| ITEM #: 14. DATE: 05/19/2025 AI #:2574 |
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CITY COUNCIL ACTION REPORT
| SUBJECT: | ESTABLISH OTHER POST-EMPLOYMENT BENEFITS (OPEB) TRUST TO SAFEGUARD FUNDS FOR RETIREE HEALTHCARE BENEFITS |
| STAFF PRESENTER(S): | Jared Askelson, Finance Director |
SUMMARY
This action will create an irrevocable Other Post-Employment Benefit trust (“OPEB trust”) solely for retiree healthcare benefits. Additionally, the resolution establishes an OPEB trust funding and withdrawal policy and an OPEB trust investment policy. The OPEB trust will secure funding for retiree healthcare benefits and use investment strategies that will reduce the overall cost.
STRATEGIC PLAN ALIGNMENT
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RECOMMENDATION
ADOPT RESOLUTION NO. 2025-2470 AUTHORIZING THE ESTABLISHMENT OF AN IRREVOCABLE OTHER POST-EMPLOYMENT BENEFITS TRUST (“OPEB TRUST”), ADOPTING AN OPEB TRUST FUNDING AND WITHDRAWAL POLICY, ADOPTING AN OPEB TRUST INVESTMENT POLICY, APPOINTING THE FINANCE DIRECTOR AS THE OPEB TRUST CITY ADMINISTRATOR, AND AUTHORIZING THE OPEB TRUST CITY ADMINISTRATOR TO EXECUTE ANY AND ALL DOCUMENTS NECESSARY TO CARRY OUT THE INTENT OF THIS RESOLUTION. (Jared Askelson, Finance Director)
FISCAL IMPACT
For fiscal year 2025, council approved a contribution of $3.4 million to the OPEB trust as part of the city’s budget. The fiscal year 2026 tentative budget includes a similar $3.4 million contribution with planned contributions extending through fiscal year 2029. Subsequent contributions are expected to be updated based upon funding levels and actuarial studies conducted for the OPEB trust. The formation of the OPEB trust and the use of the associated investment policy is anticipated to reduce the actuarial liability of the retiree healthcare program by $8.2 million.
BACKGROUND AND PREVIOUS ACTIONS
At the December 11, 2023, council work session, City Council reached consensus on the creation of a retiree healthcare plan for eligible retirees. One week later on December 18, 2023, Council adopted Resolution no. 2023-2377 that set the framework for a retiree healthcare plan with the transition commencing on December 19, 2023 with a plan effective date of July 1, 2024.
At the June 3, 2024, council work session, City Council came to consensus on the final eligibility and loss of coverage decision points for the retiree healthcare plan. This direction provided information to finalize the administrative policy and guidelines associated with this new benefit. Three weeks later on June 24, 2024, Council adopted Resolution 2024-2418 approving the policy for the retiree healthcare plan.
Healthcare for city retirees is a post-employment benefit (OPEB) and includes non-pension costs for retiree healthcare. In order to qualify for advantageous federal tax treatment with the Internal Revenue Service (IRS) and a reduced liability on financial statements according to Governmental Accounting Standards Board (GASB) rules, three requirements must be met for a qualified trust that provides OPEB benefits to retirees:
As part of the FY2025 budget, the Council approved for funding of retiree healthcare and adopted an initial contribution of $3.4M with the intention, but not guarantee, of continuing the contribution for four additional years through FY2029 at $3.4M per year. A custodian will hold OPEB trust assets for safekeeping and will ensure that the OPEB trust assets are utilized solely for the purposes of paying eligible retiree healthcare benefits and associated OPEB trust operating expenditures. The OPEB Trust custodian will be Hilltop Securities, Inc.
The OPEB Trust assets will be invested and managed by the HYAS group, a unit of Morgan Stanley Institutional Investment Advisors, LLC. Since funds deposited in the OPEB trust are not anticipated to be fully expended for more than 20 years, the investment strategy is intended to maximize long-term investment returns with less focus on short-term volatility. In the future, as the need to use a larger portion of OPEB Trust funds occurs, the investment strategy will be altered to recognize these changes in investment priorities.
This action will include the following items:
At the June 3, 2024, council work session, City Council came to consensus on the final eligibility and loss of coverage decision points for the retiree healthcare plan. This direction provided information to finalize the administrative policy and guidelines associated with this new benefit. Three weeks later on June 24, 2024, Council adopted Resolution 2024-2418 approving the policy for the retiree healthcare plan.
