I. Summary The City of Vacaville provides lifetime healthcare to its future retirees (current employees),

Additional Recommendations 1

These recommendations are not explicitly linked to specific findings.

• R80-09
  09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 $(5,000,000) Fiscal Years Annual Required Contribution (ARC) Actual Contribution ARC Shortfall The City continued to contribute a maximum of 92% (adopted in 2010) of the Kaiser Bay Area regional rate towards healthcare premiums for employees (except Engineers Local 39) and retirees until January 1, 2016, when City contribution was decreased to 85%. This change was effective for employees represented by Engineers Local 39 on August 1, 2016. Staff reported the annual cost for employee healthcare will be $8,358,925, and the annual savings from the employee contributions toward healthcare will be $1,135,380. Staff did not indicate whether the cost of the Kaiser plan increased. In 2015, employees began to make contributions to retiree healthcare (OPEB Trust) in the amount of $25/month for Non-Safety employees and $50/month for Safety employees. In return, employees’ contribution towards their dental insurance was discontinued and paid for by the City. Employee contribution to retiree healthcare was increased by $25/month in 2016 for all employees and again in 2017 for Safety employees. Currently, Non-Safety employees contribute $50/month and Safety employees contribute $100/month. Employees of the City of Vacaville have contributed a total of approximately $870,650 to the OPEB Trust Fund since fiscal year 2015-2016. On June 28, 2016, staff recommended to the Council that an ordinance to place a measure on the November 8, 2016, ballot to renew Measure M, a ¼ cent transactions and use tax, increasing the tax by an additional ½ cent from 7.878% to 8.375% for a period of 20 years. Staff reported that without Measure M, the General Fund Reserve will be depleted by 2019 and that there continues to be additional issues that impact the long-term solvency of the City. Listed among the additional issues were: (1) PERS rates for employee pensions and healthcare costs continue to rise, such that they continue to “eat up” more of the overall budget; and (2) The City needs to continue making additional contributions towards the OPEB unfunded liability to ensure the long-term health of the City. Measure M - Vacaville Essential Services Protection Measure was placed on the ballot to protect essential city services such as police programs to fight domestic violence, child/elder abuse, gang activity and neighborhood crime, fire/paramedical services for quick emergency response times; street lighting for safety; and other city services. The voters 10 approved Measure M. The City of Vacaville projects $15.3 million revenues for the first full year of the increased Measure M in their fiscal year 2018-2019 budget. On August 28, 2018, the Council adopted Resolutions No. 2018-086, 2018-087, 2018-088, 2018- 089, 2018-090, 2018-091, 2018-092, 2018-093 and 2018-094 on the consent calendar approving a new tier for retiree medical based on Agreements reached between some of the bargaining units and the City. According to the staff report, the new tier will not result in immediate cost savings but will help contain the future OPEB liability and help keep the compensation package sustainable. Therefore, employees hired on or after December 1, 2018, will receive a reduced City contribution toward their medical premium upon retirement. The contribution will be the PEMHCA minimum, which is currently $133/month. In addition, employees who have 10 or more years of service with the City will receive an additional $100 - $200/month. During the City Council meeting on September 25, 2018, an independent actuary presented the results of the City of Vacaville, June 30, 2017, Actuarial Valuation of Other Post-Employment Benefits. This report showed a reduced unfunded liability from $142 million to $106 million. According to the presenter, the $36 million decrease from the July 1, 2015, Actuarial Valuation report was based on changes in assumptions, actuarial cost method used, favorable plan experience and decrease in employer contribution from 92% to 85% of the Kaiser non-Medicare premium rate. The presenter stressed during his presentation that although the valuation changes worked in the City’s favor, this occurrence is rare. GASB Statement No. 75 (GASB 75), Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, replaced GASB 45 beginning after June 15, 2017. GASB 75 significantly changed the way government agencies calculate and report the annual costs and long-term obligations associated with OPEB. The requirements are designed to equip government policy makers, citizen and taxpayer groups, municipal bond analysts, and others with information that more comprehensively portrays the governments’ promises to provide OPEB. GASB 75 requires cities to report the total unfunded OPEB liability on their financial statements. Under the previous standards (GASB 45), Vacaville and other cities reported an OPEB-related liability on the face of the financial statements called a net OPEB obligation, which represented the cumulative amount by which a city’s contributions to its OPEB plan fell short of the ARC. This measure of the obligation understated the OPEB liability. Vacaville reported a net OPEB obligation of $30,487,224 for fiscal year ending June 30, 2017. In GASB 75, the net OPEB liability equals the total OPEB liability (a measure of the total cost of future OPEB payments already earned, stated in current dollars) minus the net position of the OPEB plan administered through a trust (the value of the assets in that OPEB plan that can be used to make benefit payments). Based on these new standards, the City of Vacaville’s 2018 CAFR reports their Net OPEB Liability as of June 30, 2017, to be $82,797,349. Total OPEB Liability /a OPEB Plan Net Position /b Net OPEB Liability /c Total cost of future OPEB Value of the assets in the Represents the unfunded payments already earned, OPEB plan (Trust) that can portion of the City’s future stated in current dollars be used to make