Background
The County of Yolo in 2011 through Resolution No. 11-46 approved a Section 115 Irrevocable Trust through the Public Agencies Retirement System (PARS) to accumulate assets for reducing the unfunded liability for costs related to Other Post-Employment Benefits (OPEB), which consists principally of retiree healthcare and dental benefits.
The initial OPEB Funding policy was adopted in June 2015. Beginning in fiscal year 2015-16, a rate of payroll was charged to all departments in order to begin consistently funding OPEB costs. Initially, the payroll charge was ramped up with the intention to over 15 years ramp-up to pay the actuarially determined contribution, or the rate required to fully fund OPEB benefits over the long-term. In November, 2019 the board adopted an update to the OPEB funding policy in order to pay the actuarially determined contribution. This was anticipated to begin with the 2020-21 fiscal year based on the actuarially determined rate of 8.8%. However, due to the COVID-19 pandemic, the increase in OPEB rate was paused and a rate of 7.8% of payroll was charged for the current fiscal year. The actuarially determined rate will be resumed in 2021-22 in line with the policy.
OPEB Funding Status
The OPEB Funding status is measured on a biennial basis with completion of the OPEB Funding Actuarial Valuations as shown below:
| Valuation Date |
Accrued Liability |
Actuarial Value of Assets |
Unfunded Liability |
Funded Ratio |
Projected Payroll |
| 06/30/2010 |
$141,774,000 |
$0 |
$141,774,000 |
0.00% |
$76,580,000 |
| 06/30/2012 |
$138,609,000 |
$529,000 |
$138,080,000 |
0.38% |
$80,292,000 |
| 06/30/2014 |
$154,027,000 |
$936,000 |
$153,091,000 |
0.61% |
$81,117,000 |
| 06/30/2016 |
$86,519,000 |
$4,393,000 |
$82,126,000 |
5.08% |
$95,781,000 |
| 06/30/2018 |
$79,891,000 |
$11,229,000 |
$68,662,000 |
14.05% |
$102,108,000 |
| 06/30/2020 |
$85,625,000 |
$20,445,000 |
$65,180,000 |
23.90% |
$122,360,000 |
The funded status has continued to improve primarily due to the implementation of the OPEB benefit caps across bargaining units, with the last caps being approved by the Board of Supervisors at the September 25, 2018 Board meeting. Thus, the combination of the benefit caps and the OPEB pre-funding plan contributed to an increase in funding status of 23.9% as of June 30, 2020. The next valuation for OPEB is expected to be completed within six months after the June 30, 2022 year end.
Actuarial Report Summary
The key actuarial assumptions included in the June 30, 2019 valuation are as follows:
| Actuarial Assumption |
June 30, 2020 Valuation |
June 30, 2018 Valuation |
| Discount Rate |
6.75% reflecting Capital Appreciation Portfolio |
Same |
| Funding Policy |
2020/21 7.8% Contribution (Full ADC 8.8%)
2021/22 and thereafter – Full ADC |
$800,000 initial trust contribution in FY14/15 and 15 Year Ramp up to ADC |
| Inflation |
3.00% |
2.75% |
| Medical Trend |
7.00% in FY2022 declining to 4.00% after FY2075 |
7.50% in FY2020 declining to 4.00% after FY2075 |
| Cap Increases |
0.00% |
CPI for certain employee groups and frozen for others |
| Cost Method |
Entry Age Normal |
Same |
| Amortization Method |
Level percent of payroll |
Level percent of payroll |
| Amortization Period |
12 year closed period |
14 year closed period |
| Actuarial Value of Assets |
Investment gains and losses spread over a 5 year period |
Same |
| Future New Entrants |
Closed group |
Same |
OPEB Rates
Below is a table of the OPEB rates that were developed in the original ramp-up plan, the actuarial determined contributions that were determined as part of the actuarial valuations, and rates that have actually charged through the budget. As shown, adaptations were made along the way and the ramp-up plan was not strictly followed as the OPEB contribution was reviewed annually in light of the circumstances as part of the budget development process:
| Fiscal Year |
Actuarially Determined Contribution Rate |
Actual Rate charged to Departments |
| 2014-15 |
29.0% |
0.0% |
| 2015-16 |
9.6% |
7.0% |
| 2016-17 |
9.7% |
8.0% |
| 2017-18 |
9.5% |
8.0% |
| 2018-19 |
9.8% |
8.0% |
| 2019-20 |
8.5% |
8.5% |
| 2020-21 |
8.8% |
7.8% |
| 2021-22 (Proposed) |
7.7% |
7.7% |
OPEB Trust Investment Performance
The table below summarizes the transactions in the County OPEB Trust during fiscal year 2019-20 as reported in the County's accounting records. The PARS Annual Report for 2019-20 (Attachment B) is a similar summary.
| |
Beginning Balance - July 1, 2019 |
Contributions |
Earnings |
Expenses |
Transfers |
Ending Balance - June 30, 2020 |
| OPEB |
$15,967,814 |
$3,579,076 |
$418,879 |
$77,548 |
$0 |
$19,888,220 |
The funds are held in trust by PARS and invested by HighMark Capital Management, an investment subsidiary of US Bank, which is the trustee for the OPEB Trust. As of June 30, 2020, the portfolio is composed of 72.2% equities, 23.9% fixed income, and 3.9% cash, as further detailed in Attachment C.
Below is a comparative table to other benchmarks or returns with a similar time horizon of investment of 25+ years for the year ended June 30, 2020.
| Investment Vehicle |
Type |
Returns |
| Russell 2000 Index |
US Small Cap Index |
(6.63%) |
| MSCI EAFE Index |
International Equity Index |
(5.13%) |
| County PARS OPEB Trust Fund |
County Portfolio |
2.45% |
| CalPERS Pension Fund |
CalPERS Portfolio |
4.70% |
| S&P 500 Composite Index |
US Large Cap Index |
7.51% |
| Barclays US Aggregate Bond Index |
US Bond Index |
8.74% |
Based on the investment performance, the portfolio underperformed the discount rate target of 6.75%. This is notably due to the significant impact associated with the COVID-19 pandemic. The portfolio is invested significantly in equities with a balanced approach between large cap, mid cap, small cap, and international equity within the equity portion of the portfolio (target 75% of portfolio). International equities and small cap equities were significantly impacted which created drag on the portfolio. However, when looking at the longer duration however, the portfolio return was approximately 6.2% over the past three fiscal years which is near the discount rate. In addition, the portfolio was rebounded significantly along with investment markets in the 2020/21 fiscal year to date. At this point in time, no adjustment is recommend to the investment portfolio selection.
Conclusion
In closing, the status of OPEB funding has improved substantially over the last several years and is now at approximately 24% funded. While there is still a long way to go to achieve the 80% funding target, a strategy is in place to make measured progress. Thus, the Department of Financial Services is requesting the Board accept the actuarial valuation and status of OPEB funding progress. |