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Other Post Employment Benefits Report (PDF)
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Source page 1
Town of Canton
Other Post-Employment Benefits
Actuarial Valuation
January 1, 2013Source page 2
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
TABLE OF CONTENTS
Page
Section I – Management Summary
Introduction ---------------------------------------------------------------------------------- 1
Summary of Actuarial Results ------------------------------------------------------------- 2
Valuation Methodology and Assumptions--------------- -------------------------------- 6
Data ------------------------------------------------------------------------------------------ 16
Funding -------------------------------------------------------------------------------------- 17
Calculation of the Net OPEB obligation (NOO) --------------------------------------- 21
Implementation ----------------------------------------------------------------------------- 24
Recommendations and Comments ------------------------------------------------------- 52
Section II – Actuarial Valuation Details
Plan Participation --------------------------------------------------------------------------- 28
Summary of Results ------------------------------------------------------------------------ 32
Schedule of Funding Progress ------------------------------------------------------------ 33
Results by Enterprise Fund ---------------------------------------------------------------- 34
Funding Schedule -------------------------------------------------------------------------- 36
Sensitivity Analysis ------------------------------------------------------------------------ 37
Actuarial Methods and Assumptions ---------------------------------------------------- 39
Principal Plan Provisions Recognized in Valuation------------------------------------ 52
Glossary-------------------------------------------------------------------------------------- 53
Acknowledgement of Qualification ------------------------------------------------------ 55Source page 3
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
SECTION I
MANAGEMENT SUMMARY
Introduction
This report presents the results of the actuarial valuation of the Town of Canton Other Post-
employment Benefits as of January 1, 2013. The valuation was performed for the purpose of
measuring the actuarial accrued liabilities associated with these benefits and calculating a
funding schedule. These results are used in satisfying the requirements under the
Governmental Accounting Standards Board Statement No. 45.
The valuation was based on participant data as of January 1, 2013 supplied by Canton and the
Massachusetts Teachers Retirement Board. The provisions reflected in the valuation are based
on Chapter 32B of the General Laws of the Commonwealth of Massachusetts and related
statutes and the benefits provided by the Town.
We are pleased to present the results of this valuation. We are available to respond to any
questions on the content of this report. Please note that this report is meant to be used in its
entirety. Use of excerpts of this report may result in inaccurate or misleading understanding
of the results.
Respectfully submitted,
STONE CONSULTING, INC.
September 19, 2013
__________________________________
Kevin K. Gabriel, FSA, MAAA
Member, American Academy of Actuaries
__________________________________
Lawrence B. Stone
Member, American Academy of Actuaries
5 West Mill Street, Suite 4
Medfield, MA 02052
Tel. (508) 359-9600
Fax. (508) 359-0190
E-mail Lstone@stoneconsult.com
1Source page 4
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Summary of Actuarial Results
The actuarial values in this report were calculated consistent with the Governmental
Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting
by Employers for Postemployment Benefits Other Than Pensions, issued June 2004. Values at
three discount rates are presented. The 7.50% discount rate represents the expected rate of
return for a funded plan with a longer-term investment horizon. For an unfunded plan, the
GASB Statement No. 45 calls for the use of a discount rate approximating the rate of return of
Canton’s general assets. The rate we used for this is 4.00%. The Canton OPEB liability is
partially funded and for this we recommend a rate that is in between these two values. The
rate we have used for this is 4.20% (see page 8 for details). The OPEB liability is extremely
sensitive to this assumption. Depending upon whether the funded, unfunded, or partially
funded rate is used, the Annual Required Contribution (ARC), Accrued Actuarial Liability
(AAL), and the Normal Cost change dramatically.
Because Canton has contributed some funds toward future benefit payments, it is necessary to
distinguish between the AAL or Accrued Actuarial Liability and UAAL or Unfunded
Actuarial Liability. The UAAL is equal to the AAL less the amount funded to date. In the
case of Canton, the accumulated assets to date are $100,000.
All figures below reflect this contribution. The summary results are as follows:
• Actuarial Accrued Liability (“AAL”) is the “price” attributable to benefits earned in past
years. The total AAL as of January 1, 2013 (at the 4.20% discount rate) is $142,752,366.
This is made up of $67,664,148 for current active Canton employees and $75,088,218 for
Canton retirees, terminated vested, spouses and survivors. The Unfunded Actuarial
Accrued Liability (UAAL) as of January 1, 2013 (at the 4.20% discount rate) is
$142,652,366. This amount is equal to the AAL offset by the assets at the valuation date
of $100,000.
• The Normal Cost is the “price” attributable to benefits earned in the current year. The
Normal Cost as of January 1, 2013 (at the 4.20% discount rate) is $5,942,736.
2Source page 5
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
• Based on a 26-year funding schedule (at the 4.20% discount rate), the Fiscal 2013
contribution would be $12,260,294. This figure is referred to as the Annual Required
Contribution (ARC). This figure should be contrasted with the ARC using the fully
funded 7.50% rate of $7,932,212 and the ARC using the unfunded rate of $12,670,241.
All of these figures compare to the pay-as-you-go contribution of the existing costs for
current retirees of $4,476,091. For an illustration of how payment of the ARC impacts the
funding of the plan over time, please refer to the “Illustrative Funding Schedule”
discussion beginning on page 17 and the accompanying table on page 34. The following
table shows the breakdown of the Actuarial Accrued Liability between future retirees and
current retirees, as well as the normal cost, at Canton’s different discount rates:
Actuarial Results as of January 1,
2013 7.50% Rate 4.20% Rate 4.00% Rate
Current Actives $34,789,676 $67,664,148 $70,887,127
Current Retirees, Beneficiaries, $54,528,505 $75,088,218 $77,137,804
Terminated Vesteds and Survivors
Total AAL $89,318,181 $142,752,366 $148,024,931
Assets $100,000 $100,000 $100,000
UAAL $89,218,181 $142,652,366 $147,924,931
Normal Cost $2,764,885 $5,942,736 $6,267,296
ARC $7,932,212 $12,260,294 $12,670,241
3Source page 6
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Change from Prior Valuation
Canton had a prior valuation of its OPEB liability done as of January 1, 2011. The following
table provides a comparison of some of the key figures:
1/1/2011 Figure,
Category 1/1/2013 Figure % Change
Projected to 2013
Total AAL $142.8 million $147.1 million -3.0%
Service Cost
$5.9 million $7.1 million -16.4%
(Normal Cost)
Amortization Cost (26
yrs for 2013, 26 yrs for $6.3 million $6.4 million -0.7%
2011)
Annual Required
$12.3 million $13.5 million -9.0%
Contribution (ARC)
Pay-As-You-Go $4.5 million $4.7 million -4.4%
The following addresses the reasons behind these changes:
1) The change in the discount rate to 4.20% from the prior valuation's discount rate of
4.25% increased the AAL by 1% and increased the Normal Cost by 1%.
2) The prior valuation used an amortization increasing at 3.25% per year at a 4.25%
discount rate. This valuation used an amortization increasing at 3.00% per year at a
4.00% discount rate. This added about 2% to the amortization on a projected basis.
3) Mortality was projected to 2018 versus 2011 for the last valuation. This added about
4% to the Normal Cost and about 4% to the AAL.
4) The change in the participation rate from 85% to 87.5% added 3% to the Normal Cost
and 1% to the AAL.
