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Page 1
PENSION & OPEB FINANCING
Presented to
November 21, 2008
Florida Government Finance Officers Association
Page 2
Pension & OPEB Financing
Participants
Todd H. Holder Director Citigroup Global Markets Inc. 200 Crescent Court, Suite 830 Dallas, Texas 75201 P: 214-720-5074 E: [email protected]
Mark S. Benton Finance Director City of Gainesville 200 E. University Avenue Gainesville, Florida 32601 P: 352-334-5054 E: [email protected]
Mark G. Pollock CLU, ChFC Principal The Financial Group, LLC 28601 Chargrin Boulevard, Suite 550 Cleveland, Ohio 44122 P: 216-455-2100 E: [email protected]
Scott D. Kremer Director of Institutional Markets The Financial Group, LLC 28601 Chargrin Boulevard, Suite 550 Cleveland, Ohio 44122 P: 216-455-2141 E: [email protected]
Page 3
Page 4
Pension & OPEB Financing
PART ONECity of Gainesville OPEB Case Study
PART TWOThe iPeb Structured Finance Strategy
Page 5
City of Gainesville OPEB Case Study
Page 6
City of Gainesville OPEB Case Study
• In the early 1980’s the City had a 30 year, non-contributory pension plan and the City funded 100% of retiree’s health insurance costs
• In 1985 normal retirement moved to 20 years & plan became contributory
• By 1985 City was picking up 80% of retirees’ dependent costs in addition to 100% of retirees
Page 7
City of Gainesville OPEB Case Study
• 20 year retirement shifted ratio between actives & retirees• Increased pension cost covered by member contributions• Rising pay-as-you-go retiree health insurance cost began to have
fiscal impact on City
Page 8
City of Gainesville OPEB Case Study
• In 1992 City performed actuarial valuation on existing retiree health insurance structure
• AAL of $92M for 100% retiree/80% dependent• Began to look toward cost sharing formula to ensure continued
provision of benefit
Page 9
City of Gainesville OPEB Case Study
• Staff & actuary worked for two years on various allocations of cost
• Chose premium sharing formula basing City contribution on years of service & age at point of accessing retiree health plan
• City contribution capped at 50% of single premium
Page 10
City of Gainesville OPEB Case Study
• Discussions with actives, retirees and City Commission• Formula implemented in1995; initial valuation resulted in $18M
AAL under revised model • At same time new formula implemented, City began program of
periodic valuations with contributions based on % of covered payroll
Page 11
RETIREE HEALTH INSURANCE PLAN Funded Status Trend
$0
$3,469,916$4,674,726
$8,974,921
$12,726,000
$18,000,000
$22,857,342
$29,811,096
$45,584,730$47,386,000
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
4/30/94 9/30/98 9/30/00 9/30/03 3/31/05
Actuarial value of assets
Actuarial accrued liability
City of Gainesville OPEB Case Study
Page 12
City of Gainesville OPEB Case Study
• By 2005 plan had UAAL of $34,660,000, with a % of payroll contribution associated with the UAAL of 4.19%
• Translated to an annual City contribution of approximately $4.2M, with covered payroll growing 4-5% per year.
• Issued $35.2M in 10 year taxable bonds and substituted debt service for UAAL amortization payments
• All-in cost of 4.892%, projected gross savings of $7M, PV savings of $5.5M over 10 year life of bonds
Page 13
City of Gainesville OPEB Case Study
• Early in 2005 hired plan consultant through RFP process• Created trust document for the plan, and separate investment
policy for the trust• Through plan consultant six external investment managers were
retained in various investment disciplines• Bond proceeds deposited in trust in 70/30 equity fixed income
mix
Page 14
City of Gainesville OPEB Case Study
• Early in 2005 hired plan consultant through RFP process• Created trust document for the plan, and separate investment
policy for the trust• Through plan consultant six external investment managers were
retained in various investment disciplines• Bond proceeds deposited in trust in 70/30 equity fixed income
mix
Page 15
1
PROJECTED SAVINGS Taxable OPEB Bonds vs. Unfunded Actuarial Accrued Liability Amortization
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
OPEB debt service
UAAL amortization
City of Gainesville OPEB Case Study
Page 16
RETIREE HEALTH INSURANCE PLAN Funded Status Trend
$0$3,469,916 $4,674,726
$8,974,921
$12,726,000
$49,249,256$51,805,265
$49,166,121
$18,000,000
$22,857,342
$29,811,096
$43,879,000$43,617,805
$47,381,963$47,386,000$45,584,730
-
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
4/30/94 9/30/98 9/30/00 9/30/03 3/31/05 9/30/05 9/30/06 9/30/08
Actuarial value of assets
Actuarial accrued liability
City of Gainesville OPEB Case Study
Page 17
City of Gainesville OPEB Case Study
• State of Florida prohibits separately rating employees • $34.6M UAAL based on blended premium; premium charged is
higher than actual only & lower than retiree only• Implicit rate subsidy – not age adjusted premium as called for by
GASB
Page 18
Age Adjusted BlendedAAL 75,573,136 47,381,963 Actuarial value of assets 49,249,956 49,249,256 UAAL 26,323,180 (1,867,993) Funded ratio 65.17% 103.94%
