OPEB Actuarial Valuation Report as of 6-30-17 for City of Encinitas
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 the City of Encinitas (the “City”) for its retiree health program.
The purpose of the valuation is to measure the City’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 parameters set by the City 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
City of Encinitas
OPEB Actuarial Valuation
Retiree Health Program
As of June 30, 2017
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City of Encinitas
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 ........................................................................................ 13
Section VII. Actuarial Certification .................................................................................................................. 17
Section VIII. Definitions ..................................................................................................................................... 19
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SECTION I. EXECUTIVE SUMMARY
Background
The City of Encinitas (the “City”) selected Nyhart to perform an updated actuarial valuation of its retiree health
program. The purpose of the valuation is to measure the City’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 parameters set by the City 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.
To be eligible for retiree health benefits, an employee must retire from the City and commence pension
benefits under PERS (typically on or after age 50 with at least 5 years of PERS eligible service). The City’s
financial obligation is to provide the CalPERS minimum required employee contribution ($12 8 per month in
2017, $133 per month in 2018, and in future years, indexed to medical CPI increases) except for former
Encinitas Fire Protection District employees hired on or before March 15, 1995 who receive full retiree health
benefits for both the employee and their dependents.
The City currently has 206 active employees who are wor king and earning service credit for eligibility of
retiree health benefits. The City currently provides a contribution towards retiree medical benefits which are
provided through the CalPERS Health Program for 88 retirees (53 safety and 35 miscellaneous).
The City pays the cost for lifetime retiree and dependent health benefits for Encinitas Fire Protection District
employees hired on or before March 15, 1995. Currently there are 59 retirees (52 firefighters and 7
miscellaneous) receiving an additional stipend which pays for full coverage of the eligible retiree and their
covered dependents up to a monthly maximum based on the average of available plans. There are also 8
active employees eligible to receive full retiree health benefits.
There are currently 29retirees receiving the minimum required employee contribution (MRC) from the City
and 196 active employees eligible to receive this benefit upon retiring from the City.
Summary of Participants
Eligible Benefits Actives Retirees
Full Benefits 8 59
Minimum Required Contribution (MRC) 198 29
Total 206 88
The City 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.
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Results of the Retiree Health Valuation
We have determined that the amount of the present value of the projected City contributions (actuarial
liability) for OPEB benefits, as of June 30, 2017, the valuation date, is $13,993,219 (including $2,022,980 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 City for current and future retirees. If the City 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 City’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 service and future service
components; the past service component (actuarial accrued liability now referred to as Total OPEB Liability) is
$12,639,192 (including $1,557,923 for the implicit rate subsidy), the current service component (normal cost
or current year accrual) is $190,479 (including $56,914 for the implicit rate subsidy) and the future service
component (not yet accrued liability) is $1,163,548 (including $408,143 for the implicit rate subsidy).
Funding
The City’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 $3,490,079. The actuarial value of assets is equal to the market value of assets.
The Net (unfunded) OPEB Liability at June 30, 2017 is $9,149,113. The Plan’s funded ratio (actuarial value of
assets over Total OPEB Liability) is 28%.
The estimated City contribution amount for retiree health benefits for the 2017/2018 fiscal year is
approximately $851,221 (including $144,522 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 City’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 OP EB
liability over 15 years (on a level-percentage of pay basis) is equal to $1,117,605 for the fiscal year ending June
30, 2019. This includes $899,272 for the City’s explicit contribution and $218,333 for the implicit rate subsidy.
The projected contribution for the fiscal year ending June 30, 2020 is $1,151,134.