benefit OPEB commitment payments $106,071,959 $23,274,610 $82,797,349 SOURCE: City of Vacaville’s 2018 CAFR a – b = c SCGJ reviewed the supplementary information required by GASB 75 regarding changes in Net OPEB Liability and related ratios of Solano County and cities within the County. GASB 75 requires this data for the last 10 years. Only the 2018 CAFR data is shown, as this is the first year since implementation. The below table only addresses Net OPEB Liability: Net OPEB Liability Total OPEB OPEB Plan Net Net OPEB Local Agency Liability /a Position /b Liability /c Vacaville $106,071,959 $23,274,610 $82,797,349 Vallejo $44,902,000 $17,982,000 $26,920,000 Fairfield** $3,153,300 Benicia Information not available Rio Vista* $1,070,410 Dixon* $3,625,000 Suisun City* $2,882,155 Solano County $58,479,842 $35,590,887 $22,888,955 Source: Respective Agency's 2018 CAFR Net OPEB Liability is a - b = c *Pursuant to GASB75, if an OPEB plan is not administered through a trust that meets specific criteria, the total OPEB liability is recognized. **City of Fairfield entered CERBT per Resolution No. 2018-32, March 20, 2018. V. FINDINGS AND RECOMMENDATIONS FINDING 1 – While the City of Vacaville made minor adjustments to the OPEB debt (with the most significant change affecting employees hired on or after December 2018), the cost for current employees and retirees still represents a significant financial threat to the City, which has not been sufficiently addressed. RECOMMENDATION 1A – Identify potential solutions to lower OPEB costs through updated policies and labor relations strategies. For example, negotiate and implement a fixed City 12 contribution toward retiree healthcare rather than based on a percentage of the Kaiser Bay Area pricing. RECOMMENDATION 1B – Establish a citizen oversight committee charged with studying OPEB and proposing recommendations to the Council. FINDING 2 – Materials provided to the City Council by staff failed to adequately address the long-term financial impact on OPEB. The complexity of OPEB hinders the understanding by the decision-makers and stakeholders who may not be subject matter experts. RECOMMENDATION 2A– Direct staff to include fiscal impact of changes and methodology used in determining the financial impact in simpler language. RECOMMENDATION 2B – Prepare future communications for decision-makers and stakeholders in simpler language to better explain the magnitude of OPEB debt and potential impacts. FINDING 3 – The City of Vacaville has not followed the Other Post Retirement Funding Policy, which contains incorrect information. The City has not made adequate ARC contributions as specified in the Policy. The hardship provision does not adequately specify the recipient of the Council’s recommendation. RECOMMENDATION 3A - Correct the Policy title to reflect “Post-Employment” rather than “Post Retirement.” RECOMMENDATION 3B - Comply with the Other Post Retirement Funding Policy as to the percentage of ARC to be paid as set forth in the Policy. RECOMMENDATION 3C - Clarify the hardship exemption in the Policy to provide a recipient for the City Council’s recommendation. FINDING 4 – Placing OPEB issues (such as healthcare premium rate changes) on the Consent Calendar hinders public awareness of and input to City Council decisions. RECOMMENDATION 4 –Present issues pertaining to OPEB and retiree health premiums as separate agenda items. FINDING 5 – Changes in health plan rates announced by CalPERS were not brought before the City Council and the public. RECOMMENDATION 5 – Place changes in the City’s contribution towards retiree healthcare and/or impact on OPEB liability on the agenda to be reviewed by the City Council in a public forum. REQUIRED RESPONSES City Manager, City of Vacaville (all findings) COURTESY COPIES Vacaville City Council Solano County Board of Supervisors City Manager, City of Vallejo 13 City Manager, City of Fairfield City Manager, City of Benicia City Manager, City of Rio Vista City Manager, City of Dixon City Manager, City of Suisun City Chief Administrative Officer, Solano County GLOSSARY (Baron’s Business Guide – Dictionary of Finance and Investment Terms) Actuary/Actuarial – Mathematician employed by a company to calculate premiums, reserves, dividend, insurance, pension and annuity rates, using risk factors obtained from experience tables. These tables are based on both the company’s history and other industry and general statistical data. Affordable Care Act (also known as Obamacare) - Signed into law in 2010 by President Barack Obama. Obamacare is designed to broaden the availability and affordability of health insurance to Americans by introducing a series of mandates, subsidies and insurance exchanges. The act also requires all insurance companies to cover all applicants with minimum standards and offer the same rates without discriminating based on pre-existing health conditions or gender. Annuitant – Individual receiving benefits from an annuity. The individual can choose to annuitize the policy, meaning that he or she begins to receive regular payments from the annuity. ARC – Annual required contribution (A rate that is actuarially determined and represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and amortize any unfunded liabilities over a period not to exceed thirty years.) Deferred Compensation – Currently earned compensation that, under the terms of a profit- sharing, pension or stock option plan, is not actually paid until a later date and is therefore not taxable until that date. Discount Rate – Interest rate used in determining the PRESET VALUE of future CASH FLOWS. Irrevocable Trust - A trust that cannot be changed or terminated by the one who created it without the agreement of the beneficiary. Liability – Claim on the assets of a company or individual. Pension Fund – Fund set up by a corporation, labor union, governmental entity, or other organization to pay the pension benefits of retired workers. Unfunded Liability – Plan that is funded by the employer out of current income as funds are required by retirees or beneficiaries. Also known as pay-as-you-go plan or a plan using the current disbursement funding approach. 15