5) Changes in claims, trends, and related factors increased the Normal Cost by 6% and the
AAL by 2%.
6) Changes in other assumptions decreased the Normal Cost by 13% and decreased the
AAL by 2%.
4Source page 7
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
The following table summarizes the changes in assumptions between the two valuations:
Current Val (1/1/2013) Prior Val (1/1/2011)
Mortality Projected to 2018 Projected to 2011
Employee Participation 87.5% 85%
Spouse % 65% 80%
Plans Pre-65 100% MC/0%IND 100% MC/0% IND
Plans Post-65(Medicare Only) 99% IND/0% MC 99% IND/0 MC
Family % Pre-65/Post-65 55%/27.5% 45%/25%
Claims age 65 COMMC Blended $26,343$20,178 $22,659/$18,571
Claims age 65 COMIND Blended NA NA/NA
Claims age 65 MEDMC/MEDIN NA/$3,521 NA/$3,834
Cumulative Trend Years 1-10
Commercial MC 87% 97%
Commercial IND NA NA
Medicare MC NA NA
Medicare IND 93% 86%
# Actives 630 616
# Retirees and Spouses 569 554
# Retirees and Spouses w Med 506 507
5Source page 8
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Valuation Methodology and Assumptions
VALUATION METHOD
The valuation of the other post-employment benefits is based upon the projected unit credit
actuarial cost method. Under this method, future health care benefit cost is projected using
assumed rates of annual health care cost increases (health care cost trend rates). The cost of
future expected life insurance death benefits is added to the projected medical cost. The
actuarial value of the future expected benefits is allocated proportionately over a health plan
member’s working lifetime.
A normal cost (or service cost) is determined for each year of the member’s creditable service
and is equal to the value of the future expected benefits divided by the total expected number
of years of service. This is similar to a normal cost in a retirement actuarial valuation. The
Actuarial Accrued Liability is the accumulated value of prior normal costs, similar to the
actuarial accrued liability in a retirement actuarial valuation, and represents the liability
associated with prior service.
GASB Statement No. 45
The actuarial cost method used in this valuation is consistent with the Governmental
Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting
by Employers for Postemployment Benefits Other Than Pensions, issued June 2004. It is one
of the allowable cost methods specified in that accounting standard, and is the cost method
most similar to the prescribed method of accounting for these benefits in the private sector
described in the Financial Accounting Standards Board Statement 106 (FAS 106).
Difference Between FAS 106 and GASB Statement No. 45
The GASB Statement No. 45 differs in one important regard from the actuarial cost method
6Source page 9
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
described in the private sector accounting standard. In the FAS 106 methodology, benefits are
considered to be fully earned in the first 10 years of service, since members become vested in
the retirement benefits in 10 years. Compared to the FAS 106 method, the GASB Statement
No. 45 attribution method produces a lower accrued liability for future retirees. The cost of
the benefit is spread over the expected working lifetime of the employee. This makes the cost
of the benefit associated with the years of service the employee is providing. This is more
appropriate for the public sector due to the relative permanence of public entities compared to
private entities. There are other significant differences between the GASB Statement No. 45
and FAS 106, most noticeably in the choice of discount rate. The GASB Statement No. 45
discount rate assumption is discussed below.
ACTUARIAL ASSUMPTIONS
Details of the assumptions used in this valuation are shown in Section II. Here we present a
brief discussion of the assumptions selected.
Demographic and Financial Assumptions
These include discount rates of 7.50%, 4.00%, and 4.20% as well as mortality, disability,
withdrawal and retirement rates. The three discount rates apply to the three scenarios of either
a fully funded, totally unfunded, or partially funded program. A fully funded program is
when the employer contributes 100% of the ARC each year. An unfunded program is where
the only amount contributed is used to pay benefits during the year so no assets accumulate.
A partially funded program is one where the employer makes contributions in excess of the
pay-as-you go figure (and so accumulates assets) but does not fund the full ARC. GASB
Statement No. 45 indicates that the discount rate for a post employment benefit plan should be
based on the degree to which the plan is funded. For an unfunded plan, the rate of return on
the employer’s general assets should be used. The argument for using this rate is that there is
no asset accumulation and funds simply come into the employer’s general assets and quickly
go out. We are recommending a 4.00% rate for this scenario for Canton. For a fully funded
plan, GASB statement No. 45 allows one to use a long-term investment rate such as what
would be used for a defined benefit pension fund. The rate we are currently recommending
7Source page 10
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
for this scenario for Canton is 7.50%, assuming Canton would use a typical type of pension
plan investment policy. For a plan where the Town has been setting aside some funds toward
the liability above the pay-as-you-go amount, but less than the full ARC (“partially” funded),
a rate in between these two levels should be used. The rate we are using for Canton in this
scenario is 4.20%.
• Derivation of the Partially Funded Rate
This rate is based on an analysis of the difference between the ARC and the amount paid for
various interest rates. We developed actual figures at certain key interest rates first. This
group of figures was then used to develop a cubic polynomial approximation to the entire
curve relating the discount rate to the difference between the ARC and the amount funded.
We have assumed the following contribution levels for Canton for future Fiscal years:
Fiscal Year Assumed Contribution
2013 $50,000
2014 $400,000
2015+ $300,000
In view of this schedule, we used $300,000 per year as our target funding level. Based on this
target, we developed a partially funded rate of 4.20%.
It should be noted that all of these rates could change significantly in the future due to
changes in the economic environment. In addition, the partially funded rate could change
significantly should Canton alter its funding policy or adopts a significantly different
investment policy than assumed.
We generally recommend that a municipal entity adopt a funding policy. This is particularly
necessary for Canton, which is funding its OPEB benefits. If Canton has not already done so,
we recommend that this policy be formalized. The GASB statement does not have a
requirement for a formal funding policy document but indicates that a formal funding policy
should be adopted. Thus, we recommend that the Town detail its intent with either a written
document or in the minutes of a meeting.
The discount rate would change if the Town were to alter the rate at which it is funding
8Source page 11
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
benefits. Such a change would lead to a lower discount rate should the funding level be
reduced, or a higher discount rate, should the rate of funding be increased. Based on the
current economic scenario, this would mean the valuation rate could fall to as low as 4.00% or
as high as 7.50%.
Impact of New Pension Eligibility Rules
Starting with employees hired April 2, 2012 and later (we have referred to them as “Tier 2”
employees), Commonwealth of Massachusetts municipal retirees will have new retirement
eligibility rules. Under these rules, we expect a change in retirement patterns, with people
retiring later. Thus, we developed different retirement patterns for the Tier 2 retirees. We have
not changed disability or withdrawal assumptions for the Tier 2 employees. Assumptions for
Tier 1 employees (those hired under the old rules) are not impacted.
Health Care Plan Assumptions
Assumptions unique to post-retirement medical plans include initial annual health care costs
and annual health care cost increase (trend) rates, Medicare eligibility, plan participation and
coverage election rates.
• Current health care costs by age
Initial health care cost assumptions were derived from premium rates for the various health
care plans in-force at January 1, 2013. Typically, we analyze the plans offered in terms of four
different categories: whether the plan offered is Commercial (not integrated with Medicare) or
Medicare Supplement and whether the plan is Indemnity (where reimbursements are a
function of billed charges) or Managed Care (where reimbursements are a function of
negotiated contracts). Grouping the plans in this manner allows us to maintain a reasonable
degree of granularity in our analysis. At the same time, it avoids the problem of a lack of
credibility that often arises if one attempts to analyze every plan separately.
