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Scott G. Miller, City of Beverly HillsChief Financial Officer / Director – Administrative Services

Implement Short, Mid and Long-Term Structural

Changes to Reduce Employee Benefit Costs

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Program 1: Tied employee salary and benefit levels to the market as a total compensation model (Short-Term) Projected savings of $730K - $2M over 5 years Projected savings of $214M - $565M over 40 years

Program 2: Implemented an expanded benefit cafeteria plan (Short-Term) Projected savings of $2.1M - $4.8M over 5 years Projected savings of $445M - $814M over 40 years

Program 3: Alternative Retiree Medical Plan (ARMP) Phase I: Implemented a two-tier plan for new employee retiree health benefits (Short & Mid-Term)

Projected savings of $55.0M over 40 Years

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Program 4: Alternative Retiree Medical Plan (ARMP) Phase II: Implementing a defined contribution retiree health plan for current employees (Mid & Long Term)

Projected savings: $91 Million in unfunded liabilities

Program 5: Developing a two-tier CalPERS employee retirement program for both Safety & Non-Safety personnel (Long-Term)

Projected savings: TBD

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Current Employees New Employees

Compensation Tied to Market Rates and Total Compensation Model

(Program 1)

Compensation Tied to Market Rates and Total Compensation Model

(Program 1)

Cafeteria Health Plan (Program 2) Cafeteria Health Plan (Program 2)

Choice of Current Retiree Medical Benefits or ARMP (Program 4)

Defined Contribution Plan for Retiree Medical Plan (Program 3)

Current CalPERS Retirement Plan (2.5% @ 55 – Miscellaneous;

3% @ 50 – Public Safety)

2nd Tier CalPERS Retirement Plan (Program 5 – To be negotiated upon

MOU renewals in 2011 & 2013)

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$214,000,000

$445,000,000

$55,000,000

$714,000,000

$91,000,000

$-

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

$800,000,000

Program 1:Tie Salary &

Benefit Levels to Market

Program 2:Cafeteria Plan

Program 3:Defined

Contribution Plan for New Hires

Total Projected 40 Year Savings For

All Four Programs

Projected 40 Year OPEB Liability

Savings

Projected 40-Year Savings (Programs 1-4) for Non Safety Employees

Employing salary and benefit surveys of comparable cities, the City of Beverly Hills tied employee compensation to market levels

Assures employees that they are at least at the 75th percentile of salary and benefits in the area

Enables the City to more accurately plan for salary and benefit related expenses

Provides a quantitative basis for salary and benefits levels during negotiations

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The City implemented a Cafeteria Plan that capped contribution limits and allowed employees to either opt out or choose from a variety of healthcare plans

The Cafeteria Plan gives employees the option to choose from multiple vision, dental and medical PPO and HMO plans

Employees benefit if they choose lower cost plans or opt out completely by having a portion of the savings passed on to them as a cash payment

The City benefits from a cap on the gross amount of insurance costs and savings from employees who pick less costly plans

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Add graph

$6,000,000

$16,000,000

$26,000,000

$36,000,000

$46,000,000

$56,000,000

$66,000,000

$76,000,000

$86,000,000

$96,000,000

$106,000,000

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Program 2: Cost of Employee Health Care Benefits

Projected Health Benefit Costs Without Cafeteria Plan (Based on Historical 6.5% Increase)

Projected Health Benefit Costs With Current Cafeteria Plan (City Council Increases Benefit Level by 5% Annually)

Projected Health Benefit Costs With Current Cafeteria Plan (City Council Increases Benefit Level by 3% Annually) 9

The City instituted a defined contribution retiree health plan to replace the prior defined benefit plan. This applied to all employees hired after January 1, 2010.

Caps the cost of future retiree medical benefits for new non-safety employees

Eliminates OPEB unfunded liabilities for new employees

As a defined contribution plan it is portable and transferrable; does not require employee to retire with the City

Still provides a generous retiree health plan benefit that is geared to younger workers

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The ARMP is a voluntary option that allows current employees to choose a defined contribution retiree medical plan in lieu of a defined benefit plan.

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Current Defined Benefit vs. Defined Contribution:Current employees hired before January 1, 2010 are provided a certain level of retiree medical coverage as defined in their MOU but the use of these plans is heavily restricted and is non transferrable.

The ARMP allows employees to receive the net present actuarial value of their current retiree benefit now, instead of waiting until they retire

Employees get a one-time transition amount which is actuarially determined and a residual monthly amount into an RHS account if not fully vested

Amounts are specific to each employee

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The Choice

Current Retiree or Alternative Medical Benefit Retiree Medical

(Defined Benefit) Program (ARMP) (Defined Contribution)

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Benefits to the City Benefits to the Employee

Reduces the City’s current OPEB unfunded liability by a projected $91

million dollars over 40 years with 58% participation

Gives participating employees the option of receiving lump sum amount

in cash, a deferred compensation plan, or a combination of the two for

maximum flexibility

Allows the City to cap the costs of the retiree health program instead of

being at the mercy of Cal-PERS and future health care costs increases

Allows portability of the defined contribution: employee can take the benefit with them even if they decide

to separate from the city

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Benefits to the City Benefits to the Employee

