Town of North Castle – Employee Benefit Policy Manual

Estimated Savings Resulting From Benefit and OPEB Policy Revisions

Background

The Town Board of North Castle New York has developed a new policy manual to revise and clarify its employee benefit policies and practices for employees and retirees not covered by its labor union agreements. Prior to the development of this manual, there had not been a comprehensive documentation of Town benefit policies, and human resources decisions had been made on the basis of ongoing practice.

A number of new policies related to medical benefits, both pre retirement and post retirement (OPEB), are being implemented with the new manual. The Town Supervisor requested an estimate of the financial impacts of these changes.

Methodology

The methodology used was designed to be materially consistent with that used in the Town’s 2008 Postretirement Welfare Benefit GASB 45 Actuarial Valuation to estimate Projected Benefit Payments. [1] This estimate was not an Actuarial Study nor was it prepared by an Actuary.

Using a series of economic and actuarial assumptions, seriatim (person by person) estimates of total benefit costs were made over the projected lifetimes of each of the employees subject to the policies in the new manual. These employees fell into two groups: Town retirees and non-union Town employees. Projections were made first under the current plan structure and then under the revised policies contained in the new policy manual. The estimated savings are the difference in total costs between the old and new policies.

For both groups an estimate of the costs of post retirement medical benefits (OPEB) including health and vision was calculated over the lifetimes of each employee. The total benefit costs occur over approximately 40 years tracking the longest expected lifetime of current employees and / or retirees. However, the majority of those costs occur in the next 18 years. As these benefit liabilities are not being funded, the estimate is presented as a total over time as opposed to a discounted present value. This is appropriate as the future costs are not being funded and thus the Town will be subject to the total expense as incurred in future years.

In addition, for the current employees, a separate short tern annual estimate of benefit cost savings was prepared over the next five years over and above the OPEB benefits.

Major Assumptions

Population Census / The population census used in the estimate consisted of 25 current retirees of the Town of North Castle and 13 current full time non-union employees who would be subject to the changes in the plan as provided by Town management. Certain non-union employees were excluded from the study where it was believed legal or other restrictions precluded them from being subject to the changes. All data was based on specific individuals except for one open position, which is expected to be filled soon.
Retirement Assumptions / It was assumed that each of the current employees would retire at their 62 birthdays or completion of 20 years of service as provided for in the new policy manual. This represents a conservative assumption as any current employee who might retire earlier, would increase the savings under the new policy.
Mortality / Based on the 2007 Social Security Administration Period Life Table. [2]
Termination Rates / It was assumed that no current employee would be terminated.
Health Care Trends / It was assumed that health care inflation will run at 6.5% over the period of the estimate.
Plan Types / Use of Individual or Family plans assumed to continue as current for each employee in the estimate. Those under 65, will switch to Medicare on age 65.
New Employees / No assumptions or savings were attributed to employees added to replace any current employee retiring over the period of the estimate. This represents a conservative assumption relating to the estimate of savings.
Major Plan Changes Considered / Change in retirement age from 55 to 62;
Change in years of service required from various to 20;
Change in employee contributions from various to 30%
Implementation of lifetime benefit cap per draft manual. [3]
Elimination of Dental / Vision Coverage.

Findings

The following is the savings estimate resulting from the changes in the benefit policies contained in the new Town of North Castle Employee Benefits Manual:

Savings on Retirement Medical Expenses (OPEB) Over Life of Employees
Current Plan Cost / New Plan Cost / Savings
Current Retirees / $7,468,087 / $3,543,709 / $3,924,378
Current Employees / $15,856,526 / $2,336,880 / $13,519,646
Total Cost / $23,324,613 / $5,880,589 / $17,444,024
New Plan Savings on Non Retirees
Current / New / One Year / Next 5 Years
$450,959.00 / $265,285.00 / $185,674 / $1,057,161

[1] A Postretirement Welfare Benefit GAB 45 Actuarial Valuation As of Jan 1, 2008 for the Town of North Castle; The USI Consulting Group - Appendix II p. 22

[2]

[3] Town of North Castle Compensation and Benefits Manual; Draft June 13, 2012 part 6-p.3