Canton offers plans in two of our categories: two Commercial Managed Care plans and one
Medicare Indemnity plan. Please refer to the “Plan Definition Table” on page 30 for more
9Source page 12
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
details.
For all of these groups, weighted-average costs for each plan grouping were calculated based
on the actual Canton active and retiree population enrollments. For categories with more than
one plan, costs were based on an average weighted by enrollment. However, in order to
capture the effect of aging on health care costs, an assumption is required for the increase in
health care costs as a person ages. We based our aging assumption on a study sponsored by
the Society of Actuaries Health Section in August 2003. The effect of this aging assumption is
illustrated in the table of “Initial Monthly Health Care Costs” in the Actuarial Methods and
Assumptions section of this report.
By age-grading the claim costs, we account for the subsidy of older employees by younger
employees implicit in a flat premium rate (also referred to as the “Attributed Cost” of each
employee). That is, the cost of an active 20-year old employee, for example, is much less
than the cost of a retired 80-year old employee. But, the premiums charged the Town are flat
– the same for both of these people. Thus, the 20-year old in our example is overcharged and
the 80-year old is undercharged by a flat rate premium. Age-grading makes this subsidy or
mischarge explicit in the claim costs at each age. For the purposes of the GASB valuation,
this subsidy needs to be taken into account in determining the retiree liability and normal cost.
The Medicare plan was also age-graded. While there is no subsidy between actives and
retirees in these plans, there is still an escalating cost by age that needs to be reflected. In
particular, it should be noted that from one year to the next, the cost of a person in these plans
(as well as commercial plans) increases due to two factors: (1) year-over-year medical trends
and (2) the fact that the person ages one more year. Without age-grading the Medicare costs,
we would understate the rate of increase in costs and so end up with smaller liabilities and
associated annual costs.
• Cost trends
The claim rates developed using the methodology described above must be projected over the
life of each retiree. For this purpose we use trend rates calculated to reflect the general rate of
10Source page 13
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
increase in Health Care costs. Since we did not have adequate data to develop trend rates
unique to Canton’s experience, we used trends based upon Stone Consulting’s understanding
of current health care rate increases.
We developed different trends for each of the categories of plans for which we also developed
claim costs. These factors were applied to the premium-based claim rates. All trend rates were
based on Stone Consulting’s trend model.
It should be noted that premium rate increases typically include factors other than health care
cost increases, such as aging of the covered population, that are reflected elsewhere in our
valuation methodology. Therefore, premium rate increases are not themselves a proxy for
health care trends. However, they do give an indication of the level of expected cost increases.
As is typical in post-retirement medical valuations, initially higher rates of health care cost
trend are assumed to decrease over time to an ultimate rate consistent with long-term
economic assumptions. Our general set of trend assumptions has Commercial Managed Care
trends that begin at 9% and scale down to 5%. For Medicare, the Indemnity trend rates begin
at 9% and scale down to 6%. These different sets of trend rate reflect our belief that (1)
Managed Care plans, with their negotiated pay levels and tighter controls, will exhibit lower
trends than unmanaged Indemnity plans; and (2) Commercial plans will be subject to
modestly higher trends than Medicare plans due to cost shifting induced by cutbacks in the
federal government’s payment of Medicare costs.
A table showing the trend rates can be found on page 47.
These trend rates should be thought of not as a forecast but as a reasonable progression of
rates based on historic patterns. For many years, health care cost increases have been
particularly volatile, and this actuarial assumption should be reviewed and, most likely, reset
every year or two. Implicit in our health care cost trend assumptions is that the general rate of
medical inflation will moderate due to economic pressure on insurers, employers, employees,
retirees, government entities, and health care providers. As expectations of future health care
11Source page 14
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
cost increases change, they will be reflected in future valuations, resulting in actuarial
gains/losses. These will be incorporated in the future costs and funding schedules. In this
manner, there is a systematic means of adjusting to changes in the health care environment.
• Sensitivity analysis
The effect of increasing health care costs is extremely significant in an actuarial valuation of
post-employment health benefits. As experience emerges the trend assumptions we have used
are unlikely to be realized exactly. To illustrate the effect of different trend rates on the
actuarial valuation results, we have included a sensitivity analysis of the effect on the actuarial
accrued liability, normal cost and annual required contribution of a 1% increase or decrease in
the health care cost trend assumption. This sensitivity analysis applies to the partially funded
scenario at 4.20%. We have also included a sensitivity analysis of the effect on the actuarial
accrued liability, normal cost and annual required contribution of a 0.50% increase or
decrease in the partially funded discount rate assumption.
• Timing
All values discussed in this report are based on a January 1, 2013 valuation. This means that
the first fiscal year of the valuation is July 1, 2013 through June 30, 2014. It is permissible,
under GASB Statement No. 45, to use these values, without adjustment for interest or any
other timing factor for a limited future time period. For an entity such as Canton, which will
be doing a valuation every two years, the standard allows use of data “not more than twenty-
four months before the beginning of the first of two years for which the valuation provides the
ARC.” This means that it is acceptable for us to use the January 1, 2013 results without
adjustment when discussing the 2013 Fiscal Year and the 2014 Fiscal Year. Included are
projected costs for the fiscal year after the 2013 Fiscal Year.
12Source page 15
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Medicare
Medicare eligibility is an important assumption with regard to future costs. Canton has
adopted Section of 18 of Chapter 32B of the Massachusetts General Laws. This section
mandates that if a retiree is eligible for Medicare Part B, they must apply for it. We assume
that active employees who were hired after March 31, 1986 will be Medicare eligible due to
their mandated participation in the Medicare program. Active employees prior to that
employment date are assumed to be 85% Medicare eligible. Adoption of Section 18 leads to
lower costs for the retiree medical plan.
• Medicare Changes
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced
significant changes to the Medicare program and its interaction with employer-sponsored
post-retirement benefits. Medicare beneficiaries are able to participate in a voluntary,
prescription drug coverage program. In order to encourage employers, including public-sector
employers, to continue providing prescription drug coverage to retirees, the Act provides for a
cash subsidy to employers whose prescription drug coverage is deemed to be actuarially
equivalent to the new Medicare Part D drug coverage. This cash subsidy can be used to offset
partially the cost of retiree medical benefits, including potentially reducing the accrued
liability for a portion of the drug benefits provided by a retiree medical plan. The Act may
have additional impact on retiree plan choices, as Medicare-eligible retirees may opt for the
Part D coverage rather than an employer’s plan options. Such changes, if they occur, may
affect the selection of future actuarial assumptions.
GASB has indicated that the subsidy should not be included as part of the OPEB valuation.
The reason being that the subsidy is considered general governmental revenue and as such in
not earmarked towards the funding of OPEB benefits.
• Health plan coverage election
Assumptions must also be made regarding the participation in health plans when active
members retire and when those already retired turn age 65. Using data supplied by Canton,
13Source page 16
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Stone Consulting modeled the behavior of employees as they moved from being active to
being retired or moved from being an under age 65 retiree to being an age 65+ retiree. Such
modeling involved an analysis of the distribution of the plans chosen by current retirees, the
possible plans available to those who will retire in the future, and our opinions about the
likely future course of retiree medical care.
