Unfunded Retiree Healthcare Obligations – a Problem for Public Agencies?*

Twenty one out of the 32 agencies that provided June 30, 2013, data to the Grand Jury had not put aside funds in an irrevocable trust to help pay for the accrued actuarial liability of retiree healthcare costs. This is an imprudent level of contribution. The City of Irvine agrees with the finding that it has not put aside funds in an irrevocable trust to pay for accrued actuarial liabilities; however, the City disagrees with the characterization this is an imprudent level of contribution as it pertains to Irvine. Unlike agencies that provide a defined retiree health care benefit, Irvine offers retirees the opportunity to self-pay for health insurance at current employee group rates. Therefore its retiree health obligations are not direct payments to a retiree or on behalf of a retiree. Because retirees, who generally cost more to insure, are allowed to pay the full premium in the City's health insurance program, the premium per participant is higher than it would otherwise be. This increased cost, as an implicit subsidy, becomes the basis of the actuarially calculated unfunded liability. The implicit benefit incurred is not considerable, especially as it compares to Irvine's resources. The calculated accrued liability represents 3% of the City's expenditures and Irvine's estimated per capita liability is the seventh lowest of the 32 entities in the Grand Jury's report. Irvine has concentrated its resources on reducing its larger unfunded pension liability and believes that working to realize the financial gains expected from this endeavor are the highest priority. The smaller retiree health care liability is not forgotten, however, and setting aside additional funding to offset this actuarial liability will be brought to City Council for consideration in the future as the City realizes savings from the reduction in its pension liability.

Anaheim, Buena Park, County of Orange, Huntington Beach, Lake Forest, and Stanton complied with the requirement to contribute a full 100% or more of their Annual Required Contribution in the FY 2012-13. The remaining 26 agencies did not comply. The City of Irvine disagrees partially with this finding. The Grand Jury report indicates that the Grand Jury believes that, "... it is in the best interest of cities with high Annual Required Contribution (ARC)/Annual Covered Payroll (ACP) values to take steps to reduce their Accrued Actuarial Liability, either by putting away funds (sinking fund) to meet these future expenses, or by renegotiating their future benefit payments with their employees/unions." The City agrees it is not setting aside monies in a sinking fund for this purpose for reasons described above, but the City's ARC/ACP value, or ratio, of less than 1% is the third lowest of the 31 entities for which data was available in the Grand Jury's report. The City of Irvine is prioritizing the accelerated payment of its larger unfunded pension liability at this time. The City is not aware of any requirement to establish a sinking fund as the finding implies, though the City will prioritize doing so The Honorable Glenda Sanders September 14, 2015 when additional funds are made available from the pay-down of its larger pension liability. Government Accounting Standards Board (GASB) Statement No. 45, establishes standards for an employer's accounting and financial reporting of Other Postemployment Benefits (OPEB). An employer's method of financing the benefits is outside the scope of this GASB Statement and there is no requirement to contribute a full 100% or more of the ARC.

All agencies surveyed (except Anaheim) do not disclose retiree health benefits as part of employee compensation per GAAP standards. The City of Irvine wholly disagrees with this finding. The City of Irvine complies with GASB Statement No. 45, which governs the reporting of retiree health benefit costs in the City's financial statements. GASB Statement No. 45 represents Generally Accepted Accounting Principles, or GAAP, for the City's treatment of these costs. We are unaware of any more detailed accounting requirements applicable to the City than this. GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, has identified GASB statements and interpretations as the authoritative guidance on state and local government GAAP. Thus, GASB Statement 45 is the highest level of authoritative guidance for state and local governments on this issue and the City of Irvine is in compliance with this as a GAAP standard. RECOMMENDATIONS