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AN ORDINANCE ESTABLISHING A FUNDING FRAMEWORK THAT USES BOTH ANNUAL APPROPRIATIONS AND THE OPEB TRUST FUND TO PAY THE COST OF OTHER POST-EMPLOYMENT BENEFITS.
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CITY PROPOSAL:
The city of Duluth does ordain:
Section 1. that Chapter 20 of the Duluth City Code 1959, as amended, is hereby amended by adding a new Article IV thereto which reads as follows:
Article IV. Funding Retiree Healthcare Costs.
Sec. 20-36 Policy and purpose.
Minnesota Statues, Section 353.95 provides for the establishment of an irrevocable other post-employment benefits (“OPEB”) trust fund to finance payments owed by the city on behalf of retired employees for health insurance costs. Since the establishment of the city’s OPEB trust fund in 2007, the City has accumulated significant assets from the investment of annual contributions made into the fund.
In order to provide budgetary certainty, predictability and stability, while ensuring the viability and sustainability of the retiree health benefits for eligible employees and retirees, the city is seeking to create provide a long-term funding framework that protects the value of the City’s OPEB trust while at the same time providing financial resources sufficient to meet future retiree insurance obligations. The assets accumulated in the trust, in conjunction with the current interest rate environment, provide the City with an opportunity to purchase fixed income investments through the State Board of Investment that will guarantee future cash flows. The future cash flows reduce the city’s dependence on annual appropriations and pooled investment earnings to fund future retiree insurance costs.
Sec. 20-37. Definitions
(a) OPEB trust fund. An irrevocable trust fund established pursuant to Minn. Stat. Sec. 353.95 to fund and pay for post-employment benefits;
(b) Pooled portfolio. All city cash balances that are pooled and invested to maximize investment income. The pooled portfolio excludes special purpose portfolios such as the community investment trust fund.
Sec. 20-38. Payment of retiree healthcare costs.
The City shall pay the lessor of the city’s total retiree healthcare costs, or $9,000,000 $ 3,500,000 of the city’s annual retiree healthcare costs through its appropriation process. The city’s annual retiree healthcare costs that exceeds $9,000,000 $ 3,500,000, if any, may shall be paid from the OPEB trust fund.
Sec. 20-39. Investment of funds.
In order to maintain the financial stability of the OPEB trust fund and ensure adequate funding for retiree healthcare costs, the city shall transfer all earnings received and accrued prior to 12/31/23 from the city’s investment in the pooled portfolio to the OPEB trust fund with the following exceptions:
(a) Investment income from deposits made by the Duluth airport authority, the Spirit Mountain authority, the Duluth transit authority, the Duluth entertainment and convention center authority, and the Duluth economic development authority;
(b) Investment income form the deposit of bond proceeds; and
(c) Investment income legally restricted for other purposes.
Effective 1/1/24, earnings not subject to the exceptions noted above, shall be deposited in a special revenue fund dedicated to capital funding needs.
2024 savings from the city’s general fund portion of retiree healthcare costs will be deposited into a special revenue fund dedicated to capital funding needs.
Effective 1/1/25, the reduction in the general operations share of the levy due to savings from the city’s general fund portion of retiree healthcare costs will be transferred to the capital projects and debt service sections of the levy and deposited into a special revenue fund or debt service fund dedicated to capital funding needs.
Section 2. That this ordinance shall take effect on January 1 2015, 2024., or 30 days after its passage and publication, whichever is later.
Statement of Purpose
The purpose of this ordinance is to amend the original ordinance 10336, 11-24-2014, reducing the city’s annual appropriation of retiree healthcare costs to $3,500,000. This ordinance also eliminates the ongoing requirement to transfer earnings from the city’s investment in the pooled portfolio to the OPEB trust fund.
The city’s OPEB trust fund was established in 2007 for the purpose of funding retiree health benefits. The city has continued to review the OPEB trust fund balance and projections on an ongoing basis. In 2014, the city created a funding framework which required retiree healthcare costs over $9,000,000 be paid from the OPEB trust fund and interest earnings from the city’s pooled portfolio be transferred to the OPEB trust fund.
Due to the city’s investment strategies along with high market returns, the market value of the OPEB trust fund has nearly doubled since 2018. To date, the City has accumulated approximately $110 million in assets in an irrevocable trust invested by the Minnesota State Board of Investment (SBI).
City staff worked with the city’s OPEB actuary and forecasted future retiree premiums using the city’s retiree census data and actuarial projections. The census data includes all current retirees as well as employees eligible for retiree health coverage provided by the city. In conjunction, the city worked with the State Board of Investment to formulate an investment strategy to fund the forecasted future OPEB premiums where the SBI is able to lock in future cash flows that take advantage of high interest rates.
To ensure future funding of eligible retiree healthcare premiums, the City has taken a conservative approach in projecting retiree healthcare premiums and actuarial mortality rates while leaving a projected OPEB trust fund balance of $27 million to minimize the risks of unforeseen circumstances.
Using the OPEB actuarial forecasts along with the SBI’s investment strategy, the city is able to reduce the annual appropriated amount for retiree healthcare costs to $3,500,000. The city is also able to redirect investment earnings from the city’s pooled portfolio toward a special revenue fund dedicated to capital funding needs.