Such models are applicable to actives and to retirees not yet age 65, since these groups will
have the option to select plans at key ages. Some retiree groupings do not require any
modeling. For example, retirees over age 65 are assumed to remain in the plans they have
already selected. If retirees have opted out of Canton coverage, we assume they will continue
to do so. Similarly, those retirees under age 65 already in Medicare plans are assumed to
remain in those plans for life. These are people who are disabled or have certain medical
conditions that qualify them for Medicare early. Pre age 65 retirees in Commercial plans are
assumed to stay in their current plan until age 65. At that point, they may migrate to a
different plan. We have modeled their possible choices at age 65 and reflected that in our
assumptions. Active employees over age 65, once they retire, are assumed to make the same
sorts of selections as retirees at age 65. The following table shows the way we modeled the
choices at each of the key ages.
Canton Participant Behavior at Key Ages
Status Age Pre-65 Retirement 65+ Retirement
Active Under 65 Commercial Managed Care: 100% Medicare Managed Care: 0%
Commercial Indemnity: 0% Medicare Indemnity: 100%
Commercial: <1%
Active 65+ NA Medicare Managed Care: 0%
Medicare Indemnity: 100%
Commercial: <1%
Retired Under 65 Current Plan Medicare Managed Care: 0%
Medicare Indemnity: 100%
Commercial: <1%
or
Actual Plan if already in Medicare
Retired 65+ NA Current Plan
14Source page 17
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Participation
In addition to determining the choices that retirees will make among plans, there is also the
issue of whether the retiree will elect coverage at all. The rate at which retirees elect coverage
is called the “Participation” Rate. Stone Consulting conducted a study of Canton retirees to
determine the historical frequency at which retirees elect to take medical coverage. Based on
this study, we assumed that 87.5% of future eligible retirees and spouses of retirees will elect
health plan coverage. For Life Insurance, we assumed that 87.5% of Canton future retirees
will elect coverage. For Dental Insurance, we assumed that 70% Canton of future retirees will
elect coverage.
It is also necessary to reflect the participation rate of spouses in the Medical plans. Spouses
will not participate at the same rate as employees for various reasons. These can include the
availability of coverage from their own employer and the cost of the spouse coverage on top
of the employee’s coverage. We examined the number of spouses covered both pre-65 and
post-65 and determined the implied percentage of spouses participating. Such analysis took
into account that spouses may “participate” by virtue of being covered under family plans.
The participation rates we developed were 65% for pre-65 and 65% for post-65. We should
also note that our expected frequency of spouses for an employee who is retiring is 80%. In
other words, we expected 8 out of 10 retiring employees to have a spouse. This level, 80%, is
the maximum level of spousal participation in the retiree programs.
15Source page 18
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Data
The participant census data for the valuation study was supplied by Canton and by the
Massachusetts Teachers Retirement System. Participants include Canton active employees
including teachers, retirees, disability retirees, surviving spouses, and inactive former
employees with 10 or more years of service who qualify for a vested retirement benefit.
The participant census data was not audited by Stone Consulting, Inc. However, it was
checked for reasonableness.
Summaries of active participants and Canton retiree census data are included in Section II.
Assets
It is our understanding that the Town of Canton has created a trust fund administered by the
town’s Treasurer. The purpose of the trust is to hold and invest the trust assets for the
exclusive purpose of providing other post-employment benefits such as medical benefits for
retirees. As of December 31, 2012, the market value of the trust fund was $100,000. The
money was invested in cash.
Recently the town has engaged the services of an asset consultant with the intent of
developing an investment policy intended to be similar to a typical pension plan. We have
reflected that the trust fund will be invested in a combination of fixed investments and
equities when developing the discount rate for the partially funded plan.
16Source page 19
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Funding
There are alternative ways to plan for the payment of post-retirement health and life insurance
benefits: continue to fund on a pay-as-you go method, contribute on an ad-hoc basis to a fund
for this purpose, or develop a funding schedule in which the unfunded amount is amortized
over some number of years. With the funding schedule, the normal cost must continue to be
paid each year to keep current.
There is no legal requirement to prefund these post-employment benefit liabilities. Nor does
GASB Statement No. 45 require actual prefunding; however, its accounting requirements will
serve to highlight the substantial unfunded accrued liabilities associated with these benefits.
ILLUSTRATIVE FUNDING SCHEDULE
The GASB Statement No. 45 is designed to account for non-pension post-employment
benefits using an approach similar to the accounting for retirement benefits. It develops an
Annual Required Contribution (“ARC”) that is based on the Normal Cost plus an amortization
of the Unfunded Actuarial Accrued Liability (“UAAL”). To the extent that actual
contributions equal to the ARC are made by the employer to the post-employment health
benefit plan, no additional liability will be required to be shown on Canton’s balance sheet.
Employer contributions may be in the form of benefit or premium payments or contributions
to a fund set aside for future benefit payments. Such a fund must meet the requirements set
out in the accounting standard.
We have calculated an illustrative funding schedule for the other post-employment benefits,
consistent with the GASB Statement No. 45. This funding schedule assumes that Canton
funds 100% of the ARC and begins with Canton’s Fiscal Year 2013. The full schedule is
shown in Section II.
17Source page 20
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Development of Funding Schedule and Annual Required Contribution
The contribution amount under a fully funded scenario using the 7.50% discount rate for
Fiscal 2013 is $7,932,212. Part of this comes from the amortization of the January 1, 2013
Unfunded Actuarial Accrued Liability of $89,218,181. This is equal to the funded AAL of
$89,318,181 less the funding to date of $100,000. The UAAL is amortized over thirty years
using an increasing amortization payment at the rate of assumed payroll increase due to
inflation (3.00%). The funding contribution is the amortization payment plus the projected
normal cost. As noted earlier, under the GASB Statement No. 45, thirty years is the maximum
amortization period allowed. Shorter periods of time and/or other amortization patterns could
be considered. The thirty-year funding schedule shown produces the lowest possible initial
fiscal year contribution under the GASB parameters. It should be noted that the contribution is
assumed to be made at the end of the fiscal year, so the first contribution is assumed to be
made June 30, 2013. The amount of the amortization payment in the first year is $5,167,327.
For the purposes of this schedule, we have not adjusted the January 1, 2013 liability for
timing by applying interest to bring it to any future date.
Yearly contributions will increase, as both normal cost and amortization payments increase
each year.
The remaining part of the ARC is the cost of the current year’s benefit accrual, the normal
cost, of $2,764,885.
Cash Flow Consideration
We have analyzed the cash flow of a funded post-employment medical trust by comparing the
expected payouts of claims over the thirty years period to expected contribution levels. If the
actuarial assumptions are met, the funded amounts will be sufficient to cover annual benefit
payments each year. Prior to adopting a funding schedule we recommend additional analysis
18Source page 21
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
be conducted to examine the effects of potential actuarial gains and losses on the cash flow.
FUNDING VERSUS PAY-AS-YOU-GO VERSUS PARTIAL FUNDING
Currently, most Massachusetts governmental entities are paying for their post-employment
medical benefits on a pay-as-you-go basis. This means that no amount in excess of the actual
cost for the year is paid. All such entities must report figures for GASB Statement No. 45
based on the unfunded discount rate. Canton has elected, to date, to make some additional
contributions above the pay-as-you-go cost. However, it is not funding the full ARC. This
level of contribution is referred to as “partial funding.”
