OPEBs Case Study at Gainesville Regional Utilities

1
OPEBsCase Study at Gainesville Regional
Utilities

• APPA Fall Business/Financial Conference
• Session 30 Are You Ready for OPEBs?
• Kim Simpson, CPA, Retired CFO GRU
• Kim Simpson Consulting
• Phone Fax [phone]
• Mobile [phone]
• simpsonsea_at_cs.com

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Why are OPEBs Important?

• GASB is Requiring Accrual of Certain Costs
• More Importantly, OPEBs are True Costs That Will
  Affect Our Rates, Competitiveness in the Future

3
GRU Looked at Retiree Health Insurance
Contributions in 1993

• Who is Gainesville Regional Utilities (GRU)?
• Combined electric, natural gas, water, wastewater
  and telecommunication utility
• Electric System Generating, TD with
  Approximately 85,000 customers
• Part of the City of Gainesville, sharing pension
  plans, post-employment benefits, some other
  functions
• Combined Revenues of about 250 million
• Health Insurance Contribution Was GRUs Largest
  OPEB

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Why We Had a Problem

• Like Most Utilities, Had Never Booked
  Post-employment Health Benefit Liability
• Costs of Such Benefits were Escalating at High
  Rate
• Large Number of New Retirees
• Put a 20 year and any age retirement system in
  place in 1985 but left generous retiree health
  plan in place

5
Why We Had A Problem (Continued)

• City Was Paying 80 of Individual Health
  Insurance Premium and 75 of Family
• With 20 Year Retirement Had Many Young Retirees
  with Families

6
Magnitude of Problem

• Actuarial Valuation of
  Unfunded Liability 90 million
• Assets On Hand -0-
• Annual Contribution if
  Funding Based on
  Actuarial Funding 13.1 million
• Annual Actual Funding
  (Pay-as-you Go) 1.3 million

7
We Had to Do Something

• We Were Concerned That If We Did Nothing, There
  Would Be No Health Benefit Contributions for
  Future Retirees
• This Got Many Active Employees Interested in
  Helping Solve Problem

8
How We Attacked the Problem

• Initiated Team to Deal with Issue
• Worked Closely with Actuary
• Discussed Issue with Unions
• Met with Elected Officials
• Communicated with Retirees, Active Employees

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How We Attacked the Problem (Continued)

• Comparisons to Competitors
• Checked Other Items
• Identified Groups of Retirees and Active
  Employees
• Put Revised Plan In Place

10
Initiated Team to Deal with Issue

• Combined Team of General Government and GRU
  Employees
• High Level Management Employees
• Selected Employees With Credibility and Respect
  of Elected Officials and Unions
• Team Worked Hard for Approximately Nine Months

11
Worked Closely with Actuary

• Used Same Actuary Who Handled Pension Valuations
• Actuary Was an Excellent Source of Ideas and Had
  a Good Feel About Relative Value of Changes
• This Doesnt Come Free but Must Be Put in Context
  of Potential Savings

12
Discussed Issue with Unions

• Critical Part of Process
• They Can Help or Hurt Communications

13
Met with Elected Officials

• We Had an Initial Meeting with Elected Officials
  to Gauge Interest (Fortitude?) to Deal with
  Problem
• Initial Meeting Gave Us Some Direction as to How
  to Proceed
• Interim Communications to Keep Them Informed
  (They Will Hear from Employees and Retirees)
• Final Meeting for Decisions

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Communicated with Retirees, Active Employees

• Focus Groups Held to Determine Knowledge of
  Problem, Values, Etc.
• Mass Mailings to Retirees
• Direct Communication With Active Employees
• Meetings With Retirees
• Individual Calculation of Impact for Each Retiree

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Comparisons to Competitors

• We Felt it Was Important to Survey
  Post-Employment Health Contributions Offered by
  Our Competitors
• Local Employers
• Other Governmental Employers
• Other Public Power Employees
• Investor Owned Utiltiies
• Conclusion We Made Higher Contributions Toward
  Retiree Health Premiums Than Our Competitors

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Checked Other Items

• Local Law, Ordinances
• Union Contracts
• State Regulations
• In Florida, Law Requires that Insurance Premium
  Charged to Retirees Cant Be Different from That
  Charged to Actives (Implicit Subsidy)
• Federal Law, Regulations
• Any Memorandum, Letters to Retirees (You Want to
  Find, If Any, Before They are Brought to You)

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Identified Different Groupings

• Current Retirees and Current Active Employees
  Eligible to Retiree
• These Active Employees Eligible to Retire Were
  Treated the Same As Retirees Because We Could Not
  Afford to Empty Out the Back Lot
• Active Employees with 10-20 Years Service (10
  year vesting with a 20 year pension plan)
• Active Employees with Less Than 10 Years Service

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Revised Plan Put into Place

• Actually Two Different Plans
• Base (or Ultimate Plan) for New Hires and Those
  Active Employees With Less than 10 Years Service
• Transition Plan for Current Retirees and Those
  Active Employees With 10 Years of Service or More
  (Consistent with Pension Plan Which Had 10 Year
  Vesting)

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Description of Base (or Ultimate) Plan

• The City Will Contribute a Calculated Percentage
  Toward Retiree Health Insurance Premium
• Maximum is 50 of Individual Premium
• Based on Years of Service and Age
• 2 for Each Year of Service Years 1 to 10
• 3 for Each Year of Service 10 to 20
• 2 for Each Year of Service Over 20

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Description of Base or Ultimate Plan (Continued)

• 2 Reduction for Each Year for Which Contribution
  is First Made Prior to Age 65
• 2 Increase for Each Year Past Age 65 for Which
  Contribution is First Made
• This Encourages Retirees Who Work Elsewhere (or
  Spouse Works Elsewhere) to Access that Employers
  Health Insurance

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Example of Base (Ultimate Plan)

• Given a Retiree at Age 55 with 25 Years of
  Service
• 10 times 2 (for 1st 10 years of svc) 20
• 10 times 3 (for next 10 years of svc) 30
• 5 times 2 (for remaining 5 years of svc) 10
• Reduction for Years Before Age 65 -20
• Total Contribution of Indiv Coverage 40

22
Description of Transition Plan

• Same as Base or Ultimate Plan Except Years of
  Service Are Increased by a Multiplier Determined
  Based on Years of Service at Plan Revision Date
• Maximum Percentage City Contribution is 155 of
  Individual Premium if Family Coverage or 80 of
  Individual Premium If Individual Coverage Is
  Selected

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Unfunded Liability After Plan Changes

• 18 million
• (About 50 for Base and 50 for Transition Costs)

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Other Changes Made

• In Order to Limit Impact on Current Retirees We
  Put a Tiered Rate Structure in Place
• Individual
• Individual and Spouse
• Individual and One Child
• Individual and Family
• Helped Older Retirees Without a Family

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Impact on Retirees

• Our 465 Current Retirees
• 294 Paid More
• 171 Paid Less

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Lessons Learned

• There is a Large Financial Exposure That Must Be
  Dealt With
• Changes Must be Made Carefully, Thoughtfully and
  With Full Communication
• Our Resulting Program is Relatively Complicated
  Maybe There Are Ways to Simplify
• Try to Think of All the Nuances
• Document Process and New Plan Thoroughly

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Summary of Unfunded Liability/Required Funding

• Actuarial Liability
• Prior to Changes 90 million
• After Revised Plan 18 million
• Required Funding
• Prior to Changes 13.1 million
• After Revised Plan 2.2 million