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Changes from Prior Valuation
The valuation reflects updated plan, premiums and census 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:
Total OPEB Recommended
(Accrued ) Liability Contribution (ADC)
June 30, 2015 Valuation @7.28% $12.060M $0.930M
Increase due to passage of time (includes interest plus additional
accruals less expected payments since June 30, 2015)
0.517M
Decrease due to net experience gain (primarily more favorable
demographic experience and maximum increase less than
assumed)
( 0.378M)
Increase due to increase in initial medical trend rate 0.093M
Increase due to lowering the discount rate to 7.0% 0.347M
June 30, 2017 Valuation @7.0% $12.639M $1.118M
Actuarial Basis
The actuarial valuation is based on the assumptions and methods outlined in Section VI I 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. Another key assumption used in the
valuation is the discount (interest) rate which is based on the expected rate of return of plan assets.
Sensitivity for a 1% increase and decrease in the healthcare trend rates and for a 1% increase and decrease in
the discount rate is provided in Section II-G.
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.
Based on current rates the amount would be de minimis.
The valuation is based on the census, plan and rate information provided by the City. 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.
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SECTION I I. FINANCIAL RESULTS
A. Valuation Results
The table below presents the employer liabilities associated with the City’s retiree health benefits. The
actuarial liability is the present value of all City contributions 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 and includes interest.
Full
Benefits*
MRC
Benefits Total
1. Actuarial Liability or Present Value of Benefits
Actives $ 1,768,307 $2,774,477 $ 4,542,784
Retirees 8,637,691 812,744 9,450,435
Total $10,405,998 $3,587,221 $13,993,219
Explicit Contribution $ 9,494,123 $2,476,116 $11,970,239
Implicit Contribution $ 911,875 $1,111,105 $ 2,022,980
2. Total OPEB Liability (TOL)
Actives $ 1,605,101 $1,583,656 $ 3,188,757
Retirees 8,637,691 812,744 9,450,435
Total $10,242,792 $2,396,400 $12,639,192
Explicit Contribution $ 9,347,760 $1,733,509 $11,081,269
Implicit Contribution $ 895,032 $ 662,891 $ 1,557,923
3. Normal Cost $ 45,960 $ 144,519 $ 190,479
Explicit Contribution $ 41,250 $ 92,315 $ 133,565
Implicit Contribution $ 4,710 $ 52,204 $ 56,914
No. of Active Employees 8 198 206
Average Age 54.0 45.5 45.8
Average Past Service 29.2 10.5 11.3
No. of Retired Employees 59 29 88
Average Age 69.0 68.7 68.9
Average Retirement Age 54.5 60.2 56.4
* These employees are eligible for stipend for full benefits up to a maximum.
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 $2,987,299 $2,888,758
2. Contribution 560,004 930,499
3. Fund Earnings (gross) 39,759 404,554
4. Benefit Payments ( 695,379) ( 730,341)
5. Investment Expenses ( 1,235) ( 1,432)
6. Administrative Expenses ( 1,690) ( 1,959)
7. Ending Market Value of Assets $2,888,758 $3,490,079
8. Estimated Return on Assets 1% 13%
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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 $3,490,079.
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 $11,081,269 $1,557,923 $12,639,192
2. Actuarial Value of Assets ( 3,490,079) ( 0) ( 3,490,079)
3. Net (Unfunded Accrued) OPEB Liability (NOL) $ 7,591,190 $1,557,923 $ 9,149,113
E. Amortization of NOL
The amortization of the NOL component of the actuarially determined contribution (ADC) is being
amortized over a period of 15 years on a level-percentage of pay basis. Under the level-percentage of pay
method, the amortization payment is scheduled to increase in future years based on wage inflation.
1. NOL $ 7,591,190 $1,557,923 $ 9,149,113
2. Amortization Factor 10.17105 10.17105 10.17105
3. Amortization of NOL $ 746,353 $ 153,172 $ 899,525
F. Actuarially Determined Contribution (ADC)
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.