In order to understand the impact of partially funding versus funding completely, a
comparison of the ARCs and normal costs under both scenarios, and the pay-as-you-go
amount is illustrated on the following chart:
The chart depicts the advantage to the entity of even a partial funding policy, since the ARC
and Normal Cost are significantly higher under the unfunded versus the funded scenario.
As can be seen in the funding schedule, the retiree medical plan’s normal cost will increase
each year, so that by the time the initial unfunded liability is fully amortized, the required
annual contribution will be substantially higher than is illustrated here for the first year. The
pay-as-you-go costs will also increase dramatically as more and more employees retire. A
projection of annual expected retiree pay-as-you-go costs is included with the funding
19Source page 22
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
schedule.
It is very important to understand that, in order to utilize the higher discount rate that goes
with the fully funded or partially funded scenarios, there must be a “Funding Policy.” That is,
the Town must intend to continue to payments and, in the future, must actually make them.
Should the policy not be followed in future years, an adjustment to the discount rate would
need to be made. As the figures above illustrate clearly, there is an iterative relationship
between the degree of funding and the amounts that must be shown as liabilities, amortization
payments, and normal cost figures. Lower funding levels lead to higher amounts for these key
figures.
The partial subsidy of prescription drug benefit costs that is available under the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 is a potential source of funds
for a portion of the retiree medical costs. To the extent that this subsidy reimburses Canton for
drug benefits it would already be paying for, the additional cash from the subsidy could be
used to help pre-fund future benefits. The magnitude of any future subsidy is only a small
portion of the additional cost to fund. Other plan design changes, such as a carve-out of
prescription drug coverage, may yield greater opportunities for savings.
DETERMINATION OF THE NET OPEB OBLIGATION (NOO)
The Statement does not require Canton to put its entire Actuarial Accrued Liability on its
books immediately as a liability. Rather, a cost is applied to its assets each year. Over time
this cost, which is called the OPEB Cost, will add up to the total liability. The total liability at
any point in time is called the Net OPEB Obligation (NOO).
For the first year of funding, the OPEB Cost and ARC are identical. Amounts contributed
toward the cost of other post-employment benefits must then be deducted. These amounts
include: 1) actual premiums paid; 2) the extra implied costs or “implicit subsidy” associated
with covering retirees; 3) any additional amounts paid during the year. The Net OPEB Cost is
the OPEB Cost less these amounts. For year one (which was Fiscal 2009), where there is no
20Source page 23
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
prior NOO on the financial statement, the Net OPEB Cost is the same as the Net OPEB
Obligation. Starting year two, the OPEB Cost must recognize not only the Normal Cost and
Amortization Cost for the year but also add interest on the prior year’s NOO as well as
subtract Annual Required Contribution (ARC) adjustment to prevent double counting of the
prior year’s NOO. The interest and the ARC adjustments somewhat offset each other so the
net impact is not large. The total contributions are then subtracted from the OPEB Cost and
the result is added to the prior year’s NOO. In this manner, the difference between each
year’s ARC and the contributions are accumulated. Please refer to the tables on pages 22 and
23 in the following discussion.
We have assumed that Canton continues its current policy and contributes partially to fund the
liability. A schedule of these payments is explicitly shown on page 23. We have not illustrated
this scenario with a “funding” schedule. The following chart projects the ARC, Pay-As-You-
Go, Annual OPEB Cost and the Net OPEB Obligation for 8 years under the partially funded
scenario. Note that the figures for the years 2009-2012 come from the Town’s annual
financial report. Figures for 2013 and forward come from this valuation report. The Annual
OPEB cost is the ARC plus an adjustment for interest not included in the ARC calculation.
The Net OPEB Obligation is the accumulation of the Annual OPEB Cost minus any
contributions. This is the amount that is subtracted from the Net Assets on your balance
sheet. In the unfunded case, the contributions are the attributed pay-as-you-go amounts.
If a contribution different from the scheduled $400,000 for Fiscal 2014 is made, the
Fiscal 2014 NOO and related numbers need to be adjusted.
21Source page 24
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
CALCULATION OF NET OPEB OBLIGATION (NOO)
"Funding" Schedule at 4.25% (2009 - 2012), 4.20% (2013+)
Normal Interest on ARC OPEB Total Change in
Year UAL Cost¹ Amort.¹ ARC NOO¹ Adjust.¹ Cost Contribs.¹ NOO NOO
2009 $138,978,486 $5,583,052 $5,133,888 $10,716,940 NA NA $10,716,940 $4,413,098 $6,303,842 $6,303,842
2010 $146,199,503 $5,820,332 $5,567,443 $11,387,774 $283,673 $240,057 $11,431,390 $4,842,461 $6,588,929 $12,892,771
2011 $130,885,254 $6,277,254 $5,307,967 $11,585,221 $547,943 $522,858 $11,610,306 $4,261,852 $7,348,454 $20,241,225
2012 $138,640,441 $6,822,159 $5,803,915 $12,626,074 $860,252 $847,360 $12,638,966 $4,557,155 $8,081,811 $28,323,036
2013 $142,652,366 $5,942,736 $6,317,558 $12,260,294 $1,189,568 $1,254,325 $12,195,537 $4,526,092 $7,669,445 $35,992,480
2014 $150,214,873 $6,192,331 $6,880,578 $13,072,909 $1,511,684 $1,648,632 $12,935,961 $5,179,872 $7,756,089 $43,748,569
2015 $157,680,290 $6,452,409 $7,482,069 $13,934,478 $1,837,440 $2,075,908 $13,696,010 $5,421,990 $8,274,020 $52,022,589
2016 $165,485,226 $6,723,410 $8,148,650 $14,872,060 $2,184,949 $2,561,642 $14,495,367 $5,538,992 $8,956,375 $60,978,964
¹ Total Contributions for all fiscal years include the implicit premiums paid. Please see the following page for a schedule of the additional
contributions assumed.
22Source page 25
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
CALCULATION OF NET OPEB OBLIGATION (Alternative Presentation)
Fiscal 2015 Fiscal 2014 Fiscal 2013 Fiscal 2012 Fiscal 2011 Fiscal 2010 Fiscal 2009
AAL $158,259,954 $150,371,173 $142,752,366 $138,640,441 $130,885,254 $146,199,503 $138,978,486
Assets $579,665 $156,300 $100,000 $0 $0 $0 $0
UAL $157,680,290 $150,214,873 $142,652,366 $138,640,441 $130,885,254 $146,199,503 $138,978,486
Service Cost $6,452,409 $6,192,331 $5,942,736 $6,822,159 $6,277,254 $5,820,332 $5,583,052
Amortization of unfunded accrued
liability $7,482,069 $6,880,578 $6,317,558 $5,803,915 $5,307,967 $5,567,443 $5,133,888
ARC $13,934,478 $13,072,909 $12,260,294 $12,626,074 $11,585,221 $11,387,774 $10,716,940
Interest on NOO $1,837,440 $1,511,684 $1,189,568 $860,252 $547,943 $283,673 $0
ARC Adjustment $2,075,908 $1,648,632 $1,254,325 $847,360 $522,858 $240,057 $0
OPEB Cost $13,696,010 $12,935,961 $12,195,537 $12,638,966 $11,610,306 $11,431,390 $10,716,940
Premiums and Implicit Subsidy Paid $5,121,990 $4,779,872 $4,476,092 $4,457,155 $4,261,852 $4,842,461 $4,413,098
Cash contributions1 $300,000 $400,000 $50,000 $100,000 $0 $0 $0
Total Contributions $5,421,990 $5,179,872 $4,526,092 $4,557,155 $4,261,852 $4,842,461 $4,413,098
Change in NOO $8,274,020 $7,756,089 $7,669,445 $8,081,811 $7,348,454 $6,588,929 $6,303,842
NOO Beginning of Fiscal Year $43,748,569 $35,992,480 $28,323,036 $20,241,225 $12,892,771 $6,303,842 $0
NOO End of Fiscal Year $52,022,589 $43,748,569 $35,992,480 $28,323,036 $20,241,225 $12,892,771 $6,303,842
1
If the cash contribution shown for Fiscal 2014 is different from $400,000, the change in the NOO and the NOO need to be adjusted.
