Retiree Health Savings Plan (RHS) October 2009 Town of Chapel Hill | 405 Martin Luther King Jr. Blvd. |

Retiree Health Savings Plan (RHS)

October 2009

Town of Chapel Hill | 405 Martin Luther King Jr. Blvd. | www.townofchapelhill.org

Town of Chapel Hill OPEB Benefits • The Town provides post-retirement health benefits to

retirees who elect to continue group health insurance until age 65

• The Town currently provides a subsidy to retirees based on years of service as follows:

• The Town also reimburses retired employees over 65 for health insurance acquired to supplement Medicare

• The Town’s annual pay-as-you-go expenses for these benefits is $871,800

Years Service Town % of Group Premium

5 to 9 Years 25%

10 to 14 Years 50%

15 to 19 Years 75%

20 or more 100%


OPEB Funding Requirements

• GASB 45 - Requires that all governments treat OPEB in the same manner as pension funds beginning FY09

• Annually required contribution (ARC) will be determined by actuarial study and reported starting in FY09

• Currently we are handling OPEB expenses on a pay-as-you-go basis ($871,800 per year)

• Based on current benefit levels and a conservative interest rate assumption ARC payments would be $3.0 mil per year


Future OPEB Liability

• The Town has budgeted $400,000 as a contribution to the State OPEB Fund for both FY2008-09 and FY2009-10

Annual Paygo vs ARC

$0.4m

$3.0m

Current contribution to liability funding is $13% of ARCCurrent contribution to liability funding is $13% of ARC


$0.87m

Retiree Healthcare BenefitsPay-as-you-go Costs (FY05 thru FY10)


$ 543,252$ 492,997

$ 706,231$ 737,748

$ 871,875Costs have increased 118% in 5 years

Costs have increased 118% in 5 years

Actuarial Study

• The Town’s OPEB Actuarial Study was updated this year. The OPEB Liability and the ARC went down ($45m vs $32m and $5.6m vs $3.0m)


Rating Agency Perspective

• Credit focus on plan for addressing liability• Rating Agencies will expect issuers to

develop plan to fund OPEB liability• Funding plan can be spread over

extended period “ramping up contributions” to eventually fund entire liability

• Failure to take action will result in a negative rating factor


Reducing OPEB Liability• New Employees:

– Many jurisdictions are reducing or eliminating the post retirement benefits completely for new employees to reduce the liability

– Elimination of benefit could hurt the Town’s ability to attract new employees

• Existing employees:– Reducing benefits for existing employees is

problematic due to the expectation of receiving the benefit at the time of employment

– There are no legal impediments to reducing or eliminating these benefits for existing employees that are not vested in the benefit


Defined Contribution Plan for New Employees

• We have been evaluating the potential use of a Defined Contribution Plan, specifically the ICMA RC Retirement Health Savings Plan (RHS), for Employees hired after June 30, 2010

• The RHS plan will reduce our OPEB liability over time and provide employees with a self-directed account comprised of Town and employee contributions


ICMA Retirement Corporation

• Independent not-for-profit organization that provides retirement products exclusively to public sector focus

• $26 billion* administered in public sector assets


ICMA RC RHS Plan

• A medical expense reimbursement plan that allows employees to: – accumulate assets to pay for medical

expenses upon retirement on a tax-free basis– invest contributions appropriately for their

circumstances in the Vantagepoint Mutual Funds

• Employer defines eligible group, contributions and benefit eligibility


Participation in RHS

• Participation is mandatory for all members of a covered group

• Covered group examples– All employees– Public Safety employees-Fire– Public Safety employees-Police– Employees hired after a designated date


Contributions

• Mandatory for everyone in covered group

• Determined by employer

• Contribution examples– Direct employer contributions (either % of pay or flat dollar

amount)

– Mandatory pre-tax employee contributions (either % of pay or flat dollar amount)

– Mandatory pre-tax employee contribution from leave


Benefit Eligibility

• Can be any combination of the following (as defined by the employer)

– Retirement – Separation from service– Age


Accumulation of Assets• Individual employee accounts• Employees may select investment options within

their individual accounts• Employer may place vesting schedule on any

mandatory employer contribution (any employee mandatory contribution is vested immediately)

• All contributions go into a single “bucket” and can be used to pay all eligible qualified medical expenses as defined in IRC section 213


Reimbursements• Health Insurance Premiums (either employer or

non-employer plan)– Medical insurance premiums– COBRA Premiums– Medicare supplemental insurance premiums– Dental insurance premiums– Qualified long term care insurance premiums

• Qualifying medical expenses as defined by IRC Section 213– Deductibles– Co-Pays– Coinsurance– Prescription Drugs


Investment OptionsActively Managed Funds

• Short –Term Bond

• Cash Management

• US Treasury Securities

• Asset Allocation

• Equity Income

• Growth & Income

• Growth

• Aggressive Opportunities

• International

Milestone Funds

• Series of age-based funds targeting specific retirement dates. Strategy “ages: with participant

Index Funds• Core Bond Index• 500 Stock Index• Broad Market Index• Mid/Small Cap Stock Index• Overseas Equity Index

Model Portfolio Funds• Savings Oriented• Conservative Growth• Traditional Growth• Long-term Growth• All Equity Growth Fund


Plan Comparison

Current Defined BenefitRHS - New EmployeeDefined Contribution

Benefit at Retirement Employee can stay in Town Medical Insurance Plan – Employees with less than 20yrs of service pay % of cost

Employee will have an account with funds accumulated since hire to pay qualified expenses for self & family

Portability Employees that leave Town service before retirement receive no benefits

Employee contributions are portable and Employer portion is vested per schedule

Security Benefits are dependent on Town policy and appropriation

Funds are held in trust and administered by a 3rd party

Cost Currently $3.0m per year ARC and $30m total liability($871,800 pay as you go)

$910 per year for participating employee. (1% Employee Contribution) No long-term liability.


Recommended Plan • Eligible Group: Employees hired after June 30, 2010• Contributions

– Employer: $35 per bi-weekly pay period ($910/YR)

– Employee: 1% of pre-tax pay ($400/YR for employee with salary of $40,000)

• Benefits Eligibility– Upon separation from service for employee contribution

– Employer contribution based on vesting schedule:

• 25% after 5yrs, 50% after 10yrs, 75% after 15yrs, 100% after 20yrs( Matches defined benefit plan)


Recommendation• Adopt Plan Adoption Resolution:

– Authorizing the Manager to execute documents required to establish the plan

– Plan assets will be held in trust for the exclusive benefit of plan participants and their survivors

• Enact Ordinance Amendment establishing a RHS plan for employees hired after 6/30/10


Documents

Retiree Health Savings Plan (RHS) October 2009 Town of Chapel Hill | 405 Martin Luther King Jr. Blvd. |