3. Actuarially Determined Contribution (ADC) $ 33,355 $ 14,845 $ 48,200 FY2019/2020 1. Normal Cost at End of Fiscal Year $ 10,884 $ 5,909 $ 16,793 2. Amortization of NOL 22,788 9,108 31,896 3. Actuarially Determined Contribution (ADC) $ 33,672 $ 15,017 $ 48,689 C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 6 G. Sensitivity Analysis: The impact of a 1% decrease and increase in the discount (interest) rate and the impact of a 1% increase and decrease in future healthcare trend rates on the District’s actuarial liability, TOL, NOL and the ADC is provided below: 1% Decrease in Discount Rate Dollar ($) Increase/ (Decrease) Percentage (%) Increase/ (Decrease) - Actuarial Liability $95,314 16% - TOL $59,648 12% - NOL $59,648 19% - ADC $ 6,030 13% 1% Increase in Discount Rate - Actuarial Liability ($75,499) (12%) - TOL ($49,753) (10%) - NOL ($49,753) (16%) - ADC ($ 5,182) (11%) 1% Increase in Future Healthcare Trend Rates - Actuarial Liability $93,863 16% - TOL $65,066 13% - NOL $65,066 21% - ADC $10,091 21% 1% Decrease in Future Healthcare Trend Rates - Actuarial Liability ($75,454) (12%) - TOL ($53,779) (11%) - NOL ($53,779) (17%) - ADC ($ 8,129) (17%) C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 7 SECTION III. PROJECT ED CASH FLOWS The valuation process includes the projection of the expected benefits (including the explicit District contribution and the implicit rate subsidy) to be paid by the District under its retiree health benefits program. This expected cash flow takes into account the likelihood of each employee reaching age for eligibility to retire and receive health benefits. The projection is performed by applying the turnover assumption to ea ch active employee for the period between the valuation date and the expected retirement date. Once the employees reach their retirement date, a certain percent are assumed to enter the retiree group each year. Employees already over the latest assumed retirement age as of the valuation date are assumed to retire immediately. The per capita cost as of the valuation date is projected to increase at the applicable healthcare trend rates both before and after the employee's assumed retirement. The projected pe r capita costs are multiplied by the number of expected future retirees in a given future year to arrive at the cash flow for that year. Also, a certain number of retirees will leave the group each year due to expected deaths or reaching a limit age and this group will cease to be included in the cash flow from that point forward. Because this is a closed-group valuation, the number of retirees dying each year will eventually exceed the number of new retirees, and the size of the cash flow will begin to decrease and eventually go to zero. The expected employer cash flows for selected future years are provided in the following table: C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 8 Projected Employer Total Cash Flows – Representative Years Fiscal Year Explicit Implicit District Total 2017/18 $ 21,010 $ 5,914 $ 26,924 2018/19 $ 22,405 $ 6,868 $ 29,273 2019/20 $ 23,784 $ 5,901 $ 29,685 2020/21 $ 25,108 $ 7,875 $ 32,983 2021/22 $ 26,422 $ 11,211 $ 37,633 2022/23 $ 27,721 $ 12,818 $ 40,539 2023/24 $ 28,995 $ 15,328 $ 44,323 2024/25 $ 30,181 $ 16,114 $ 46,295 2025/26 $ 31,283 $ 13,268 $ 44,551 2026/27 $ 32,576 $ 6,113 $ 38,689 2027/28 $ 33,494 $ 6,697 $ 40,191 2028/29 $ 34,441 $ 5,304 $ 39,745 2029/30 $ 35,457 $ 3,470 $ 38,927 2030/31 $ 36,377 $ 4,190 $ 40,567 2031/32 $ 37,279 $ 5,537 $ 42,816 2032/33 $ 38,222 $ 6,497 $ 44,719 2033/34 $ 39,264 $ 4,833 $ 44,097 2034/35 $ 40,242 $ 7,443 $ 47,685 2035/36 $ 41,165 $ 9,103 $ 50,268 2036/37 $ 42,120 $ 11,616 $ 53,736 2037/38 $ 43,211 $ 15,238 $ 58,449 2038/39 $ 44,132 $ 19,943 $ 64,075 2039/40 $ 44,784 $ 16,277 $ 61,061 2040/41 $ 45,259 $ 19,331 $ 64,590 2041/42 $ 45,581 $ 17,703 $ 63,284 2042/43 $ 45,689 $ 22,976 $ 68,665 2043/44 $ 45,628 $ 21,273 $ 66,901 2044/45 $ 45,440 $ 21,248 $ 66,688 2045/46 $ 45,053 $ 19,496 $ 64,549 2050/51 $ 41,658 $ 1,930 $ 43,588 2055/56 $ 37,583 $ - $ 37,583 2060/61 $ 33,384 $ - $ 33,384 2065/66 $ 