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 to consistently funding OPEB costs. Under the existing policy, this charge was to ramp up slowly over a 15 year period to ultimately pay the actuarially determined contribution, or the rate required to fully fund OPEB benefits over the long-term. Since that time, the Policy has also required an annual report to the Board of Supervisors on the status of funding progress. The information below is intended to satisfy the annual reporting requirement:
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 |
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 14.05% as of June 30, 2018. The next valuation for OPEB is expected to be completed within six months after the June 30, 2020 year end.
Actuarial Report Summary
The key actuarial assumptions included in the June 30, 2019 valuation are as follows:
| Actuarial Assumption |
June 30, 2018 Valuation |
June 30, 2016 Valuation |
| Discount Rate |
6.75% reflecting Capital Appreciation Portfolio |
6.50% reflecting Balanced Portfolio |
| Funding Policy |
$800,000 initial trust contribution in FY14/15 and 15 Year Ramp up to ADC |
Same |
| Inflation |
3.00% |
2.75% |
| Medical Trend |
7.50% in FY2020 declining to 4.00% after FY2075 |
6.50% in FY2018 declining to 5.00% annual after FY2021 |
| 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 |
14 year closed period |
16 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 |
OPEB Policy Ramp-up Rate* |
Actuarially Determined Contribution Rate |
Actual Rate charged to Departments |
| 2014-15 |
0.0% |
29.0% |
0.0% |
| 2015-16 |
7.0% |
9.6% |
7.0% |
| 2016-17 |
8.0% |
9.7% |
8.0% |
| 2017-18 |
10.0% |
9.5% |
8.0% |
| 2018-19 |
11.0% |
9.8% |
8.0% |
| 2019-20 |
13.0% |
8.5% |
8.5% |
| 2020-21 (Proposed) |
15.0% |
8.8% |
8.8% |
OPEB Policy Changes
The proposed update to the OPEB Policy (Attachment B) reflects several changes as specified below:
- Incorporation of principles of financial sustainability and intergenerational equity consistent with the County's broader fiscal principles; and
- Enhances reporting requirements to require Chief Financial Officer to annually report additional information pertaining to the funded progress and the actuarial valuation; and
- Most significantly, changes the County funding strategy to pay the Actuarial Determined Contribution annually (10 years in advance of the original timeline envisioned by the prior OPEB funding ramp-up plan); and
- Only allows temporary suspension or reduction of contributions in times of fiscal distress, with stipulation that any sustained reduction in funding contributions will require further efforts to structure benefits to a sustainable level.
OPEB Trust Investment Performance
The table below summarizes the transactions in the County OPEB Trust during fiscal year 2018-19 as reported in the County's accounting records. The PARS Annual Report for 2018-19 (Attachment C) is a similar summary.
| |
Beginning Balance - July 1, 2018 |
Contributions |
Earnings |
Expenses |
Transfers |
Ending Balance - June 30, 2019 |
| OPEB |
$10,968,889 |
$3,736,564 |
$910,293 |
$64,182 |
$416,249 |
$15,967,814 |
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, 2019, the portfolio is composed of 76.1% equities, 21.0% fixed income, and 2.9% cash, as further detailed in Attachment D.
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, 2019.
| Investment Vehicle |
Type |
Returns |
| Russell 2000 Index |
US Small Cap Index |
(3.31)% |
| MSCI EAFE Index |
International Equity Index |
1.08% |
| County PARS OPEB Trust Fund |
County Portfolio |
6.22% |
| CalPERS Pension Fund |
CalPERS Portfolio |
6.80% |
| Barclays US Aggregate Bond Index |
US Bond Index |
7.87% |
| S&P 500 Composite Index |
US Large Cap Index |
10.53% |
Based on the investment performance, the portfolio slightly underperformed the discount rate target of 6.75%; however, it performed relatively in-line with CalPERS performance during the period. The slight under performance was due to low returns stemming from international equities and small cap US stock funds, but offset by strong increases in US large cap stocks and US bonds. However, when looking over a slightly longer time period of three years, the returns were 9.86%. At this point in time no adjustment to the investing objectives or mechanisms is recommended.
Conclusion
In closing, the status of OPEB funding has improved substantially over the last several years and is now at approximately 14% 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, status of OPEB funding progress, and approve the revised OPEB Funding policy. |