Healthcare for city retirees is a post-employment benefit (OPEB) and includes non-pension costs for retiree healthcare. In order to qualify for advantageous federal tax treatment with the Internal Revenue Service (IRS) and a reduced liability on financial statements according to Governmental Accounting Standards Board (GASB) rules, three requirements must be met for a qualified trust that provides OPEB benefits to retirees:
- Employer contributions to the trust are irrevocable;
- The Trust’s assets are dedicated to providing benefits to the retirees; and
- The Trust’s assets are legally protected from creditors of the employer or employee (anti-alienation)
As part of the FY2025 budget, the Council approved for funding of retiree healthcare and adopted an initial contribution of $3.4M with the intention, but not guarantee, of continuing the contribution for four additional years through FY2029 at $3.4M per year. A custodian will hold OPEB trust assets for safekeeping and will ensure that the OPEB trust assets are utilized solely for the purposes of paying eligible retiree healthcare benefits and associated OPEB trust operating expenditures. The OPEB Trust custodian will be Hilltop Securities, Inc.
The OPEB Trust assets will be invested and managed by the HYAS group, a unit of Morgan Stanley Institutional Investment Advisors, LLC. Since funds deposited in the OPEB trust are not anticipated to be fully expended for more than 20 years, the investment strategy is intended to maximize long-term investment returns with less focus on short-term volatility. In the future, as the need to use a larger portion of OPEB Trust funds occurs, the investment strategy will be altered to recognize these changes in investment priorities.
This action will include the following items:
- Authorization to establish an irrevocable other post-employment benefits trust (“OPEB Trust”).
- Adoption of an OPEB Trust Funding and Withdrawal Policy – The purpose of the policy is to state the funding strategy and withdrawal provisions for the OPEB Trust. This policy will state the amount to be contributed for the first few years, with related city council approval requirements.
- Adoption of an OPEB Investment Policy – The purpose of the policy is to establish clear guidelines and standards for investing OPEB Trust assets to ensure consistency, compliance, effective decision-making, and suitable risk/liquidity management.
- Appointment of an OPEB Trust-City Administrator (CA).
- Authorization of the OPEB Trust-CA to execute any and all documents necessary to carry out the directives to establish and maintain the OPEB Trust and related documents, policies and agreements identified herein.
STAFF ANALYSIS
The creation of a trust is intended to safeguard funds for City of Goodyear retiree healthcare and allow for greater investment flexibility with the goal of minimizing employee benefit expenses to the city.
The OPEB Trust Funding and Withdrawal Policy has provisions to help ensure the city does not over-fund the OPEB Trust. The policy is required to be reviewed every 2 years and when the OPEB liability funding reaches a ratio of 65% of assets to liabilities. The policy is also designed to facilitate asset growth by prohibiting initial withdrawals. Authorization to withdrawal funds will be sought in the future by way of a separate action of the Council.
The Investment Policy was designed for the long-term nature of the OPEB plan. While the OPEB is not a pension plan, investments will be similar to a pension fund-type investment securities. Planned target asset allocation is 60% equity/alternative and 40% fixed income, which is more conservative than Arizona State Retirement System (ASRS) and Public Safety Personnel Retirement System (PSPRS) pension plan investment portfolios. The policy establishes limits and guidelines for the City Trust Administrator to ensure prudent financial management practices for the OPEB Trust. Resolution 2025-2470 is included as Attachment A.
The OPEB Trust Funding and Withdrawal Policy has provisions to help ensure the city does not over-fund the OPEB Trust. The policy is required to be reviewed every 2 years and when the OPEB liability funding reaches a ratio of 65% of assets to liabilities. The policy is also designed to facilitate asset growth by prohibiting initial withdrawals. Authorization to withdrawal funds will be sought in the future by way of a separate action of the Council.
The Investment Policy was designed for the long-term nature of the OPEB plan. While the OPEB is not a pension plan, investments will be similar to a pension fund-type investment securities. Planned target asset allocation is 60% equity/alternative and 40% fixed income, which is more conservative than Arizona State Retirement System (ASRS) and Public Safety Personnel Retirement System (PSPRS) pension plan investment portfolios. The policy establishes limits and guidelines for the City Trust Administrator to ensure prudent financial management practices for the OPEB Trust. Resolution 2025-2470 is included as Attachment A.