29,335 $ - $ 29,335 2070/71 $ 23,923 $ - $ 23,923 2075/76 $ 15,672 $ - $ 15,672 2080/81 $ 6,863 $ - $ 6,863 2085/86 $ 1,641 $ - $ 1,641 2090/91 $ 127 $ - $ 127 2095/96 $ - $ - $ - 2100/01 $ - $ - $ - All Years $2,092,469 $375,218 $2,467,687 C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 9 SECTION I V. BENEFIT PLAN PROV ISIONS This study analyzes the postretirement health benefit plan provided by the District. The District contributes to the retiree health coverage of eligible retirees and eligible surviving spouses. The District provides the minimum required employer contribution under the CalPERS Health Plan for eligible retirees and surviving spouses in receipt of a pension benefit from PERS. An employee is eligible for this employer contribution provided they are vested in their PERS pension benefit and commence payment of their pension benefit when retiring from the District. The surviving spouse of an eligible retiree who elected spouse coverage under CalPERS is eligible for the employer contribution upon the death of the retiree. The minimum required employer contributions is statutorily set under PEMHCA and is scheduled to increase in the future based on the medical portion of CPI. A history of the increases in past years and current amounts are as follows: Calendar Year Minimum Required Employer Contribution 2008 $97.00 2009 $101.00 2010 $105.00 2011 $108.00 2012 $112.00 2013 $115.00 2014 $119.00 2015 $122.00 2016 $125.00 2017 $128.00 2018 $133.00 2019+ Adjusted Annually to reflect Medical Portion of CPI Premium Rates The District participates in the CalPERS Health Program, a community-rated program for its medical coverage. The following tables summarize the 2017 and 2018 monthly premiums for the primary medical plans in which the retirees are enrolled. 2017 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERSSelect Retiree Only $ 599.54 $ 778.45 $ 802.24 $ 714.43 $ 633.46 Retiree Plus Spouse $1,199.08 $1,556.90 $1,604.48 $1,428.86 $1,266.92 Retiree Plus Family $1,558.80 $2,023.97 $2,085.82 $1,857.52 $1,647.00 Retiree Only- Medicare $ 300.48 N/A $ 389.76 $ 353.63 $ 353.63 Retiree Plus Spouse – Medicare $ 600.96 N/A $ 779.52 $ 707.26 $ 707.26 2017 Other So. Cal. Region (Continued) Sharp HMO UHC HMO Anthem HMO Select Anthem HMO Traditional Health Net Salud Health Net Smart Care Retiree Only $ 614.46 $ 549.76 $ 659.03 $ 799.15 $ 473.46 $ 537.20 Retiree Plus Spouse $1,228.92 $1,099.52 $1,318.06 $1,598.30 $ 946.92 $1,074.40 Retiree Plus Family $1,597.60 $1,429.38 $1,713.48 $2,077.79 $1,231.00 $1,396.72 Retiree Only- Medicare N/A $ 324.21 N/A N/A N/A N/A Retiree Plus Spouse – Medicare N/A $ 648.42 N/A N/A N/A N/A C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 10 2018 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERSSelect Retiree Only $ 666.80 $ 695.97 $ 733.50 $ 698.96 $ 654.74 Retiree Plus Spouse $1,333.60 $1,391.94 $1,467.00 $1,397.92 $1,309.48 Retiree Plus Family $1,733.68 $1,809.52 $1,907.10 $1,817.30 $1,702.32 Retiree Only- Medicare $ 316.34 N/A $ 382.30 $ 345.97 $ 345.97 Retiree Plus Spouse – Medicare $ 632.68 N/A $ 764.60 $ 691.94 $ 691.94 2018 Other So. Cal. Region (Continued) Sharp HMO UHC HMO Anthem HMO Select Anthem HMO Traditional Health Net Salud Health Net Smart Care Retiree Only $ 618.14 $ 616.66 $ 659.69 $ 735.08 $ 461.56 $ 607.68 Retiree Plus Spouse $1,236.28 $1,233.32 $1,319.38 $1,470.16 $ 923.12 $1,215.36 Retiree Plus Family $1,607.16 $1,603.32 $1,715.19 $1,911.21 $1,200.06 $1,579.97 Retiree Only- Medicare N/A $ 330.76 N/A N/A N/A N/A Retiree Plus Spouse – Medicare N/A $ 661.52 N/A N/A N/A N/A C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 11 SECTION V. VALUATION DATA The valuation was based on the census furnished to us by the District. The following tables display the age distribution for retirees and the age/service distribution for active employees. Age Distribution of Eligible Retired Participants & Beneficiaries Age Covered Waived Total <50 0 0 0 50-54 0 0 0 55-59 1 1 2 60-64 2 3 5 65-69 4 1 5 70-74 2 2 4 75-79 3 0 3 80+ 1 1 2 Total: 13 8 21 Average Age: 70.1 69.9 70.0 Average