Retiree Health Savings Plan RHS

1
Retiree Health Savings Plan (RHS)

• October 2009

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
2
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 Towns annual pay-as-you-go expenses for
  these benefits is 871,800

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
3
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
4
Future OPEB Liability
Annual Paygo vs ARC

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

3.0m
0.4m
0.87m
Current contribution to liability funding is 13
of ARC
Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
5
Retiree Healthcare BenefitsPay-as-you-go Costs
(FY05 thru FY10)
871,875
Costs have increased 118 in 5 years
737,748
706,231
543,252
492,997
Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
6
Actuarial Study

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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
7
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
8
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 Towns
  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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
9
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
10
ICMA Retirement Corporation

• Independent not-for-profit organization that
  provides retirement products exclusively to
  public sector focus
• 26 billion administered in public sector assets

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
11
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
12
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
13
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
14
Benefit Eligibility

• Can be any combination of the following (as
  defined by the employer)
• Retirement
• Separation from service
• Age

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
15
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
16
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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
17
Investment Options

• Actively 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

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
18
Plan Comparison
Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
19
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)

Town of Chapel Hill 405 Martin Luther King Jr.
Blvd. www.townofchapelhill.org
20
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

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