FISCAL YEAR 05
City of Gainesville OPEB Case Study
Age Adjusted BlendedAAL 67,563,979 43,617,805 Actuarial value of assets 51,805,265 51,805,265 UAAL 15,758,714 (8,187,460) Funded ratio 76.68% 118.77%
FISCAL YEAR 06
Page 19
TREND IN ACTUARIAL ACCRUED LIABILITY
$67,563,979.00
$75,573,136.00
$47,381,963
$18,000,000
$22,857,342
$29,811,096
$45,584,730$47,386,000
$43,617,805
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
4/30/94 9/30/98 9/30/00 9/30/03 3/31/05 9/30/05 9/30/06
AAL - Age Adjusted
AAL - Blended
City of Gainesville OPEB Case Study
Page 20
City of Gainesville OPEB Case Study
• Implemented GASB 43 & GASB 45 in fiscal 2005, with required note disclosure
• Instituted separately issued financial statements for Other Post Employment Benefits Fund in Fiscal 2006
Page 21
November 21, 2008
The iPeb Structured Finance Strategy®
Page 22
4 MAIN REASONS PEOPLE WORK FOR THE GOVERNMENT
4 Main Reasons People Work
for the Government
(The Country’s Largest Employer)
Flexible Qualifications
Pay and Benefits Hiring OutlookJob Security
421 3
Page 23
4 MAIN REASONS PEOPLE WORK FOR THE GOVERNMENT
Pay and Benefits
2
Pay Benefits
Pension Healthcare
Competitive Salary 13 Paid Sick Days 10 Paid Holidays Flexible Work Hours Transit Subsidies Recruitment Bonus Student Loan
Repayment Relocation Assistance
Lifetime Pension
Lifetime health Insurance into Retirement
Page 24
2006 PENSION FUNDING LEVELS
96% - 110%
80% - 95%
55% - 79%
Page 25
HEALTH CARE - GASB OPEB ISSUES – HISTORICAL PERSPECTIVE
1940
► Medical plans became employer paid
► Unions play roll
► Medical inflation 2X
► Life expectancies increase
► Retire age moved back 55 to 65
2004
► GASB rules released
► Calculate UAAL
► Report liability
► Develop a plan
2007
► GASB rules become effective
► Actuarial reports
► Plan design changes
A B C
2008
► Funding alternatives
► Plan management
D
Page 26
2006 OPEB FUNDING LEVELS
0%
1% - 35%
Over 35%
Page 27
THE UNIVERSE IS DIVIDED INTO 2 CAMPS
Those looking atNon-Funding
Solutions
Those looking at Funding
Solutions(after exhausted all Non-Funding
solutions)
A B
Page 28
METHODS TO ADDRESS OPEB FUNDING
ProsPros
Reducing or limiting a portion of existing benefits can help reduce the UAAL
Private sector precedents
ConsCons
Polarization of employee/ retiree interests
May need to be used in conjunction with other options
Reduce or Control Benefits
ProsPros
Clean template from which to start (for many)
Trust fund treatment can move discount rate to 7%-8%, similar to a pension system.
Discount rate decreases the PV of unfunded liabilities
ConsCons
Limit to how much actuaries will allow
Aggressive assumptions may have negative rating implications
Implement Favorable Actuarial
Assumptions
ProsPros
No immediate impact on budget
Pre-funding not required by GASB
ConsCons
Lack of funding means growing net OPEB obligation on balance sheet
Likely negative rating consequence
Continue Pay-Go Funding Approach
ProsPros
Least complicated
Funds invested to offset future liabilities
If annual budget contribution equals ARC, no balance sheet liability
ConsCons
Annual payments could be substantially higher than current budget
Contributes to Budget Stress
Increase to Annual Required
Contribution
ProsPros
Immediate budget relief possible
Can be used in conjunction with all other strategies
Market gains realized on additional assets
ConsCons
May defer excessive debt service in later years
Legislation may be required in some jurisdictions
Issue
OPEB Bonds
ProsPros
Same as “Issue OPEB Bonds”
Lowers net cost of capital through insurance proceeds
Possible credit enhancement to stand alone bond issue
Private sector precedents
ConsCons
Requires employees to acknowledge insurable interest
Mortality assumptions may not match cash flows
iPeb Structured Finance Strategy®
Page 29
LIABILITY MANAGEMENT COMPONENTS
Page 30
BASIC iPebTM OVERVIEW STRUCTURE
= iPebTMBond
Insurance
Benefits Trust
3 Pieces:
Page 31
iPeb STRUCTURED FINANCE STRATEGY® MECHANICS SUMMARY
GOVERNMENTAL ENTITY
OPEB TRUST
BONDS
RETIREE BENEFITS
Fund Retirement Payments
$25% 75%
Buy Ins. on employees
Cash
Sets
Up
Trust
Transfers
OPEB
Liability
Issue Bonds
Make P&I Payments
Receives $
Transfer Both
Buckets to Trust
Death
Benefits
Pledged to
Bond
Holders
Invested in Portfolio
CashInsurance
DeathBenefit
DeathBenefit CV
#1 #2
Page 32
ANALYSIS OF FUNDING ALTERNATIVES
Establish projected cash flows to fund UAAL
Identify sources of funding
Comparison of cash flows
Purpose:
Actuarial funding method Entry age vs.. projected unit credit
UAAL amortization method Level dollar vs.. level % of payroll
Actuarial discount rate Projected UAAL amortization
Payroll growth assumption Projected level % payroll amortization
Long-term medical inflation rate Projected normal cost
Projected retiree healthcare costs Projected liquidity
Mortality table Projected mortality
Actuarial Components of Funding:
Page 33
Project Unfunded Actuarial Accrued Liability (UAAL)
Level % of Payroll Amortization
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
Year E nding
Unf
unde
d A
AL
EO
Y
• Initial UAAL of $100 million.