Explicit Implicit Total
FY2018/2019
1. Normal Cost $ 152,919 $ 65,161 $ 218,080
2. Amortization of NOL 746,353 153,172 899,525
3. Actuarially Determined Contribution (ADC) $ 899,272 $ 218,333 $ 1,117,605
4. Estimated Payroll $18,351,000 $18,351,000 $18,351000
5. ADC as % of Payroll 4.9% 1.2% 6.1%
FY2019/2020
1. Normal Cost $ 157,507 $ 67,116 $ 224,623
2. Amortization of NOL 768,744 157,767 926,511
3. Actuarially Determined Contribution (ADC) $ 926,251 $ 224,883 $ 1,151,134
4. Estimated Payroll $18,902,000 $18,902,000 $18,902,000
5. ADC as % of Payroll 4.9% 1.2% 6.1%
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G. Sensitivity Analysis:
The impact of a 1% decrease and increase in the discount (interest) rate and the impact of a 1% increase
and decrease in future healthcare trend rates on the City’s actuarial liability, TOL, NOL and the ADC is
provided below:
1% Decrease in Discount Rate
Dollar
($) Increase/
(Decrease)
Percentage
(%) Increase/
(Decrease)
- Actuarial Liability $1,891,595 14%
- TOL $1,470,044 12%
- NOL $1,470,044 16%
- ADC $ 111,465 10%
1% Increase in Discount Rate
- Actuarial Liability ($1,530,260) (11%)
- TOL ($1,222,523) (10%)
- NOL ($1,222,523) (13%)
- ADC ($ 94,518) ( 8%)
1% Increase in Future Healthcare Trend Rates
- Actuarial Liability $1,842,147 13%
- TOL $1,527,887 12%
- NOL $1,527,887 17%
- ADC $ 189,501 17%
1% Decrease in Future Healthcare Trend Rates
- Actuarial Liability ($1,513,894) (11%)
- TOL ($1,273,527) (10%)
- NOL ($1,273,527) (14%)
- ADC ($ 155,874) (14%)
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SECTION III. PROJECT ED CASH FLOWS
The valuation process includes the projection of the expected benefits (including the explicit City contribution
and the implicit rate subsidy) to be paid by the City 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 each 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 b efore and
after the employee's assumed retirement. The projected per 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 cash flows for selected future years are provided in the table on the following page ..
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Projected Employer Total Cash Flows – Representative Years
Fiscal Year Explicit Implicit City Total
2017/18 $ 706,699 $ 144,522 $ 851,221
2018/19 $ 733,821 $ 152,752 $ 886,573
2019/20 $ 751,752 $ 157,752 $ 909,504
2020/21 $ 782,680 $ 169,410 $ 952,090
2021/22 $ 799,542 $ 160,421 $ 959,963
2022/23 $ 822,209 $ 168,003 $ 990,212
2023/24 $ 847,207 $ 172,033 $ 1,019,240
2024/25 $ 826,489 $ 150,692 $ 977,181
2025/26 $ 829,590 $ 143,314 $ 972,904
2026/27 $ 857,543 $ 155,601 $ 1,013,144
2027/28 $ 854,195 $ 145,155 $ 999,350
2028/29 $ 866,659 $ 151,518 $ 1,018,177
2029/30 $ 879,131 $ 134,979 $ 1,014,110
2030/31 $ 907,283 $ 151,698 $ 1,058,981
2031/32 $ 928,219 $ 165,250 $ 1,093,469
2032/33 $ 929,741 $ 158,807 $ 1,088,548
2033/34 $ 930,301 $ 154,390 $ 1,084,691
2034/35 $ 951,195 $ 158,365 $ 1,109,560
2035/36 $ 953,201 $ 158,902 $ 1,112,103
2036/37 $ 960,541 $ 168,718 $ 1,129,259
2037/38 $ 964,116 $ 167,628 $ 1,131,744
2038/39 $ 974,549 $ 170,296 $ 1,144,845
2039/40 $ 982,258 $ 179,563 $ 1,161,821
2040/41 $ 976,150 $ 177,796 $ 1,153,946
2041/42 $ 977,147 $ 154,441 $ 1,131,588
2042/43 $ 974,811 $ 154,910 $ 1,129,721
2043/44 $ 969,426 $ 131,686 $ 1,101,112
2044/45 $ 960,693 $ 122,201 $ 1,082,894