23Source page 26
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Implementation
According to the GASB Statement No. 45, its provisions would be effective for Canton fiscal
years beginning after December 15, 2007. The timing is due to Canton being a “Tier 2
government under GASB 34”. In the first fiscal year of adoption, Fiscal 2009, Canton
recorded a liability of $6,303,842 on its balance sheet to the extent that its contributions
(including benefit payments) for other post-employment benefits were less than the Annual
Required Contribution (“ARC”) determined in accordance with the GASB standard and
described above. The total actuarial liability is determined by a valuation to be performed at
least every two years. The total actuarial liability is reduced by any assets set aside to pre-fund
the post-retirement benefits, with the resulting unfunded actuarial liability being amortized
according to a funding schedule similar to that illustrated in this report. By the end of Fiscal
2012, Canton had recorded a figure of $28,323,036 for its NOO.
To be considered a funded system, the retiree medical plan assets must be “segregated and
restricted in a trust, or equivalent arrangement, in which (a) employer contributions to the
plan are irrevocable, (b) assets are dedicated to providing benefits to retirees and their
beneficiaries, and (c) assets are legally protected from creditors of the employers or plan
administrator, for the payment of benefits in accordance with the terms of the plan.” (GASB
45, p. 47, “Plan Assets”). Our understanding is that Canton has set up such a trust and
therefore Canton receives “credit” under the GASB accounting standard for assets set aside to
pre-fund post-retirement benefits.
24Source page 27
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Recommendations and Comments
Post-employment medical benefits are a significant long-term liability that is only now
starting to be addressed by Massachusetts government employers. In managing this liability,
any governmental entity needs to consider the parameters that can significantly influence the
level of the liability. To facilitate such a review, we recommend that Canton continues to
maintain a continuing group that is cognizant of the relevant financial and employee benefits
issues raised by GASB Statement No. 45. We would recommend that the group review the
following:
1) Funding Policy: As previously discussed, the funding policy is critical to the valuation
not only because it impacts the funds backing the liability but also because it impacts
the discount rate that is used to calculate all of the relevant figures. Canton needs to
bear in mind that it is the formulation of a funding policy that is essential, not simply
the contribution of funds. Of course, if a funding policy is developed, it needs to be
implemented, not just formulated. Thus, we recommend that the Town maintain a
written funding policy that it reviews each year. This is especially the case now that
Canton is partially funding its liability.
2) Plan Design: One of the major factors influencing costs is the design of the plans that
Canton offers to retirees. To the extent that any part of these plans changes materially,
costs my either increase or decrease. In order to keep costs under control, the Town
should review the design of all its medical plans annually. Changes in plan
characteristics such as deductibles, coinsurance levels, out-of-pocket maximums, and
covered services can help mitigate the impacts of ever-increasing medical costs. In
addition, the Town should review the networks it is using to be sure that it is getting
the most competitive reimbursement levels available.
3) Contribution Levels: The extent to which the Town subsidizes the cost of retiree
benefits is one of the most significant factors in the ultimate costs. Under the GIC,
25Source page 28
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
retired Canton employees and their spouses pay 25% of the premium cost for their
medical insurance. This is about average for Massachusetts municipal entities. At the
extremes, some municipal entities require as much as 50% for all participants (the
most that retirees can be asked to contribute) while other require as little as 10%.
Contribution levels have a double impact on costs. First off, there is a direct
relationship between contributions and costs in that higher contribution levels mean
that more of the cost of the plan is born by the Town. Secondly, higher contribution
levels lead to higher participation rates because the plan becomes less costly to the
retiree. In the case of cities and towns where a substantial portion of the medical costs
are paid by the employer, participation rates tend to be very high. Canton’s
participation level of 87.5% for retirees is about what we would expect for a
municipality with this contribution level.
In general, a very-well subsidized plan will have many participants enrolled at a high
cost. Also, to the extent that other employers are cutting back or eliminating their
programs, there is increased likelihood that a favorably subsidized plan will be elected
by retirees, since no coverage or only very expensive coverage may be available from
other sources such as their spouse’s employer. There has been a very definite move
toward reducing the subsidies paid by Massachusetts public entities.
4) Eligibility: The extent to which retirees are eligible for benefits is another variable that
very directly impacts costs. Canton should review its eligibility criteria each year to be
sure that they are accord with town goals for controlling costs and for providing well-
deserved benefits for those who have worked for the town. Retirement system policies
can also affect the eligibility for benefits. In the case of Canton, the Town pays for
medical benefits for those who reach ten years of service, even if they do not retire
from the Town immediately upon separation from service. This will produce a higher
liability and ARC for Canton than if only those actually retiring from the Town were
covered.
26Source page 29
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
In addition to reviewing the above items regularly, we recommend that the Town continue
working on improving its data. This is an issue faced by virtually all public entities with
respect to GASB Statement No. 45. Some of the typical issues are:
1) Be sure that it has a record of those eligible for coverage who do not take coverage.
This should cover not only actives who are not enrolled, but retired employees who
opted out.
2) Maintain as part of the database whether an employee is a member of the
Massachusetts Teachers’ Retirement System.
27Source page 30
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
SECTION II
ACTUARIAL VALUATION DETAILS
Population Data
A. DISTRIBUTION BY AGE: INACTIVES, RETIREES, BENEFICIARIES,
TERMINATED VESTEDS AND SURVIVORS WITH MEDICAL COVERAGE
Age Number(1)
0-19 0
20-24 0
25-29 0
30-34 0
35-39 1
40-44 0
45-49 1
50-54 8
55-59 10
60-64 78
65-69 139
70-74 122
75-79 89
80-84 59
85-89 39
90-94 16
95-99 7
100+ 0
TOTAL 569
(1)
Includes only retired employees and vested terminees, beneficiaries, and
survivors with medical coverage.
28Source page 31
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
B. FUTURE RETIREES – ACTIVE PARTICIPANTS
# OF PARTICIPANTS*
Current Plan Medicare Eligible Pre-Medicare Eligible Total
No Medical/ Unknown 160 4 164
Indemnity 0 0 0
Managed Care 449 17 466
TOTAL 609 21 630
* “Pre-Medicare eligible” means hired March 31, 1986 or before and “Medicare eligible”
means hired after March 31, 1986. Employees hired March 31, 1986 or before do not
contribute to Medicare.
