Accept the June 30, 2022 Other Post-Employment Benefits (OPEB) Actuarial Valuation and receive an update on the status of OPEB. (No general fund impact) (Haynes)

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 increasing the rate over 15 years 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 that fiscal year. The actuarially determined rate 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:
 

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 40.2% as of June 30, 2022. 

Actuarial Report Summary

The key actuarial assumptions included in the June 30, 2019 valuation are as follows:
 

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:
 

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.
 

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, 2022, the portfolio is composed of 71.2% equities, 20.37% fixed income, and 8.3% cash, as further detailed in Attachment C.

The County's OPEB investment portfolio return for the fiscal year ending June 30, 2022 was -14.95% and underperformed the discount rate target of 6.25%. 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 71.2% of portfolio). Mid-cap equities and small-cap equities were significantly impacted by inflation and interest rate hikes.  International equities were significantly impacted by both inflation and the conflict between Russia and Ukraine.

However, when looking at the longer duration the portfolio return was approximately 5.2% over the past three (3) fiscal years which is closer to the discount rate. In addition, the portfolio has rebounded significantly along with investment markets in the 2022/23 fiscal year to date with an investment return rate of 11.55% or 5.3% over the discount rate target of 6.25%. At this time, no adjustment is recommended 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 40% 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.

The Department of Financial Services collaborated with the County Administrator's Office in the preparation of the staff report and analysis of the OPEB actuarial valuations.