2045/46 $ 949,053 $ 102,952 $ 1,052,005
2050/51 $ 845,950 $ 20,737 $ 866,687
2055/56 $ 691,547 $ 13,242 $ 704,789
2060/61 $ 525,285 $ - $ 525,285
2065/66 $ 371,120 $ - $ 371,120
2070/71 $ 238,283 $ - $ 238,283
2075/76 $ 133,400 $ - $ 133,400
2080/81 $ 61,164 $ - $ 61,164
2085/86 $ 20,741 $ - $ 20,741
2090/91 $ 4,562 $ - $ 4,562
2095/96 $ 566 $ - $ 566
2100/01 $ - $ - $ -
All Years $42,180,823 $4,855,921 $47,036,744
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SECTION V. BENEFIT PLAN PROV ISIONS
This study analyzes the postretirement health benefit plan provided by the City. The City contributes to the
retiree health coverage of eligible retirees and eligible surviving spouses. The City’s financial obligation is as
follows:
Except for former Encinitas Fire Protection District employees hired on or before March 15, 1995, the City
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 City. The surviving spouse of an eligible retiree who ele cted 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
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
The City provides former Encinitas Fire Protection District employees with a contribution equal to the lesser of
the actual premium cost for coverage or 100% of the PEMCHA Southern California average premium as
follows:
Retiree Only
Retiree Plus
Spouse
Retiree Plus
Family
Non- Medicare (Basic)
2017 $651.02 $1,302.03 $1,692.64
2018 $649.89 $1,299.78 $1,689.71
Medicare
2017 $335.20 $ 670.40 $1,005.60
2018 $345.46 $ 690.92 $1,036.37
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Premium Rates
The City participates in the CalPERS Health Program, a community-rated program, for medical coverage. The
tables below summarize the calendar 2017 and 2018 monthly medical premiums for the primary medical
plans in which the retirees are enrolled.
2017 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERS Select
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
2018 Other So. Cal. Region Kaiser BS HMO PERSCare PERSChoice PERS Select
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
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SECTION V I . VALUATION DATA
The valuation was based on the census furnished to us by the City. The following tables display the age
distribution for retirees and the age/service distribution for active employees as of the Valuation Date.
Age Distribution of Eligible Retired Participants & Beneficiaries
Miscellaneous Safety
Age Full MRC Total Full MRC Total Full MRC Total
<50 0 0 0 0 0 0 0 0 0
50-54 0 0 0 2 1 3 2 1 3
55-59 2 2 4 7 0 7 9 2 11
60-64 1 5 6 13 0 13 14 5 19
65-69 0 10 10 7 0 7 7 10 17
70-74 1 4 5 11 0 11 12 4 16
75-79 0 5 5 8 0 8 8 5 13
80+ 3 2 5 4 0 4 7 2 9
Total: 7 28 35 52 1 53 59 29 88
Average Age: 71.9 69.3 69.8 68.7 53.1 68.4 69.0 68.7 68.9
Average Retirement Age: 59.9 61.2 61.0 53.8 30.9 53.3 54.5 60.2 56.4
Age/Service Distribution of All Active Benefit Eligible Employees
Service Full PEMCHA
Age 0-4 5-9 10-14 15-19 20-24 25-29 30-34 Total Benefit MRC
20-24 0 0 0 0
25-29 7 7 0 7
30-34 16 4 2 1 23 0 23
35-39 15 9 7 6 37 0 37
40-44 15 8 9 7 1 40 0 40
45-49 5 1 8 7 5 2 28 1 27
50-54 7 1 8 5 1 5 1 28 3 25
55-59 3 0 6 4 5 8 1 27 3 24
60-64 3 1 2 2 0 1 1 10 1 9
65-69 0 0 0 0 3 0 0 3 0 3
70+ 0 0 0 3 0 0 0 3 0 3
Total: 71 24 42 35 15 16 3 206 8 198
Average Age: 45.8 54.0 45.5
Average Service: 11.3 29.2 10.5