Keeps employee benefits highly competitive which aids recruitment

and retention

Builds trust by allowing employees to positively affect the City’s fiscal health

while benefiting at the same time

Substitutes low cost bonded dollars for high cost future dollars, thus

capping the City’s costs & lowering OPEB unfunded liability

Provides a voluntary alternative to employees current retiree medical

benefit

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$217,000,000

$109,000,000

$157,000,000

$66,000,000

$-

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

Past City Program (Pay As You Go) 50% of Current Safety & 58% of Non-Safety Employees Electing to Convert to a Defined

Contribution Plan

Impact of ARMP (Safety & Non-Safety) on Projected Unfunded Accrued Liability Over 40 Years

Police & Fire (Safety) Non-Safety

Results and Follow up of the ARMP:

58% participation from eligible participants

Generated interest from the Police and Fire departments; looking ahead to a second offering for Safety employees

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Plan to implement a two-tier pension plan for all Public Safety and Miscellaneous employees

Proactive step in tackling the runaway issue of pension costs: actuarial analysis show that CalPERS pension plans are unsustainable1

Does not affect current employees or impinge on negotiated benefits

Allows the City to keep in line with an increasing number of municipalities instituting two tier plans

1 Ron Seeling, Chief Actuary at CalPERS19

Marcus WuPartner

Hanson Bridgett LLP

Vested-rights law under California Constitution

Exposure to current taxation (e.g., constructive receipt, assignment of income, cash-or-deferred arrangement (CODA))

Tax limits on deferred contributions (e.g. 401k and 457b plans)

Overcoming the obstacles

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Informed consent Full and free choice between benefit

programsShifting legal landscape

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Structured as choice between programsVesting period for cash-outsMandatory 20% RHS contributionProgram funded by employer

contributions only; no salary reductionsElection converted nontaxable benefits

to taxable, not vice versa

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ARMP structured as employer contributions

Enabled 401k plan to use higher 415(c) limit

415(m) excess-benefit plan for overflow (City used ICMA-RC design)

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Not risk-free, but risk can be managedBalance against long-term economic

valuePossibly lower risk given current

economic conditionsDon’t try this at home alone

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Cash-out option under cafeteria planCost-saving opportunity with cash

offering If in PEMHCA, employer must still make

minimum contributions

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Brad AuSenior Vice President

Aon Hewitt

“Cost neutral” or better – cost avoidanceCap the City’s future medical cost

increasesSupportable / “reasonable” assumptionsFair / attractive to employees

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Existing retiree healthcare program description• CalPERS health program• 10 bargaining groups, each w/ tiered benefit structures• Fixed dollar benefits and varying premium coverage

ARMP - employee option to convert Defined Benefit (DB) to Defined Contribution (DC)

Initial account balance = DB retiree healthcare “accrued liability”• GASB 45: FYE 2009 - $58 MM (roughly 50% eligible for ARMP; non-safety)

“Residual” payments• DC annual allocations add to account balance• Paid for duration of DB “accrual” or “funding” period• Based on annual cost to provide DB plan

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Interpretation of Plan Provisions• Vesting vs. accrued• Benefit accrual period• Targeted benefit

Projection of Results• GASB 45 OPEB results• Unfunded liability• Cash flow / financing• Sensitivity to assumption variability

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Defined Benefit (DB) Plan Versus

Defined Contribution (DC) Plan

Variable Cost Fixed

KnownLevel of Healthcare

CoverageUnknown

Retirement/Non-Portable

Eligibility Termination/Portable

City Who Takes Risk? Employee

Supportable, equitable, communicable, sellable• GASB OPEB where possible / practicable - valuation vs. individual

calculations• Considered historical – investment returns, trend, retirement• CalPERS assumptions• No single “right” answer

Types of assumptions• General – discount rate / investment return, healthcare trend, mortality,

full/partial value• Bargaining group – retirement age, accrual period• Individual – plan election, marital, spousal age difference, gender

Impact of assumptions• Understand what’s important Drivers of costs, benefits, emotions

• Many have considerable (e.g., 50%+) impact on results

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Numerous assumption sets• Start w/ GASB OPEB valuation assumptions• 15+ versions…w/ a, b, c scenarios• Conservative vs. “reasonable” vs. aggressive

Final assumptions• 6% investment return (City’s historical return: 9.8%),

10% to 5% trend, full value of accrued liability• Retirement ages 52 to 63, primarily 20 year accrual /

“funding”• Most valuable benefit election, same age spouse,

gender neutral

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General Process1) Set goals2) Understand provisions (e.g., MOU, other communication)3) Establish assumptions4) Preliminary results5) Review / modify assumptions6) Review / interpret MOUs7) Revise results and reassess8) Repeat steps 5-8 as many times as necessary

Methodology is important • 10 bargaining groups, tiered benefit structures, MOU vs. administrative

practice

Valuation vs. individual considerations • Calculations are different, e.g., we don’t all die at the same age…