Retirement Age: 58.8 59.3 59.0 Age/Service Distribution of Active Benefit Eligible District Employees Service Age 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 Total 20-24 0 0 25-29 0 0 30-34 2 3 5 35-39 4 2 6 40-44 0 1 2 3 45-49 0 0 0 1 1 50-54 0 0 0 0 1 0 1 2 55-59 1 0 2 0 0 0 0 1 4 60-64 0 0 0 0 0 0 0 0 0 65-69 1 0 0 0 0 0 0 0 0 1 70+ 0 0 0 0 0 0 0 0 0 0 Total: 8 6 4 1 1 0 1 1 0 22 Average Age: 44.0 Average Service: 9.8 Average Pay: $81,911 C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 12 SECTION V I . ACTUARIAL ASSUMPTI ONS AND METHODS The liabilities set forth in this report are based on the actuarial assumptions described in this section. Fiscal Year: July 1st to June 30th Valuation Date: June 30, 2017 Funding Periods Covered: FY2018/19 and FY2019/20 Asset Return: 7.0% per year; assumes the District invests in the CERBT asset allocation Strategy 1 with a margin for adverse deviation of 28 bps. [The prior valuation assumed 7.28%] Discount Rate: 7.0% per annum. This discount rate assumes the District continues to fully fund for its retiree health benefits through the California Employers’ Retiree Benefit Trust (CERBT) under its investment allocation strategy 1. [The prior valuation assumed a discount rate equal to 7.28%] Sensitivity analysis showing a 1% increase or decrease in the discount rate is also provided. Inflation: 2.75% per annum Payroll Increases: 3.0% per annum, in aggregate Salary Increases: Merit increases from the most recent CalPERS pension plan study. The benefits are not payroll related but each individual’s projected cost is allocated over their lifetime as a level-percentage of pay. Pre-retirement Turnover: According to the termination rates under the CalPERS pension plan. Sample rates for Miscellaneous employees are as follows: Entry Age Service 20 30 40 50 0 17.42% 16.06% 14.68% 13.32% 5 8.68% 7.11% 5.54% 0.97% 10 6.68% 5.07% 0.71% 0.38% 15 5.03% 3.47% 0.23% 0.04% 20 3.70% 0.21% 0.05% 0.01% 25 2.29% 0.05% 0.01% 0.01% 30 0.05% 0.01% 0.01% 0.01% C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 13 Pre-retirement Mortality: According to the pre-retirement mortality rates under the CalPERS pension plan updated to reflect the most recent experience study. Sample deaths per 1,000 employees applicable to Miscellaneous employees are as follows: Age Males Females 25 0.4 0.2 30 0.5 0.3 35 0.6 0.4 40 0.8 0.5 45 1.1 0.7 50 1.6 1.0 55 2.3 1.4 60 3.1 1.8 Post-retirement Mortality: According to the post-retirement mortality rates under the CalPERS pension plan updated to reflect the most recent published experience study. Sample deaths per 1,000 employees applicable to Miscellaneous employees are as follows: Age Males Females 55 6.0 4.2 60 7.1 4.4 65 8.3 5.9 70 13.1 9.9 75 22.1 17.2 80 39.0 29.0 85 69.7 52.4 90 129.7 98.9 Retirement Age: According to the retirement rates under the most recent CalPERS pension plan experience study. According to the following retirement tables: Miscellaneous Tier 1: 2.7% @ 55 Miscellaneous Tier 2: 2.0% @ 60 Miscellaneous Tier 3: 2.0% @ 62 Participation Rates: 50% of future retirees under age 65 at retirement are assumed to elect coverage at retirement. Actual medical plan coverage is used for current retirees and for current active employees not waiving coverage. For active employees waiving coverage, a weighted average premium is assumed. Spouse Coverage: 50% of future retirees are assumed to elect coverage for their spouse. Actual spousal coverage is used for current retirees. Male spouses are assumed to be 3 years older than female spouses. Actual spouse age is used for current retirees. Dependent Coverage: Not explicitly valued. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 14 Claim Cost Development: The valuation claim costs are based on the premiums paid for medical insurance coverage. The District participates in CalPERS, a community rated plan. An implicit rate subsidy can exist when the non -Medicare rates for retirees are the same as for active employees. Since non -Medicare eligible retirees are typically much older than active employees, their actual medical costs are typically higher than for active employees. The current valuation contains an estimate of the implicit rate subsidy. Medical Trend Rates: Medical costs are adjusted in future years by the following trends: Year PPO HMO 2018 Actual Actual 2019 6.5% 6.0% 2020 6.0% 5.5% 2021 5.5% 5.0% 2022+ 5.0% 5.0% [The prior valuation assumed 0.5% lower initial trend rates] Minimum Contribution: The CalPERS minimum required employer contribution is assumed to increase 4% per year. Actuarial Cost Method: The actuarial cost method used to determine the allocation of the retiree health actuarial liability to the past (accrued), current and future periods is the Entry Age Normal (EAN) cost method. The EAN cost method is a projected benefit cost method which means the “cost” is based on the projected benefit expected to be paid at retirement. The EAN normal cost equals the level annual amount of contribution from the employee’s date of hire (entry date) to their retirement date that is sufficient to fund the projected benefit. While both are acceptable methods, typically for plans unrelated to pay the normal cost is calculated to remain level in dollars and for pay-related plans the normal cost is calculated to remain level as a percentage of pay. The District has elected to use level percentage of pay. The EAN actuarial accrued liability or total OPEB liability equals the present value of all future benefits for retired and current employees and their beneficiaries less the portion expected to be funded by future normal costs. All eligible employees and participating retirees and spouses as of the measurement date listed in the data provided by the District were included in the valuation in accordance with the provisions of the Plan. Actuarial Value of Assets: Any assets of the plan will be valued on a market value basis. [The prior valuation used a 5 year asset smoothing method] Amortization of NOL: The unfunded actuarial accrued or net OPEB liability (NOL) is being amortized over 20 years using a level dollar amortization method. Future bases will be separately amortized. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 15 SECTION VII. ACTUARIAL CERTI FICATION This report summarizes the actuarial valuation for the San Dieguito Water District (the “District”) as of June 30, 2017. The purpose of the valuation is to measure the District’s liability for OPEB benefits and to determine an actuarially determined contribution (ADC) for the fiscal periods ending June 30, 201 9 and June 30, 2020. The ADC is a target or recommended contribution to a defined benefit OPEB plan for the applicable period, determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. The valuation results will also serve as the basis for complying with GASB 75 applicable for the fiscal year ending June 30, 2018 and, if necessary, for GASB 74. To the best of our knowledge, the report presents a fair position of the funded status of the plan. The valuation is based upon our understanding of the plan provisions as summarized within the report. The information presented herein is based on the actuarial assumptions and substantive plan provisions summarized in this report and participant information and asset information furnished to us by the Plan Sponsor. We have reviewed the employee census provided by the Plan Sponsor for reasonableness when compared to the prior information provided but have not audited the information at the source, and therefore do not accept responsibility for the accuracy or the completeness of the data on which the information is based. When relevant data may be missing, we may have made assumptions we feel are neutral or conservative to the purpose of the measurement. We are not aware of any significant issues with and have relied on the data provided. The discount rate and other economic assumptions have been selected by the Plan Sponsor. Demographic assumptions have been selected by the Plan Sponsor with the concurrence of Nyhart. In our opinion, the actuarial assumptions are individually reasonable and in combination represent our estimate of anticipated experience of the Plan. All calculations have been made in accordance with generally accepted actuarial principles and practice. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following:  plan experience differing from that anticipated by the economic or demographic assumptions;  changes in economic or demographic assumptions;  increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period); and  changes in plan provisions or applicable law. While some sensitivity analysis was provided in the report, we did not perform an analysis of the potential range of future measurements due to the limited scope of our engagement. To our knowledge, there have been no significant events prior to the current year's measurement date or as of the date of this report that could materially affect the results contained herein. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 16 Neither Nyhart nor any of its employees has any relationship with the plan or its sponsor that could impair or appear to impair the objectivity of this report. Our professional work is in full compliance with the American Academy of Actuaries “Code of Professional Conduct” Precept 7 regarding conflict of interest. The undersigned meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Should you have any questions please do not hesitate to contact me. Certified by: Marilyn K. Jones, ASA, EA, MAAA, FCA Date: November 13, 2017 Consulting Actuary C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 17 SECTION VIII. DEFINITIONS The definitions of the terms used in the actuarial valuations are noted below. Actuarial Assumptions – Assumptions as to the occurrence of future events affecting health care costs, such as: mortality, turnover, disablement and retirement; changes in compensation and Government provided health care benefits; rates of investment earnings and asset appreciation or depreciation; procedures used to determine the Actuarial Value of Assets; characteristics of future entrants for Open Group Actuarial Cost Methods; and other relevant items. Actuarial Cost Method – A procedure for determining the Actuarial Present Value of Future Benefits and expenses and for developing an actuarially equivalent allocation of such value to time periods, usually in the form of a Service Cost and a Total OPEB Liability or Normal Cost and an Actuarial Accrued Liability. Actuarially Determined Contribution - A target or recommended contribution to a defined benefit OPEB plan for the reporting period, determined in accordance with the parameters and in conformity with Actuarial Standards of Practice. Annual OPEB Cost – An accrual-basis measure of the periodic cost of an employer’s participation in a defined benefit OPEB plan. Actuarial Present Value (also referred to as Actuarial Liability) – The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of Actuarial Assumptions. For purposes of this standard, each such amount or series of amounts is: a. adjusted for the probable financial effect of certain intervening events (such as changes in coverage levels, marital status, etc.); b. multiplied by the probability of the occurrence of an event (such as survival, death, disability, termination of employment, etc.) on which the payment is conditioned; and c. discounted according to an assumed rate (or rates) of return to reflect the time value of money. Deferred Outflow / (Inflow) of Resources – represents the following items that have not been recognized in the OPEB Expense: a. Differences between expected and actual experience of the OPEB plan b. Changes in assumptions c. Differences between projected and actual earnings in OPEB plan investments (for funded plans only) Explicit Subsidy – The difference between (a) the amounts required to be contributed by the retirees based on the premium rates and (b) actual cash contribution made by the employer. Funded Ratio – The actuarial value of assets expressed as a percentage of the actuarial accrued liability. Healthcare Cost Trend Rate – The rate of change in the per capita health claims costs over time as a result of factors such as medical inflation, utilization of healthcare services, plan design, and technological developments. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 18 Implicit Rate Subsidy – In an experience-rated healthcare plan that includes both active employees and retirees with blended premium rates for all plan members, the difference between (a) the age -adjusted premiums approximating claim costs for retirees in the group (which, bec ause of the effect of age on claim costs, generally will be higher than the blended premium rates for all group members) and (b) the amounts required to be contributed by the retirees. Normal Cost – The portion of the Actuarial Present Value of plan bene fits and expenses which is allocated to a valuation year by the Actuarial Cost Method. OPEB – Benefits (such as death benefits, life insurance, disability, and long-term care) that are paid in the period after employment and that are provided separately from a pension plan, as well as healthcare benefits paid in the period after employment, regardless of the manner in which they are provided. OPEB does not include termination benefits or termination payments for sick leave. OPEB Expense – Changes in the Net OPEB Liability in the current reporting period, which includes Service Cost, interest cost, changes of benefit terms, expected earnings on OPEB Plan investments, reduction of active employees’ contributions, OPEB plan administrative expenses, and curre nt period recognition of Deferred Outflows / (Inflows) of Resources. Pay-as-you-go – A method of financing a benefit plan under which the contributions to the plan are generally made at about the same time and in about the same amount as benefit payments and expenses becoming due. Per Capita Costs – The current cost of providing postretirement health care benefits for one year at each age from the youngest age to the oldest age at which plan participants are expected to receive benefits under the plan. Present Value of Future Benefits – Total projected benefits include all benefits estimated to be payable to plan members (retirees and beneficiaries, terminated employees entitled to benefits but not yet receiving them, and current active members) as a res ult of their service through the valuation date and their expected future service. The actuarial present value of total projected benefits as of the valuation date is the present value of the cost to finance benefits payable in the future, discounted to re flect the expected effects of the time value (present value) of money and the probabilities of payment. Expressed another way, it is the amount that would have to be invested on the valuation date so that the amount invested plus investment earnings will provide sufficient assets to pay total projected benefits when due. Real Rate of Return – the rate of return on an investment after adjustment to eliminate inflation. Select and Ultimate Rates – Actuarial assumptions that contemplate different rates for s uccessive years. Instead of a single assumed rate with respect to, for example, the healthcare trend rate assumption, the actuary may apply different rates for the early years of a projection and a single rate for all subsequent years. For example, if an actuary applies an assumed healthcare trend rate of 6.5% for year 20W0, 6.0% for 20W1, 5.5% for 20W2, then 5.0% for 20W3 and thereafter, then 6.5%, 6% and 5.5% are select rates, and 5% is the ultimate rate. Service Cost (also referred to as Normal Cost) – The portion of the Actuarial Present Value of projected benefit payments that are attributed to a valuation year by the Actuarial Cost Method. Substantive Plan – The terms of an OPEB plan as understood by the employer(s) and plan participant. C:\Retmed\CityEnc\2017\Final\Actuarial Valuation Report District 2017.docx Page | 19 Total OPEB Liability (also referred to as Actuarial Accrued Liability) – That portion, as determined by a particular Actuarial Cost Method, of the Actuarial Present Value of Future Benefits which is attributed to past periods of employee service (or not provided for by the future Service Costs).