29Source page 32
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
PLAN DEFINITION TABLE
Ee.
Indv. Retirees Family Retirees Contrib.
Plan Name Plan Type Rate¹ Enrolled Rate¹ Enrolled %
Commercial Managed
BCBS HMO Care $662.00 36 $1,740.00 26 25.00%
Commercial Managed
BCBS PPO Care $908.00 49 $2,154.00 23 25.00%
MEDEX Medicare Indemnity $373.00 372 NA NA 25.00%
Dental Basic Dental $23.10 116 $78.54 135 25.00%
Dental Enhanced Dental $35.30 69 $127.34 68 25.00%
Life (5000) Life $8.15 408 NA NA 25.00%
¹Rates at 1/1/2013
30Source page 33
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
C. DISTRIBUTION BY AGE AND SERVICE: ACTIVE PARTICIPANTS
Age Group 0-4 5-9 10-15 15-19 20-24 25-29 30-34 35-39 40+ Total
0-19 0 0 0 0 0 0 0 0 0 0
20-24 9 0 0 0 0 0 0 0 0 9
25-29 42 2 1 0 0 0 0 0 0 45
30-34 28 32 3 0 0 0 0 0 0 63
35-39 24 24 25 3 1 0 0 0 0 77
40-44 35 23 27 21 4 0 0 0 0 110
45-49 20 20 20 17 10 2 0 0 0 89
50-54 11 16 28 13 12 11 0 0 0 91
55-59 10 13 21 13 11 8 1 4 0 81
60-64 6 8 7 5 5 5 3 1 0 40
65-69 2 5 6 1 3 1 0 0 0 18
70-74 0 1 0 0 0 1 0 0 0 2
75-79 0 0 0 1 1 1 0 0 0 3
80-84 0 0 1 0 0 0 0 0 0 1
85-89 0 0 0 0 0 0 0 0 1 1
90-94 0 0 0 0 0 0 0 0 0 0
95-99 0 0 0 0 0 0 0 0 0 0
100+ 0 0 0 0 0 0 0 0 0 0
TOTAL 187 144 139 74 47 29 4 5 1 630
31Source page 34
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
SUMMARY OF RESULTS
Actives
- Already in Medicare 0
- Pre-Medicare Coverage 609
- Post-Medicare Coverage 21
Total 630
Retired, Disabled, Survivors, Vesteds, and 569
Beneficiaries
Actuarial Accrued Liability and Unfunded Actuarial Accrued Liability (as of
January 1, 2013)
At 7.50% At 4.20% At 4.00%
Discount Discount Discount
AAL Active Employees $34,789,676 $67,664,148 $70,887,127
AAL Current Retirees $54,528,505 $75,088,218 $77,137,804
TOTAL AAL $89,318,181 $142,752,366 $148,024,931
FUNDING $100,000 $100,000 $100,000
TOTAL UAAL $89,218,181 $142,652,366 $147,924,931
Normal (Service) Cost (as of January 1, 2013)
At 7.50% At 4.20% At 4.00%
Discount Discount Discount
TOTAL $2,764,885 $5,942,736 $6,267,296
32Source page 35
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
SUMMARY OF RESULTS
(continued)
Annual Required Contribution (ARC) Calculation
At 7.50% Discount At 4.20%Discount At 4.00% Discount
Amortization of UAAL $5,167,327 $6,317,558 $6,402,945
(26 yrs for Unfunded, 30
Yrs for Funded)
Normal Cost $2,764,885 $5,942,736 $6,267,296
TOTAL $7,932,212 $12,260,294 $12,670,241
Expected Claims
• Fiscal 2013 $4,476,091
Schedule of Funding Progress Other Post-Employment Benefits
(Dollars in Thousands)
Actuarial
Accrued UAAL as a
Actuarial Liability (AAL) Unfunded Percentage
Actuarial Value of [Projected Unit AAL Funded Covered of Covered
Valuation Assets Credit] (UAAL) Ratio Payroll Payroll
Date (a) (b) (b-a) (a/b) (c) (b-a)/c)
(1)
1/1/2009 $0 $138,978 $138,978 0.00% $32,236 431.1%
1/1/2011 $0 $130,885 $130,885 0.00% $34,416 380.3%
1/1/2013 $0 $148,024 $147,924 0.07% $36,479 405.5%
(1)
Originally $80,263, and later revised.
33Source page 36
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
RESULTS BY ENTERPRISE FUND
Sewer3
Normal Interest ARC OPEB Total Change in
Year UAL Cost¹ Amort.¹ ARC on NOO4 Adjust.¹ Cost Contribs.¹ NOO NOO
2009 $582,629 $29,587 $21,522 $51,109 NA NA $51,109 $113 $50,996 $50,996
2010 $548,700 $30,844 $20,895 $51,739 $2,167 $1,942 $51,965 $124 $51,841 $102,838
2011 $491,224 $33,266 $19,921 $53,187 $4,371 $4,171 $53,387 $109 $53,278 $156,116
2012 $546,669 $34,679 $22,885 $57,565 $6,635 $6,535 $57,664 $114 $57,550 $213,666
2013 $832,574 $45,359 $36,872 $82,231 $8,974 $9,462 $81,742 $5,4262 $76,316 $289,982
2014 $909,267 $47,264 $41,649 $88,913 $12,179 $13,283 $87,810 $5,814 $81,996 $371,978
Water3
Normal Interest ARC OPEB Total Change in
Year UAL Cost¹ Amort.¹ ARC on NOO4 Adjust.¹ Cost Contribs.¹ NOO NOO
2009 $1,488,146 $65,149 $54,972 $120,121 NA NA $120,121 $5,343 $114,778 $114,778
2010 $1,401,485 $67,918 $53,370 $121,288 $4,878 $4,371 $121,795 $5,863 $115,932 $230,711
2011 $1,254,681 $73,250 $50,883 $124,132 $9,805 $9,356 $124,581 $5,160 $119,421 $350,132
2012 $1,379,100 $76,363 $57,733 $134,096 $14,881 $14,658 $134,319 $5,396 $128,923 $479,055
2013 $2,051,997 $89,282 $90,876 $180,157 $20,120 $21,216 $179,062 $18,1382 $160,924 $639,979
2014 $2,212,698 $93,032 $101,352 $190,123 $26,879 $29,314 $191,949 $19,431 $172,518 $812,497
34Source page 37
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
RESULTS BY ENTERPRISE FUND
(continued)
Rink3
Normal Interest ARC OPEB Total Change in
Year UAL Cost¹ Amort.¹ ARC on NOO4 Adjust.¹ Cost Contribs.¹ NOO NOO
2009 $310,544 $22,414 $11,507 $33,921 NA NA $33,921 $163 $33,758 $33,758
2010 $326,679 $23,366 $12,479 $35,845 $1,435 $1,286 $35,995 $178 $35,816 $69,575
2011 $292,460 $25,201 $11,897 $37,098 $2,957 $2,822 $37,234 $157 $37,077 $106,651
2012 $309,788 $27,388 $13,009 $40,397 $4,533 $4,465 $40,465 $168 $40,297 $146,949
2013 $319,745 $23,858 $14,160 $38,018 $6,172 $6,508 $37,682 $164 $37,518 $184,467
2014 $357,866 $24,860 $16,392 $41,252 $7,748 $8,449 $40,550 $176 $40,374 $224,841
Black boxed area numbers based on prior financial except for Rink which has been restated to exclude Recreation. Amounts for the
Rink for 2009-2012 were restated using the ratio (separately for the AAL, NC and contributions) of the 2013 Rink only amount to the
total for the whole Town. These ratios were applied to the appropriate total figures in the prior years.