Average Pay: $86,488 $98,470 $86,004
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Age/Service Distribution of Benefit Eligible Safety Employees
Service
Full PEMCHA
Age 0-4 5-9 10-14 15-19 20-24 25-29 30-34 Total Benefit MRC
20-24 0 0 0 0
25-29 1 1 0 1
30-34 7 1 1 9 0 9
35-39 8 3 3 1 15 0 15
40-44 2 0 5 2 9 0 9
45-49 2 1 4 2 4 1 14 0 14
50-54 1 0 1 1 0 2 5 2 3
55-59 0 0 0 0 2 1 1 4 2 2
60-64 0 0 1 0 0 0 1 2 1 1
65-69 0 0 0 0 0 0 0 0 0 0
70+ 0 0 0 0 0 0 0 0 0 0
Total: 21 4 15 7 6 4 2 59 5 54
Average Age: 42.9 55.8 41.7
Average Service: 11.8 29.1 10.2
Average Pay: $96,456 $99,509 $96,174
Age/Service Distribution of Benefit Eligible Miscellaneous Employees
Service
Full PEMCHA
Age 0-4 5-9 10-14 15-19 20-24 25-29 30-34 Total Benefit MRC
20-24 0 0 0 0
25-29 6 6 0 6
30-34 9 4 1 14 0 14
35-39 7 6 4 5 22 0 22
40-44 13 8 4 5 1 31 0 31
45-49 3 0 4 5 1 1 14 1 13
50-54 6 1 7 4 1 3 1 23 1 22
55-59 3 0 6 4 3 7 0 23 1 22
60-64 3 1 1 2 0 1 0 8 0 8
65-69 0 0 0 0 3 0 0 3 0 3
70+ 0 0 0 3 0 0 0 3 0 3
Total: 50 20 27 28 9 12 1 147 3 144
Average Age: 47.0 50.9 46.9
Average Service: 11.1 29.5 10.7
Average Pay: $82,487 $96,738 $82,190
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SECTION VI 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
Funding Policy: The actuarially determined contribution (ADC) assuming the City’s funding
strategy is to fund the normal cost (current accrual for benefits being earned)
plus an amortization of the net (unfunded accrued) OPEB liability.
Expected Rate of Return: 7.0% per annum. This discount rate assumes the City continues to fully fund
for its retiree health benefits through the California Employers’ Retiree Benefit
Trust (CERBT) under its investment allocation strategy 1. The rate reflects the
CERBT published median interest rate for strategy 1 of 7.28% with an
additional margin for adverse deviation.
[The prior valuation used 7.28%]
Discount Rate: 7.0% per annum.
[The prior valuation used 7.28%]
Sensitivity analysis showing a 1% increase or decrease in the discount rate is
also provided.
Inflation: 2.75% per annum
Merit Increases: Merit increases from the most recent CalPERS pension plan experiences study.
The benefits are not payroll related but each individual’s projected cost is
allocated over their lifetime as a level-percentage of pay.
Wage Inflation: 3.0% per annum, in aggregate.
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%
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Sample rates for Firefighter employees are as follows:
Entry Age
Service 20 30 40 50
0 9.5% 9.5% 9.5% 9.5%
5 2.6% 2.6% 2.6% 1.0%
10 0.9% 0.9% 0.3% 0.3%
15 0.8% 0.8% 0.2% 0.2%
20 0.7% 0.2% 0.2% 0.2%
25 0.6% 0.1% 0.1% 0.1%
30 0.1% 0.1% 0.1% 0.1%
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 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 experience study. Sample deaths per
1,000 employees applicable to Miscellaneous and Safety retirees 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
Sample deaths per 1,000 employees applicable to industrial disabled retirees
are as follows:
Age Males Females
55 6.0 4.2
60 7.5 5.2
65 11.2 8.4
70 16.4 14.0
75 28.3 23.2
80 49.0 39.1
85 76.8 62.5
90 129.7 98.9
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Disability Rates: According to the disability rates under the CalPERS pension plan updated to
reflect the most recent experience study.