Need to Educate • City Council, City Manager, Finance, HR, actuary / consultant,

bargaining units, individual employees33

John KimPartner

De La Rosa & Company

Two options for funding the ARMP prepayment amount:• Cash• Borrow money Taxable conventional bank financing (i.e. line of

credit) Taxable municipal bond financing (i.e. lease revenue

bonds)

The City went out to bid to several commercial banks and its bond underwriter to select the lowest cost of borrowing

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Pros ConsCash • No interest cost

• Ease of execution • Ability to size funding of ARMP prepayments

• Decreased reserves/liquidity

Conventional Bank Loan

• Low interest cost • Maintains reserves/liquidity • Ability to size funding of ARMP prepayments

• Interest cost • Need to pledge security (collateral) • 60-90 days required

Municipal Bonds

• Lowest interest cost • Maintains reserves/liquidity

• Interest cost • Need to pledge security (typically leased asset) • 60-90 days required • Less flexibility to size funding of ARMP prepayments

The City selected municipal bond financing based on the lower cost of borrowing vs. bank line of credit (0.73% lower)

Saved over $900,000 over 11 years, on top of the long-term savings for all 4 programs

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CITY OF BEVERLY HILLSCNB Bank Loan vs. Taxable Bond Financing (11 Year Maturity)

2010 Bond Payments Annual

Date Annual Date Annual Savings7/31/2011 2,388,312 6/1/2011 2,299,827 88,4857/31/2012 2,388,312 6/1/2012 2,302,348 85,9637/31/2013 2,388,312 6/1/2013 2,300,573 87,7387/31/2014 2,388,312 6/1/2014 2,299,516 88,7967/31/2015 2,388,312 6/1/2015 2,298,411 89,9007/31/2016 2,388,312 6/1/2016 2,301,893 86,4197/31/2017 2,388,312 6/1/2017 2,299,872 88,4407/31/2018 2,388,312 6/1/2018 2,297,477 90,8357/31/2019 2,388,312 6/1/2019 2,298,915 89,3977/31/2020 2,388,312 6/1/2020 2,299,667 88,6447/31/2021 2,388,312 6/1/2021 2,299,669 88,643

Total Payments 26,271,427 25,298,168 973,259Avg Annual Payment 2,388,312 2,299,833 88,478

Total Proceeds 20,000,000 20,000,00010-Year Treasury 3.03% 3.03%Spread to Treasury +1.99% +1.26%All-In Interest Rate 5.02% 4.29%(Includes Costs of Issuance)

CNB Loan Payments

The City issued taxable lease revenue bonds secured by General Fund lease payment

• Utilized unencumbered leased asset (i.e. Rodeo Drive parking facility)

• Bonds are taxable because proceeds will be used to fund pre-fund private retiree benefits

Term of the bonds: 11 years

Strong underlying credit ratings (“Aaa/AAA/AAA”)• No debt service reserve fund• Overall taxable yield: 4.53%

The City adopted fiscal policies giving Beverly Hills residents/investors first priority to purchase bonds

• City-hosted website: www.buybeverlyhillsbonds.org• Bonds sold out in 53 minutes!

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Educate your elected officials on funding options early

Develop matrix to compare funding options• Reserves/liquidity• Interest/upfront costs• Flexibility to size prepayment amount• Security needed (i.e. collateral and/or revenue pledge)• Timing

If conventional bank financing used, consider:• What collateral? (e.g. segregated cash deposit, land)

If municipal bonds are used:• What is my agency’s credit rating?• Do I have leased assets available?

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Over 29 years experience in both public and private sectors Has worked in a management capacity for the City of

Claremont, City & County of San Francisco, Turner Broadcast, Delloitte/Tousche and the City of Palm Desert, among others

Recipient of commendations from the State of California, the CSU system, the Municipal Management Assistants of Southern California, the Municipal Information Systems Association of CA, the Government Finance Officers Association

Presented to ICMA, GFOA, State of California, CSMFO and National Association of Colleges & Universities.

Phone: (310) 285-2411Email: sgmiller@beverlyhills.org

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Phone: (213) 996-1729Email: brad.au@aonhewitt.com

Senior Vice President and actuary in Aon Hewitt’s Los Angeles office.

Over 15 years of experience consulting on various employee benefit and retirement programs.

Assists senior management in the strategy and design of retirement programs that meet organizational goals.

Experience in the public and private sector includes advising on pension, retiree medical, supplemental retirement, and other benefit programs

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Phone: (415) 995-5829Email: mwu@hansonbridgett.com

Partner based in Hanson Bridgett’s San Francisco Office Specialist in representing public and private employers

with respect to compensation and benefits matters with a focus on retirement and deferred compensation, particularly 401(k) plans and ESOPs

Experienced in helping to establish and administer health plans, flexible benefit plans, dependant care plans, and a wide range of severance benefit plans

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De La Rosa & Co. is a top-five ranked bond underwriter serving California public agencies

Partner based in Los Angeles Office Over 14 years of experience working with

cities, counties, special districts and other public agencies

Specializes in bond financing for public infrastructure, utilities, redevelopment, schools, and housing

Phone: (310) 207-1975Email: jkim@ejdelarosa.com