• The UAAL projection is based upon level percentage of payroll amortization. The salary growth is projected at
5%. The interest rate assumption is 7.5% net of expenses.
Page 34
UAAL Amortization
Total Cash Flow:
$316,176,024
Average Annual Deposit:
$10,539,200
Lowest:
$4,758,903
Highest:
$19,588,290
$100 Million UAAL Amortization over 30 years
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
• Amortization based upon 7.5% discount rate and 5% salary growth.
• Middle of year payments necessary to fully fund UAAL.
Page 35
Annual Level Savings
Annual Level Savings UAAL Amortization vs. Refunding Debt Service
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
UAAL Amortization Debt S ervice
Total Cash Flow:
$272,353,171
Savings:
$38,971,576
PV Savings:
$-15,062,820
% Savings:
-14.95%
Net Cost of Capital:
8.43%
Page 36
Debt Service Comparisons
UAAL Amortization vs.. OPEB Bond Debt Service vs. iPeb Debt Service
Total Cash Flow:
$289,025,069
Savings:
$27,150,996
PV Savings:
$7,616,370
% Savings:
7.56%
Net Cost of Capital:
6.43% 0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
UAAL Amortization Debt S ervice iP eb S olution
Page 37
iPebTM: AN ALTERNATIVE TO CUTTING BENEFITS
We believe the iPebTM meets the following 3 major objectives:
Reduces the cash flow necessary to fund the OPEB
obligation
Provides sufficient liquidity to meet future liabilities
Strengthens the balance sheet and GASB 43/45
reporting
Cash Flow LiquidityBalance Sheet
Impact
321
Page 38
Source: Clark ConsultingTM; Executive Benefits – A Survey of Current Trends 2005; 152 of Fortune 1000 Companies Responded
EMPLOYER OWNED LIFE INSURANCE UTILIZED TO FUND RETIREE COMPENSATION PLANS
PRIVATE SECTOR PRECENDENCE
All Companies Financial Institutions
Page 39
Citigroup Global Markets Inc. - Disclaimer
Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the existence of and proposed terms for any transaction contemplated hereby (a “Transaction”).
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Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.
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· The extension of commercial loans or other products or services to you by Citibank, N.A. (“Citibank”) or any of its subsidiaries will not be conditioned on your taking other products or services offered by Citibank or any of its subsidiaries or affiliates, unless such a condition is permitted under an exception to the Anti-tying Rules.
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Although this material may contain publicly available information about Citi corporate bond research or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances.
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Page 40
IRS CIRCULAR 230 DISCLOSURE:
To the extent these materials contain tax advice, the U.S. Treasury Department requires us to inform you that any such advice, whether in the body of these materials or in any attachment, it not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Advice from our firms relating to tax matters may not be used in promoting, marketing or recommending any entity, investment plan or arrangements to any taxpayer.
NOTICE OF PATENT PENDING AND PROPRIETARY INFORMATION
The material contained in this presentation and accompanying materials and exhibits has been developed by and constitutes the proprietary work of The Financial Group. The iPebPP Structured Finance Solution™ is currently awaiting patent issue.
You are being made aware of this “Patent Pending” notice and requested to honor the proprietary nature of the information. We request that any sharing of this information should have the prior
expressed permission of the officers or directors of The Financial Group, LLC.
This presentation does not constitute investment, legal or tax advice, and the material contained in this report should not be interpreted or relied upon for implementation.
You should consult your investment, tax and/or legal advisors.
The Financial Group - Disclaimer
Intended for discussion purposes only and not as tax or legal advice. Please consult your own attorney and accountant for tax and legal advice.
Important Information Regarding Insurance Products
Insurance products:
are NOT insured by the FDIC
are NOT deposits or other obligations of any bank and are NOT guaranteed by any bank; and
are subject to investment risks, including the possible loss of principal if the issuing company is unable to meet its obligations.
PATENT PENDING
© 2006 by The Financial Group, LLC. All Rights Reserved.