The city of Duluth's actuary, Van Iwaarden Associates, has estimated the City's Actuarial Accrued Liability (AAL) for retiree health care at approximately $270 million, according to a draft report given to the City last week.
In October 2005, Van Iwaarden Associates, issued an actuarial valuation of the city's retiree medical plan as of Jan. 1, 2005. That report placed the city's total actuarial accrued liability (AAL) at $280 million, which included a $31 million dollar reduction due to Medicare Part D savings. This report estimated that if the city continued with only its pay-as-you-go policy for retiree health care claims, the city's AAL would be $309 million by 2007.
"The $270 million valuation may not seem to be as large of a reduction as what was being discussed a year ago during the 2007 budget process," Mayor Herb Bergson said. "However, due to a recent GASB interpretation the new valuation had to add back the $31 million Medicare Part D savings that was included in the 2005 valuation. In addition, the 2007 valuation includes $22 million for dental and life insurance liabilities, which were not part of the 2005 valuation. If these items had not been added, the liability would have been closer to $217 million. These are solid steps."
Van Iwaarden Associates has been working on a new actuarial valuation that will be current as of June 1, 2007, the date a survey was completed that provides much more accurate information regarding retirees and their dependents than was previously available. The final version of the Van Iwaarden report will be available within a few weeks.
The new valuation will incorporate the results attributable to actions taken by the city over the last few years to fund and reduce the AAL. These actions include moving all active employees to a single health plan and a new drug co-pay plan; changing new employees from a defined benefit plan to a defined contribution plan; establishing an irrevocable trust fund; and taking the steps necessary to establish a funding plan to reduce the liability, which includes utility rate increases, transfers from community investment fund, a one-time transfer from group health Fund and allocation of retired TIF taxes.
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Because no action has yet been taken to change health plans for current retirees, this report continues to calculate the liability for retirees based on all of the various health plans and drug co-pays they currently use. It is estimated the liability could be reduced another $30 million if retirees used the same health plan and drug co-pays as active employees.
In order to show the effect of our current funding plan on the AAL several years into the future, the 2005 valuation estimated the unfunded AAL would be $405 million by 2014; the 2007 draft estimates that amount to be $277 million. This is a decrease of $128 million, which would have been even greater when taking the $53 million addition of Medicare Part D and dental and life insurance liabilities into consideration. Finally, by moving all employees hired after Jan. 1, 2007 to a defined contribution plan, any future liability related to these employees will be limited to the recognition of an implicit subsidy for those that choose to purchase city health care after retirement.
Although much still needs to be done to totally fund the existing retiree health care liability, the city has made remarkable progress in the last two years to make this liability more manageable. A funding plan was developed and put into effect, and difficult decisions and tough actions were necessary to accomplish the progress achieved. "Unfortunately, more painful decisions and actions will be needed in order to fully fund the liability over the next 30 years," Mayor Bergson added. "Future administrations and councils must carefully guard against taking actions that will negate the sacrifices made by all parties involved these past few years."
--City of Duluth press release