¹For all years, Total Contributions are equal to the implicit premiums paid.
2
Increase from 2012-2013 due to employees categorized sewer and water in 2013, but not in the prior valuation.
3
One retiree has been added who were actives in 2011. The town has not been able to identify retirees and their beneficiaries who were
previously employees of the enterprise funds. Therefore, these amounts are understated due to the lack of data.
4
Interest rate set at 4.2% for the entire Town of Canton including the enterprise funds.
35Source page 38
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Funding Schedule at 7.50%
Projected
Year-End Annual
Fiscal Year Normal Cost1 Amortization2 Contribution UAAL Benefit Cost3
2013 2,764,885 5,167,327 7,932,212 90,354,668 4,476,092
2014 2,972,251 5,322,347 8,294,598 91,409,745 4,779,872
2015 3,195,170 5,482,017 8,677,188 92,372,307 5,121,990
2016 3,434,808 5,646,478 9,081,286 93,230,266 5,238,992
2017 3,692,419 5,815,872 9,508,291 93,970,474 5,494,341
2018 3,969,350 5,990,348 9,959,698 94,578,635 5,869,749
2019 4,267,051 6,170,059 10,437,110 95,039,219 6,065,476
2020 4,587,080 6,355,161 10,942,241 95,335,363 6,306,045
2021 4,931,111 6,545,815 11,476,927 95,448,763 6,580,320
2022 5,300,944 6,742,190 12,043,134 95,359,566 6,862,852
2023 5,698,515 6,944,456 12,642,971 95,046,244 7,103,365
2024 6,125,904 7,152,789 13,278,693 94,485,464 7,340,596
2025 6,585,347 7,367,373 13,952,720 93,651,948 7,503,538
2026 7,079,248 7,588,394 14,667,642 92,518,320 7,621,848
2027 7,610,191 7,816,046 15,426,237 91,054,944 7,687,303
2028 8,180,956 8,050,527 16,231,483 89,229,748 7,712,854
2029 8,794,527 8,292,043 17,086,570 87,008,033 7,724,699
2030 9,454,117 8,540,804 17,994,921 84,352,271 7,919,674
2031 10,163,176 8,797,029 18,960,204 81,221,885 8,077,069
2032 10,925,414 9,060,939 19,986,353 77,573,017 7,971,215
2033 11,744,820 9,332,768 21,077,587 73,358,268 8,070,735
2034 12,625,681 9,612,751 22,238,432 68,526,431 8,036,619
2035 13,572,607 9,901,133 23,473,741 63,022,195 8,044,112
2036 14,590,553 10,198,167 24,788,720 56,785,830 7,743,897
2037 15,684,844 10,504,112 26,188,957 49,752,846 7,644,101
2038 16,861,208 10,819,236 27,680,443 41,853,631 7,563,401
2039 18,125,798 11,143,813 29,269,611 33,013,055 7,472,405
2040 19,485,233 11,478,127 30,963,360 23,150,048 7,302,321
2041 20,946,626 11,822,471 32,769,097 12,177,145 7,080,174
2042 22,517,623 12,177,145 34,694,768 0 6,916,230
1
Assumes 7.50% annual increase in normal cost and a static group of actives
2
Asssumes 3.00% annual increase in amortization payment
3
The Pay-As-You-Go amount is for the current group of actives and retirees and is shown for the calendar year. It does not
include any future hires. It is not directly comparable to the funding contribution but it included for illustrative purposes
only. It does illustrate in the short-term, the estimated amount of claims costs for retirees. However, the retiree amount is
expected to grow as new employees retire or become disabled.
36Source page 39
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
Sensitivity Analysis
The results of any actuarial valuation are sensitive to the assumptions used. That is, a change in
an actuarial assumption will produce a change in the actuarial accrued liability and/or normal
cost each year of the valuation. To illustrate this sensitivity, we performed valuations in which
we changed two different inputs: the trend rate and the discount rate.
A) Trend Rate Sensitivity
For postretirement medical plans in particular, the calculated actuarial values are highly
sensitive to the assumed rate of health care cost trend. This is due to the compounding effect of
the annual trend rates assumed for medical costs, as opposed to pension valuations where
benefit levels typically remain fixed.
The following table illustrates the effect on our valuation results of a 1% increase or decrease in
the assumed rates of health care cost trend in each year.
As of January 1, 2013 Health Care Cost Trend Rates
As Reported
(4.20%) +1% Each Year -1% Each Year
Liability for:
• Future Retirees $67,664,148 $85,404,093 $54,398,467
• Current Retirees, Beneficiaries,
and Survivors $75,088,218 $84,279,319 $67,934,361
Total AAL $142,752,366 $169,683,412 $122,332,828
Normal Cost $5,942,736 $7,232,009 $4,626,437
Annual Required Contribution
for Fiscal Year 2013: $12,260,294 $14,742,246 $10,039,687
The cumulative effect of a 1% increase in health care cost trend increases the AAL by
approximately 19%, the normal cost by 22%, and the ARC by 20%. A 1% decrease in trend
would decrease the AAL by 14%, the normal cost by 22% and the ARC by 18%.
37Source page 40
Town of Canton
Other Post-Employment Benefits Valuation
as of January 1, 2013
There is the likelihood – based on historical experience – of significant deviations from the
smooth rates of health care cost increase typically projected in any actuarial valuation.
Therefore, emerging experience under the plan is likely to differ from the assumptions made as
of any valuation date. This will produce actuarial gains and losses each year, even if the
underlying assumptions remain reasonable for the future. Amortization of gains and losses will
affect the updated funding schedule calculated at any point in the future.
B) Discount Rate Sensitivity
We also examined the sensitivity of the various key numbers to changes in the 4.20% discount
rate. For this testing, we varied the discount rate by 0.50%, or in other words, we used rates of
3.70% and 4.70%. The following table shows the results we obtained:
As of January 1, 2013 Discount Rates
As Reported Minus 0.50% Plus 0.50%
(4.20%) (3.70%) (4.70%)
Liability for:
• Future Retirees $67,664,148 $76,124,375 $61,617,848
• Current Retirees, Beneficiaries, and
Survivors $75,088,218 $79,820,091 $72,159,582
Total AAL $142,752,366 $155,944,466 $133,777,430
Normal Cost $5,942,736 $6,798,600 $5,348,598
Annual Required Contribution
for Fiscal Year 2013: $12,260,294 $14,098,517 $10,937,078
Thus, the cumulative effect of a 0.50% increase in the discount rate is to decrease the AAL by
approximately 6%, the normal cost by 10%, and the ARC by 11%. A 0.50% decrease in the
discount rate would increase the AAL by 9%, the normal cost by 14% and the ARC by 15%. It
is prudent, and GASB Statement No. 45 requires, an updated actuarial valuation be performed
periodically. For an entity of Canton’s size, a new valuation will be required at least every two
years.
38