Council Hears Financial Impact Of Retiree Medical Choices
OCEAN CITY – Although the actuary study on retirement health benefits has been presented, Bolton Partners will have to return with more recommendations for the Mayor and City Council before any final decisions are made.
Kay Moran of Bolton Partners, Inc. presented a report on post-employment medical benefits actuarial valuation during this week’s meeting.
Currently the town’s post-employment medical benefit is retirees pay 20 percent of the cost and it does not include spouses. Eligibility for the benefit is if the town employee was hired before July 1, 2005 and is a general employee 55 years old, with 30 years of service, or 55 years old, with 15 years of service. A public safety employee can be of any age with 25 years of service, or 55 years old, with 15 years of service.
If a town employee was hired after July 1, 2005 they are eligible for the town’s benefit if they 55 years old, with 30 years of service, or if 65 years old, with 25 years of service. A public safety employee can be of any age or with 25 years of service.
According to the actuary study, the real cost involves the total liability, which is the present value of the estimated post-retirement cash flow. Actuarial assumptions will not change the actual cash flow, only the estimates. Since there is a trust fund with investment earnings, the future costs will be offset by trust fund earnings.
Ocean City’s re-funded discount rate is the same as is used for the town employee’s pension fund, which is 7.5 percent. If the trust earns 7.5 percent, the actual cost will be lowered.
For the closed plan and open plan, the accrued liability is $37,010,000 and the assets are $5,209,649. The accrued liability will need to be funded in the trust for future employees.
“The evaluation is a snap shot in time with your current employees projecting what the costs of those current employees will be in the future, and accounting for what you haven’t funded,” Moran said. “For every employee on their day one, they start accruing a benefit, so this accrued liability is accounting for the future costs of benefits for all your future employees.”
The open plan includes current employees, and an accrued liability amortized over 28 years as a level percent of pay. Because the council voted to close the plan to new hires, Bolton Partners had to calculate a closed plan. The closed plan pertains to future town employees, and an accrued liability amortized over 28 years as a level dollar because their level of pay is unknown.
Moran explained that upon the assumption that that the town would continue to fund the retiree health care benefit, the 7.5 percent discount rate, the accrued liability does not change whether the plan is open or closed. The assets do not change because that is the defined amount in the trust fund now.
“What does change is the amortization method,” Moran said. “In the previous evaluation, we used a level percentage of pay so we had assumed that your pay increase over the life of the 30 years of the amortization period would be 4 percent per year.”
Moran recognized the fact that there has been no increase in pay over the last few years, but the 4 percent was factored in due to long-term assumption.
“If you close the plan to new hires, you can no longer use that amortization method so we had to switch to a level dollar so that increases your liability for each year,” Moran explained. “The difference between those two methods is about $906,000.”
The amortization of accrued liability for the open plan is $1,842,000 and for the closed plan it is $2,748,000.
The costs of current Ocean City retirees for PPO pre-Medicare is $10,045 annually, the employee pays 80 percent of that which equals $8,036. For HMO pre-Medicare, the employee pays 80 percent which equals $5,741.
Councilman Joe Hall asked what the estimation would be if the employee was hired today and what the cost to the trust fund would be 30 years from now.
“The town of Ocean City is obligating to pay this employee 30 years from now his retiree health care,” Joe Hall said.
Moran said that Bolton Partners has not done a 30-year projection on an individual basis. The estimate presented encompasses the cost in total, which is $3,516,000 for the open plan and $4,422,000 for the closed plan.
Joe Hall also asked if the estimate takes into account the potential risk to the trust fund because of the evolution of changing federal regulations, for example if the age to enter into Medicare changes.
“As you know, our desire of the majority has been is we pay the bill today for service performed today,” Joe Hall said. “And especially looking out 30 years from now I find it unpredictable…and that is a commitment being made on future taxpayers.”
Moran explained the actuary study takes into account all of the assumptions. In determining the present value of benefits for a retiree, it is based on assumptions that include the current cost of medical benefits, how fast medical costs will increase and mortality. Moran said that the $37 million includes all the accounting of those assumptions.
Mary Knight pointed out that the $906,000 is ongoing and it would be an amount that the town would have to pay every year. As well as if the retirement age were to be raised then the liability would be reduced.
“If we don’t close the plan and change the percentage that the new employee pays, that is going to make a significant difference,” Mayor Rick Meehan said. “If we decide today that we don’t close the plan but the new employee pays 50 percent of the cost it would certainly make a big difference in how these numbers play out. Those are alternatives that we should look at because our goal is to have the economic way to provide a benefit.”
The Mayor and City Council asked Moran to return on March 1 with further recommendations on how the benefit could be reduced in cost. Such as, the option to change the retirement age, keeping the plan open and changing the percentage that the new employee pays, a 30-year projection, a defined contribution plan basis, and even if accrued sick days can be used towards retiree health benefits instead of their pension.
“Let’s be honest, you cannot cut costs without cutting the benefit…so who gets hit with that’s what they have to determine,” Finance Administrator Martha Lucey told The Dispatch yesterday.