Retirement Age: According to the retirement rates under the most recent CalPERS pension plan
experience study. According to the followin g retirement tables:
Miscellaneous Tier 1: 2.7% @ 55
Miscellaneous Tier 2: 2.0% @ 62
Safety Tier 1: 3.0% @ 55
Safety Tier 2: 2.7% @ 57
Firefighter Tier 1: 3.0% @ 55
Firefighter Tier 2: 2.7% @ 57
[The PERS retirement rates have been updated to reflect the 2014 CalPERS
Experience Study.]
Participation Rates: 100% of future retirees who are eligible to receive full benefits are assumed to
elect coverage at retirement.
50% of future retirees who are eligible for the PEMCHA MRC are assumed to
elect coverage at retirement. 20% of retirees waiving coverage are assumed to
elect coverage at age 65. Retirees currently waiving coverage are assumed to
continue to waive coverage in the future.
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: 80% of future retirees are assumed to elect coverage for their spouse. Actual
spousal coverage is used for current retirees. This percentage is reduced by
50% for employees only eligible for the MRC at retirement. Male spouses are
assumed to be 3 years older than female spouses. Actual spouse age is used
for current retirees.
Dependent Coverage: 25% of future retirees with full benefits are assumed to elect family coverage
to age 65; dependent coverage is assumed to end at the retiree’s attainment of
age 65.
Claim Cost Development: The valuation claim costs are based on the premiums paid for medical
insurance coverage. The City participates in CalPERS, a community rated plan.
Past valuations assumed the City was exempt from the valuation of any
medical plan implicit rate subsidy. 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.
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Medical Trend Rates: Medical costs are adjusted in future years by the following trends:
Year PPO HMO
2018 Actual Actual
2019 7.0% 6.5%
2020 6.5% 6.0%
2021 6.0% 5.5%
2022 5.5% 5.0%
2023+ 5.0% 5.0%
[The prior valuation assumed 0.5% lower initial trend rates.]
Medicare Participation: 100%
Minimum Contribution: The CalPERS minimum required contribution is assumed to increase 4% per
year.
CalPERS Service: Actual CalPERS Service as reported by CERBT was included for purposes of
applying the CalPERS demographic tables and determining eligibility for
benefits.
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. For plans unrelated to pay, the normal cost is
calculated to remain level in dollars; for pay-related plans the normal cost is
calculated to remain level as a percentage of pay. The City has elected to
determine the EAN normal cost as a level percentage of pay. The EAN actuarial
accrued 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 employees eligible as of the measurement date in accordance with the
provisions of the Plan listed in the data provided by the City were included in
the valuation.
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 15 years using a level percentage of pay amortization method. Future
bases will be separately amortized.
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SECTION VI I I. ACTUARIAL CERTIFI CATION
This report summarizes the actuarial valuation for the City of Encinitas (the “City”) as of June 30, 2017. The
purpose of the valuation is to measure the City’s liability for OPEB benefits and to determine an actuarially
determined contribution (ADC) for the fiscal periods ending June 30, 20 19 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 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 perf orm 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.
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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
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SECTION IX. 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 (Accrued) OPEB 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, 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 t echnological
developments.
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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, because 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 benefits 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 current 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 part icipants 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 n ot yet receiving
them, and current active members) as a result 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 reflect 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 successive 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.
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Substantive Plan – The terms of an OPEB plan as understood by the employer(s) and plan participant.
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).